SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

Safeguard Scientifics, Inc.

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

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock ($.10 par value)		New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 30, 2008, the aggregate market value of the Registrant’s common stock held by non-affiliates of the registrant was $149,773,608 based on the closing sale price as reported on the New York Stock Exchange.

The number of shares outstanding of the Registrant’s Common Stock, as of March 16, 2009 was 121,839,293.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission for the Company’s 2009 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

SAFEGUARD SCIENTIFICS, INC.

FORM 10-K

DECEMBER 31, 2008

PART I
Item 1. Business			3
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			22
Item 2. Properties			22
Item 3. Legal Proceedings			22
Item 4. Submission of Matters to a Vote of Security Holders			22
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6. Selected Consolidated Financial Data			25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			51
Item 8. Financial Statements and Supplementary Data			52
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures			98
Item 9A. Controls and Procedures			98
Item 9B. Other Information			99
PART III
Item 10. Directors, Executive Officers and Corporate Governance			100
Item 11. Executive Compensation			100
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			100
Item 13. Certain Relationships and Related Transactions, and Director Independence			101
Item 14. Principal Accountant Fees and Services			101
PART IV
Item 15. Exhibits and Financial Statement Schedules			102
Exhibit 10.4
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9.2
Exhibit 10.11
Exhibit 10.12
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Cautionary Note concerning Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially, include, among others, managing rapidly changing technologies, limited access to capital, competition, the ability to attract and retain qualified employees, the ability to execute our strategy, the uncertainty of the future performance of our partner companies, acquisitions and dispositions of companies, the inability to manage growth, compliance with government regulation and legal liabilities, additional financing requirements, labor disputes and the effect of economic conditions in the business sectors in which our partner companies operate, all of which are discussed in Item 1A. “Risk Factors.” Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Item 1. Business

Business Overview

Safeguard’s charter is to build value in growth-stage technology and life sciences businesses. We provide capital as well as a range of strategic, operational and management resources to our partner companies. Safeguard participates in expansion financings, corporate spin-outs, management buy-outs, recapitalizations, industry consolidations and early-stage financings. Our vision is to be the preferred catalyst for creating great technology and life sciences companies.

We strive to create long-term value for our shareholders by helping our partner companies in their efforts to increase market penetration, grow revenue and improve cash flow in order to create long-term value. We concentrate on companies that operate in two categories:

Technology — including companies focused on providing software as a service (SaaS), technology-enabled services and vertical software solutions for healthcare information technology, the financial services sector and internet-based businesses; and

Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices, regenerative medicine and specialty pharmaceuticals.

In 2008, our management team executed against the following objectives, to:

•

Deploy capital in companies within our strategic focus;

•

Build value in our partner companies with strong management teams using organic and acquisitive growth to position our partner companies for liquidity at premium valuations;

•

Realize the value of select partner companies through selective, well-timed exits to maximize risk-adjusted value; and

•

Provide the tools needed for investors to fully recognize the shareholder value that has been created by our efforts.

To meet these strategic objectives during 2008, Safeguard focused on, and will continue to focus on:

•

finding opportunities to deploy our capital in additional partner company holdings;

•

helping to achieve additional market penetration, revenue growth, cash flow improvement and growth in the long-term value of our partner companies; and

•

realizing value in our partner companies if and when we believe doing so will maximize value for our shareholders.

We incorporated in the Commonwealth of Pennsylvania in 1953. Our corporate headquarters is located at 435 Devon Park Drive, Building 800, Wayne, Pennsylvania 19087.

Significant 2008 Highlights

We are proud of the following key accomplishments that occurred during 2008:

•

In May 2008, we consummated the sale of five legacy partner companies: Acsis, Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., Neuronyx, Inc. and ProModel Corporation. Safeguard received gross proceeds of approximately $74.5 million as a result of this transaction. In addition, Safeguard was released from an aggregate of $31.5 million in debt guarantees involving certain of the companies which were sold.

•

In July 2008, Safeguard deployed $3.35 million in a Series C financing for Swaptree.com, an internet-based service that leverages a proprietary technology to enable users to swap books, CDs, DVDs and video games for free. Based in Boston, Massachusetts, Swaptree is using the financing for continued technological and operational development, marketing support and senior management recruitment.

•

In September and December 2008, Safeguard deployed $3.5 million in a $12 million Series A financing with Oxford Bioscience Partners for Molecular Biometrics, Inc. The metabolomics company’s lead product, ViaMetrics-E™, is a diagnostic procedure designed to help identify the most viable embryos with the greatest reproductive potential for in vitro fertilization (IVF). Molecular Biometrics is utilizing the financing to launch its patented technology in Europe, Japan and Australia in 2009.

•

In October 2008, Safeguard deployed $7.5 million in a $21 million Series C financing for Tengion, Inc., a clinical stage regenerative medicine company focused on the development of neo-organs and neo-tissues. The funding is primarily being utilized to support phase II clinical trials for the Tengion Neo-Bladder® Augment and Neo-Bladder® Conduit. These will be the first products to utilize the body’s own regenerative cells and harness them to develop and complete regeneration of the bladder.

•

In November 2008, Safeguard deployed $2.5 million in a $10.4 million Series AA financing for Garnet BioTherapeutics, Inc., a clinical stage regenerative medicine company targeting the acceleration of healing and reduced scarring associated with surgical procedures and other dermatologic conditions. Garnet Biotherapeutics is using the financing to support research and Phase II clinical trials for its proprietary human adult bone marrow-derived cells, along with manufacturing and development.

•

We augmented our Technology and Life Sciences Advisory Boards with key new members and leveraged these boards to provide critical and timely analysis and guidance regarding Safeguard, our partner companies and a variety of deal opportunities.

Our Strategy

We focus on companies that address the strategic challenges facing businesses today and the opportunities they present. We believe these challenges have five general themes:

•

Maturity — Many existing technologies, solutions and therapies are reaching the end of their designed lives or patent protection; the population of the U.S. is aging; and many businesses based on once-novel technologies are now facing consolidation and other competitive pressures. The IT infrastructure is maturing and the sectors are consolidating.

•

Migration — Many technology platforms are migrating to newer technologies and facing changing cost structures; many medical treatments are moving toward earlier stage intervention; and many business models are migrating toward different revenue-generation models integrating technologies and services.

•

Convergence — Many technology and life sciences businesses are intersecting in fields like medical devices and targeted diagnostics for targeted therapies. Within life sciences itself, devices, diagnostics and therapeutics are converging.

•

Compliance — Regulatory compliance is driving buying behavior in technology and life sciences. HIPPA, Sarbanes-Oxley, the FDA, the Patriot Act and the SEC are all telling businesses how to spend their money.

•

Cost containment — The importance of cost containment grows as healthcare costs and IT infrastructure maintenance costs grow and as a recessionary dynamic weakens sectors of the economy.

These themes tend to drive growth and attract entrepreneurs who need capital support and strategic guidance. Safeguard deploys capital along with management expertise, process excellence and marketplace insight designed to provide tangible benefits to our partner companies.

Our corporate staff (28 employees at December 31, 2008) is dedicated to creating long-term value for our shareholders by helping our partner companies build value and by finding additional acquisition opportunities.

Identifying Opportunities

Safeguard’s go-to-market strategy, including marketing and sourcing activities, is designed to generate a large volume of high-quality opportunities to acquire majority or primary shareholder stakes in partner companies. Our principal focus is on acquiring such stakes in growth-stage companies that have attractive growth prospects within the technology and life sciences industries. Generally, we prefer candidates:

•

operating in large and/or growing markets;

•

with barriers to entry by competitors, such as proprietary technology and intellectual property, or other competitive advantages;

•

with capital requirements between $5 million and $50 million; and

•

with a compelling strategy for achieving growth.

We target our sourcing efforts on the Eastern U.S., however, our in-bound deal sourcing leads generate candidate opportunities throughout the U.S. and southeastern Canada. Our in-bound deal sourcing comes from a variety of sources, including investment bankers, syndication partners, existing partner companies and advisory board members.

