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 June 30, 2004

Commission File Number 1-5620

SAFEGUARD SCIENTIFICS, INC.

(Exact name of registrant as specified in its charter)


		Pennsylvania		23-1609753
		(State or other jurisdiction of		(I.R.S. Employer
		incorporation or organization)		Identification Number)

		800 The Safeguard Building,
		435 Devon Park Drive Wayne, PA		19087
		(Address of principal executive offices)		(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 August 3, 2004
Common Stock 119,736,751

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2004			2003
	(in thousands except per share data)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	292,328		$	217,860
Restricted cash		604			1,069
Short-term investments		8,494			7,081
Accounts receivable, less allowances ($2,700 – 2004; $2,656 – 2003)		191,286			245,504
Inventories		20,760			35,849
Prepaid expenses and other current assets		11,492			11,293

Total current assets		524,964			518,656
Property and equipment, net		33,832			34,007
Ownership interests in and advances to companies		35,763			53,119
Available-for-sale securities		14,464			—
Intangible assets, net		11,714			14,689
Goodwill		153,881			195,652
Note receivable - related party		6,981			11,946
Deferred taxes		7,284			—
Other		12,888			8,262

Total Assets	$	801,771		$	836,331

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	14,093		$	11,530
Accounts payable		98,036			108,843
Accrued expenses		75,006			105,557
Deferred revenue		12,059			14,529

Total current liabilities		199,194			240,459
Long-term debt		4,812			2,537
Deferred taxes		—			1,853
Minority interest		143,720			142,159
Other long-term liabilities		13,044			13,152
Convertible subordinated notes		54,763			200,000
Convertible senior debentures		150,000			—
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; 119,737 and 119,450 shares issued and outstanding in 2004 and 2003		11,974			11,945
Additional paid-in capital		737,917			735,651
Accumulated deficit		(527,293	)		(510,198	)
Accumulated other comprehensive income (loss)		14,302			(39	)
Treasury stock, at cost (53 shares-2003)		—			(191	)
Unamortized deferred compensation		(662	)		(997	)

Total shareholders’ equity		236,238			236,171

Total Liabilities and Shareholders’ Equity	$	801,771		$	836,331

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands except per share data)
	(unaudited)
Revenue
Product sales	$	262,787		$	309,804		$	485,815		$	570,115
Service sales		118,898			108,519			234,516			218,008
Other		106			889			124			1,788

Total revenue		381,791			419,212			720,455			789,911

Operating Expenses
Cost of sales-product		244,992			288,246			452,073			524,152
Cost of sales-service		78,328			70,662			154,433			143,888
Selling and service		34,051			33,269			68,207			67,565
General and administrative		29,944			28,694			55,065			59,320
Depreciation and amortization		6,538			8,255			13,381			16,133
Impairment		42,719			—			42,719			—

Total operating expenses		436,572			429,126			785,878			811,058

		(54,781	)		(9,914	)		(65,423	)		(21,147	)
Other income, net		29,598			12,881			40,077			17,072
Impairment – related party		—			—			—			(659	)
Interest income		731			853			1,366			1,885
Interest and financing expense		(2,616	)		(3,477	)		(5,914	)		(6,921	)

Income (loss) before income taxes, minority interest and equity loss		(27,068	)		343			(29,894	)		(9,770	)
Income tax benefit (expense)		4,683			(1,465	)		3,915			(2,857	)
Minority interest		13,851			107			15,185			97
Equity loss		(3,927	)		(2,135	)		(6,301	)		(6,159	)

Net Loss	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)

Net Loss Per Share:
Basic	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.16	)

Diluted	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.17	)

Weighted Average Shares Outstanding – Basic and Diluted		119,505			118,348			119,410			118,256

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
	2004			2003
	(in thousands)
	(unaudited)
Net cash provided by (used in) operating activities	$	14,685		$	(27,384	)

Investing Activities
Proceeds from sales of available-for-sale and trading securities		14,784			22,409
Proceeds from sales of and distributions from companies and funds		38,408			7,207
Advances to companies		(1,015	)		(139	)
Repayment of advances to companies and funds		—			753
Acquisitions of ownership interests in companies, funds and subsidiaries, net of cash acquired		(1,741	)		(10,810	)
Repayments of advances to related party		4,965			1,039
Increase in restricted cash and short-term investments		(8,597	)		(8,982	)
Decrease in restricted cash and short-term investments		7,648			12,601
Capital expenditures		(9,101	)		(7,195	)
Reduction in cash due to the deconsolidation of a consolidated company		(954	)		—
Other, net		(3,867	)		(568	)

Net cash provided by investing activities		40,530			16,315

Financing Activities
Proceeds from convertible senior debentures		150,000			—
Payments of offering costs on convertible senior debentures		(4,812	)		—
Repurchase of convertible subordinated notes		(145,237	)		—
Payments of costs to repurchase convertible subordinated notes		(913	)		—
Borrowings on revolving credit facilities		35,689			51,033
Repayments on revolving credit facilities		(28,303	)		(49,055	)
Borrowings on term debt		518			80
Repayments on term debt		(1,877	)		(1,204	)
Issuance of Company common stock		1,270			34
Issuance of subsidiary common stock		14,465			816
Offering cost on issuances of subsidiary common stock		(1,547	)		(31	)

Net cash provided by financing activities		19,253			1,673

Net Increase (Decrease) in Cash and Cash Equivalents		74,468			(9,396	)
Cash and Cash Equivalents at beginning of period		217,860			254,779

Cash and Cash Equivalents at end of period	$	292,328		$	245,383

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004

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 2003 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 52 or 53 – week period ending on the Saturday closest to the end of the fiscal period. The Company and all other subsidiaries operate on a calendar year. Alliance’s second quarter ended on July 3, 2004 and June 28, 2003, each a period of 13 weeks and year-to-date each a period of 26 weeks.

The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:


For the three months ended June 30,
2004		2003
ChromaVision Medical Systems CompuCom Systems⁽²⁾ Mantas Pacific Title and Art Studio		Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Art Studio Protura Wireless SOTAS (merged with Mantas in October 2003) Tangram Enterprise Solutions


For the six months ended June 30,
2004		2003
ChromaVision Medical Systems CompuCom Systems⁽²⁾ Mantas Pacific Title and Art Studio Tangram Enterprise Solutions⁽¹⁾		Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Art Studio Protura Wireless SOTAS (merged with Mantas in October 2003) Tangram Enterprise Solutions

⁽¹⁾ Tangram was consolidated through February 20, 2004 at which time it was sold to Opsware, Inc. in a stock and debt for stock exchange. The Company recorded an $8.5 million gain on the transaction, which is included in Other income, net on the Consolidated Statements of Operations for the six months ended June 30, 2004.

⁽²⁾ On May 28, 2004, the Company announced that CompuCom entered into a definitive agreement to be acquired by an affiliate of Platinum Equity, LLC in a cash transaction. See Note 18 for a description of the transaction.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries:



June 30, 2004		December 31, 2003

ChromaVision Medical Systems CompuCom Systems ⁽²⁾ Mantas Pacific Title and Art Studio		ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Art Studio Tangram Enterprise Solutions

⁽²⁾ See Note 18

3. RECLASSIFICATIONS

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

4. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company reviews goodwill for impairment annually or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.

On May 28, 2004, the Company announced that its subsidiary, CompuCom Systems, Inc. entered into a definitive agreement pursuant to which an affiliate of Platinum Equity, LLC would acquire CompuCom for $4.60 per common share in cash. Platinum will also acquire the Company’s holdings of CompuCom preferred shares at par of $15 million plus accumulated dividends (see Note 18). A possible impairment of the carrying value of goodwill was indicated as the Company’s estimated net proceeds from the transaction are less than the Company’s carrying value of CompuCom. Accordingly, the Company completed the two-step testing requirements of SFAS No. 142. In the first step, the Company compared the fair value of the CompuCom reporting unit to its carrying value. Fair value was determined based on the Company’s estimated net proceeds from the transaction. This calculation resulted in an indication of impairment in the CompuCom reporting unit. The fair value of the CompuCom reporting unit was then allocated to the assets and liabilities of the CompuCom reporting unit. This fair value was then deducted from the fair value of the CompuCom reporting unit to determine the implied fair value of goodwill. The carrying value of the recorded goodwill related to CompuCom exceeded its implied fair value by $23.3 million.

An analysis of the proposed merger also indicated that the goodwill on CompuCom’s separate company financial statements may also be impaired. Accordingly, CompuCom separately performed the two-step testing requirements of SFAS No. 142. As a result, CompuCom recorded a loss from impairment of goodwill of $33.4 million during the second quarter of 2004. CompuCom recorded an income tax benefit of $9.5 million related to this impairment charge. The Company’s share of this charge was $19.4 million on a pre-tax basis or $14.0 million net of income taxes.

After recording the Company’s share of CompuCom’s impairment charge, the Company’s carrying value of its goodwill still exceeded its implied fair value by $9.3 million and the Company recorded an additional impairment charge of $9.3 million.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

The net effect of the impairment charge on the Company’s net loss is $23.3 million and is presented on the Consolidated Statements of Operations as follows (in millions):


Impairment on Consolidated Statements of Operations	($42.7	)
Share of impairment allocated to minority shareholders of CompuCom (included in Minority Interest on the Consolidated Statements of Operations)	14.0
The Company’s share of CompuCom’s tax benefit related to the impairment charge (included in Income Taxes on the Consolidated Statements of Operations)	5.4

	($23.3	)

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


	Strategic			Non-Strategic						Total
	Companies			Companies			CompuCom			Segments
	(in thousands)
	(unaudited)
Balance at December 31, 2003	$	89,348		$	1,415		$	104,889		$	195,652
Additions		4,724			—			—			4,724
Purchase Price Adjustments		(2,361	)		—			—			(2,361	)
Deconsolidation		—			(1,415	)		—			(1,415	)
Impairment		—			—			(42,719	)		(42,719	)

Balance at June 30, 2004	$	91,711		$	—		$	62,170		$	153,881

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:


		June 30, 2004
		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net
				(in thousands)
				(unaudited)
Customer-related	6 - 11 years	$	19,100	$	13,470	$	5,630
Contract-related	2 - 3 years		2,840		2,495		345
Technology-related	2 - 17 years		11,313		5,574		5,739

Total		$	33,253	$	21,539	$	11,714


		December 31, 2003
		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net
				(in thousands)
Customer-related	6 - 11 years	$	19,100	$	12,023	$	7,077
Contract-related	2 - 3 years		2,840		2,155		685
Technology-related	2 - 17 years		11,547		4,620		6,927

Total		$	33,487	$	18,798	$	14,689

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Amortization expense related to intangible assets was $1.6 million and $3.1 million for the three and six months ended June 30, 2004 and $1.4 million and $3.0 million for the three and six months ended June 30, 2003, respectively. The following table provides estimated future amortization expense related to intangible assets:


	Total
	(in thousands)
	(unaudited)
Remainder of 2004	$	2,566
2005		3,779
2006		1,860
2007		885
2008 and thereafter		2,624

	$	11,714

5. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), which replaced FIN 46. FIN 46R defines the provisions under which a Variable Interest Entity should be consolidated. FIN 46R is effective for all entities that are subject to the provisions of FIN 46R no later than the end of the first reporting period that ended after March 15, 2004. 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 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 February 2004, the FASB issued Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This EITF was issued to determine the meaning of other-than-temporary impairment and its application to investments in debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF 03-1 also applies to investments in equity securities that are both outside SFAS 115’s scope and are not accounted for by the equity method, which are defined as “cost method investments.” The impairment accounting guidance is effective for reporting periods beginning after June 15, 2004 and the disclosure requirements for annual reporting periods ending after June 15, 2004. The Company does not believe that the adoption of the provisions of EITF 03-1 will have a material 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 sources of comprehensive income (loss) are from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale and foreign currency translation adjustments, which have been negligible to date. Reclassification adjustments result from the recognition in net loss of unrealized gains or losses that were included in comprehensive loss in prior periods.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)
	(unaudited)
Net Loss	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)

Other Comprehensive Income (Loss), Before Taxes:
Foreign Currency Translation Adjustments		(111	)		—			(123	)		—
Unrealized holding gains in available-for-sale securities		14,464			11,961			14,464			11,987
Reclassification adjustments		—			(4,093	)		—			(4,193	)
Related Tax (Expense) Benefit:
Unrealized holding gains (losses) in available-for-sale securities		—			(52	)		—			(61	)
Reclassification adjustments		—			1,384			—			1,419

Other Comprehensive Income		14,353			9,200			14,341			9,152

Comprehensive Income (loss)	$	1,892		$	6,050		$	(2,754	)	$	(9,537	)

7. OWNERSHIP INTERESTS IN AND ADVANCES TO COMPANIES

The following summarizes the carrying value of the Company’s ownership interests in and advances to companies accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at June 30, 2004 and December 31, 2003.


	June 30,		December 31,
	2004		2003
	(in thousands)
	(unaudited)
Equity Method
Public Companies	$	—	$	9,354
Non-Public Companies		—		934
Private Equity Funds		22,711		27,279

		22,711		37,567
Cost Method
Non-Public Companies		11,116		12,618
Private Equity Funds		1,936		2,934

	$	35,763	$	53,119

The market value of the Company’s public companies accounted for under the equity method was $37 million at December 31, 2003. In April 2004, the Company sold its interest in Sanchez for $32.1 million in cash and 226,435 shares of Fidelity National Financial (“FNF”) common stock valued at $8.3 million on the date of the merger in exchange for our Sanchez common stock, which we sold during the second quarter for net cash proceeds of $8.3 million.

8. DEBT

In May 2004, 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 2005 and bears interest at the prime rate (4.0% at June 30, 2004) 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 one times any amounts outstanding under the facility. Prior to May 5, 2004, the facility required cash collateral at the bank equal to two times any amounts outstanding under the facility. In conjunction with the issuance of the 2024 Convertible Senior Debentures, the Company amended its revolving credit facility to grant the bank a right to a security interest in accounts held by the Company at

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

the bank equal to any amounts outstanding under the facility. As of June 30, 2004, the Company had outstanding guarantees related to three strategic companies’ credit facilities, which allowed for total borrowings of up to $18 million, ($12 million was outstanding as of June 30, 2004). As of June 30, 2004, there was $7 million available to the Company under the Company’s credit facility.

At June 30, 2004, CompuCom has a $25 million working capital facility and a $50 million receivables securitization facility. Consistent with its financing requirements, CompuCom did not renew the working capital facility in July 2004. No amounts were outstanding under the working capital facility at June 30, 2004 and December 31, 2003. Terms of the facility limit the amounts available for capital expenditures and dividends.

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 receivable 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. 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 receivables on the Consolidated Balance Sheets. The investors in the securitized receivables have no recourse to the Company’s or CompuCom’s assets as a result of debtor’s defaults. CompuCom is retained as a servicer of the receivables; however, the cost of servicing is not material. The Company and CompuCom account for these transactions in accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and meet the sales criteria stated in Paragraph 9 of SFAS 140. Amounts outstanding as sold receivables as of June 30, 2004 consisted of one $10 million certificate with an October 2005 maturity date. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

Four consolidated companies maintain separate credit facilities which provide for aggregate borrowings of $20 million as of June 30, 2004, of which $18 million is guaranteed by the Company under its credit facility. One of the revolving credit facilities totaling $10 million matures in September 2004, $2 million, which had an original maturity of July 2004 has been extended to September 2004, $5 million facility matures in March 2005 and the $3 million facility matures in February 2005. As of June 30, 2004 outstanding borrowings under these facilities were $12 million. These obligations bear interest at variable rates ranging between the prime rate and the prime rate plus 1.25% or LIBOR (ranging from 1.4% to 1.6% at June 30, 2004) plus 2.5%.

Debt as of June 30, 2004 also included mortgage obligations ($3.4 million), term loans ($2.8 million), and capital lease obligations ($0.7 million) of consolidated companies. These obligations bear interest at fixed rates ranging between 7.0% and 22.0% and variable rates indexed to the prime rate plus 1.5%.

Four consolidated companies maintained separate credit facilities which provided for aggregate borrowings of $19.0 million as of December 31, 2003, of which $13.0 million was guaranteed by the Company under its credit facility. As of December 31, 2003 outstanding borrowings under these facilities were $4.7 million. These obligations bore interest at variable rates ranging between the prime rate and the prime rate plus 1.25% or LIBOR plus 2.5%.

Debt as of December 31, 2003 also included mortgage obligations ($3.5 million), term loans ($4.9 million) and capital lease obligations ($1.0 million) of consolidated companies. These obligations bore interest at fixed rates between 8.0% and 20.3% and variable rates indexed to the prime rate plus 1.0% to 1.5%.