Our Technology Group currently targets companies with the following business models and vertical markets:

Our Life Sciences Group currently targets companies with the following business models and vertical markets:

We believe there are many opportunities within these business models and vertical markets, and our sourcing activities are focused on finding candidate companies and evaluating how well they align with our criteria. However, we recognize we may have difficulty identifying candidate companies and completing transactions on terms we believe appropriate. As a result, we cannot be certain how frequently we will enter into transactions with new, or for that matter, existing partner companies.

Competition. We face intense competition from other companies that acquire, or provide capital to, technology and life sciences businesses. Competitors include venture capital and, occasionally, private equity investors, as well as companies seeking to make strategic acquisitions. Many providers of growth capital also offer strategic guidance, networking access for recruiting and general advice. Nonetheless, we believe we are a preferable capital provider to potential partner companies because our strategy and capabilities offer:

•

responsive operational assistance, including strategy design and execution, business development, corporate development, sales, marketing, finance, risk management, human resources and legal support;

•

the flexibility to structure minority or majority transactions with or without debt;

•

occasional liquidity opportunities for founders and existing investors;

•

a focus on maximizing risk-adjusted value growth, rather than absolute value growth within a narrow or predetermined time frame;

•

interim c-level management support, as needed;

•

opportunities to leverage Safeguard’s balance sheet for borrowing and stability; and

•

a record of building revenue growth in our partner companies.

Helping Our Partner Companies To Build Value

We offer operational and management support to each of our partner companies through our experienced professionals. Our employees have expertise in business and technology strategy, sales and marketing, operations, finance, legal and transactional support. We provide hands-on assistance to the management teams of our partner companies to support their growth. We believe our strengths include:

•

applying our expertise to support a company’s introduction of new products and services;

•

leveraging our market knowledge to generate additional growth opportunities;

•

leveraging our business contacts and relationships; and

•

identifying and evaluating potential acquisitions and providing capital to pursue potential acquisitions to accelerate growth.

Strategic Support. By helping our partner companies’ management teams remain focused on critical objectives through the provision of human, financial and strategic resources, we believe we are able to accelerate their development and success. We play an active role in determining the strategic direction of our partner companies, including:

•

defining short- and long-term strategic goals;

•

identifying and planning for the critical success factors to reach these goals;

•

identifying and addressing the challenges and operational improvements required to achieve the critical success factors and, ultimately, the strategic goals;

•

identifying and implementing the business measurements that we and others will apply to measure a company’s success; and

•

providing capital to drive growth.

Management and Operational Support. We provide management and operational support to our partner companies in order to accelerate their growth. We engage in ongoing planning and assessment of the development of our partner companies and their management teams. Our executives and our Advisory Board members provide mentoring, advice and guidance to develop the management of our partner companies. Our executives serve on the boards of directors of our partner companies, working with them to develop and implement strategic and operating plans. We measure and monitor achievement of these plans through regular operational and financial performance measurements. We believe these services provide our partner companies with significant competitive advantages within their respective markets.

Realizing Value

In general, we will hold our stake in a partner company as long as we believe the risk-adjusted value of that stake is maximized by our continued ownership and effort. From time to time, we engage in discussions with other companies interested in our partner companies, either in response to inquiries or as part of a process we initiate. To the extent we believe that a partner company’s further growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we may sell some or all of our stake in the partner company. These sales may take the form of privately negotiated sales of securities or assets, public offerings of the partner company’s securities and, in the case of our publicly traded partner companies, sales of their securities in the open market. We have in the past taken partner companies public through rights offerings and direct share subscription programs, and we will continue to consider these (or similar) programs to maximize the value of our partner companies to our shareholders. We expect to use the proceeds from these sales (and sales of other assets) primarily to pursue opportunities to create new partner company relationships or for other working capital purposes, either with existing partner companies or at Safeguard.

Our Partner Companies

An understanding of our partner companies is important to understanding Safeguard and its value-building strategy. Following are more detailed descriptions of the partner companies in which we owned a stake at December 31, 2008. The indicated ownership percentage is presented as of December 31, 2008 and reflects the percentage of the vote we are entitled to cast based on issued and outstanding voting securities (on a common stock equivalent basis), excluding the effect of options, warrants and convertible debt.

In May, 2008 we completed the sale of our interests in Acsis, Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., Neuronyx, Inc. and ProModel Corporation (the “Bundle Transaction”).

Clarient, Inc.		(Safeguard Ownership: 60.4%)

General. Clarient (www.clarientinc.com) is an advanced oncology diagnostics services company that combines innovative technologies, meaningful test results, and world-class expertise to improve the lives of those affected by cancer by bringing clarity to a complex disease.

Opportunity. Safeguard first took an ownership interest in Clarient in 1996, and we have increased our ownership position over time. Shares of Clarient’s common stock trade on the Nasdaq Capital Market under the symbol “CLRT.”

We believe that the growing demand for personalized medicine and the continued aging of the world’s population, coupled with the higher incidence of cancer among seniors, support an expanding market for Clarient’s services. Clarient estimates that the market for advanced cancer diagnostic testing will increase from an estimated $2.0 billion today, to over $3.0 billion by 2012, based upon industry analyst data.

Strategy. Clarient’s goal is to position itself within a wide-range of the oncology diagnostics markets, including molecular marker development and molecular marker clinical validation through a technology-empowered laboratory. Clarient has deployed the best available testing platforms, which are connected to its internet-based platform, PATHSiTE^®, that delivers critical information to community pathologists, oncologists, and pharmaceutical researchers. Clarient focuses on developing high-value, revenue generating opportunities by connecting its medical expertise and intellectual property with its strong commercial team to commercialize novel diagnostic tests (also referred to as “novel markers” or “biomarkers”) which detect characteristics of an individual’s tumor or disease that, once identified and qualified, allow for more accurate prognosis, diagnosis, and treatment. In addition, Clarient is working to identify specific partners and technologies where it can assist in the commercialization of third-party developed novel diagnostic tests. Clarient believes that broader discovery and use of novel diagnostic tests will clarify and simplify decisions for healthcare providers and the biopharmaceutical industry.

Services. Clarient provides a wide range of cancer diagnostic and consultative services which include technical laboratory services and professional interpretation; such reports and analyses are provided through its internet-based application, PATHSiTE.™

Clarient’s anatomic pathology services are focused on the most common types of solid tumors: breast, prostate, lung and colon, representing over 80% of annual diagnosed cases in the United States. Clarient also offers an extensive menu of hematopathology testing for leukemia and lymphoma.

Clarient’s laboratory continues to expand its service offerings as new assays emerge. Clarient also provides a complete complement of commercial services to biopharmaceutical companies and other research organizations, ranging from drug discovery assistance to the development of directed diagnostics through clinical trials. Clarient’s menu of specialized technologies used to assess and characterize cancer include: immunohistochemistry (IHC), flow cytometry, molecular/PCR, fluorescent in situ hybridization (FISH), cytogenetics, and histology.

Sales and Marketing. Clarient’s primary target market includes community pathology practices and hospitals. The process of selling diagnostic services requires a knowledgeable and skilled diagnostic sales force that can help pathologists understand the mechanisms of targeted therapy and the value of prognostic and predictive testing which Clarient offers. Clarient’s sales approach is designed to understand current or potential customers’ needs and to then provide the appropriate solutions from its expanding range of diagnostic services. Clarient’s marketing efforts continued to focus on establishing a strong and distinctive brand identity for diagnostic services, with a core focus of targeting community pathologists. Clarient uses CONTiNUUM™, its national and regional seminar and webcast programs to provide a collaborative environment between potential customers and its advisory board and medical staff. Clarient also uses a web-based sales system to optimize customer and territory management.

Patents and Proprietary Technology. Clarient is focused on developing an intellectual property portfolio for its laboratory service methodologies which utilizes automated cellular instrumentation, rare event identification, and its proteomic mathematic capabilities. In addition, Clarient holds trademarks to protect the names of its service offerings. To protect its trade secrets and proprietary know-how, Clarient utilizes confidentiality agreements with its employees, consultants, customers, business partners, and other third parties.