Aggregate maturities of long-term debt in future years are (in millions): $9.1 – 2004; $5.9 – 2005; $1.1 – 2006; $2.8 – 2007 and $0.0 thereafter.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

9. CONVERTIBLE SUBORDINATED NOTES AND CONVERTIBLE SENIOR DEBENTURES

In June 1999, the Company issued $200 million of 5% convertible subordinated notes due June 15, 2006 (2006 Notes). Interest is payable semi-annually. The 2006 Notes are redeemable in whole or in part at the option of the Company for a maximum of 101.67% (currently 100.83%) of face value depending on the date of redemption and subject to certain restrictions. The 2006 Notes are convertible into the Company’s common stock subject to adjustment under certain conditions. Pursuant to the terms of the 2006 Notes, the conversion rate of the notes at June 30, 2004 was $24.1135 of principal amount per share. As of June 30, 2004, the Company has repurchased $58.7 million and $145.2 million for the three and six months ended June 30, 2004 respectively, of face value of the 2006 Notes for $59.2 million and $146.1 million, including transaction costs, for the three and six months ended June 30, 2004 respectively. The Company recorded $0.5 million and $1.4 million of expense for the three and six months ended June 30, 2004 respectively, which is included in Other Income, Net on the Consolidated Statements of Operations at June 30, 2004, in relation to the acceleration of deferred debt costs associated with the 2006 Notes. As of June 30, 2004, the outstanding balance of the 2006 Notes is $54.8 million. Pursuant to the terms of the 2024 Notes, the Company expects to redeem the balance of the 2006 Notes with a portion of the proceeds from the proposed sale of CompuCom. See Note 18 for further discussion.

In February 2004, the Company completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024 (the 2024 Notes). The Company has used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes by one or more privately negotiated transactions. Interest on the 2024 Notes is payable semi-annually. At the note holders’ option, subsequent to June 30, 2004, the notes are convertible into our common stock before the close of business on March 14, 2024, subject to certain conditions. The note holders may require repurchase of the notes on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective amount plus accrued and unpaid interest. The note holders may also require repurchase of the notes upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, we may redeem all or some of the 2024 Notes commencing March 20, 2009. The conversion rate of the notes at June 30, 2004 was $7.2174 of principal amount per share.

Pursuant to the terms of the 2024 Notes, the Company has certain obligations to escrow five years of interest payments on the 2024 Notes as a result of the sale of CompuCom. See Note 18 for further discussion.

10. STOCK-BASED COMPENSATION

In June 2004, the Company’s shareholders approved the 2004 Equity Compensation Plan under which six million shares have been reserved for issuance. Incentive or non-qualified stock options, restricted stock awards (including deferred stock units), stock appreciation rights, performance units and other stock-based awards may be granted to Company employees, directors and consultants under the 2004 Equity Compensation Plan, the 2001 Associates Equity Compensation Plan and the 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 June 30, 2004, the Company reserved 18.5 million shares of common stock for possible future issuance under its equity compensation plans. Several subsidiaries maintain equity compensation plans.

Option activity is summarized below:


				Weighted
				Average
	Shares			Exercise Price
	(In thousands)
Outstanding at December 31, 2003		10,319		$	8.10
Options granted		185			2.26
Options exercised		(359	)		3.54
Options canceled/forfeited		(604	)		10.69

Outstanding at June 30, 2004		9,541		$	8.00

Options exercisable at end of period		6,753
Shares available for future grant		8,996

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

The following summarizes information about the Company’s stock options outstanding at June 30, 2004:


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 - $ 1.74		1,379		6.3	$	1.38		578	$	1.36
	1.89 - 2.62		1,592		5.7		2.15		663		2.13
	3.36 - 4.79		1,801		6.0		3.75		844		3.92
	5.28 - 7.68		2,060		4.5		5.36		1,965		5.35
	8.83 - 13.08		1,951		2.4		11.82		1,952		11.82
	13.29 - 30.47		293		3.6		26.71		286		26.62
	45.47 - 50.98		465		3.6		47.85		465		47.85

$	1.25 - $50.98		9,541			$	8.00		6,753	$	10.22

The Company issued shares of restricted stock to employees in 2001 and 2002, which vest 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 approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2004 and $0.4 million and $1.1 million for the three and six months ended June 30, 2003, respectively. Unamortized compensation expense related to restricted stock issuances at June 30, 2004 is $0.6 million.

In addition to the restricted stock grants, the Company issued 0.9 million of deferred stock units to senior executives in December 2002 and 0.6 million in January 2004. The value of these deferred stock units was $1.6 million and $3.0 million, respectively, based on the fair value of the stock as of the date of the grant. 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 deferred stock units granted in December 2002 and 0.3 million of the units granted in January 2004 vest 25% after one year, then in 36 equal monthly installments thereafter. The remaining 0.3 million of deferred stock units granted in January 2004 vest after five years, or earlier depending on the achievement of certain performance criteria, including the sale of CompuCom. In the second quarter of 2004, the Company adjusted the estimated remaining vesting period for these deferred stock units to reflect the likelihood that the CompuCom transaction would be completed in September 2004. As a result, the Company recorded $0.9 million of compensation expense related to these deferred stock units in the second quarter of 2004 and expects to record the remaining $0.5 million in the third quarter of 2004 upon the sale of CompuCom. Total compensation expense for deferred stock units was $1.2 million and $1.4 million for the three and six months ended June 30, 2004, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2003, respectively. Unamortized compensation expense related to deferred stock units at June 30, 2004 is $2.7 million.

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company measures stock-based compensation cost in accordance with APB 25, “Accounting for Stock Issued to Employees”. Accordingly, no compensation expense is recorded for stock options issued to employees at fair market value. Stock options issued to non-employees are measured at fair value on the date of grant using the Black-Scholes model and are expensed over the vesting period.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure – an amendment to SFAS 123”. The Company elected to continue to account for stock-based compensation in accordance with APB 25. Had compensation cost been recognized consistent with SFAS No. 148, the Company’s consolidated net loss and loss per share would have been as follows:

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004


		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
					(in thousands, except per share data)
Consolidated net loss	As Reported	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,472	)		(3,137	)		(3,057	)		(5,518	)

	Pro forma	$	(13,933	)	$	(6,287	)	$	(20,152	)	$	(24,207	)

Loss Per Share
Basic	As Reported	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.16	)
	Pro forma	$	(0.12	)	$	(0.05	)	$	(0.17	)	$	(0.20	)
Diluted	As Reported	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.17	)
	Pro forma	$	(0.12	)	$	(0.06	)	$	(0.17	)	$	(0.21	)
Per share weighted average fair value of stock options issued on date of grant		$	1.67		$	1.35		$	1.67		$	1.05

The following ranges 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 six months ended June 30, 2004 and 2003 using the Black-Scholes option-pricing model for public companies and subsidiaries and the minimum value method for private equity method companies:


	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Company
Dividend yield	0%	0%	0%	0%
Expected volatility	95%	95%	95%	95%
Average expected option life	5 years	5 years	5 years	5 years
Risk-free interest rate	3.9%	2.5%	3.9%	2.5%

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Subsidiaries and Equity Method
Companies
Dividend yield	0%	0%	0%	0%
Expected volatility	70% to 108%	0% to 212%	70% to 109%	0% to 212%
Average expected option life	4 to 5 years	4 to 8 years	4 to 5 years	4 to 8 years
Risk-free interest rate	3.6% to 3.9%	2.1% to 3.4%	2.5% to 3.9%	2.1% to 3.7 %

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

11. INCOME TAXES

The Company’s consolidated income tax benefit recorded for the three and six months ended June 30, 2004 was $4.7 million and $3.9 million, respectively, net of a recorded valuation allowance of $13.0 million and $17.9 million, respectively. 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, except for deferred tax assets related to CompuCom, which files separate federal and state income tax returns.

12. NET LOSS PER SHARE

The calculations of net loss per share were:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands except per share data)
	(unaudited)
Basic:
Net loss	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)

Average common shares outstanding		119,505			118,348			119,410			118,256

	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.16	)

Diluted:
Net loss	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)
Effect of public holdings		—			(556	)		—			(1,135	)

Adjusted net loss	$	(12,461	)	$	(3,706	)	$	(17,095	)	$	(19,824	)

Average common shares outstanding		119,505			118,348			119,410			118,256

Diluted	$	(0.10	)	$	(0.03	)	$	(0.14	)	$	(0.17	)

If a consolidated or equity method public company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from net 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 loss for purposes of calculating diluted net loss per share.

The computation of average common shares outstanding for the three and six months ended June 30, 2004, excludes 0.2 million shares of non-vested restricted stock. The computation of average common shares outstanding for the three and six months ended June 30, 2003 excludes 0.9 million and 1.1 million shares of non-vested restricted stock. These shares will be included in the computation when they vest.

Approximately 1.2 million and 1.9 million weighted average common stock equivalents related to stock options, restricted stock and deferred stock units were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2004, respectively, and 0.5 million and 0.3 million for the three and six months ended June 30, 2003, respectively, as their inclusion would be anti-dilutive due to the net loss in the respective periods. Approximately 3.1 million and 5.2 million shares representing the weighted average effect of assumed conversion of the 2006 Notes were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2004, respectively, because their effect was anti-dilutive due to the net loss in the respective periods. A total of 8.3 million shares representing the weighted average effect of assumed conversion of the 2006 Notes were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2003 because their effect was anti-dilutive due to the net loss in the respective periods. Approximately 1.1 million and 0.8 million shares related to 2024 Notes were not included in the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2004, respectively, because such notes were not convertible during the period based on conditions required for conversion. Additionally, the result of including such shares would be anti-dilutive due to the net loss in the respective periods.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

13. PARENT COMPANY FINANCIAL INFORMATION

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, whose carrying value was $61.5 million at June 30, 2004 and $64.0 million at December 31, 2003.

Parent Company Balance Sheets


	June 30,		December 31,
	2004		2003
	(in thousands)
	(unaudited)
Assets
Cash and cash equivalents	$	152,374	$	122,965
Restricted cash		554		1,019
Short-term investments		8,494		7,081
Other current assets		25,851		23,967

Total current assets		187,273		155,032
Ownership interests in and advances to companies		210,212		249,136
Available-for-sale securities		14,464		—
Note receivable - related party		6,981		11,946
Goodwill		53,307		53,307
Intangibles, net		2,829		3,090
Other		8,296		5,075

Total Assets	$	483,362	$	477,586

Liabilities and Shareholders’ Equity
Current maturities of long-term debt	$	11,699	$	8,491
Other current liabilities		18,607		20,113

Total current liabilities		30,306		28,604
Long-term debt		135		281
Other long-term liabilities		11,920		12,530
Convertible subordinated notes		54,763		200,000
Convertible senior debentures		150,000		—
Shareholders’ equity		236,238		236,171

Total Liabilities and Shareholders’ Equity	$	483,362	$	477,586

In connection with its ownership interests in certain companies, the Company has guarantees of $23 million at June 30, 2004, of which $11 million relates to guarantees of its wholly owned subsidiaries. A total of $9 million of debt associated with its guarantees have been recorded on the Parent Company Balance Sheets at June 30, 2004.

Debt for the six months ended June 30, 2004 includes primarily mortgage obligations ($3.4 million), bank credit facilities ($8.0 million), term loans ($0.2 million) and capital lease obligations ($0.2 million). These obligations bear interest at fixed rates between 9.0% to 20.3%, and variable rates of prime or LIBOR plus 2.5%.

Debt for the year ended December 31, 2003 included primarily mortgage obligations ($3.5 million), bank credit facilities ($4.7 million), term loans ($0.3 million) and capital lease obligations ($0.3 million). These obligations bore interest at fixed rates between 9.0% to 20.3%, and variable rates of the prime rate or LIBOR plus 2.5%.

Aggregate maturities of long-term debt during future years are (in millions): $8.3 – 2004 $0.4 – 2005; $0.3 – 2006; $2.8 – 2007 and $0.0 thereafter.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Parent Company Statements of Operations


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	23,806		$	21,405		$	47,297		$	45,406

Operating expenses:
Cost of sales		16,167			14,709			32,079			31,083
Selling		3,879			3,191			7,262			6,756
General and administrative		9,977			9,806			18,127			21,710
Depreciation and amortization		1,092			1,510			2,286			2,776

		31,115			29,216			59,754			62,325

		(7,309	)		(7,811	)		(12,457	)		(16,919	)
Other income, net		29,598			12,881			40,077			17,072
Impairment – related party		—			—			—			(659	)
Interest income		462			502			895			1,193
Interest and financing expense		(2,327	)		(2,772	)		(5,349	)		(5,538	)

Income (loss) before income taxes and equity loss		20,424			2,800			23,166			(4,851	)
Income tax expense		—			—			—			(1	)
Equity loss		(32,885	)		(5,950	)		(40,261	)		(13,837	)

Net loss	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)

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

The effect of the impairment charge on CompuCom is included in Equity loss in the Parent Company Statements of Operations.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Parent Company Statements of Cash Flows


	Six Months Ended June 30,
	2004			2003
	(in thousands)
	(unaudited)
Net cash used in operating activities	$	(15,193	)	$	(17,597	)

Investing Activities
Proceeds from sales of trading securities		14,784			22,409
Proceeds from sales of and distributions from companies and funds		38,408			7,207
Advances to companies		(1,015	)		(139	)
Repayment of advances to companies		—			1,403
Acquisitions of ownership interests in companies, funds and subsidiaries, net of cash acquired		(14,241	)		(18,115	)
Capital expenditures		(766	)		(332	)
Repayments of advances to related party		4,965			1,039
Increase in restricted cash and short-term investments		(13,097	)		(8,982	)
Decrease in restricted cash and short-term investments		12,149			12,601
Other, net		45			—

Net cash provided by investing activities		41,232			17,091

Financing Activities
Proceeds from convertible senior debentures		150,000			—
Payment of offering costs on convertible senior debentures		(4,812	)		—
Repurchase of convertible subordinated notes		(145,237	)		—
Payments of costs to repurchase convertible subordinated notes		(913	)		—
Borrowings on revolving credit facilities		31,645			46,735
Repayments on revolving credit facilities		(28,303	)		(49,018	)
Repayments on long-term debt		(280	)		(669	)
Issuance of Company common stock, net		1,270			34

Net cash provided by (used in) financing activities		3,370			(2,918	)

Net (Decrease) Increase in Cash and Cash Equivalents		29,409			(3,424	)
Cash and Cash Equivalents at beginning of year		122,965			112,714

Cash and Cash Equivalents at end of period	$	152,374		$	109,290

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

14. OPERATING SEGMENTS

Our reportable segments include i) Strategic 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) Non-strategic Companies (formerly referred to as “Legacy” in the second quarter of 2003), in which we generally have less than a controlling interest or which do not directly fall within our strategic focus; and iii) CompuCom, which represents the results of our subsidiary, CompuCom. See Net Results of Operations in Item 2 for companies included in the above referenced segments. See also Note 18 regarding our proposed sale of CompuCom.

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)
JUNE 30, 2004

Three Months Ended June 30, 2004


	Strategic			Non-Strategic						Total						Consolidated
	Companies			Companies			CompuCom			Segments			Other Items			Results
	(in thousands)
	(unaudited)
Revenue
Product sales	$	1,838		$	—		$	260,949		$	262,787		$	—		$	262,787
Service sales		29,748			8,186			80,964			118,898			—			118,898
Other		79			—			—			79			27			106

Total Revenue		31,665			8,186			341,913			381,764			27			381,791

Operating expenses
Cost of sales — product		235			—			244,757			244,992			—			244,992
Cost of sales — service		19,302			4,033			54,993			78,328			—			78,328
Selling and service		12,861			694			20,496			34,051			—			34,051
General and administrative		8,233			1,167			15,488			24,888			5,056			29,944
Depreciation and amortization		2,385			686			3,407			6,478			60			6,538
Impairment		—			—			42,719			42,719			—			42,719

Total operating expenses		43,016			6,580			381,860			431,456			5,116			436,572

		(11,351	)		1,606			(39,947	)		(49,692	)		(5,089	)		(54,781	)
Other income (loss), net		(347	)		30,829			—			30,482			(884	)		29,598
Interest income		60			5			209			274			457			731
Interest and financing expense		(168	)		(16	)		(116	)		(300	)		(2,316	)		(2,616	)

Net income (loss) before income taxes, minority interest, and equity loss		(11,806	)		32,424			(39,854	)		(19,236	)		(7,832	)		(27,068	)
Income tax benefit		—			—			—			—			4,683			4,683
Minority interest		1,220			(249	)		12,880			13,851			—			13,851
Equity loss		—			(3,861	)		—			(3,861	)		(66	)		(3,927	)

Net Income (Loss)	$	(10,586	)	$	28,314		$	(26,974	)	$	(9,246	)	$	(3,215	)	$	(12,461	)

Segment Assets
June 30, 2004	$	163,885		$	67,650		$	391,272		$	622,807		$	178,964		$	801,771

December 31, 2003	$	148,402		$	76,855		$	462,378		$	687,635		$	148,696		$	836,331

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Three Months Ended June 30, 2003


	Strategic			Non-Strategic						Total						Consolidated
	Companies			Companies			CompuCom			Segments			Other Items			Results
							(in thousands)
							(unaudited)
Revenue
Product sales	$	524		$	4,549		$	304,731		$	309,804		$	—		$	309,804
Service sales		26,150			9,372			72,997			108,519			—			108,519
Other		46			757			—			803			86			889

Total Revenue		26,720			14,678			377,728			419,126			86			419,212

Operating expenses
Cost of sales — product		204			3,103			284,939			288,246			—			288,246
Cost of sales — service		17,853			3,925			48,884			70,662			—			70,662
Selling and service		12,174			1,904			19,191			33,269			—			33,269
General and administrative		6,542			1,987			15,022			23,551			5,143			28,694
Depreciation and amortization		2,767			1,287			4,138			8,192			63			8,255

Total operating expenses		39,540			12,206			372,174			423,920			5,206			429,126

		(12,820	)		2,472			5,554			(4,794	)		(5,120	)		(9,914	)
Other income (loss), net		(55	)		12,881			—			12,826			55			12,881
Impairment — related party		—			—			—			—			—			—
Interest income		16			2			334			352			501			853
Interest and financing expense		(135	)		(34	)		(420	)		(589	)		(2,888	)		(3,477	)

Net income (loss) before income taxes, minority interest, and equity income (loss)		(12,994	)		15,321			5,468			7,795			(7,452	)		343
Income tax expense		—			—			—			—			(1,465	)		(1,465	)
Minority interest		2,513			(315	)		(2,091	)		107			—			107
Equity income (loss)		—			(2,148	)		—			(2,148	)		13			(2,135	)

Net Income (Loss)	$	(10,481	)	$	12,858		$	3,377		$	5,754		$	(8,904	)	$	(3,150	)

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Six Months Ended June 30, 2004


	Strategic			Non-Strategic						Total						Consolidated
	Companies			Companies			CompuCom			Segments			Other Items			Results
							(in thousands)
							(unaudited)
Revenue
Product sales	$	3,695		$	384		$	481,736		$	485,815		$	—		$	485,815
Service sales		58,928			15,755			159,833			234,516			—			234,516
Other		86			—			—			86			38			124

Total Revenue		62,709			16,139			641,569			720,417			38			720,455

Operating expenses
Cost of sales — product		385			1			451,687			452,073			—			452,073
Cost of sales — service		38,084			8,305			108,044			154,433			—			154,433
Selling and service		24,400			2,916			40,891			68,207			—			68,207
General and administrative		14,128			2,484			28,922			45,534			9,531			55,065
Depreciation and amortization		4,867			1,571			6,821			13,259			122			13,381
Impairment		—			—			42,719			42,719			—			42,719

Total operating expenses		81,864			15,277			679,084			776,225			9,653			785,878

		(19,155	)		862			(37,515	)		(55,808	)		(9,615	)		(65,423	)
Other income (loss), net		(347	)		42,611			—			42,264			(2,187	)		40,077
Interest income		73			11			392			476			890			1,366
Interest and financing expense		(298	)		(46	)		(236	)		(580	)		(5,334	)		(5,914	)

Net income (loss) before income taxes, minority interest, and equity loss		(19,727	)		43,438			(37,359	)		(13,648	)		(16,246	)		(29,894	)
Income tax benefit		—			—			—			—			3,915			3,915
Minority interest		3,118			224			11,843			15,185			—			15,185
Equity loss		—			(6,176	)		—			(6,176	)		(125	)		(6,301	)

Net Income (Loss)	$	(16,609	)	$	37,486		$	(25,516	)	$	(4,639	)	$	(12,456	)	$	(17,095	)

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Six Months Ended June 30, 2003


	Strategic			Non-Strategic						Total						Consolidated
	Companies			Companies			CompuCom			Segments			Other Items			Results
							(in thousands)
							(unaudited)
Revenue
Product sales	$	2,376		$	5,590		$	562,149		$	570,115		$	—		$	570,115
Service sales		55,940			16,192			145,876			218,008			—			218,008
Other		99			1,515			—			1,614			174			1,788

Total Revenue		58,415			23,297			708,025			789,737			174			789,911

Operating expenses
Cost of sales — product		442			3,472			520,238			524,152			—			524,152
Cost of sales — service		37,390			7,286			99,212			143,888			—			143,888
Selling and service		24,821			3,643			39,101			67,565			—			67,565
General and administrative		12,849			3,769			29,957			46,575			12,745			59,320
Depreciation and amortization		5,207			2,370			8,318			15,895			238			16,133

Total operating expenses		80,709			20,540			696,826			798,075			12,983			811,058

		(22,294	)		2,757			11,199			(8,338	)		(12,809	)		(21,147	)
Other income (loss), net		(55	)		17,017			—			16,962			110			17,072
Impairment — related party		—			—			—			—			(659	)		(659	)
Interest income		39			3			652			694			1,191			1,885
Interest and financing expense		(306	)		(76	)		(823	)		(1,205	)		(5,716	)		(6,921	)

Net income (loss) before income taxes, minority interest, and equity loss		(22,616	)		19,701			11,028			8,113			(17,883	)		(9,770	)
Income tax expense		—			—			—			—			(2,857	)		(2,857	)
Minority interest		4,434			(132	)		(4,205	)		97			—			97
Equity loss		—			(6,136	)		—			(6,136	)		(23	)		(6,159	)

Net Income (Loss)	$	(18,182	)	$	13,433		$	6,823		$	2,074		$	(20,763	)	$	(18,689	)


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Other Items
Corporate operations	$	(7,898	)	$	(7,439	)	$	(16,371	)	$	(17,906	)
Income tax benefit (expense)		4,683			(1,465	)		3,915			(2,857	)

	$	(3,215	)	$	(8,904	)	$	(12,456	)	$	(20,763	)

15. BUSINESS COMBINATIONS

Acquisitions by the Company

In February 2004, 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 to 62.5%.

In March 2004, ChromaVision Medical Systems entered into a securities purchase agreement with a limited number of accredited investors pursuant to which ChromaVision agreed to issue 10.5 million shares of common stock and warrants to purchase an additional 1.6 million shares of common stock for an aggregate purchase price of $21 million. Of the total placement of $21 million, the Company funded $7.5 million to ChromaVision, $3.0 million of the total funding was received by ChromaVision in the first quarter of 2004 and $4.5 million was initially held in escrow pending certain regulatory requirements. The escrowed funds were subsequently released to ChromaVision on April 27, 2004. As of March 31, 2004, the Company’s ownership in ChromaVision was 59.7%. As a result of the third party participants in ChromaVision’s $21 million placement, the Company’s ownership in

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

ChromaVision was diluted to 56.7% at June 30, 2004.

The Company’s allocation of the purchase price for ChromaVision was as follows (in millions):


Working Capital (including cash)	$	7.8
Fixed Assets		0.1
Goodwill		4.5
Acquired In-Process Research and Development		0.1

Total Purchase Price	$	12.5

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. The Company then converted a total of $2.2 million of debt into common stock of SOTAS. As a result of these transactions, the Company increased its ownership in SOTAS 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.

On October 1, 2003, the Company merged SOTAS and Mantas under the Mantas name. The Company accounted for the merger as a combination of entities under common control. The merger had no impact on the Company’s Consolidated Financial Statements. Immediately after the merger, the Company acquired additional shares of Mantas for $13 million. As a result of these transactions, the Company increased its ownership in Mantas to 84%. The Company has completed its analysis of the purchase price allocation for the Mantas acquisition. In the fourth quarter of 2003 and the first quarter of 2004, the Company allocated $0.3 million and $0.6 million, respectively, of Mantas losses to minority interest. In the second quarter of 2004, in connection with the Company’s review of the purchase price allocation, these previously allocated Mantas losses were recorded by the Company.

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%.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisitions discussed above had occurred as of the beginning of the periods presented, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives. 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 June 30,			Six Months Ended June 30,
	2003			2004			2003
	(in thousands except per share data)
	(unaudited)
Total revenues	$	419,212		$	720,455		$	789,911
Net loss	$	(4,767	)	$	(17,600	)	$	(21,402	)
Diluted loss per share	$	(0.05	)	$	(0.15	)	$	(0.19	)

The effect of the 2004 acquisitions did not have a material impact on the pro forma financial information for the three months ended June 30, 2004.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

16. RELATED PARTY TRANSACTIONS

In October 2000, the Company guaranteed certain margin loans advanced by a third party to Warren V. 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 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 the 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 will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis. In April 2004, the Company received a total of $4.5 million in net cash proceeds from Mr. Musser as a result of the sale of certain collateral and applied these proceeds against the loan. See Note 18 regarding the proposed sale of CompuCom, which if consummated, the Company will receive an additional $2.0 million related to the CompuCom shares held by Mr. Musser.

17. COMMITMENTS AND CONTINGENCIES

Safeguard Scientifics Securities Litigation

On June 26, 2001, the Company and Warren V. Musser, the Company’s former Chairman, were named as defendants in a putative class action filed in the United States District Court for the Eastern District of Pennsylvania (“the Court”). 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 were consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court 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 that 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. On November 5, 2003, the Third Circuit denied plaintiffs’ petition and declined to hear the appeal. On November 18, 2003, plaintiffs’ counsel moved to intervene new plaintiffs and proposed class representative in the consolidated action, which motion was denied by the Court on February 18, 2004. On July 12, 2004, a third putative class action complaint captioned Mandell v. Safeguard Scientifics, Inc., et al. was filed against Safeguard and Mr. Musser in the United States District Court for the Eastern District of Pennsylvania. The new complaint asserts similar claims to those asserted in the consolidated and amended class action complaint. The complaint also

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

asserts individual claims on behalf of two individual plaintiffs who had attempted unsuccessfully to intervene in the consolidated action. Safeguard has not yet responded to the new complaint.

While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

CompuCom Litigation

On May 28, 2004, Safeguard was named along with CompuCom Systems, Inc. and members of CompuCom’s board of directors as a defendant in a putatitve class action lawsuit brought in the Court of Chancery of the State of Delaware on behalf of CompuCom’s minority stockholders seeking to enjoin the proposed merger of CompuCom with Platinum Equity, LLC on the ground that the members of the board of directors of CompuCom and Safeguard have allegedly breached fiduciary duties to CompuCom and its minority stockholders. On June 1, 2004 and June 10, 2004, two separate additional putative class action lawsuits were filed in the Court of Chancery against the same defendants, each lawsuit asserting claims similar to those brought in the first proceeding. The lawsuits were subsequently consolidated. On July 27, 2004, the plaintiffs filed an amended class action complaint , asserting claims similar to those brought in the original complaints and adding claims relating to CompuCom’s disclosure in its Schedule 14A filed with the Securities & Exchange Commission on July 15, 2004. On July 27, 2004, the plaintiffs also filed a motion for expedited proceedings and discovery in connection with the injunctive relief sought and requested that a preliminary injunction hearing be held before August 19, 2004, the date of the special meetings of the shareholders of the Company and the stockholders of CompuCom relating to the CompuCom merger. Defendants filed their opposition to the motion on July 28, 2004. On July 29, 2004, the Court denied the Plaintiffs’ motion. The Company has not yet responded to the amended complaint.

While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

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.

In connection with its ownership interests in certain affiliates, the Company has guarantees of $23 million at June 30, 2004, of which $19 million relate to guarantees of our consolidated companies (and $18 million of which is guaranteed under the Company’s revolving credit facility (see Note 8)). A total of $13 million of debt associated with its guarantees of consolidated companies has been recorded on the consolidated companies’ Balance Sheets and is, therefore, reflected in the Company’s Consolidated Balance Sheet at June 30, 2004. Additionally, we have committed capital of approximately $25 million, including commitments made in prior years to various companies and funds, to be funded over the next several years, including approximately $10 million which is expected to be funded during the next twelve months.

The Company has received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, the Company 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 June 30, 2004 and assuming for these purposes the only distributions from the funds are equal to the carrying value of the funds on the June 30, 2004 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 $4 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

The Company’s ownership in the general partner of the funds which have potential clawback liabilities ranges 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.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

In October 2001, the Company entered into an agreement with Mr. Musser, its former Chairman and Chief Executive Officer, to provide for annual payments of $650,000 per year and certain health care and other benefits for life. As a result of this agreement, the Company recorded expense of $5.5 million, which was included in General and Administrative Expense in the Consolidated Statements of Operations for the year ended December 31, 2001. The related current liability of $0.5 million is included in Accrued Expenses and the long-term portion of $4.4 million is included in Other Long-Term Liabilities on the Consolidated Balance Sheets at June 30, 2004.

The Company has entered into retention agreements with certain executive officers at June 30, 2004. 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 cash exposure under the agreements is $7 million at June 30, 2004.

18. PROPOSED SALE OF COMPUCOM

The Company presently intends to use the cash proceeds from the proposed sale to increase our ownership interest in strategic subsidiaries, thereby funding their respective growth plans; to acquire new strategic subsidiaries; to escrow five years of interest payments (approximately $19.7 million) for our convertible senior debentures with a stated maturity of 2024, pursuant to the terms of such debentures; to retire the remaining $54.8 million of our 5% convertible subordinated notes, due 2006, pursuant to terms of the 2024 Notes; depending upon market conditions from time to time, to consider steps to modify our capital structure (which may include the repurchase of a portion of our outstanding equity securities or debt); and for our general corporate purposes (including payment of the Company’s transaction expenses related to the proposed CompuCom merger).

The Company has agreed to provide to the landlord under CompuCom’s Dallas headquarters lease, Corp Delaware L.P., a subsidiary of W.P. Carey & Co. LLC, a letter of credit in the amount equal to $6.3 million, after the effective date of the proposed CompuCom merger, in order to facilitate CompuCom obtaining the consent required under the lease agreement, dated March 31, 1999, between Delaware Corp LLC and CompuCom. The letter of credit will expire on March 31, 2019 and CompuCom will reimburse the Company for all fees and expenses incurred by the Company in order to obtain and maintain this letter of credit. This reimbursement may not exceed 1.5% of the aggregate principal amount of the Company’s letter of credit per annum.

In connection with this transaction, a possible impairment of the carrying value of goodwill was indicated as the Company’s estimated net proceeds from the transaction are less than the Company’s carrying value of CompuCom. Accordingly, the Company completed the two-step testing requirements of SFAS No. 142. In the first step, the Company compared the fair value of the CompuCom reporting unit to its carrying value. Fair value was determined based on the Company’s estimated net proceeds from the transaction. This calculation resulted in an indication of impairment in the CompuCom reporting unit. The fair value of the CompuCom reporting unit was then allocated to the assets and liabilities of the CompuCom reporting unit. This fair value was then deducted from the fair value of the CompuCom reporting unit to determine the implied fair value of goodwill. The carrying value of the goodwill exceeded its implied fair value by $23.3 million.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

An analysis of the proposed merger also indicated that the goodwill on CompuCom’s separate company financial statements may also be impaired. Accordingly, CompuCom separately performed the two-step testing requirements of SFAS No. 142. As a result, CompuCom recorded a loss from impairment of goodwill of $33.4 million during the second quarter of 2004. CompuCom also recorded an income tax benefit of $9.5 million related to the impairment charge. The Company’s share of this charge was $19.4 million on a pre-tax basis, or $14.0 million, net of income taxes.

The Company’s total impairment charge is presented on the Consolidated Statements of Operations as follows (in millions):


Impairment on Consolidated Statements of Operations	$	(42.7	)
Share of impairment allocated to minority shareholders of CompuCom (included in Minority Interest on the Consolidated Statements of Operations)		14.0
The Company’s share of CompuCom’s tax benefit related to the impairment charge (included in Income Taxes on the Consolidated Statements of Operations)		5.4

	$	(23.3	)

The transaction is expected to close in the third quarter of 2004 at which point, the Company will present the results of operations of CompuCom as discontinued operations for all periods presented and will record a gain or loss on the disposal for the difference between the Company’s carrying value in CompuCom, ($124.8 million at June 30, 2004) and the net proceeds received by the Company. The amount of the gain or loss on disposal will be affected by several factors including CompuCom’s results of operations from July 1, 2004 to closing, the amount of the additional impairment charge if any, and any adjustments to current estimates of proceeds and transaction costs.