In March 2007, Clarient sold its technology business (which developed, manufactured and marketed the ACIS Automated Image Analysis System) and related intellectual property to Carl Zeiss MicroImaging, Inc. (“Zeiss”) (the “ACIS Sale”). As part of the ACIS Sale, Clarient transferred its patent portfolio and other intellectual property relating to its technology business to Zeiss. Clarient entered into a license agreement with Zeiss pursuant to which Zeiss granted Clarient a non-exclusive, perpetual, and royalty-free license to certain of the transferred patents, copyrights, and software code for use in connection with image applications (excluding the sales of imaging instruments) and its laboratory services business. Clarient believes this license will be useful in its development of new tests, applications, unique analytical capabilities, and other service offerings, including the development of proprietary tests.

Competition. Competition in the diagnostic services industry is intense and has increased with the rapid pace of technological development. The oncology testing marketplace has been consolidating. The esoteric clinical laboratory business, including flow cytometry, molecular diagnostics, analysis of tumors of unknown origin, and expanded services for IHC and cytogenetics is highly competitive. Clarient’s industry is led by two national laboratories: Laboratory Corporation of America Holdings (also known as LabCorp) and Quest Diagnostics Incorporated. Both companies offer a wide test and product menu with significant financial, sales, and logistical resources, and have extensive contracts with a variety of payor groups. Secondary competitors include laboratories that are affiliated with large medical centers or universities, such as Mayo Medical Laboratories and Associated Regional and University Pathologists. New competitors have more recently entered Clarient’s market and have further heightened the competitive landscape. Clarient anticipates that additional companies will enter its market and will aggressively compete for market share.

Governmental Regulation. Because Clarient operates a clinical laboratory, many aspects of its business are subject to complex federal, state, and local regulations. In 1988, Congress passed the Clinical Laboratory Improvement Amendments (CLIA) establishing quality standards for all laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Under CLIA, a laboratory is defined as any facility which performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health. CLIA specifies quality standards for proficiency testing, patient test management, quality control, personnel qualifications and quality assurance for laboratories performing non-waived tests. To enroll in the CLIA program, laboratories must register by completing an application, paying fees, being surveyed, if applicable, and becoming certified in the state in which they operate. The State of California Department of Health and Human Services—Laboratory Field Services enforces the state’s requirements to apply for and maintain licensure, CLIA certification, and proficiency testing. CLIA accreditation is maintained through regular inspections by the College of American Pathologists. Clarient’s facilities have been inspected by these authorities and have been issued licenses to manufacture medical devices and provide laboratory diagnostic services in California. Clarient received its California state licensure with CLIA certification in the fourth quarter of 2004. These licenses must be renewed every year. The State of California could prohibit Clarient’s provision of laboratory services if Clarient failed to maintain these licenses.

Facilities. Clarient leases a 78,000 square foot facility in Aliso Viejo, California to accommodate its executive and administrative offices and its diagnostic services laboratory. Clarient currently subleases approximately 14,000 square feet of the space to one subtenant.

Employees. As of December 31, 2008, Clarient had 269 employees: 165 in laboratory diagnostics, research and development and support positions; 62 in executive, finance, billing, and administrative positions; and 42 in sales and marketing positions. Clarient believes that its relationship with its employees is good. In addition to full-time employees, Clarient utilizes the services of various independent contractors, primarily for certain product development, marketing and administrative activities.

LIFE SCIENCES PARTNER COMPANIES

Advanced BioHealing, Inc. (“Advanced BioHealing”)		(Safeguard Ownership: 28.3%)

General. Advanced BioHealing (www.advancedbiohealing.com), is a leader in the science and clinical application of regenerative medicine. Advanced BioHealing develops and markets cell-based and tissue-engineered products that use living cells to repair or replace body tissue damaged by injury, disease or the aging process. The company’s lead product, Dermagraft™ (www.dermagraft.com), is FDA-approved for the treatment of diabetic foot ulcers, a common affliction of persons with diabetes. Since Safeguard’s investment in 2007 and Advanced BioHealing’s official re-launch of Dermagraft, Advanced BioHealing has grown its revenue and has increased its workforce to more than 160 employees to match growing demand.

Opportunity. As the U.S. population ages, the payors in our healthcare system are applying pressure to increase effective treatments while reducing costs. Advanced BioHealing helps healthcare providers meet these constraints for wound patients by providing an innovative and value-oriented healthcare product. We believe the market for Advanced BioHealing’s products will continue to grow as its treatments are adopted and approved for other indications. Industry analysts estimate the market opportunity in the advanced wound care sector at $4 billion and in Advanced BioHealing’s addressable diabetic foot ulcer and intravenous leg ulcer sector at $1 billion.

Alverix, Inc. (“Alverix”)		(Safeguard Ownership: 50.0%)

General. Alverix (www.alverix.com) is an optoelectronics company that produces low-cost, handheld readers with the accuracy and precision of laboratory instruments. Alverix partners with diagnostic and original equipment manufacturers (OEMs) seeking to increase current test accuracy, improve the portability of existing tests, or develop new assays for use at the point-of-care (“POC”). Whether at a physicians’ office, laboratory outreach location, retail clinic or a patient’s home, Alverix’s POC devices enable central laboratory quality results to be obtained where test information is critical to patient care. Previously, this level of performance required expensive laboratory instrumentation. Alverix is building on 30 years of expertise in optical sensors, image processing, software and signal enhancement algorithms to develop proprietary technologies for low-cost, portable detection devices for medical diagnostics and other applications. Alverix was spun out of Avago Technologies, which itself was spun out of Agilent, Inc. Current applications include testing for drugs of abuse (“DOA”), cardiac, cancer and infectious disease. Alverix currently has an OEM contract with Chembio Diagnostic Systems.

Opportunity. As we focus our efforts on companies bringing advanced diagnostic technologies to the market, Alverix presents an opportunity to capitalize on two macro trends: first, the demand for improved cost and efficiency of healthcare delivery; and second, greater consumer control of personal healthcare. Both of these trends are increasing demand for rapid POC tests. Alverix’s detection devices provide immediate, accurate results in POC venues (such as physicians’ offices, clinics, retail environments, workplace or home), with the potential for greater functionality and sensitivity. Because of its disruptive technologies, we believe Alverix will be able to exploit significant portions of the fragmented multi-billion dollar POC market. Additionally, Alverix’s flexible technology platform will permit future product expansions that increase access to new and existing diagnostic tests, as well as promoting next-generation diagnostics designed for broad use by physicians and patients.

Avid Radiopharmaceuticals, Inc. (“Avid”)		(Safeguard Ownership: 13.9%)

General. Avid (www.avidrp.com) is developing molecular imaging agents to detect neurodegenerative diseases such as Alzheimer’s disease (“AD”), Parkinson’s disease (“PD”) and Dementia with Lewy Bodies (“DLB”). Avid is conducting clinical trials at more than 25 research centers across the U.S. and initiated Phase III trials in early 2009 for its amyloid imaging compound, florpiramine F18 (18F-AV-45), which tests for the presence of AD pathology in people with symptoms of cognitive impairment. In the course of these trials, Avid has expanded its pharma collaborations and today has excellent relationships with Lilly, Pfizer and Genentech, as well as with smaller biotech firms.

Opportunity. Avid is developing a new technology that targets the increasing demand for diagnostics for an aging population. We believe that this demand for effective and value-oriented healthcare products will only increase in the future, and Avid is well-positioned to address the critical need to improve diagnosis and characterization of AD, PD and other chronic neurological disorders. The World Health Organization reports that nearly one billion people worldwide are affected by neurological disorders, and an estimated 6.8 million people die every year as a result of neurological disorders. The addressable market for the diagnosis of Alzheimer’s disease alone is estimated at more than $500 million annually. As the global population ages, there is an increasing demand for innovative, accurate solutions to diagnose these diseases. Avid’s vision is to develop novel diagnostic imaging agents to enable earlier and more accurate diagnosis, treatment selection and therapeutic monitoring for these significant medical disorders.

Cellumen, Inc. (“Cellumen”)		(Safeguard Ownership: 40.6%)

General. Cellumen (www.cellumen.com) delivers proprietary services and products to support drug discovery and development. By leveraging its cellular systems biology (“CSB”) technology, Cellumen’s objective is to improve the efficacy, decrease the toxicity and optimize patient stratification and treatment for pharmaceutical companies’ new and existing drugs. The goal of this approach is to obtain accurate measures of efficacy and potential toxicity of these drugs and biologics well before entering expensive clinical testing. Another goal is to improve clinical trial enrollment and increase new drug efficacy by conducting theranostic (predicting response to therapeutics) patient profiling. Cellumen is continuing to develop and commercialize its product catalog and CSB platform. Cellumen’s customers include Eli Lilly, Mitsubishi Tanabe Pharma and Roche, as well as the U.S. Environmental Protection Agency, Food and Drug Administration and National Institutes of Health.

Opportunity. Through CSB, Cellumen is striving to be the leading provider of proprietary solutions for pharmaceutical companies, seeking to drive down costs and increasing the efficacy of drug development and clinical trials. Cellumen’s breakthrough technology is positioned to tap into an annual $2 billion market opportunity in outsourced pharmaceutical R&D programs by focusing on the pharmaceutical industry’s continuous push to improve product development timelines. With the current failure rate in drug development surpassing 90%, there is a clear need within the pharmaceutical industry for more efficient drug discovery methods and technologies. Cellumen has positioned itself to address this need for a lucrative and expanding market.

Garnet BioTherapeutics, Inc. (“Garnet”)		(Safeguard Ownership: 31.2%)

General. Garnet (www.garnetbio.com) is a clinical stage regenerative medicine company targeting the acceleration of healing and reduction of scarring associated with surgical procedures and other dermatologic conditions. Garnet has identified the first in a series of cell products called GBT 009, which is capable of reducing inflammation and promoting healing. These cells are safe, and when applied to a cut or incision, release pro-healing and anti-inflammatory factors that accelerate wound closure and reduce or eliminate scarring. In addition, Garnet has developed proprietary scalable cell expansion technology that can cost-effectively generate a large number of patient doses. Garnet is initially developing its cell-based therapy for cosmetic and dermatologic applications where accelerated healing and reduced scarring are desirable. Garnet expects to initiate Phase II clinical trials for its proprietary human adult bone marrow-derived cells in 2009.

Opportunity. Cosmetic applications such as breast augmentation, abdominoplasty and facelifts represent a market opportunity of more than $1 billion worldwide. Garnet believes that the cell-based therapy may also be applicable for treatment of burns, auto-immune disorders such as psoriasis, and in other conditions where inflammation or scar formation plays an important role in disease pathology. Garnet is well positioned within the regenerative medicine field, which is already yielding the next generation of significant and differentiated medical products.

Molecular BioMetrics, Inc. (“Molecular Biometrics”)		(Safeguard Ownership: 37.8%)

General. Molecular Biometrics (www.molecularbiometrics.com) is a metabolomics company developing novel clinical tools for applications in personalized medicine to more accurately characterize biologic function in health and disease. Currently focused on reproductive health, Molecular Biometrics’ lead product, ViaMetrics-E™, is the first, and only, non-invasive diagnostic procedure designed to help identify the most viable embryos with the greatest reproductive potential for in vitro fertilization (IVF), while reducing multiple births. Current techniques used to determine reproductive potential of embryos are not as effective as they should be in today’s era of personalized medicine. Molecular Biometrics’ objective is to improve upon today’s IVF success rate, which range between 25-35% worldwide, and help shift the medical practice away from multiple embryo transfer, thereby reducing the likelihood of multiple births.

Opportunity. The availability of Molecular Biometrics’ ViaMetrics-E will be revolutionary for the 7.3 million people in the United States, and the millions of others worldwide, who are affected by infertility. This technology will fulfill an unmet medical need and is well positioned to tap into the $4 billion global IVF market. ViaMetrics-E is intended to provide increased accuracy when assessing the viability of an embryo for implantation through IVF. ViaMetrics-E may hold significant potential to increase IVF success rates, while minimizing the number of IVF cycles and/or the number of embryos required to achieve a live birth. ViaMetrics-E could also provide physicians with a procedure that may reduce the incidence, costs, and medical risk associated with multiple births, which constitute more than one-third of births under current IVF methods. Currently, the annual number of assisted reproductive technologies (ART) cycles, with the majority being IVF, exceeds 1 million worldwide. Each IVF cycle in the U.S. costs between $10,000 and $15,000. The ability to reduce the number of IVF cycles and the complications associated with multiple births could result in substantial savings to the overall healthcare system.

NuPathe, Inc. (“NuPathe”)		(Safeguard Ownership: 23.5%)

General. NuPathe (www.nupathe.com) is a specialty pharmaceutical company developing innovative therapeutic products for the treatment of neurological and psychiatric diseases, including migraine and Parkinson’s disease. NuPathe initiated phase III clinical trials in early 2009 for Zelrix^TM, the first and only migraine patch that delivers Sumatriptan through NuPathe’s proven and proprietary SmartRelief™ technology, intended to reduce negative side effects such as nausea and/or vomiting. Development continues for NuPathe’s NP201 Parkinson’s Disease LAD^TM, which represents a potentially superior alternative to existing options by providing consistent drug levels over a prolonged period. Pre-clinical proof-of-concept studies for NP201 are underway.

Opportunity. Patients clearly need better options for acute migraine. Triptans, the gold standard in treatment today, can be quite efficacious, but are inadequate for many migraine sufferers in their current forms. Many patients experience difficulty taking their medication due to nausea that accompanies their migraine and many experience troublesome side effects from current medications. Phase I clinical trials demonstrated that Zelrix delivers sumatriptan in a rapid, predictable and consistent manner. Migraine represents a more than $3 billion market affecting more than 28 million people annually in the U.S.

Rubicor Medical, Inc. (“Rubicor”)		(Safeguard Ownership: 44.6%)

General. Rubicor (www.rubicor.com) has developed and is commercializing medical devices for minimally invasive breast biopsy and tissue removal. Rubicor’s mission is to redefine breast care and to change the way physicians diagnose and treat breast cancer and benign breast disease. Rubicor has three FDA approved breast care devices in the U.S. for biopsy and removal of breast tissue and lesions. During 2008, Rubicor halted operations and furloughed and terminated employees while it sought additional funding. Rubicor is in active negotiations now with parties to fund the company to enable it to launch its three products in 2009. It is anticipated that a new management team and new board representatives will be brought in along with new capital partners .

Opportunity. The U.S. market for breast biopsy and therapeutic procedures exceeds an estimated $500 million annually, with approximately 1.5 million biopsies performed annually. Rubicor’s devices represent attractive alternatives to existing procedures and technology for breast lesion biopsy and removal, resulting in a more accurate assessment of the sample.

Tengion, Inc. (“Tengion”)		(Safeguard Ownership: 4.5%)

General. Tengion (www.tengion.com) is a clinical stage regenerative medicine company that is focused on developing, manufacturing and commercializing human neo-organs and neo-tissues using its Autologous Organ Regeneration Platform™. Tengion’s mission is to transform the lives of patients in need of an organ transplant or augmentation. Tengion uses biocompatible materials and a patient’s own (autologous) cells to create a functional neo-organ or neo-tissue that is designed to catalyze the body’s innate ability to regenerate. Phase II trials are underway for Tengion’s bladder treatments.

Opportunity. Tengion’s patented technology is the first product to utilize the body’s own regenerative cells and harness them to develop and complete regeneration of the bladder. This technology represents a tremendous opportunity to help shape the future of regenerative medicine and expand upon the convergence of biotechnology and medical devices. Tengion’s progress represents a growing trend towards regenerative medicine, a field anticipated to become the source of significant innovation and medical products over the next decade. Tengion’s addressable market is estimated at more than $1 billion in the U.S. and up to $3 billion worldwide.