Pro Forma Financial Information

The following unaudited pro forma condensed consolidated financial information as of June 30, 2004 and December 31, 2003 and for the six months ended June 30, 2004 and year ended December 31, 2003, gives effect to consummation of the disposition of the Company’s CompuCom shares in the proposed CompuCom merger. The unaudited pro forma condensed consolidated balance sheet assumes the disposition of the Company’s shares in the CompuCom merger as if it had occurred as of June 30, 2004. The unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2004 and year ended December 31, 2003 assume the disposition of the Company’s shares in the CompuCom merger occurred on January 1, 2003.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Unaudited Pro Forma Condensed Consolidated Balance Sheet
June 30, 2004


	As Reported		Deconsolidate			Proposed			Pro Forma
	June 30, 2004		CompuCom⁽¹⁾			Transaction			June 30, 2004
	(in thousands)
Current Assets
Cash and cash equivalents	$	292,328	$	(115,704	)	$	108,013	⁽²⁾	$	284,637
Restricted cash		604		—			—			604
Short-term investments		8,494		—			3,800	⁽²⁾		12,294
Accounts receivable, net		191,286		(159,998	)		—			31,288
Inventories		20,760		(20,571	)		—			189
Prepaid expenses and other current assets		11,492		(3,579	)		—			7,913
Asset held for sale		—		124,835			(124,835)	⁽¹⁾		—

Total current assets		524,964		(175,017	)		(13,022	)		336,925
Property and equipment, net		33,832		(18,249	)		—			15,583
Ownership interests in and advances to companies		35,763		—			—			35,763
Available-for-sale securities		14,464		—			—			14,464
Intangible assets, net		11,714		(3,146	)		—			8,568
Goodwill, net		153,881		(62,164	)		—			91,717
Non-current deferred taxes		7,284		(7,284	)		—			—
Note receivable - related party		6,981		—			—			6,981
Other		12,888		(571	)		15,900	⁽²⁾		28,217

Total assets	$	801,771	$	(266,431	)	$	2,878		$	538,218

Current Liabilities
Current maturities of long-term debt	$	14,093	$	—		$	—		$	14,093
Current convertible subordinated notes		—		—			54,763	⁽⁴⁾		54,763
Other current liabilities		185,101		(146,511	)		—			38,590

Total current liabilities		199,194		(146,511	)		54,763			107,446
Long-term debt		4,812		—			—			4,812
Minority interest		143,720		(119,920	)		—			23,800
Other long-term liabilities		13,044		—			—			13,044
Convertible subordinated notes		54,763		—			(54,763)	⁽⁴⁾		—
Convertible senior debentures		150,000		—			—			150,000
Shareholders’ equity		236,238		—			2,878	⁽⁵⁾⁽⁶⁾		239,116

Total liabilities and shareholders’ equity	$	801,771	$	(266,431	)	$	2,878		$	538,218

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheets

(1) The pro forma condensed consolidated balance sheet gives effect to the proposed CompuCom merger assuming the CompuCom merger occurred on June 30, 2004.

(2) Proposed Transaction.
The proposed transaction assumes the following for the Company. (in thousands):


Gross Proceeds	$	127,888
Transaction costs		(175	)
2024 Debentures interest escrow - current		(3,800	)
2024 Debentures interest escrow - non-current		(15,900	)

Net adjustments to cash, as presented		108,013
2006 Notes retirement (see (4))		(54,763	)

Net cash proceeds, after repayment of debt	$	53,250

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

The $127.9 million of gross cash proceeds to be received by the Company in connection with the CompuCom merger does not include any proceeds to be paid to the Company as a result of CompuCom shares pledged as collateral in connection with the loan made by the Company to Warren V. Musser (See Note 16).

(3) Use of Proceeds.
The pro forma condensed consolidated balance sheet assumes for the purpose of this presentation that the net sales proceeds of $53.3 million from the proposed sale of CompuCom will be deposited into a bank account and are presumed to be non-interest bearing cash for the pro forma statements of operations.

(4) Debt.
The pro forma condensed consolidated balance sheet reflects the reclassification of $54.8 million of 2006 Notes which are required to be repurchased within twelve months of the completion of the sale of CompuCom using proceeds from the proposed CompuCom merger to a current liability.

(5) Compensation Charge.
The pro forma condensed consolidated balance sheet assumes the acceleration of certain DSUs ($0.5 million) recorded in shareholders’ equity and is not presented in the pro forma statements of operations.

(6) Gain on Sale.
The pro forma condensed consolidated balance sheet assumes that the Company will record a gain on sale of $2.9 million representing the difference between the estimated proceeds of $127.7 million over the carrying value as of June 30, 2004 of $124.8 million.

Unaudited Pro Forma Condensed Consolidated Statements of Operations
For The Six Months Ended June 30, 2004


							Adjustments
	As Reported			Deconsolidate			and		Pro Forma
	June 30, 2004			CompuCom⁽¹⁾			Eliminations⁽¹⁾		June 30, 2004
	(in thousands except per share amounts)
Revenue	$	720,455		$	(641,569	)	$	—	$	78,886

Operating expenses
Cost of sales		606,506			(559,334	)		—		47,172
Selling and service		68,207			(40,891	)		—		27,316
General and administrative		55,065			(28,906	)		—		26,159
Depreciation and amortization		13,381			(6,821	)		—		6,560
Impairment		42,719			(42,719	)		—		—

Total operating expenses		785,878			(678,671	)		—		107,207

		(65,423	)		37,102			—		(28,321	)
Other income, net		40,077			—			—		40,077
Interest income		1,366			(392	)		—		974
Interest and financing expense		(5,914	)		236			—		(5,678	)

Income (loss) before income taxes, minority interest, and equity loss		(29,894	)		36,946			—		7,052
Income tax		3,915			(4,044	)		—		(129	)
Minority interest		15,185			(11,843	)		—		3,342
Equity loss		(6,301	)		—			—		(6,301	)

Net income (loss) from continuing operations	$	(17,095	)	$	21,059		$	—	$	3,964

Basic income (loss) per share	$	(0.14	)						$	0.03
Diluted income (loss) per share⁽²⁾	$	(0.14	)						$	0.03

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2004

Unaudited Pro Forma Condensed Consolidated Statements of Operations
For The Year Ended December 31, 2003


							Adjustments
	As Reported			Deconsolidate			and		Pro Forma
	December 31, 2003			CompuCom⁽¹⁾			Eliminations⁽¹⁾		December 31, 2003
	(in thousands except per share amounts)
Revenue	$	1,622,558		$	(1,455,120	)	$	—	$	167,438

Operating expenses
Cost of sales		1,376,526			(1,280,822	)		—		95,704
Selling and service		133,322			(78,353	)		—		54,969
General and administrative		111,215			(58,718	)		—		52,497
Depreciation and amortization		32,756			(15,458	)		—		17,298
Impairment		15,968			—			—		15,968

Total operating expenses		1,669,787			(1,433,351	)		—		236,436

		(47,229	)		(21,769	)		—		(68,998	)
Other income, net		48,930			—			—		48,930
Impairment - related party		(659	)		—			—		(659	)
Interest income		3,311			(1,114	)		—		2,197
Interest and financing expense		(13,568	)		1,395			—		(12,173	)

Loss before income taxes, minority interest, and equity loss		(9,215	)		(21,488	)		—		(30,703	)
Income tax		(5,400	)		5,191			—		(209	)
Minority interest		(1,537	)		8,291			—		6,754
Equity loss		(17,179	)		—			—		(17,179	)

Net loss from continuing operations	$	(33,331	)	$	(8,006	)	$	—	$	(41,337	)

Basic loss per share	$	(0.28	)						$	(0.35	)
Diluted loss per share⁽²⁾	$	(0.30	)						$	(0.35	)

Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations

(1) The pro forma condensed consolidated statements of operations give effect to the proposed CompuCom merger assuming the CompuCom merger occurred on January 1, 2003. The consolidated financial statements reflect an impairment charge, which increased the Company’s net loss by $23.3 million in the second quarter of 2004 to reduce the goodwill related to CompuCom to its estimated fair value. In addition, when the transaction is consummated, the Company will record $0.5 million of expense related to the acceleration of certain deferred stock units. The Company will also record a gain or loss on the sale of CompuCom based upon the difference between the carrying value and the net cash proceeds ultimately received. These amounts are not reflected in the unaudited pro forma condensed consolidated statements of operations above.

(2) If a consolidated or equity method public company has dilutive options or securities outstanding, diluted loss per share is computed first by deducting from net loss the income attributable to the potential exercise of the dilutive options or securities of the company. The impact is shown as an adjustment to net loss for purposes of calculating diluted loss per share. The pro forma diluted loss per share shown in the above tables excludes the effect of CompuCom’s diluted options and securities.

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, except to the extent otherwise required by law.

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

Safeguard is a company that seeks to create long-term shareholder value by taking controlling interests primarily in information technology and healthcare life sciences companies and helping them develop through superior operations and management. We sponsor companies at the leading edge of technology cycles and work to accelerate the commercialization of their technology-based solutions, products and services. Our value creation strategy is designed to drive superior growth at our companies by providing leadership and counsel, capital support and financial expertise, strategic guidance and operating discipline, access to best practices and industry knowledge.

We offer a range of operational management services to each of our companies through a team of dedicated professionals. We engage in an ongoing planning and assessment process through our involvement and engagement in the development of our companies, and our executives provide mentoring, advice and guidance to develop the management of our companies.

In general, we continue to hold our ownership interest in companies as long as we believe that the company meets our strategic criteria and that we can leverage our resources to assist them in achieving superior financial performance and value growth. When a company no longer meets our strategic criteria, we consider divesting the company and redeploying the capital realized in other acquisition and development opportunities. We may achieve liquidity events through a number of means, including sales of an entire company or sales of our interests in a company, which may include, in the case of our public companies, sales in the open market or in privately negotiated sales, and public offerings of the company’s securities.

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 2004. In addition, we expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. Additionally, we 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, our operating losses attributable to our corporate operations, our equity method subsidiaries and our consolidated method 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. These transactions have resulted in significant volatility in our financial results which we expect will continue during 2004.

Proposed Sale of CompuCom

On May 28, 2004, we announced that our subsidiary, CompuCom Systems, Inc. entered into a definitive agreement pursuant to which an affiliate of Platinum Equity, LLC would acquire CompuCom for $4.60 per common share in cash. Platinum will acquire Safeguard’s holdings of CompuCom preferred shares at par of $15 million plus accumulated dividends. We have agreed to vote our CompuCom shares in favor of the transaction, subject to the approval of our shareholders. Safeguard expects to receive proceeds of approximately $127.7 million, net of transaction costs, from the sale of its interest in CompuCom.

Safeguard presently intends to use the cash proceeds from the proposed sale to increase our ownership interest in strategic subsidiaries, thereby funding their respective growth plans; to acquire new strategic subsidiaries; to escrow five years of interest payments (approximately $19.7 million) for our convertible senior debentures with a stated maturity of 2024, pursuant to the terms of such debentures; to retire the remaining $54.8 million of our 5% convertible subordinated notes, due 2006, pursuant to terms of the

2024 debentures; depending upon market conditions from time to time, to consider steps to modify our capital structure (which may include the repurchase of a portion of our outstanding equity securities or debt); and for our general corporate purposes (including payment of Safeguard’s transaction expenses related to the proposed CompuCom merger).

Safeguard has agreed to provide to the landlord under CompuCom’s Dallas headquarters lease, Corp Delaware L.P., a subsidiary of W.P. Carey & Co. LLC, a letter of credit in the amount equal to $6.3 million, after the effective date of the proposed CompuCom merger (see Note 18), in order to facilitate CompuCom obtaining the consent required under the lease agreement, dated March 31, 1999, between Delaware Corp LLC and CompuCom. The letter of credit will expire on March 31, 2019 and CompuCom will reimburse Safeguard for all fees and expenses incurred by Safeguard in order to obtain and maintain this letter of credit. This reimbursement may not exceed 1.5% of the aggregate principal amount of Safeguard’s letter of credit per annum.

In connection with this transaction, a possible impairment of the carrying value of goodwill was indicated as Safeguard’s estimated net proceeds from the transaction are less than Safeguard’s carrying value of CompuCom. Accordingly, Safeguard completed the two-step testing requirements of SFAS No. 142. In the first step, Safeguard compared the fair value of the CompuCom reporting unit to its carrying value. Fair value was determined based on Safeguard’s estimated net proceeds from the transaction. This calculation resulted in an indication of impairment in the CompuCom reporting unit. The fair value of the CompuCom reporting unit was then allocated to the assets and liabilities of the CompuCom reporting unit. This fair value was then deducted from the fair value of the CompuCom reporting unit to determine the implied fair value of goodwill. The carrying value of the goodwill exceeded its implied fair value by $23.3 million.

An analysis of the proposed merger also indicated that the goodwill on CompuCom’s separate company financial statements may also be impaired. Accordingly, CompuCom separately performed the two-step testing requirements of SFAS No. 142. As a result, CompuCom recorded a loss from impairment of goodwill of $33.4 million during the second quarter of 2004. CompuCom also recorded an income tax benefit of $9.5 million related to the impairment charge. Safeguard’s share of this charge was $19.4 million on a pre-tax basis, or $14.0 million, net of income taxes.

After recording Safeguard’s share of CompuCom’s impairment charge, Safeguard’s carrying value of its goodwill still exceeded its implied fair value by $9.3 million, Safeguard recorded an additional impairment charge of $9.3 million.

The net effect of the impairment charge is presented on the Consolidated Statements of Operations as follows (in millions):


Impairment on Consolidated Statements of Operations	$	(42.7	)
Share of impairment allocated to minority shareholders of CompuCom (included in Minority Interest on the Consolidated Statements of Operations)		14.0
Safeguard’s share of CompuCom’s tax benefit related to the impairment charge (included in Income Taxes on the Consolidated Statements of Operations)		5.4

	$	(23.3	)

The transaction is expected to close in the third quarter of 2004 at which point, Safeguard will present the results of operations of CompuCom as discontinued operations for all periods presented and will record a gain or loss on the disposal for the difference between Safeguard’s carrying value in CompuCom, as adjusted for the impairment charge and the net proceeds received by Safeguard. The amount of the gain or loss on disposal will be affected by several factors including CompuCom’s results from July 1, 2004 through the date of the closing, the amount of additional impairment charge, if any, and any adjustments to current estimates of proceeds and transaction costs.

Net Results of Operations

Our reportable segments include i) Strategic 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) Non-Strategic Companies (formerly referred to as “Legacy” in the second quarter of 2003) in which we generally have less than a controlling interest or which do not directly fall within our strategic focus; and iii) CompuCom, which represents the results of our subsidiary, CompuCom. See “Proposed Sale of CompuCom.”

At June 30, 2004, we had ownership in 12 companies, which were classified into the following segments:


	Strategic	Non-Strategic
	Companies	Companies	CompuCom
Consolidated	Alliance Consulting (100%)	Pacific Title and	CompuCom (58%)^(b)
	ChromaVision	Art Studio (84%)
	Medical Systems(57%)
	Mantas (84%)

Equity		Nextone (27%)
		ProModel Solutions ^(a)(35%)

Cost		eMerge (17%)
		Mobility Technologies (3%)
		Neuronyx (7%)
		Realtime Media (9%)
		Ventaira (formerly BatellePharma) (11%)

(a) QuestOne Decision Sciences does business as ProModel Solutions.

(b) See “Proposed Sale of CompuCom.”

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 June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Strategic companies	$	(10,586	)	$	(10,481	)	$	(16,609	)	$	(18,182	)
Non-Strategic companies		28,314			12,858			37,486			13,433
CompuCom		(26,974	)		3,377			(25,516	)		6,823

Total segments		(9,246	)		5,754			(4,639	)		2,074
Corporate operations		(7,898	)		(7,439	)		(16,371	)		(17,906	)
Income tax benefit (expense)		4,683			(1,465	)		3,915			(2,857	)

	$	(12,461	)	$	(3,150	)	$	(17,095	)	$	(18,689	)

Strategic Companies


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue
Product sales	$	1,838		$	524		$	3,695		$	2,376
Service sales		29,748			26,150			58,928			55,940
Other		79			46			86			99

Total Revenue		31,665			26,720			62,709			58,415

Operating Expenses
Cost of sales - product		235			204			385			442
Cost of sales - service		19,302			17,853			38,084			37,390
Selling and service		12,861			12,174			24,400			24,821
General and administrative		8,233			6,542			14,128			12,849
Depreciation and amortization		2,385			2,767			4,867			5,207

Total Operating Expenses		43,016			39,540			81,864			80,709

		(11,351	)		(12,820	)		(19,155	)		(22,294	)
Other loss, net		(347	)		(55	)		(347	)		(55	)
Interest income		60			16			73			39
Interest and financing expense		(168	)		(135	)		(298	)		(306	)
Minority interest		1,220			2,513			3,118			4,434

	$	(10,586	)	$	(10,481	)	$	(16,609	)	$	(18,182	)

Alliance Consulting is an information technology services and consulting firm that provides custom business driven solutions by leveraging domain expertise and extensive technical competency. Alliance Consulting architects, builds and delivers technology solutions for the Fortune 2000 market, offering business intelligence and data warehousing, packaged enterprise solutions, strategy, application development and integration, and managed services. Over its ten-year history, Alliance Consulting has developed considerable domain expertise in the pharmaceutical, financial services, manufacturing, healthcare, retail and distribution industries. Alliance Consulting has 10 offices in the U.S. and has approximately 600 employees and contractors. Alliance Consulting recognizes revenue upon the performance of services. Contracts for services are typically for one year or less. Alliance Consulting’s revenue potential is largely dependent upon spending for IT services and its ability to compete with both on-shore and off-shore providers.

ChromaVision provides a proprietary, software-based microscope, imaging system, called ACIS or automated cellular imaging system, which aids pathologists in the analysis of various diseases and conditions. ChromaVision places most of its ACIS units with users on a “fee-per-use” basis. Revenue is recognized based on the greater of actual usage fees or the minimum monthly rental fee specified in the contract with the customer. Revenue on product sales is recognized upon acceptance by the customer subsequent to a testing and evaluation period. Maintenance revenue is recognized ratably over the term of the maintenance contract, typically 12 months. ChromaVision’s existing offering is centered around diagnostic testing, primarily for breast cancer. ChromaVision has begun the implementation plans to broaden their service offering to include the direct provisions of Access technical services to their Access remote pathology customers as well as to provide an array of complementary advanced cancer diagnostic services. ChromaVision is beginning to provide Access technical services in their own laboratory facility that is currently being renovated for these purposes. Future revenue will be impacted by ChromaVision’s ability to sell ACIS units to research and development organizations, expand its’ tests to other cancer therapies, expand its lab services offerings and to partner with pharmaceutical industry drug developers in defining target therapies for specific, identifiable markers. ChromaVision is expected to face increasing competition from competitors in its existing and expansion markets.

Mantas provides next-generation analytic applications for the global financial services and telecommunications markets. Mantas’ products are used by global leaders to comply with major industry regulations, such as the USA PATRIOT Act. All of Mantas’ financial services products are based on its Behavior Detection Platform that encompasses proprietary analytical techniques to provide applications for anti-money laundering, compliance fraud management and revenue assurance. During the fourth quarter of 2003, SOTAS, a majority-owned subsidiary, was merged into Mantas, joining complementary technologies, target markets, development capabilities and ultimately customer value propositions. Mantas recognizes revenue from software licenses, post-contract customer support and related consulting services under contracts ranging from one to three years. Mantas is a market leader in behavior technology for the financial services and telecommunications industries. Its ability

to grow will be largely influenced by its ability to enhance its technology, and to expand it to new tiers of the financial services and telecommunications markets, including markets overseas, as well as new vertical markets. Mantas faces significant competition from large consulting firms and software development businesses.

In 2003, the strategic segment also included the operating results of Agari Mediaware, which was shut down in July 2003. For comparative purposes, the operating results of SOTAS, Inc., which was merged with Mantas on October 1, 2003, have been combined with the operating results of Mantas.

These companies all incurred losses in 2003 and may need additional capital to fund their operations. If we decide not to provide sufficient capital resources to allow them to reach a cash flow positive position, and these companies are unable to raise capital from outside resources, then they may need to scale back their operations. If Alliance Consulting meets its business plans for 2004 and the related milestones established by us, we believe they will have sufficient cash or availability under established lines of credit to fund their operations for at least the next twelve months. In the first quarter of 2004, we funded a total of $12.5 million to ChromaVision, of which $4.5 million was released to ChromaVision in the second quarter of 2004. ChromaVision separately raised an additional $13.5 million in the first quarter of 2004, which was released to ChromaVision as of April 27, 2004, which should provide sufficient cash for ChromaVision for the next twelve months. In July 2004, we committed $10 million to fund Mantas, $5 million of which was funded in July 2004.

There is intense competition in the markets in which these companies operate, and we expect competition to intensify in the future. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. These companies’ future success depends on each company’s ability to execute their business plan and to adapt to their respective rapidly changing markets.

Revenue.

Quarter 2004 vs. 2003. Total revenue increased $4.9 million or 18.5% for the three months ended June 30, 2004 as compared to the prior year period. Alliance recorded an increase of $3.2 million or 15.6% in 2004 as compared to 2003. Alliance attributes this increase to increased efficiency related to the utilization of staff; however the acceleration of offshore outsourcing and ongoing industry consolidation has slowed the rate of revenue growth at Alliance. Mantas recorded a $2.2 million increase or 66.8% increase in revenue in 2004 as compared to 2003. Mantas attributes the increase to continued growth in the financial services sector of its business. Mantas continues to be affected by the weakness of external IT spending, which results in intense competition among systems integrators, consultants and software vendors for available business opportunities. Partially offsetting these increases in revenues is a decrease at ChromaVision of $0.5 million or 16.2% in 2004 as compared to 2003. ChromaVision attributes the decline primarily to a decrease in the average monthly revenue for ACIS placements and the remote viewing stations. The decline in average monthly revenue is primarily due to pricing concessions offered to ChromaVision’s customers in response to lower Medicare reimbursement levels from 2003 to 2004. This decline was offset by an increase in system sales revenue of $0.6 million as well as $0.2 million of lab services revenue.

Year-to-date 2004 vs. 2003. Total revenue increased $4.3 million or 7.4% for the six months ended June 30, 2004 as compared to the prior year period. Alliance recorded an increase in revenue of $3.5 million or 8.1% in 2004 as compared to 2003. Alliance attributes this increase to greater utilization of staff. Mantas recorded an increase in revenue of $2.2 million or 24.4% in 2004 as compared to 2003. Mantas attributes this increase to continued growth in the financial services sector of its business. Partially offsetting these increases is a decrease at ChromaVision of $1.4 million or 24.3% in 2004 as compared to 2003. ChromaVision attributes the decline primarily to pricing concessions offered to ChromaVision’s customers in response to lower reimbursement levels from 2003 to 2004. This decline was partially offset by an increase of system sales of $0.7 million as well as $0.2 million of revenue associated with the new lab services line of the business.

ChromaVision anticipates that average monthly ACIS System revenue will remain at approximately the levels experienced in the first half of 2004, and that most, if not all, of the negative impact from reimbursement has been reflected in the current revenue amounts. Both system sales and lab services are expected to have a favorable impact on revenues in the second half of 2004.

Cost of Sales.

Quarter 2004 vs. 2003. Total cost of sales increased $1.5 million or 8.2% for the three months ended June 30, 2004 as compared to the prior year period. Alliance recorded an increase of $1.5 million or 9.9% in 2004 as compared to 2003. Alliance attributes this increase to increased revenues as gross margins were relatively constant. ChromaVision recorded an increase in cost of

sales of $0.2 million or 63.8% in 2004 as compared to 2003. ChromaVision attributes this increase to an increase in the number of system sales in 2004 as compared to 2003. ChromaVision recorded five system sales in 2004 as compared to two sales in 2003. Partially offsetting the increase was a decrease in cost of sales at Mantas of $0.2 million or 6.8%. Mantas attributes this decline to better contract terms in 2004 as compared to 2003.

Year-to-date 2004 vs. 2003. Total cost of sales increased $0.6 million or 1.7% for the six months ended June 30, 2004 as compared to the prior year period. Alliance recorded an increase of $1.0 million or 3.2% in 2004 as compared to 2003. Alliance attributes this increase to increased revenues as gross margins were relatively constant. ChromaVision recorded an increase in cost of sales of $0.2 million or 29.7% in 2004 as compared to 2003 due to increased system sales and costs associated with its new lab services business. ChromaVision attributes this increase to an increase in the number of system sales in 2004 as compared to 2003. ChromaVision recorded 8 system sales in 2004 as compared to two sales in 2003. Partially offsetting these increases was a decrease in cost of sales at Mantas of $0.6 million or 9.4%. Mantas attributes this decline to better contract terms in 2004 as compared to 2003.

Selling and Service and General and Administrative.

Quarter 2004 vs. 2003. Selling and service and general and administrative expenses increased by $2.4 million or 12.7% for the three months ended June 30, 2004 as compared to the prior year period. ChromaVision recorded an increase of $2.2 million or 54.9% in 2004 as compared to 2003. ChromaVision attributes this increase primarily to non-cash compensation charges related to stock options and restricted stock for employees, consultants costs, as well as legal costs. Alliance recorded a $1.7 million or 24.3% increase in 2004 as compared to 2003. Alliance attributes this increase primarily to employee related costs associated with new hires and severance for a former executive. Partially offsetting these increases is a decline at Mantas of $0.6 million or 9.4%. The decline at Mantas primarily relates to cost savings realized from the reduced headcount as a result of the merger with SOTAS in October 2003. The remaining decline is related to operations at Agari Mediaware, which was shut down in July 2003.

Year-to-date 2004 vs. 2003. Selling and service and general and administrative expenses increased $0.8 million or 2.3% for the six months ended June 30, 2004 as compared to the prior year period. ChromaVision recorded an increase of $2.3 million or 28.7% in 2004 as compared to 2003. ChromaVision attributes this increase to additional professional fees surrounding various corporate matters and non-cash compensation charges related to stock options and restricted stock. Alliance recorded an increase of $1.6 million or 11.6% in 2004 as compared to 2003. Alliance attributes this increase to an increase in employee related costs primarily due to new hires and severance for a former executive. Partially offsetting these increases is a decrease at Mantas of $1.0 million or 7.3%. Mantas attributes this decline primarily to efficiency realized from the reduced headcount as a result of the merger with SOTAS in October 2003. The remaining decline relates to operations at Agari Mediaware, which was shut down in the third quarter of 2003.

Non-Strategic Companies


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	8,186		$	14,678		$	16,139		$	23,297
Operating expenses		6,580			12,206			15,277			20,540

		1,606			2,472			862			2,757
Other income, net		30,829			12,881			42,611			17,017
Interest income		5			2			11			3
Interest and financing expense		(16	)		(34	)		(46	)		(76	)
Minority interest		(249	)		(315	)		224			(132	)
Equity loss		(3,861	)		(2,148	)		(6,176	)		(6,136	)

	$	28,314		$	12,858		$	37,486		$	13,433

Introduction.

Revenue for the non-strategic segment is primarily derived from Pacific Title’s film title and special effects services. In 2003, Pacific Title sold large format film projectors. It exited this business at the end of 2003. In addition, in 2003 and until Tangram was sold in February 2004, revenue included software license sales of Tangram’s asset tracking software, software maintenance contracts and post-contract customer support consulting services. The non-strategic segment also included the management fees generated by a management company of a private equity fund through August 2003 when it was sold.

Revenue.

Quarter 2004 vs. 2003. Revenue decreased $6.5 million or 44.2% for the three months ended June 30, 2004 as compared to the prior year period. Pacific Title recorded a decline of $3.1 million or 27.6% in 2004 as compared to 2003. Pacific Title attributes this decline to the shut down of its large format projectors business in 2003. A total of $2.6 million of the decline in revenue relates to the sale in February 2004 of Tangram. Also contributing to the decline is $0.8 million related to the sale of our interest in a management company of a private equity fund in August 2003.

Year-to-date 2004 vs. 2003. Revenue decreased $7.2 million or 30.7% for the six months ended June 30, 2004 as compared to the prior year period. Tangram represents a $3.6 million decline in 2004 as compared to 2003 primarily due to their sale in February 2004. Pacific Title recorded a $2.0 million or 12.1% decline in revenue in 2004 as compared to 2003. Pacific Title attributes $4.2 million of this decline to the sales of large format projectors in 2003, which they no longer sell. This decline was offset by an increase of $2.1 million related to increases in its post-production services business. A total of $1.5 million of the decline is related to the sale of our interest in a management company of a private equity fund in August 2003.

Operating Expenses

Quarter 2004 vs. 2003. Operating expenses decreased $5.6 million or 46.1% for the three months ended June 30, 2004 as compared to the prior year period. Tangram represents $2.6 million of the decline due to their sale in February 2004. Pacific Title recorded a $2.1 million or 24.1% decline in 2004 as compared to 2003. Pacific Title attributes this decline to sales of its large format projectors in 2003, which was shut down in 2003. Also contributing to the decline is $0.9 million recorded in 2003 related to operating expenses at Protura Wireless and a management company of a private equity fund. We sold our interest in this fund in August 2003 and closed Protura Wireless in July 2003.

Year-to-date 2004 vs. 2003. Operating expenses decreased $5.3 million or 25.6% for the six months ended June 30, 2004 as compared to the prior year period. A total of $2.2 million of the decrease relates to operations at Tangram, which was sold in February 2004. A total of $1.9 million was recorded in 2003 related to operating expenses at Protura Wireless and a management company of a private equity fund. We sold our interest in this fund in August 2003 and closed Protura Wireless in July 2003. Pacific Title recorded a decline of $1.0 million or 7.6% in 2004 as compared to 2003. Pacific Title attributes this decline to costs associated with the large format projector business which was shut down at the end of 2003.

Other Income, Net.


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Gain on sale of companies and funds, net	$	32,200		$	12,884		$	44,416		$	17,088
Gain (loss) on trading securities		161			874			(396	)		810
Impairment charges		(1,550	)		(489	)		(1,550	)		(489	)
Other		18			(388	)		141			(392	)

	$	30,829		$	12,881		$	42,611		$	17,017

Quarter 2004 vs. 2003. During the second quarter of 2004, we sold our interest in Sanchez for cash and shares of Fidelity National Financial (“FNF”) and reported a gain of $31.7 million, which is included in gain on sale of companies and funds. Gain on sale of companies for the three months ended June 30, 2003 includes $5.9 million related to the sale of DocuCorp and $6.4 million related to the sale of Internet Capital Group. Total net cash proceeds for gains on sale of companies and funds was $32.5 million and $25.4 million for the three months ended June 30, 2004 and 2003.

The gain on trading securities for the second quarter of 2004 reflects the adjustment to fair value of our holdings of Opsware and FNF common stock. Total net proceeds related to the sale of Opsware and FNF common stock during the second quarter of 2004 was $10.7 million. The gain on trading securities for the second quarter of 2003 is related to the adjustment to fair value of our holdings in Vertical Net.

Year-to-date 2004 vs. 2003. In addition to the $31.7 million gain recognized on our sale of Sanchez in the second quarter of 2004, we recorded a gain of $8.5 million related to our sale of Tangram for shares of Opsware in the first quarter of 2004. Also included in gain on sale of companies is $2.7 million attributable to a distribution from a bankruptcy proceeding and $1.5 million relating to the final payment of an installment sale of a company sold in 1997. Gain on sale of companies for the six months ended June 30, 2003 includes the second quarter sales of DocuCorp and Internet Capital Group, 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 non-strategic company. Total net cash proceeds for gains on sale of companies and funds was $37.3 million for the six months ended June 30, 2004 and $29.8 million for the six months ended June 30, 2003.

Loss on trading securities in 2004 primarily reflect the adjustment to fair value of our holdings in Opsware and subsequent loss on sale of Opsware stock of $0.1 million. Total net cash proceeds related to our sales of Opsware and FNF common stock for the six months ended June 30, 2004 was $14.8 million. Loss on trading securities in 2003 primarily reflect the adjustment to fair value of our holdings in Vertical Net, 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 investments.

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. We recognize our share of losses to the extent we have cost basis in the equity investee, or we have outstanding commitments or guarantees. Equity loss consisted of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Share of our equity method non-strategic companies’ results of operations	$	(1,437	)	$	795		$	(1,764	)	$	1,199
Share of private equity funds results of operations		(2,424	)		(2,665	)		(4,412	)		(7,057	)
Impairment charges on cost method holdings		—			(278	)		—			(278	)

	$	(3,861	)	$	(2,148	)	$	(6,176	)	$	(6,136	)

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.