TECHNOLOGY PARTNER COMPANIES
MINORITY HOLDINGS

Advantedge Healthcare Solutions, Inc. (“AHS”)		(Safeguard Ownership: 37.7%)

General. AHS (www.ahsrcm.com) is a healthcare information technology (“HCIT”) company that provides medical billing software and services to healthcare providers on an outsourced basis. AHS employs a web-based technology platform and continuous business process improvement methods to increase the operating efficiencies of medical billing and to improve results for its physician customers.

Opportunity. AHS competes in a fragmented outsourced revenue cycle management market of approximately $4 billion in annual revenue. AHS plans to grow primarily via acquisition and by employing its proprietary platform and services. AHS’ management has significant experience acquiring revenue cycle management companies. AHS acquired Professional Billing & Management Services, Inc. (PBMS), a premier and long-standing anesthesia billing company located in Chambersburg, Pennsylvania in 2007, and Staten Island University Hospital (SIUH)’s existing physician billing division, Regency Alliance Services in early 2009. The company is actively pursuing additional acquisition opportunities.

Authentium, Inc. (“Authentium”)		(Safeguard Ownership: 20.0%)

General. Authentium (www.authentium.com) provides anti-malware and identity protection software that is used by leading software providers, including Google, Microsoft and Symantec. In 2008, Authentium launched an industry-shifting identity theft prevention product called SafeCentral™ (www.safecentral.com). SafeCentral significantly reduces the risk of consumers having their personal information stolen while using internet services such as online banking, tax filing, etc. (which are significant sources of identity theft).

Opportunity. The rapid proliferation of viruses and malware has spawned an enormous anti-malware market expected to reach over $7 billion in 2009. Authentium’s new product, SafeCentral, is a next generation anti-malware solution that is gaining traction with customers such as First Trade and offers a tremendous growth opportunity in 2009 and beyond. Identity theft is becoming an increasingly common problem with over eight million US adults affected in 2007.

Beyond.com, Inc. (“Beyond”)		(Safeguard Ownership: 37.1%)

General. Beyond (www.beyond.com) is an internet-based business that provides career services and technology to job seekers and employers throughout the United States and Canada. Beyond is the largest niche and local career network, comprised of more than 15,000 online communities. The Beyond network of websites accounts for over five million resumes and powers career portals for some of the internet’s best known career brands, media publishers and well-established career portals.

Opportunity. Beyond is a leader in the transition from print to online recruitment, a field where online job listings are projected to reach $12 billion by 2012. Already one of the industry’s leading career platforms, Beyond is well positioned for growth by expanding its partner network and generating more revenue opportunities from targeted niche and local job advertisements.

Bridgevine, Inc. (“Bridgevine”)		(Safeguard Ownership: 20.8%)

General. Bridgevine (www.bridgevine.com) is an internet marketing company that enables online consumers to shop for special offers as well as compare and purchase digital services and products such as internet, phone, VoIP, TV, wireless, music, entertainment and more. Bridgevine leverages its proprietary technology platform to acquire leads through numerous sources, including search, e-tail and retail, and then offers an optimized bundle of products and services from its growing base of participating merchants, which now totals over 100. Founded to capitalize on a fragmented and confusing online services marketplace, Bridgevine supplies a simplified shopping experience coupled with unique content and promotions, education and comparison services to end-users through its network of websites. Bridgevine’s advertising partners include Comcast, AT&T, Charter, Real Networks, Dlink, Vonage, Netflix, Qwest, Time Warner and Verizon.

Opportunity. Bridgevine’s technology platform provides consumers with “one stop shopping” for digital services (as opposed to goods which are sold on websites such as Amazon.com). Bridgevine participates in the large and growing customer generation segment of the market for digital services in the U.S., which has been projected to grow to $10 billion by 2014. As additional services migrate to the digital domain, Bridgevine will be well positioned to take advantage of broader market opportunities.

GENBAND, Inc. (“GENBAND”)		(Safeguard Ownership: 2.3%)

General. GENBAND (www.genband.com) provides media gateway, IP security and session border gateway technology to telecommunications providers. NextPoint Networks, Inc. merged with GENBAND in September 2008. NextPoint Networks, Inc. was formed in 2007 through the merger of Safeguard’s partner company NexTone Communications and Reef Point Systems. Over the past five years, GENBAND has secured business with more than half of the world’s top 100 network service providers, partnered with seven of the world’s largest telecom equipment manufacturers, extended its global reach to more than 80 countries, executed four acquisitions, and expanded its employee base from 80 to 500.

Opportunity. GENBAND competes in a market estimated at $12 billion and is aggressively developing products that enable telecommunications and mobile networks to provide enhanced voice and data services such as VOIP and internet video. GENBAND will benefit from its aggressive product development path aimed at the integration of emerging technologies like femto base stations, security, control and packet inspection.

Kadoo, Inc. (“Kadoo”)		(Safeguard Ownership: 14.0%)

General. Kadoo (www.kadoo.com) was established to enable online users to post, manage and securely share large volumes of digital photos, videos and other files. Kadoo effectively ceased operations in February 2009 as it was unable to raise additional funding.

Portico Systems, Inc. (“Portico”)		(Safeguard Ownership: 46.8%)

General. Portico (www.porticosys.com) is a HCIT company that is pioneering the next generation of healthcare payor software solutions. Portico’s integrated provider management solution offers a suite of solutions that helps health plans address challenges such as growing healthcare costs, quality, consumerism, competition and regulatory changes while creating an agile infrastructure that lays a foundation for efficiency and flexibility. The Portico Provider Platform streamlines provider network processes and accelerates new revenue streams, enhancing employee effectiveness and optimizing provider relationships.

Opportunity. Portico’s exclusive focus on provider operations has allowed the company to design the only modular end-to-end provider platform that streamlines the interactions between payors and their provider networks. Portico’s offerings also enable payors to reduce costs by removing duplicative processes within a payor’s infrastructure. Portico acquired Ethidium Health Systems in 2008 to enable its payor customers to better collaborate with the growing home health care market. Portico is positioned at the forefront of emerging medical home and pay-for-performance initiatives with its industry-leading integrated provider management platform. Portico addresses a market for U.S. healthcare payor IT spending estimated at $7 billion.

Swaptree, Inc. (“Swaptree”)		(Safeguard Ownership: 29.3%)

General. Swaptree (www.swaptree.com) is an internet-based business that enables users to trade books, CDs, DVDs and video games using its proprietary trade matching software. Swaptree’s innovative model has gained significant media attention, which has driven its unique visitors to grow more than 300% since becoming a Safeguard partner company, while its user base has grown over fivefold during the same period.

Opportunity. Swaptree.com has many of the features users have come to expect from other community sites, including discussion forums; the ability to create smaller trading groups around certain interests or types of items; and tools for integrating Swaptree with other e-commerce sites such as Amazon.com and social networks such as Facebook and MySpace. Swapping is the next logical step in internet commerce. First there was e-commerce, then online auctions, and then online classifieds for buying and selling used items. Now there is demand for trading online, driven in no small part by an economy where consumers are spending less, searching for great deals, and a desire to be more environmentally friendly.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

Information on revenue, operating income (loss) and net income (loss) from continuing operations for each operating segment of Safeguard’s business for each of the three years in the period ended December 31, 2008 and assets as of December 31, 2008 and 2007 is contained in Note 20 to the Consolidated Financial Statements.

OTHER INFORMATION

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

AVAILABLE INFORMATION

All periodic and current reports, registration statements, and other filings that Safeguard is required to file with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available free of charge from the SEC’s website (http://www.sec.gov) or public reference room at 450 Fifth Street N.W., Washington, DC 20549 (1-800-SEC-0330) or through Safeguard’s internet website (http://www.safeguard.com). Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) also may be obtained free of charge, upon written request to: Investor Relations, Safeguard Scientifics, Inc., 435 Devon Park Drive, Building 800, Wayne, Pennsylvania 19087.