Quarter 2004 vs. 2003. The $1.7 million increase in equity loss in 2004 as compared to 2003 is primarily attributable to a $2.2 million increase in our share of equity method non strategic companies results of operations. Included in this total is $1.5 million related to companies in which we no longer have ownership interests. Partially offsetting the overall increase in equity loss is a $0.2 million decline in our share of private equity funds results of operations, which is attributable to the sale of a private equity fund in the third quarter of 2003.

Year-to-date 2004 vs. 2003. Equity loss for the six months ended June 30, 2004 compared to the prior year period remained constant. Included in equity loss is $3.0 million increase in our share of equity method non-strategic companies results of operations and is mainly attributable to $2.1 million of equity losses attributable to companies in which we no longer have ownership interests. The $2.6 million decline in our share of private equity funds results of operations is primarily due to the sale of a private equity fund in the third quarter of 2003.

CompuCom


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue
Product sales	$	260,949		$	304,731		$	481,736		$	562,149
Service sales		80,964			72,997			159,833			145,876

Total Revenue		341,913			377,728			641,569			708,025

Operating Expenses
Cost of sales – product		244,757			284,939			451,687			520,238
Cost of sales – service		54,993			48,884			108,044			99,212
Other operating expenses		39,391			38,351			76,634			77,376
Impairment		42,719			—			42,719			—

		381,860			372,174			679,084			696,826

		(39,947	)		5,554			(37,515	)		11,199
Interest income		209			334			392			652
Interest and financing expense		(116	)		(420	)		(236	)		(823	)
Minority interest		12,880			(2,091	)		11,843			(4,205	)

	$	(26,974	)	$	3,377		$	(25,516	)	$	6,823

See “Proposed Sale of CompuCom”.

CompuCom’s product revenue is derived from procurement services CompuCom offers to its clients, providing them with a single point of contact for multi-vendor technology acquisition and support. CompuCom’s service revenue is derived primarily from IT outsourcing services, IT consulting and system integration services, complex configuration and imaging services, vendor warranty contracts, software licensing management fees and services provided in support of certain manufacturers’ direct fulfillment initiatives.

Revenue

Quarter 2004 vs. 2003. Revenue, which consists of product revenue and service revenue, decreased $35.8 million or 9.5% for the three months ended June 30, 2004 as compared to the same period in 2003. Of the decrease, $43.8 million or 14.4% in 2004 as compared to 2003 was attributable to product revenue partially offset by an increase of $8.0 million or 10.9% in 2004 as compared to 2003 related to service revenue. CompuCom reported declines in both the hardware and software portions of product revenue. CompuCom attributes the decline in the hardware portion of total product revenue to the result of lower sales generated by CompuCom’s large enterprise account base, as well as lower sales to the federal government. CompuCom attributes the decline in the software portion of total product revenue to the shift to a greater mix of software licenses sold for which CompuCom recorded a fee rather than gross revenue. CompuCom attributes the increase in service revenue primarily to increased demand for their application development staffing and testing services and ITO services, partially offset by a decrease in services provided to the federal government.

Year–to-Date 2004 vs. 2003. Revenue, which consists of product revenue and service revenue, decreased $66.5 million or 9.4% for the six months ended June 30, 2004 as compared to the same period in 2003. Of the decrease, $80.4 million or 14.3% in 2004 as compared to 2003 was attributable to product revenue partially offset by an increase of $13.9 million or 9.6% in 2004 as compared to 2003 related to service revenue. CompuCom reported declines in both the hardware and software portions of product revenue. CompuCom attributes the decline in the hardware portion of total product revenue to the result of lower sales generated by CompuCom’s large enterprise accounts, as well as lower sales to the federal government. CompuCom attributes the decline in the software portion of total product revenue to the shift to a greater mix of software licenses sold for which CompuCom recorded a fee rather than gross revenue. CompuCom attributes the increase in service revenue primarily to increases in their application development staffing and testing services, ITO services and fees earned from their software licensing management services, partially offset by a decrease in services provided to the federal government.

Cost of Sales/Gross Margin

Quarter 2004 vs. 2003. Product gross margin for the three months ended June 30, 2004 was 6.2% compared to 6.5% for the same period in 2003. CompuCom believes this decrease is primarily due to continued pricing pressure in their large enterprise account base, partially offset by an increase in volume incentive dollars received from suppliers, the reduction in lower margin

sales to the federal government, and a decline in the mix of lower margin software revenue relative to total product revenue. Service gross margin for the three months ended June 30, 2004 was 32.1% compared to 33.0% for the same period in 2003. This decline is primarily the result of a higher mix of application development staffing and testing services, as well as lower gross margins in their ITO services.

Year–to-Date 2004 vs. 2003. Product gross margin for the six months ended June 30, 2004 was 6.2% compared to 7.5% for the same period in 2003. CompuCom believes this decrease is primarily due to continued pricing pressure and lower volume incentive dollars received from suppliers. Service gross margin for the six months ended June 30, 2004 was 32.4% compared to 32.0% for the same period in 2003. CompuCom attributes this increase primarily to the result of the increase in fees from CompuCom’s software management services and from the decrease in lower margin sales to the federal government, partially offset by an increase in the mix of application development and testing services and competitive pricing pressures in CompuCom’s ITO 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 lower revenue and related gross margin when compared to the comparable prior year period or previous quarter.

Other Operating Expenses.

Quarter 2004 vs. 2003. Other operating expenses increased 2.7% for the three months ended June 30, 2004. CompuCom attributes this increase for the three month period to an increase in selling and service expenses related to increases in personnel and related costs associated with their investment in the expansion and specialization of their sales force and increased revenue in application development and testing services partially offset by their own cost management efforts related to general and administrative expenses, including certain infrastructure costs, in particular occupancy-related expenses, as well as personnel related costs .

Year–to-Date 2004 vs. 2003. Other operating expenses decreased 1.0% for the six months ended June 30, 2004 as compared to the same period in 2003. CompuCom attributes this decrease for the six month period to its own cost management efforts related to general and administrative expenses, including certain infrastructure costs, in particular occupancy-related expenses, as well as personnel related costs. This is partially offset by an increase in selling and service expenses related to increases in personnel and related costs associated with their investment in the expansion and specialization of their sales force and increased revenue in application development and testing services.

Impairment

On May 28, 2004, Safeguard announced that its subsidiary, CompuCom Systems, Inc. entered into a definitive agreement pursuant to which an affiliate of Platinum Equity, LLC would acquire CompuCom for $4.60 per common share in cash. Platinum will also acquire the Company’s holdings of CompuCom preferred shares at par of $15 million plus accumulated dividends (see “Proposed Sale of CompuCom”). In connection with this merger with CompuCom announced during the second quarter of 2004, a possible impairment of the carrying value of goodwill was indicated as Safeguard’s estimated net proceeds from the transaction are less than Safeguard’s carrying value of CompuCom. Accordingly, Safeguard completed the two-step testing requirements of SFAS No. 142. In the first step, Safeguard compared the fair value of the CompuCom reporting unit to its carrying value. Fair value was determined based on Safeguard’s estimated net proceeds from the transaction. This calculation resulted in an indication of impairment in the CompuCom reporting unit. The fair value of the CompuCom reporting unit was then allocated to the assets and liabilities of the CompuCom reporting unit. This fair value was then deducted from the fair value of the CompuCom reporting unit to determine the implied fair value of goodwill. The carrying value of the goodwill exceeded its implied fair value by $23.3 million.

An analysis of the proposed merger also indicated that the goodwill on CompuCom’s separate company financial statements may also be impaired. Accordingly, CompuCom separately performed the two-step testing requirements of SFAS No. 142. As a result, CompuCom recorded a loss from impairment of goodwill of $33.4 million during the second quarter of 2004. CompuCom also recorded an income tax benefit of $9.5 million related to this impairment charge. Safeguard’s share of this charge was $19.4 million on a pre-tax basis, or $14.0 million, net of income taxes, which is included in Other Items.

After recording our share of CompuCom’s impairment charge, Safeguard’s carrying value of its goodwill still exceeded its implied fair value by $9.3 million, Safeguard recorded an additional impairment charge of $9.3 million.

The net effect of the impairment charge is presented in the CompuCom Segment as follows (in millions):


Impairment on CompuCom Segment	$	(42.7	)
Share of impairment allocated to minority shareholders of CompuCom (included in Minority Interest on the CompuCom Segment)		14.0
Safeguard’s share of CompuCom’s tax benefit related to the impairment charge (included in Income Taxes in Other Items)		5.4

	$	(23.3	)

Interest Income. Interest income decreased for the three and six months ended June 30, 2004 as compared to the same periods in 2003. CompuCom attributes the decline to a decrease in interest earned on available cash for the three and six months ended June 30, 2004 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 six months ended June 30, 2004 as compared to the prior year periods. The decrease is primarily due to the fourth quarter 2003 reduction in amounts utilized under CompuCom’s receivable securitization.

Other Items

Corporate Operations


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
General and administrative costs, net	$	(4,094	)	$	(4,557	)	$	(8,007	)	$	(11,277	)
Stock-based compensation		(935	)		(500	)		(1,486	)		(1,294	)
Depreciation and amortization		(60	)		(63	)		(122	)		(238	)
Interest income		457			501			890			1,191
Interest expense		(2,316	)		(2,888	)		(5,334	)		(5,716	)
Impairment – related party		—			—			—			(659	)
Other		(950	)		68			(2,312	)		87

	$	(7,898	)	$	(7,439	)	$	(16,371	)	$	(17,906	)

General and Administrative Costs, Net. Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs. The decline of $0.5 million or 10.2% for the three months ended June 30, 2004 as compared to the prior year period is primarily due to certain cost reduction efforts including reduced employee-related costs and the reduction in the use of outside consulting services. The $3.3 million or 29.0% decline in general and administrative costs for the six months ended June 30, 2004 as compared to the prior year period is mainly attributable to certain cost reduction efforts including reduced employee-related costs, the reduction in the use of outside consulting services and a decline in the costs of certain directors and officers insurance expense.

Stock Based Compensation. Stock based compensation consists primarily of expense related to grants of restricted stock and deferred stock units to employees. This expense increased for the three and six months ended June 30, 2004 versus the same period in the prior year due to certain deferred stock units issued in January 2004, which are expected to vest in the third quarter of 2004 upon the sale of CompuCom. This increase was offset by a decrease in restricted stock amortization as more restricted stock vested in the 2003 periods.

Interest Income. Interest income remained constant for the three months ended June 30, 2004 as compared to the prior year period and decreased $0.3 million for the six months ended June 30, 2004 when compared to the same prior year period. The decline is related to the interest on a note in 2004 related to the sale of the corporate campus in October 2003 as well as the collection of an installment sale related to a company sold in 1997. Both the note and installment sale were paid to the

Company in 2004. Also attributing to the decline is a decline of interest earned on invested cash balances due to lower interest rates in 2004 as compared to 2003.

Interest Expense. Interest expense is primarily comprised of the interest payments on our $200 million, 5% subordinated convertible debt due 2006 and the $150 million, 2.625% convertible senior debentures with a stated maturity of 2024. Interest expense decreased $0.6 million and $0.4 million for the three and six months ended June 30, 2004 when compared to the same prior year period due to the purchases Safeguard completed of a portion of the 2006 Notes through privately negotiated transactions during the first and second quarters of 2004. Partially offsetting this decrease is an increase of $1.5 million and $1.0 million for the three and six months ended June 30, 2004 related to the 2024 Notes issued in February 2004.

Impairment – related party. In May 2001, we entered into a loan agreement with Mr. Musser, our former CEO. 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 collateral we held at March 31, 2003 was approximately $13.8 million. There was no impairment charge taken in the first six months of 2004 as the carrying value of the collateral we held at June 30, 2004 was approximately $11 million. We will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis. In addition, if the proposed sale of CompuCom is consummated, the Company will receive an additional $2.0 million related to the CompuCom shares held by Mr. Musser, which are included as a portion of the collateral described above. See “Proposed Sale of CompuCom.”

Other. Included in this category are costs associated with the purchases of our 2006 Notes, including $0.5 million and $1.4 million for the three and six months ended June 30, 2004 due to the acceleration of the amortization relative to deferred issuance costs on the 2006 Notes repurchased during 2004. Also included is $0.5 million and $0.9 million for the three and six months ended June 30, 2004 related to the commissions and premiums paid relative to the repurchase of the 2006 Notes.

Income Taxes. Our consolidated income tax benefit recorded for the three and six months ended June 30, 2004, was $4.7 million and $3.9 million net of recorded valuation allowance of $13.0 million and $17.9 million. Of the $4.7 million and $3.9 million of income tax benefit, $4.8 million and $4.0 million was generated by CompuCom, which is not consolidated for tax purposes, and $0.1 million and $0.1 million relates to state income tax expense generated by subsidiaries in jurisdictions where the company has no offsetting tax attributes. We have recorded a valuation allowance to reduce our net deferred tax asset to an amount that is more likely than not to be realized in future years except for deferred tax assets related to CompuCom, which files separate federal and state income tax returns.

Liquidity And Capital Resources

We funded our operations with proceeds from sales of and distributions from companies, funds, trading securities and sales of non-strategic assets. Other sources of liquidity which have been utilized by Safeguard in prior periods include sales of available-for-sale securities, 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 companies, sales of available-for-sale securities and Safeguard equity and debt issuances has at times been adversely affected by the decline in the US markets and other factors.

Parent Company

Parent company includes Safeguard and its wholly owned subsidiaries, including Alliance Consulting.

As of June 30, 2004 at the parent company level, we had $152.4 million of cash and cash equivalents, $0.5 million of restricted cash and $8.5 million of short-term investments, for a total of $161.4 million. In addition, our majority-owned subsidiaries had cash and cash equivalents of $140.0 million, of which CompuCom represents $115.7 million.

Proceeds from sales of and distributions from companies and funds were $33.3 million and $38.4 million for the three and six months ended June 30, 2004, primarily related to the sale of Sanchez. Proceeds from sales of trading securities were $10.7 million and $14.8 million for the three and six months ended June 30, 2004, primarily attributable to sales of FNF and Opsware common shares. Proceeds from sales of and distributions from companies and funds were $2 million and $7 million for the three and six months ended June 30, 2003. Proceeds from sales of available-for-sale and trading securities were $22 million for the three and six months ended June 30, 2003.

In May 2004, we renewed our revolving credit facility 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. This credit facility matures in May 2005 and bears interest at the prime rate (4.0% at June 30, 2004) 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 one times any outstanding amounts under the facility. In conjunction with the issuance of the 2024 Notes, we amended our revolving credit facility to grant the bank a right to a security interest in accounts held by us at the bank equal to any amounts outstanding under the facility. The reduction from the two times cash collateral has provided us with less restrictions of our cash and increased our liquidity. This facility provides us additional flexibility to implement our strategy and support our companies. As of June 30, 2004, we provided guarantees related to three strategic companies’ credit facilities that allowed for borrowing of up to $18 million of which $12 million was outstanding. As of June 30, 2004, there was $7 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.

In May 2001, we entered into a $26.5 million loan agreement with Mr. Musser, the former CEO of Safeguard. 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 fourth quarter of 2002 and the first quarter of 2003, we impaired the loan by $11.4 million and $0.7 million respectively, to the estimated value of the collateral that we held at that date. The carrying value of the loan at June 30, 2004 was $7.0 million and the value of the underlying collateral was $10.7 million. In April 2004, we received a total of $4.5 million in net cash proceeds from Mr. Musser as a result of the sale of certain collateral. We will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis. In addition, if the proposed sale of CompuCom is consummated, the Company will receive an additional $2.0 million related to the CompuCom shares held by Mr. Musser, which are included as a portion of the collateral described above. See “Proposed Sale of CompuCom.”

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 $23 million at June 30, 2004, a total of $18 million relates to guarantees of our consolidated companies under our credit facility. A total of $12 million of debt associated with our guarantees has been recorded on the consolidated companies’ Balance Sheets and is therefore reflected in the Company’s Consolidated Balance Sheets at June 30, 2004. Additionally, we have committed capital of approximately $25 million, including commitments made in prior years to various companies and funds, 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 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 June 30, 2004 and assuming for these purposes the only distributions from the funds is equal to the carrying value of the funds on the June 30, 2004 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 $4 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 October 2001, Safeguard entered into an agreement with its former Chairman and Chief Executive Officer to provide for annual payments of $650,000 per year and certain health care and other benefits for life. As a result of this agreement, Safeguard recorded expense of $5.5 million, which was included in General and Administrative Expense in the Consolidated Statements of Operations for the year ended December 31, 2001. The related current liability of $0.5 million is included in Accrued Expenses and the long-term portion of $4.4 million is included in Other Long-Term Liabilities on the Consolidated Balance Sheets at June 30, 2004.