The internet website addresses for Safeguard and its companies are included in this report for identification purposes. The information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

The following corporate governance documents are available free of charge on Safeguard’s website: the charters of our Audit, Compensation and Nominating & Corporate Governance Committees, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics. Copies of these corporate governance documents also may be obtained by any shareholder, free of charge, upon written request to: Corporate Secretary, Safeguard Scientifics, Inc., 435 Devon Park Drive, Building 800, Wayne, Pennsylvania 19087. We also will post on our website any amendments to or waivers of our Code of Business Conduct and Ethics that relate to our directors and executive officers.

Item 1A. Risk Factors

You should carefully consider the information set forth below. The following risk factors describe situations in which our business, financial condition or results of operations could be materially harmed, and the value of our securities may decline. You should also refer to other information included or incorporated by reference in this report.

Our business depends upon our ability to make good decisions regarding the deployment of capital into new or existing partner companies and, ultimately, the performance of our partner companies, which is uncertain.

If we make poor decisions regarding the deployment of capital into new or existing partner companies, our business model will not succeed. Our success as a company ultimately depends on our ability to choose the right partner companies. If our partner companies do not succeed, the value of our assets could be significantly reduced and require substantial impairments or write-offs and our results of operations and the price of our common stock could decline. The risks relating to our partner companies include:

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most of our partner companies have a history of operating losses or a limited operating history;

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intensifying competition affecting the products and services our partner companies offer could adversely affect their businesses, financial condition, results of operations and prospects for growth;

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inability to adapt to the rapidly changing marketplaces;

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inability to manage growth;

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the need for additional capital to fund their operations, which we may not be able to fund or which may not be available from third parties on acceptable terms, if at all;

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inability to protect their proprietary rights and/or infringing on the proprietary rights of others;

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certain of our partner companies could face legal liabilities from claims made against them based upon their operations, products or work;

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the impact of economic downturns on their operations, results and growth prospects;

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inability to attract and retain qualified personnel; and

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government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies.

These risks are discussed in greater detail under the caption “— Risks Related to Our Partner Companies” below.

Our partner companies (and the nature of our interests in them) could vary widely from period to period.

As part of our strategy, we continually assess the value to our shareholders of our interests in our partner companies. We also regularly evaluate alternative uses for our capital resources. As a result, depending on market conditions, growth prospects and other key factors, we may at any time:

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change the partner companies on which we focus;

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sell some or all of our interests in any of our partner companies; or

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otherwise change the nature of our interests in our partner companies.

Therefore, the nature of our holdings could vary significantly from period to period.

Our consolidated financial results also may vary significantly based upon which partner companies are included in our financial statements. For example:

•

For the year ended December 31, 2008, we consolidated the results of operations of Clarient in continuing operations. In our Form 10-K for the year ended December 31, 2007, we consolidated the results of operations of Acsis, Alliance Consulting, Clarient and Laureate Pharma in continuing operations. We sold three of our majority-owned partner companies — Acsis, Alliance Consulting and Laureate Pharma — on May 6, 2008.

Our business model does not rely, or plan, upon the receipt of operating cash flows from our partner companies. Our partner companies currently provide us with no cash flow from their operations. We rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations.

We need capital to develop new partner company relationships and to fund the capital needs of our existing partner companies. We also need cash to service and repay our outstanding debt, finance our corporate overhead and meet our existing funding commitments. As a result, we have substantial cash requirements. Our partner companies currently provide us with no cash flow from their operations. To the extent our partner companies generate any cash from operations, they generally retain the funds to develop their own businesses. As a result, we must rely on cash on hand, liquidity events and new capital raising activities to meet our cash needs. If we are unable to find ways of monetizing our holdings or to raise additional capital on attractive terms, we may face liquidity issues that will require us to curtail our new business efforts, constrain our ability to execute our business strategy and limit our ability to provide financial support to our existing partner companies.

Fluctuations in the price of the common stock of our publicly traded holdings may affect the price of our common stock.

Fluctuations in the market prices of the common stock of our publicly traded holdings are likely to affect the price of our common stock. The market prices of our publicly traded holdings have been highly volatile and subject to fluctuations unrelated or disproportionate to operating performance. For example, the aggregate market value of our holdings in Clarient (Nasdaq: CLRT), our only public company holding, at December 31, 2007, was approximately $86.8 million, and at December 31, 2008, was approximately $75.8 million, reflecting a decrease in the per-share market price partially offset by an increase in our ownership of 4.2 million shares.

Intense competition from other acquirors of interests in companies could result in lower gains or possibly losses on our partner companies.

We face intense competition from other capital providers as we acquire and develop interests in our partner companies. Some of our competitors have more experience identifying, acquiring and selling companies and have greater financial and management resources, brand name recognition or industry contacts than we have. Despite making most of our acquisitions at a stage when our partner companies are not publicly traded, we may still pay higher prices for those equity interests because of higher valuations of similar public companies and competition from other acquirers and capital providers, which could result in lower gains or possibly losses.

We may be unable to obtain maximum value for our holdings or sell our holdings on a timely basis.

We hold significant positions in our partner companies. Consequently, if we were to divest all or part of our holdings in a partner company, we may have to sell our interests at a relative discount to a price which may be received by a seller of a smaller portion. For partner companies with publicly traded stock, we may be unable to sell our holdings at then-quoted market prices. The trading volume and public float in the common stock of Clarient, our only publicly traded partner company, are small relative to our holdings. As a result, any significant open-market divestiture by us of our holdings in these partner companies, if possible at all, would likely have a material adverse effect on the market price of their common stock and on our proceeds from such a divestiture. Additionally, we may not be able to take our partner companies public as a means of monetizing our position or creating shareholder value.

Registration and other requirements under applicable securities laws may adversely affect our ability to dispose of our holdings on a timely basis.

Our success is dependent on our executive management.

Our success is dependent on our executive management team’s ability to execute our strategy. A loss of one or more of the members of our executive management team without adequate replacement could have a material adverse effect on us.

Our business strategy may not be successful if valuations in the market sectors in which our partner companies participate decline.

Our strategy involves creating value for our shareholders by helping our partner companies build value and, if appropriate, accessing the public and private capital markets. Therefore, our success is dependent on the value of our partner companies as determined by the public and private capital markets. Many factors, including reduced market interest, may cause the market value of our publicly traded partner companies to decline. If valuations in the market sectors in which our partner companies participate decline, their access to the public and private capital markets on terms acceptable to them may be limited.

Our partner companies could make business decisions that are not in our best interests or with which we do not agree, which could impair the value of our holdings.

Although we may seek a controlling equity interest and participation in the management of our partner companies, we may not be able to control the significant business decisions of our partner companies. We may have shared control or no control over some of our partner companies. In addition, although we currently own a controlling interest in some of our partner companies, we may not maintain this controlling interest. Acquisitions of interests in partner companies in which we share or have no control, and the dilution of our interests in or loss of control of partner companies, will involve additional risks that could cause the performance of our interests and our operating results to suffer, including:

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the management of a partner company having economic or business interests or objectives that are different than ours; and

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partner companies not taking our advice with respect to the financial or operating difficulties they may encounter.

Our inability to control our partner companies also could prevent us from assisting them, financially or otherwise, or could prevent us from liquidating our interests in them at a time or at a price that is favorable to us. Additionally, our partner companies may not act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to recognize losses on our interests in these partner companies.

We may have to buy, sell or retain assets when we would otherwise not wish to do so in order to avoid registration under the Investment Company Act.

The Investment Company Act of 1940 regulates companies which are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. Under the Investment Company Act, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. We refer to this test as the “40% Test.” Securities issued by companies other than majority-owned partner companies are generally considered “investment securities” for purpose of the Investment Company Act, unless other circumstances exist which actively involve the company holding such interests in the management of the underlying company. We are a company that partners with growth-stage technology and life sciences companies to build value; we are not engaged primarily in the business of investing, reinvesting or trading in securities. We are in compliance with the 40% Test. Consequently, we do not believe that we are an investment company under the Investment Company Act.

We monitor our compliance with the 40% Test and seek to conduct our business activities to comply with this test. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively helping our partner companies in their efforts to build value. In order to continue to comply with the 40% Test, we may need to take various actions which we would otherwise not pursue. For example, we may need to retain a majority interest in a partner company that we no longer consider strategic, we may not be able to acquire an interest in a company unless we are able to obtain majority ownership interest in the company, or we may be limited in the manner or timing in which we sell our interests in a partner company. Our ownership levels also may be affected if our partner companies are acquired by third parties or if our partner companies issue stock which dilutes our majority ownership. The actions we may need to take to address these issues while maintaining compliance with the 40% Test could adversely affect our ability to create and realize value at our partner companies.

Recent economic disruptions and downturns may have negative repercussions for the Company.

Recent events in the United States and international capital markets, debt markets and economies generally may negatively impact the Company’s ability to pursue certain of its tactical and strategic initiatives, such as: accessing additional public or private equity or debt financing for itself or for its partner companies and selling the Company’s interests in its partner companies on terms acceptable to the Company and in time frames consistent with our expectations.

We have material weaknesses in our internal control over financial reporting and cannot provide assurance that additional material weaknesses will not be identified in the future. Our failure to effectively maintain our internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause us to fail to meet our reporting obligations, cause investors to lose confidence in our reported financial information and/or have a negative affect on our stock price.

We have determined that we had deficiencies in our internal control over financial reporting as of December 31, 2008 that constituted “material weaknesses” as defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5. These material weaknesses are identified in Item 9A, Controls and Procedures.

We cannot assure that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our financial statements. These misstatements could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and/or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

If we do not meet the New York Stock Exchange continued listing requirements, our common stock may be delisted.

The New York Stock Exchange (“NYSE”) listing standards require us, among other things, to maintain an average closing price of at least $1.00 per share of common stock during any consecutive 30-trading-day period. On November 4, 2008, we were notified by the NYSE that we were not in compliance with the NYSE listing standard relating to minimum average share price. We have notified the NYSE of our intent to cure the deficiency; and, if necessary, we will undertake a reverse split of our common stock in order to do so. Based on currently applicable NYSE rules, we must bring our share price and average share price back above $1.00 on or before September 1, 2009, subject to possible extension, to regain compliance with the NYSE’s price condition, or our common stock will be subject to suspension and delisting procedures. During the cure period and subject to compliance with NYSE’s other continued listing standards, our common stock will continue to be listed on the NYSE.

A delisting of our common stock from the NYSE would negatively impact us because it would, unless we were able to obtain a listing for our common stock on another national or regional securities exchange, trigger a situation where the holders of our currently outstanding convertible debentures would have the right to cause us to redeem the convertible debentures held by such holders at face value. It is uncertain whether the Company would be able to make such a redemption, based upon its available cash on hand, cash equivalents and other potential sources of funding. In addition, any delisting by the NYSE could or would also: (i) reduce the liquidity and market price of our common stock; (ii) reduce the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limit our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets, and (iv) impair our ability to provide equity incentives to our employees.

There could be negative effects if we do effect a reverse split of our Common Stock.

If we undertake a reverse split of our stock in order to address the NYSE compliance issue described above, the immediate effect of a reverse stock split would be to reduce the number of shares of our outstanding common stock and to increase the trading price of our common stock. However, we cannot predict the specific effect of any reverse stock split upon the market price of our common stock. Based on the data we have reviewed it appears that sometimes a reverse stock split improves stock performance and sometimes it does not, and sometimes a reverse stock split improves overall market capitalization and sometimes it does not. We cannot assure you that the trading price of our common stock after the reverse stock split will rise in proportion to the reduction in the number of shares of our common stock outstanding as a result of the reverse stock split. Also, we cannot assure you that a reverse stock split would lead to a sustained increase in the trading price of our common stock. The trading price of our common stock may change due to a variety of factors, such as our operating results and other factors related to our business and general market conditions. We also cannot predict other possible negative effects of a reduction in the number of our common shares outstanding on the Company or on individual stockholders.

Risks Related to our Partner Companies

Most of our partner companies have a history of operating losses or limited operating history and may never be profitable.

Most of our partner companies have a history of operating losses or limited operating history, have significant historical losses and may never be profitable. Many have incurred substantial costs to develop and market their products, have incurred net losses and cannot fund their cash needs from operations. We expect that the operating expenses of certain of our partner companies will increase substantially in the foreseeable future as they continue to develop products and services, increase sales and marketing efforts, and expand operations.

Our partner companies face intense competition, which could adversely affect their business, financial condition, results of operations and prospects for growth.

There is intense competition in the technology and life sciences marketplaces, and we expect competition to intensify in the future. Our business, financial condition, results of operations and prospects for growth will be materially adversely affected if our partner companies are not able to compete successfully. Many of the present and potential competitors may have greater financial, technical, marketing and other resources than those of our partner companies. This may place our partner companies at a disadvantage in responding to the offerings of their competitors, technological changes or changes in client requirements. Also, our partner companies may be at a competitive disadvantage because many of their competitors have greater name recognition, more extensive client bases and a broader range of product offerings. In addition, our partner companies may compete against one another.

Our partner companies may fail if they do not adapt to the rapidly changing technology and life sciences marketplaces.

If our partner companies fail to adapt to rapid changes in technology and customer and supplier demands, they may not become or remain profitable. There is no assurance that the products and services of our partner companies will achieve or maintain market penetration or commercial success, or that the businesses of our partner companies will be successful.

The technology and life sciences marketplaces are characterized by:

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rapidly changing technology;

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evolving industry standards;

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frequent new products and services;

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shifting distribution channels;

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evolving government regulation;

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frequently changing intellectual property landscapes; and

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changing customer demands.

Our future success will depend on our partner companies’ ability to adapt to these rapidly evolving marketplaces. They may not be able to adequately or economically adapt their products and services, develop new products and services or establish and maintain effective distribution channels for their products and services. If our partner companies are unable to offer competitive products and services or maintain effective distribution channels, they will sell fewer products and services and forego potential revenue, possibly causing them to lose money. In addition, we and our partner companies may not be able to respond to the rapid technology changes in an economically efficient manner, and our partner companies may become or remain unprofitable.

Our partner companies may grow rapidly and may be unable to manage their growth.

We expect some of our partner companies to grow rapidly. Rapid growth often places considerable operational, managerial and financial strain on a business. To successfully manage rapid growth, our partner companies must, among other things:

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rapidly improve, upgrade and expand their business infrastructures;

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scale up production operations;

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develop appropriate financial reporting controls;

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attract and maintain qualified personnel; and

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maintain appropriate levels of liquidity.

If our partner companies are unable to manage their growth successfully, their ability to respond effectively to competition and to achieve or maintain profitability will be adversely affected.

Based on our business model, some or all of our partner companies will need to raise additional capital to fund their operations at any given time. We may not be able to fund some or all of such amounts, and such amounts may not be available from third parties on acceptable terms, if at all.

We cannot be certain that our partner companies will be able to obtain additional financing on favorable terms, if at all. Because our resources and our ability to raise capital are limited, we may not be able to provide our partner companies with sufficient capital resources to enable them to reach a cash flow positive position. We also may fail to accurately project the capital needs of our partner companies for purposes of our cash flow planning. If our partner companies need to but are not able to raise capital from us or other outside sources, then they may need to cease or scale back operations. In such event, our interest in any such partner company will become less valuable.

Recent economic disruptions and downturns may negatively affect our partner companies’ plans and their results of operations.

Many of our partner companies are largely dependant upon outside sources of capital to fund their operations. Disruptions in the availability of capital from such sources will negatively affect the ability of such partner companies to pursue their business models and will force such companies to revise their growth and development plans accordingly. Any such changes will, in turn, affect the ability of the Company to realize the value of its capital deployments in such companies.

In addition, the downturn in the economy as well as possible governmental responses to such downturn and/or to specific situations in the economy could effect the business prospects of certain of our partner companies, including, but not limited to, in the following ways: weaknesses in the financial services industries; reduced business and/or consumer spending; and/or systematic changes in the ways the healthcare system operates in the United States.