At December 31, 2003, we had outstanding $200 million of 5% convertible subordinated notes due June 15, 2006 (the 2006 Notes). In February 2004, we completed the sale of $150 million of 2.625% convertible senior debentures due March 15, 2024 (the 2024 Notes). We used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes by one or more privately negotiated transactions. As of June 30, 2004, we had repurchased $145.2 million of face value of the 2006 Notes for $146.1 million. As of June 30, 2004, the outstanding balance of the 2006 Notes is $54.8 million. We intend to use a portion of the proceeds from the proposed sale of CompuCom to redeem the remaining 2006 Notes.

Interest on the 2006 Notes is payable semi-annually. The 2006 Notes are redeemable in whole or in part at our option for a maximum of 101.67% 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. The conversion rate of the notes at June 30, 2004 was $24.1135 of principal amount per share. The closing price of our common stock on June 30, 2004 was $2.30. The note holders may also require repurchase of the notes upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control.

Interest on the 2024 Notes is payable semi-annually. At the note holders’ option subsequent to June 30, 2004, the notes are convertible into our common stock before the close of business on March 14, 2024 subject to certain conditions. The conversion rate of the notes at June 30, 2004 was $7.2174 of principal amount per share. The note holders may require repurchase of the notes on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective amount plus accrued and unpaid interest. The note holders may also require repurchase of the notes upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, we may redeem all or some of the 2024 Notes commencing March 20, 2009.

The 2024 Notes also provide that if we sell an interest in a company that is not strategic, and the aggregate book value of that interest, when added to the aggregate book value of all such interests sold in the preceding 12 months, exceeds $50 million, we will:

(i) place in escrow and pledge to the trustee an amount equal to our interest obligations on the 2024 Notes through March 2009;

(ii) apply, within one year after such sale, an amount equal to the lesser of (a) the outstanding principal amount on the 2006 Notes or (b) 50% of remaining cash proceeds after (i) is satisfied, to repurchase our outstanding 2006 Notes. If this amount is less than $20 million and the outstanding balance of the 2006 Notes exceeds $20 million, we will use 50% of cash proceeds from the subsequent sales of non-strategic companies to repurchase 2006 Notes until the aggregate amount equals $20 million. We may use our common stock to satisfy these repurchase obligations during the one-year period.

The aggregate book value of all of our companies that are not strategic was $169.5 million at June 30, 2004.

The proposed sale of CompuCom is considered the sale of a non-strategic asset and accordingly, uses of such proceeds are subject to the requirements under the terms of the 2024 Notes described above. See “Proposed Sale of CompuCom”.

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 have the ability to repurchase or refinance the remaining balance of the 2006 Notes prior to their due date.

Based on the above discussion, we believe our cash and cash equivalents at June 30, 2004 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 companies, our current operating plan to acquire interests in new companies and our general corporate requirements.

As a result of the proposed CompuCom transaction, we would receive approximately $128 million of cash proceeds, which would be used to pay transaction costs, retire the remaining $54.8 million of principal related to the 2006 Notes as well as escrowing approximately $19.7 million for certain future interest payments on our 2024 Notes.

Alliance Consulting, which is included in the parent company, has an outstanding credit facility that provides for borrowings of up to $10 million as of June 30, 2004. The revolving credit facility matures in September 2004. As of June 30, 2004, outstanding borrowings under this facility were $8 million.

Analysis of Parent Company Cash Flows

Cash (Used In) Operating Activities

Net cash used in operating activities was $15.2 million for the six months ended June 30, 2004 compared to $17.6 million for the six months ended June 30, 2003. The decrease was due primarily to working capital changes.

Cash Provided by Investing Activities

Cash provided by investing activities primarily reflects the proceeds from the sales of non-strategic assets and private equity funds, partially offset by acquisition of ownerships interests in companies from third parties.

Net cash provided by investing activities was $41.2 million for the six months ended June 30, 2004 compared to $17.1 million for the six months ended June 30, 2003. The increase in cash provided of $24.1 million is primarily due to an increase of $31.2 million in proceeds from sales and distributions from companies and funds, partially offset by a $7.6 million decline in proceeds from sales of trading securities and a $3.9 million decline in acquisitions of ownership interests in companies, funds and subsidiaries, net of cash acquired, which includes $12.5 million of funding to ChromaVision in 2004 as compared to $5.0 million in 2003 and $1.6 million relating to our investment in private equity funds in 2004 as compared to $4.8 million in 2003. Included in the increase in proceeds from sales and distributions from companies and funds is $32.1 in cash proceeds related to our sale of Sanchez. Included in proceeds from sales of trading securities in 2004 is $8.3 million related to our sales of FNF common stock (received in Sanchez merger in the second quarter of 2004) and $6.5 million related to our sale of Opsware common stock (received in sale of Tangram in the first quarter of 2004).

Cash Provided by (Used In) Financing Activities

Cash provided by financing activities was $3.4 million for the six months ended June 30, 2004 as compared to cash used in financing activities of $2.9 million for the six months ended June 30, 2003. The increase of $6.3 million is mainly attributable to a $15.1 million and $20.7 million decline in borrowings and repayments on revolving credit facilities. In February 2004, we completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of 2024, net of related offering costs of $5.0 million. We have repurchased $145.2 million of face value of the 2006 notes as of June 30, 2004.

CompuCom (See “Proposed Sale of CompuCom”).

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.

The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. Amounts outstanding as sold receivables as of June 30, 2004 consisted of one $10 million certificate, with an October 2005 maturity date. 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. These programs have been at times a material factor in CompuCom’s financing needs. As of June 30, 2004 and December 31, 2003, CompuCom was owed approximately $7.0 million and $18.6 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.

In addition, 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. 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 June 30, 2004 and December 31, 2003, CompuCom was owed approximately $3.6 million and $2.6 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.

Other Consolidated Subsidiaries

Mantas, ChromaVision and Pacific Title have outstanding credit facilities that provide for borrowings of up to $10 million as of June 30, 2004. A revolving credit facility for $2 million which had an original maturity of July 2004 has been extended to September 2004, a total of $3 million matures in February 2005 and $5 million matures in March 2005. As of June 30, 2004, there were $4 million of outstanding borrowings under these facilities.

Consolidated Working Capital

Consolidated working capital increased to $326 million at June 30, 2004 compared to $278 million at December 31, 2003. The increase is primarily attributable to proceeds from sales of and distributions from companies and funds as well as decreases in accounts payable and accrued liabilities, partially offset by declines in receivables and inventories at CompuCom. CompuCom attributes this activity to a decline in revenue in the second quarter of 2004 as compared to the fourth quarter of 2003.

Analysis of Consolidated Company Cash Flows

Cash used in Operating Activities

Net cash provided by operating activities was $14.7 million for the six months ended June 30, 2004 compared to net cash used of $27.4 million for the same prior year period. The increase is attributable to decreases in accounts receivable and inventories, primarily at CompuCom.

Cash Provided by Investing Activities

Cash provided by investing activities primarily reflects the acquisition of ownership interests in companies from third parties, partially offset by proceeds from the sales of non-strategic assets and private equity funds.

Net cash provided by investing activities was $40.5 million for the six months ended June 30, 2004 as compared to $16.3 million in the prior period. The increase of $24.2 million is primarily due to a $31.2 million increase in proceeds from sales of and distributions from companies and funds, partially offset by a $7.6 million decline in proceeds from available-for-sale and trading securities.

During the second quarter of 2004, we sold our interest in Sanchez Computer Associates, Inc. We received $32.1 million in cash and 226,435 shares of Fidelity National Financial (“FNF”) common stock valued at $8.3 million on the date of the merger in exchange for our Sanchez common stock, which we sold during the second quarter for net cash proceeds of $8.3 million. Also, during the second quarter of 2004, we completed the sale of our Opsware common shares for $2.4 million in cash proceeds. Total cash proceeds in 2004 related to our sale of Opsware common stock was $6.5 million, which is included in proceeds from sales of available-for-sale and trading securities for the six months ended June 30, 2004.

Cash Provided by Financing Activities

Cash provided by financing activities was $19.3 million for the six months ended June 30, 2004 compared to $1.7 million for the prior year period. The increase of $17.6 million is primarily due to a $13.6 million increase in issuance of subsidiary common stock to third parties by ChromaVision.

Contractual Cash Obligations and Other Commercial Commitments

The following table summarizes our contractual obligations and other commercial commitments as of June 30, 2004, by period due or expiration of the commitment.


	Payments Due by Period
					2005 and		2007 and		Due after
	Total		2004		2006		2008		2008
	(in millions) (unaudited)
Contractual Cash Obligations
Long-term debt and capital lease obligations(a)	$	18.9	$	12.3	$	6.6	$	—	$	—
Convertible subordinated notes (b)		54.8		—		54.8		—		—
Convertible senior debentures (c)		150.0		—		—		—		150.0
Operating leases		89.1		6.5		19.0		15.9		47.7
Funding commitments (d)		25.4		4.6		11.1		5.0		4.7
Potential clawback liabilities (e)		3.8		—		—		—		3.8
Other long-term obligations (f)		4.8		0.2		1.0		1.1		2.5

Total Contractual Cash Obligations	$	346.8	$	23.6	$	92.5	$	22.0	$	208.7

(a) We have various forms of debt including lines of credit, term loans, equipment leases and mortgages. Of our total outstanding guarantees of $23 million, $13 million of outstanding debt associated with the guarantees is included on the Consolidated Balance Sheets at June 30, 2004. The remaining $10 million is not reflected on the Consolidated Balance Sheets or in the above table.

(b) The 2006 Notes are due on June 15, 2006 and are redeemable in whole or in part at our option on or after June 18, 2002, for a maximum of 101.67% 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. The conversion rate of the 2006 notes at June 30, 2004 was $24.1135 of principal amount per share. The closing price of our common stock on June 30, 2004 was $2.30 per share. The 2006 note holders may also require repurchase of the notes upon certain events, including the sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. See (c) for repurchases. See “Proposed Sale of CompuCom”.

(c) In February 2004, we completed the issuance of $150 million of 2.625% convertible senior debentures due 2024. The above table reflects the outstanding balance of our 2024 Notes as of March 31, 2004. We used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes by redemption or by one or more privately negotiated transactions. As of June 30, 2004, we have repurchased $145.2 million of face value of 2006 Notes. See “Proposed Sale of CompuCom”.

(d) These amounts include funding commitments to private equity funds. The amounts have been included in the respective years based on estimated timing of capital calls provided to us by the funds’ management.

(e) 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 a 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 June 30, 2004 and the only value provided by the funds is the carrying values represented on the June 30, 2004 financial statements, the maximum clawback we would be required to return for our general partner interests is $6 million. Management estimates its liability to be approximately $4 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

(f) Primarily reflects the amount payable to our former Chairman and CEO under a consulting contract.

We have entered into retention agreements with certain executive officers at June 30, 2004. 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 million at June 30, 2004. This amount is not included in the above table.

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 our consolidated financial position or results of operations.

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, 2003. 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 products and service introductions, shifting distribution channels, the ability to protect their proprietary rights, the ability to manage growth, impact of economic downturns, and government regulations and legal uncertainties;

• 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, and these companies may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter;

• Our companies currently do not provide us with any cash flow from their operations so we rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations and therefore we may have problems raising money we need in the future to fund the needs of our companies, to make acquisitions and to fund our operations;

• Our stock price may be subject to significant fluctuations because of market conditions generally and due to the impact of the volatility of the public companies we own, which can be subject to fluctuations unrelated or disproportionate to operating performance;

• Intense competition from other acquirers of interests in companies could result in lower gains or possibly losses on our companies, in addition we may not be able to obtain maximum value for our holdings in companies or liquidate our interests in companies on a timely basis;

• We have incurred significant indebtedness and may incur additional indebtedness in the future, which could adversely affect our business and our ability to make full payment on our indebtedness and may restrict our operating flexibility, in addition, our ability to repay or refinance our indebtedness will depend upon our future ability to monetize our interests in our companies and our operating performance, which may be affected by general economic, financial, competitive, regulatory, business and other factors beyond our control;

• The values of our companies as determined by the public and private capital markets may decline, our companies’ access to the public and private capital markets on terms acceptable to them may be limited, and our companies could make business decisions that could impair the value of our company interests;

• Accounting conventions which may require us to change the presentation of our financial statements;

• The outcome of several lawsuits which have been brought or threatened against us; and

• We may incur significant costs, and fail to obtain maximum value for our companies, to avoid being subject to the Investment Company Act of 1940, and we would suffer adverse consequences if we were 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 June 30, 2004, the fair market value of our holdings in public securities was approximately $200 million. A 20% decrease in equity prices would result in an approximate $40 million decrease in the fair value of our publicly traded securities. At June 30, 2004, the value of the collateral securing the Musser loan, included $2.7 million of equity securities, $2.0 million of which is held in CompuCom common stock. See “Proposed Sale of CompuCom”.

CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes borrowings on these facilities to meet its working capital and other financing needs. At June 30, 2004, the securitization facility had borrowings of approximately $10 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 $0.1 million based on CompuCom’s average balances utilized under its facilities during the six months ended June 30, 2004. Our share of this increase would be approximately $0.1 million after deduction for minority interest but before income taxes.

At June 30, 2004, we had outstanding $54.8 million of fixed rate notes due in June 2006. Interest payments are due June and December of each year. Based on transactions for these notes in the secondary market, these notes have a fair market value at June 30, 2004 of approximately $54.9 million. See “Proposed Sale of CompuCom.”


										Fair Market
										Value at
Liabilities	2004			2005			2006			6/30/04
Convertible Subordinated Notes due by year (in millions)		—			—		$	54.8		$	54.9

Fixed Interest Rate		5	%		5	%		5	%		5	%

Interest Expense (in millions)	$	4.6		$	2.7		$	1.3			N/A

In February 2004, we completed the issuance of $150 million of fixed rate notes with a stated maturity of 2024. Interest payments of approximately $2.0 million are due March and September of each year starting in September 2004. We used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes by one or more privately negotiated transactions. As of June 30, 2004, we have repurchased $145.2 million of face value of 2006 Notes. The holders of the 2024 Notes may require repurchase of the notes on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective amount plus accrued and unpaid interest. See “Proposed Sale of CompuCom”.


													Fair Market
										After			Value at
Liabilities	2004			2005			2006			2006			6/30/04
Convertible Senior Notes due by year (in millions)		—			—			—		$	150.0		$	109.3

Fixed Interest Rate		2.625	%		2.625	%		2.625	%		2.625	%		2.625	%

Interest Expense (in millions)	$	3.5		$	4.0		$	4.0		$	68.7			N/A

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There were no significant changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Safeguard Scientifics Securities Litigation

On June 26, 2001, the Company and Warren V. Musser, the Company’s former Chairman, were named as defendants in a putative class action filed in federal court in Philadelphia. Plaintiffs allege that defendants failed to disclose that Mr. Musser had pledged some or all of his Safeguard stock as collateral to secure margin trading in his personal brokerage accounts. Plaintiffs allege that defendants’ failure to disclose the pledge, along with their failure to disclose several margin calls, 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.

These two cases were consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs 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 a 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 that 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. On November 5, 2003, the Third Circuit denied plaintiffs’ petition and declined to hear the appeal. On November 18, 2003, plaintiffs’ counsel moved to intervene in the consolidated action new plaintiffs and proposed class representatives, which motion was denied by the Court on February 18, 2004. On July 12, 2004, a third putative class action complaint captioned Mandell v. Safeguard Scientifics, Inc., et al. was filed against Safeguard and Mr. Musser in the United States District Court for the Eastern District of Pennsylvania. The new complaint asserts similar claims to those asserted in the consolidated and amended class action complaint. The complaint also asserts individual claims on behalf of two individual plaintiffs who had attempted unsuccessfully to intervene in the consolidated action. Safeguard has not yet responded to the new complaint, but intends to pursue a vigorous defense. Safeguard believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

CompuCom Litigation

On May 28, 2004, Safeguard was named along with CompuCom Systems Inc. and members of CompuCom’s board of directors as a defendant in a putatitve class action lawsuit brought in the Court of Chancery of the State of Delaware on behalf of CompuCom’s minority stockholders seeking to enjoin the proposed merger of CompuCom with Platinum Equity, LLC on the ground that the members of the board of directors of CompuCom and Safeguard have allegedly breached fiduciary duties to CompuCom and its minority stockholders. On June 1, 2004 and June 10, 2004, two separate putative class action lawsuits were filed in the Court of Chancery against the same defendants, each lawsuit asserting claims similar to those brought in the first proceeding. The lawsuits were subsequently consolidated. On July 27, 2004, the plaintiffs filed an amended class action complaint, asserting claims similar to those brought in the original complaints and adding claims relating to CompuCom’s disclosure in its Schedule 14A filed with the Securities & Exchange Commission on July 15, 2004. On July 27, 2004, the plaintiffs also filed a motion for expedited proceedings and discovery in connection with the injunctive relief sought and requested that a preliminary injunction hearing be held before August 19, 2004, the date of the special meetings of the shareholders of Safeguard and the stockholders of CompuCom relating to the CompuCom merger. Defendants filed their opposition to the motion on July 28, 2004. On July 29, 2004, the Court denied the Plaintiffs’ motion. Safeguard has not yet responded to the amended complaint.

While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

Item 2. Change in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

Recent Sales of Unregistered Securities. On February 18, 2004, we issued and sold in a private placement $125 million aggregate principal amount of 2.625% convertible senior debentures due 2024 (2024 Notes) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On February 20, 2004, we issued and sold an additional $25 million in aggregate principal amount of the 2024 Notes, purchased pursuant to the initial purchaser’s option. Wachovia Securities acted as the initial purchaser in connection with the offering of the 2024 Notes. The aggregate discounts or commissions paid in connection with this sale totaled $4.5 million.

The 2024 Notes are convertible, subject to certain conditions, into Safeguard’s common stock at an initial conversion rate of 138.5540 shares per $1,000 principal amount of the 2024 Notes, which is equal to a conversion price of approximately $7.2174 per share, subject to adjustment in certain circumstances.

Purchases of Equity Securities by the Company and Affiliated Purchasers. During the first and second quarter of 2004, the Company repurchased $86.5 and $58.7 million, respectively, principal amount of its 5% convertible subordinated notes due June 15, 2006 (2006 Notes). Prior to the repurchases, a total of $200 million principal amount of the 2006 Notes were outstanding. The 2006 Notes are convertible, at the holder’s option, into shares of the Company’s common stock. The conversion rate of the 2006 Notes at June 30, 2004 was $24.1135 of principal amount per share. The following table sets forth information regarding repurchases of the 2006 Notes by the Company.

ISSUER PURCHASES OF EQUITY SECURITIES


							Total Principal
							Amount of 2006
				Average Price Paid			Notes Purchased as		Approximate Dollar Value
	Total Principal			Per $1,000			Part of Publicly		of 2006 Notes that May
	Amount of 2006			Principal Amount of			Announced Plans or		Yet Be Purchased Under
Period	Notes Purchased			the 2006 Notes			Programs⁽¹⁾		the Plans or Programs⁽¹⁾
January 1, 2004 – January 31, 2004		—			—			—		—
February 1, 2004 – February 29, 2004	$	42,000,000	⁽³⁾	$	24.17	⁽⁸⁾	$	42,000,000	$	103,895,000	⁽²⁾
March 1, 2004 – March 31, 2004	$	44,500,000	⁽⁴⁾	$	24.29	⁽⁹⁾	$	44,500,000	$	59,061,250	⁽²⁾
April 1, 2004 – April 30, 2004	$	17,600,000	⁽⁵⁾	$	24.29	⁽¹⁰⁾	$	17,600,000	$	41,329,250	⁽²⁾
May 1, 2004 – May 31, 2004	$	41,137,000	⁽⁶⁾	$	24.31	⁽¹¹⁾	$	41,137,000	$	—	⁽²⁾
June 1, 2004 – June 30, 2004		—			—			—	$	—	⁽²⁾
Total	$	145,237,000	⁽⁷⁾	$	24.26	⁽¹²⁾	$	145,237,000	$	—	⁽²⁾

(1) The Company announced in a press release on February 11, 2004 its plan to retire a majority of the principal amount of the Company’s 2006 Notes by redemption or through one or more privately negotiated repurchase transactions, using all of the net proceeds of approximately $146 million received from the sale of the 2024 Debentures. On that date, $200 million principal amount of the 2006 Notes were outstanding. Since the plan was not in effect during the period from January 1, 2004 through January 31, 2004, there were no 2006 Notes repurchased, or yet to be repurchased, under the plan during this period.

(2) Represents the funds available for repurchases under the plan at the end of the relevant periods after taking into account the principal amount of debt repurchased and costs incurred to repurchase such debt.

(3) The total principal amount of these 2006 Notes was convertible into 1,741,762 shares of the Company’s common stock as of the date of repurchase.

(4) The total principal amount of these 2006 Notes was convertible into an aggregate of 1,845,439 shares of the Company’s common stock as of the respective dates of repurchase.

(5) The total principal amount of these 2006 Notes was convertible into an aggregate of 729,882 shares of the Company’s common stock as of the respective dates of repurchase.

(6) The total principal amount of these 2006 Notes was convertible into an aggregate of 1,705,974 shares of the Company’s common stock as of the respective dates of repurchase.

(7) The total principal amount of these 2006 Notes was convertible into an aggregate of 6,023,057 shares of the Company’s common stock as of the respective dates of repurchase.

(8) On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 2006 Notes was $24.17.

(9) On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 2006 Notes was $24.29.

(10) On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 2006 Notes was $24.29.

(11) On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 2006 Notes was $24.31.

(12) On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 2006 Notes was $24.26.

Item 4. Submission of Matters to a Vote of Security Holders

The shareholders of the Company voted on three items of business at the Annual Meeting of Shareholders held on June 11, 2004:

1. the election of nine directors,

2. a proposal to approve the Safeguard Scientifics, Inc. 2004 Equity Compensation Plan, and

3. a proposal to ratify the appointment of KPMG LLP as independent auditor for the fiscal year ending December 31, 2004.

The nominees for directors were elected based upon the following votes:


NOMINEE	VOTES FOR		VOTES WITHHELD
Anthony L. Craig		105,269,984		3,464,356
Julie A. Dobson		104,897,195		3,837,145
Robert E. Keith, Jr.		105,152,713		3,581,627
Andrew E. Lietz		104,965,634		3,768,706
George MacKenzie		104,997,132		3,737,208
Jack L. Messman		105,105,657		3,628,683
John W. Poduska, Sr.		105,085,443		3,648,897
Robert Ripp		105,803,000		2,931,340
John J. Roberts		104,903,025		3,831,315

The proposal to approve the Safeguard Scientifics, Inc. 2004 Equity Compensation Plan received the following votes:


46,931,468		VOTES FOR
13,800,740		VOTES AGAINST
825,198		ABSTENTIONS
47,176,934		BROKER NON-VOTES

The proposal to ratify the appointment of KPMG LLP as independent auditors for the fiscal year ending December 31, 2004 received the following votes:


105,362,185		VOTES FOR
2,695,205		VOTES AGAINST
676,950		ABSTENTIONS
0		BROKER NON-VOTES

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

10.1 Safeguard Scientifics, Inc. 2004 Equity Compensation Plan

10.2 First Amendment to Safeguard Scientifics, Inc. 1999 Equity Compensation Plan

10.3 Second Amendment to Safeguard Scientifics, Inc. 2001 Associates Equity Compensation Plan

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 April 12, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing that it had completed the repurchase of an additional $19.9 million of face value of its 5% Convertible Subordinated Notes due June 15, 2006.

On April 15, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing the completion of the merger of Sanchez Computer Associates, Inc. and a subsidiary of Fidelity National Financial, Inc.

On April 26, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing the filing of a registration statement on Form S-3 with the Securities and Exchange Commission relating to the resale by selling–security holders of its 2.625% Convertible Senior Debentures due 2024, and the common stock issuable upon conversion of the debentures.

On May 5, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing the appointment of Anthony Ibarguen as Chief Executive Officer and President of Alliance Consulting Group Associates, Inc., a subsidiary of Safeguard, which report also included the furnishing of information under Item 12.

On May 17, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing the repurchase of an additional $41.1 million face value of its 5% Convertible Subordinated Notes due June 15, 2006.

On May 28, 2004, the Company filed a Current Report on Form 8-K, Items 5 and 7, regarding a press release announcing the entrance of CompuCom Systems Inc. into an Agreement and Plan of Merger with CHR Holding Corporation and CHR Merger Corporation.


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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets – June 30, 2004 (unaudited) and December 31, 2003		3
Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2004 and 2003		4
Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2004 and 2003		5
Notes to Consolidated Financial Statements		6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		50
Item 4 - Controls and Procedures		51
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings		52
Item 2 - Change in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities		53
Item 4 - Submission of Matters to a Vote of Security Holders		55
Item 6 - Exhibits and Reports on Form 8-K		56
Signatures		57
SAFEGUARD SCIENTIFICS, INC. 2004 EQUITY COMPENSATION PLAN
FIRST AMENDMENT TO 1999 EQUITY COMPENSATION PLAN
SECOND AMENDMENT TO 2001 ASSOCIATES EQUITY COMPENSATION PLAN
CERTIFICATION OF THE CEO AND CFO
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

(1)		The pro forma condensed consolidated balance sheet gives effect to the proposed CompuCom merger assuming the CompuCom merger occurred on June 30, 2004.

(2)		Proposed Transaction. The proposed transaction assumes the following for the Company. (in thousands):

		The $127.9 million of gross cash proceeds to be received by the Company in connection with the CompuCom merger does not include any proceeds to be paid to the Company as a result of CompuCom shares pledged as collateral in connection with the loan made by the Company to Warren V. Musser (See Note 16).

(3)		Use of Proceeds. The pro forma condensed consolidated balance sheet assumes for the purpose of this presentation that the net sales proceeds of $53.3 million from the proposed sale of CompuCom will be deposited into a bank account and are presumed to be non-interest bearing cash for the pro forma statements of operations.

(4)		Debt. The pro forma condensed consolidated balance sheet reflects the reclassification of $54.8 million of 2006 Notes which are required to be repurchased within twelve months of the completion of the sale of CompuCom using proceeds from the proposed CompuCom merger to a current liability.

(5)		Compensation Charge. The pro forma condensed consolidated balance sheet assumes the acceleration of certain DSUs ($0.5 million) recorded in shareholders’ equity and is not presented in the pro forma statements of operations.

(6)		Gain on Sale. The pro forma condensed consolidated balance sheet assumes that the Company will record a gain on sale of $2.9 million representing the difference between the estimated proceeds of $127.7 million over the carrying value as of June 30, 2004 of $124.8 million.

(1)		The pro forma condensed consolidated statements of operations give effect to the proposed CompuCom merger assuming the CompuCom merger occurred on January 1, 2003. The consolidated financial statements reflect an impairment charge, which increased the Company’s net loss by $23.3 million in the second quarter of 2004 to reduce the goodwill related to CompuCom to its estimated fair value. In addition, when the transaction is consummated, the Company will record $0.5 million of expense related to the acceleration of certain deferred stock units. The Company will also record a gain or loss on the sale of CompuCom based upon the difference between the carrying value and the net cash proceeds ultimately received. These amounts are not reflected in the unaudited pro forma condensed consolidated statements of operations above.

(2)		If a consolidated or equity method public company has dilutive options or securities outstanding, diluted loss per share is computed first by deducting from net loss the income attributable to the potential exercise of the dilutive options or securities of the company. The impact is shown as an adjustment to net loss for purposes of calculating diluted loss per share. The pro forma diluted loss per share shown in the above tables excludes the effect of CompuCom’s diluted options and securities.

(a)		QuestOne Decision Sciences does business as ProModel Solutions.

(b)		See “Proposed Sale of CompuCom.”

(i)		place in escrow and pledge to the trustee an amount equal to our interest obligations on the 2024 Notes through March 2009;

(ii)		apply, within one year after such sale, an amount equal to the lesser of (a) the outstanding principal amount on the 2006 Notes or (b) 50% of remaining cash proceeds after (i) is satisfied, to repurchase our outstanding 2006 Notes. If this amount is less than $20 million and the outstanding balance of the 2006 Notes exceeds $20 million, we will use 50% of cash proceeds from the subsequent sales of non-strategic companies to repurchase 2006 Notes until the aggregate amount equals $20 million. We may use our common stock to satisfy these repurchase obligations during the one-year period.

(a)		We have various forms of debt including lines of credit, term loans, equipment leases and mortgages. Of our total outstanding guarantees of $23 million, $13 million of outstanding debt associated with the guarantees is included on the Consolidated Balance Sheets at June 30, 2004. The remaining $10 million is not reflected on the Consolidated Balance Sheets or in the above table.

(b)		The 2006 Notes are due on June 15, 2006 and are redeemable in whole or in part at our option on or after June 18, 2002, for a maximum of 101.67% 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. The conversion rate of the 2006 notes at June 30, 2004 was $24.1135 of principal amount per share. The closing price of our common stock on June 30, 2004 was $2.30 per share. The 2006 note holders may also require repurchase of the notes upon certain events, including the sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. See (c) for repurchases. See “Proposed Sale of CompuCom”.

(c)		In February 2004, we completed the issuance of $150 million of 2.625% convertible senior debentures due 2024. The above table reflects the outstanding balance of our 2024 Notes as of March 31, 2004. We used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes by redemption or by one or more privately negotiated transactions. As of June 30, 2004, we have repurchased $145.2 million of face value of 2006 Notes. See “Proposed Sale of CompuCom”.

(d)		These amounts include funding commitments to private equity funds. The amounts have been included in the respective years based on estimated timing of capital calls provided to us by the funds’ management.

(e)		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 a 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 June 30, 2004 and the only value provided by the funds is the carrying values represented on the June 30, 2004 financial statements, the maximum clawback we would be required to return for our general partner interests is $6 million. Management estimates its liability to be approximately $4 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

(f)		Primarily reflects the amount payable to our former Chairman and CEO under a consulting contract.

•		The performance of our companies, which face risks such as intense competition, rapid changes in technology and customer demands, frequent new products and service introductions, shifting distribution channels, the ability to protect their proprietary rights, the ability to manage growth, impact of economic downturns, and government regulations and legal uncertainties;

•		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, and these companies may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter;

•		Our companies currently do not provide us with any cash flow from their operations so we rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations and therefore we may have problems raising money we need in the future to fund the needs of our companies, to make acquisitions and to fund our operations;

•		Our stock price may be subject to significant fluctuations because of market conditions generally and due to the impact of the volatility of the public companies we own, which can be subject to fluctuations unrelated or disproportionate to operating performance;

•		Intense competition from other acquirers of interests in companies could result in lower gains or possibly losses on our companies, in addition we may not be able to obtain maximum value for our holdings in companies or liquidate our interests in companies on a timely basis;

•		We have incurred significant indebtedness and may incur additional indebtedness in the future, which could adversely affect our business and our ability to make full payment on our indebtedness and may restrict our operating flexibility, in addition, our ability to repay or refinance our indebtedness will depend upon our future ability to monetize our interests in our companies and our operating performance, which may be affected by general economic, financial, competitive, regulatory, business and other factors beyond our control;

•		The values of our companies as determined by the public and private capital markets may decline, our companies’ access to the public and private capital markets on terms acceptable to them may be limited, and our companies could make business decisions that could impair the value of our company interests;

•		Accounting conventions which may require us to change the presentation of our financial statements;

•		The outcome of several lawsuits which have been brought or threatened against us; and

•		We may incur significant costs, and fail to obtain maximum value for our companies, to avoid being subject to the Investment Company Act of 1940, and we would suffer adverse consequences if we were deemed to be an investment company.

1.		the election of nine directors,

2.		a proposal to approve the Safeguard Scientifics, Inc. 2004 Equity Compensation Plan, and

3.		a proposal to ratify the appointment of KPMG LLP as independent auditor for the fiscal year ending December 31, 2004.

(a)		Exhibits.

10.1		Safeguard Scientifics, Inc. 2004 Equity Compensation Plan

10.2		First Amendment to Safeguard Scientifics, Inc. 1999 Equity Compensation Plan

10.3		Second Amendment to Safeguard Scientifics, Inc. 2001 Associates Equity Compensation Plan

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.


		SAFEGUARD SCIENTIFICS, INC.
		(Registrant)

Date: August 6, 2004		ANTHONY L. CRAIG
		Anthony L. Craig
		Chief Executive Officer and President

Date: August 6, 2004		CHRISTOPHER J. DAVIS
		Christopher J. Davis
		Executive Vice President and Chief Administrative
		and Financial Officer