Our partner companies are subject to independent audits and the results of such independent audits could adversely impact our partner companies.

As reported in its Form 10-K for the year ended December 31, 2008, Clarient’s independent auditors have determined that there is substantial doubt about Clarient’s ability to continue as a going concern. The going concern explanatory paragraph in Clarient’s audit opinion could have a negative impact on:

•

Clarient’s ability to extend, renew or refinance its bank credit facility or to secure additional debt or equity financing in order to fund anticipated working capital needs and capital expenditures and to execute its strategy;

•

Clarient’s relationships with existing customers or potential new customers; and

•

Clarient’s stock price.

If any of such events were to occur, the value of our holdings in Clarient could be adversely impacted.

Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.

Our partner companies assert various forms of intellectual property protection. Intellectual property may constitute an important part of our partner companies’ assets and competitive strengths. Federal law, most typically, copyright, patent, trademark and trade secret laws, generally protects intellectual property rights. Although we expect that our partner companies will take reasonable efforts to protect the rights to their intellectual property, the complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of these partner companies and the demands of quick delivery of products and services to market, create a risk that their efforts will prove inadequate to prevent misappropriation of our partner companies’ technology, or third parties may develop similar technology independently.

Some of our partner companies also license intellectual property from third parties, and it is possible that they could become subject to infringement actions based upon their use of the intellectual property licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed intellectual property; however, this may not adequately protect them. Any claims against our partner companies’ proprietary rights, with or without merit, could subject our partner companies to costly litigation and the diversion of their technical and management personnel from other business concerns. If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease.

Third parties have and may assert infringement or other intellectual property claims against our partner companies based on their patents or other intellectual property claims. Even though we believe our partner companies’ products do not infringe any third-party’s patents, they may have to pay substantial damages, possibly including treble damages, if it is ultimately determined that they do. They may have to obtain a license to sell their products if it is determined that their products infringe another person’s intellectual property. Our partner companies might be prohibited from selling their products before they obtain a license, which, if available at all, may require them to pay substantial royalties. Even if infringement claims against our partner companies are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns.

Certain of our partner companies could face legal liabilities from claims made against their operations, products or work.

The manufacture and sale of certain of our partner companies’ products entails an inherent risk of product liability. Certain of our partner companies maintain product liability insurance. Although none of our partner companies to date have experienced any material losses, there can be no assurance that they will be able to maintain or acquire adequate product liability insurance in the future and any product liability claim could have a material adverse effect on our partner companies’ revenue and income. In addition, many of the engagements of our partner companies involve projects that are critical to the operation of their clients’ businesses. If our partner companies fail to meet their contractual obligations, they could be subject to legal liability, which could adversely affect their business, operating results and financial condition. The provisions our partner companies typically include in their contracts, which are designed to limit their exposure to legal claims relating to their services and the applications they develop, may not protect our partner companies or may not be enforceable. Also, as consultants, some of our partner companies depend on their relationships with their clients and their reputation for high-quality services and integrity to retain and attract clients. As a result, claims made against our partner companies’ work may damage their reputation, which in turn could impact their ability to compete for new work and negatively impact their revenue and profitability.

Our partner companies’ success depends on their ability to attract and retain qualified personnel.

Our partner companies are dependent upon their ability to attract and retain senior management and key personnel, including trained technical and marketing personnel. Our partner companies also will need to continue to hire additional personnel as they expand. Some of our partner companies may have employees represented by labor unions. Although our partner companies have not been the subject of a work stoppage, any future work stoppage could have a material adverse effect on their respective operations. A shortage in the availability of the requisite qualified personnel or work stoppage would limit the ability of our partner companies to grow, to increase sales of their existing products and services, and to launch new products and services.

Government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies.

Failure to comply with applicable requirements of the FDA or comparable regulation in foreign countries can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Manufacturers of pharmaceuticals and medical diagnostic devices and operators of laboratory facilities are subject to strict federal and state regulation regarding validation and the quality of manufacturing and laboratory facilities. Failure to comply with these quality regulation systems requirements could result in civil or criminal penalties or enforcement proceedings, including the recall of a product or a “cease distribution” order. The enactment of any additional laws or regulations that affect healthcare insurance policy and reimbursement (including Medicare reimbursement) could negatively affect our partner companies. If Medicare or private payors change the rates at which our partner companies or their customers are reimbursed by insurance providers for their products, such changes could adversely impact our partner companies.

Some of our partner companies are subject to significant environmental, health and safety regulation.

Some of our partner companies are subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as to the safety and health of manufacturing and laboratory employees. In addition, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters and administrative offices in Wayne, Pennsylvania contain approximately 18,000 square feet of office space in one building. We currently lease our corporate headquarters under a lease with approximately 5.5 years remaining.

Clarient, our only consolidated partner company, leases approximately 78,000 square feet of office and laboratory services space under a ten-year lease with an option to extend the lease term for up to two additional five-year periods, which commenced on December 1, 2005.

Item 3. Legal Proceedings

We, as well as our partner companies, are involved in various claims and legal actions arising in the ordinary course of business. While in the current 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, no assurance can be given as to the outcome of these lawsuits, and one or more adverse rulings could have a material adverse effect on our consolidated financial position and results of operations, or that of our partner companies. See Note 16 for a discussion of ongoing claims and legal actions.

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

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2008.

ANNEX TO PART I — EXECUTIVE OFFICERS OF THE REGISTRANT

Name		Age				Position		Executive Officer Since
Peter J. Boni			63			President, Chief Executive Officer and Director			2005
James A. Datin			46			Executive Vice President and Managing Director, Life Sciences			2005
Kevin Kemmerer			40			Executive Vice President and Managing Director, Technology			2008
Brian J. Sisko			48			Senior Vice President and General Counsel			2007
Stephen T. Zarrilli			47			Senior Vice President and Chief Financial Officer			2008

Mr. Boni joined Safeguard as President and Chief Executive Officer in August 2005. Prior to joining Safeguard, Mr. Boni was an Operating Partner for Advent International, a global private equity firm with $10 billion under management, from April 2004 to August 2005; Chairman and Chief Executive Officer of Surebridge, Inc., an applications outsourcer serving the mid-market, from March 2002 to April 2004; Managing Principal of Vested Interest LLC, a management consulting firm, from January 2001 to March 2002; and President and Chief Executive Officer of Prime Response, Inc., an enterprise applications software provider, from February 1999 to January 2001. Mr. Boni is a director of Clarient, Inc.

Mr. Datin joined Safeguard as Executive Vice President and Managing Director, Life Sciences Group in September 2005. Mr. Datin served as Chief Executive Officer of Touchpoint Solutions, Inc., a provider of software that enables customers to develop and deploy applications, content and media on multi-user interactive devices, from December 2004 to June 2005; Group President in 2004, and as Group President, International, from 2001 to 2003, of Dendrite International, a provider of sales, marketing, clinical and compliance solutions and services to global pharmaceutical and other life sciences companies; and Group Director, Corporate Business Strategy and Planning at GlaxoSmithKline, from 1999 to 2001, where he also was a member of the company’s Predictive Medicine Board of Directors that evaluated acquisitions and alliances. His prior experience also includes international assignments with and identifying strategic growth opportunities for E Merck and Baxter. Mr. Datin is a director of Clarient, Inc.

Mr. Kemmerer joined Safeguard as Principal, Technology Group, in June 2004, became Senior Vice President, Technology in April 2006, Senior Vice President and Managing Director, Technology in April 2008 and Executive Vice President and Managing Director, Technology in September 2008. Mr. Kemmerer served most recently as Director of Kennet Venture Partners, a venture capital firm for which he worked from November 2000 to June 2004 and previously as Principal, Mergers and Acquisitions of Broadview International, for whom he worked from August 1997 to November 2000.

Mr. Sisko joined Safeguard as Senior Vice President and General Counsel in August 2007. Prior to joining Safeguard, Mr. Sisko served as Chief Legal Officer, Senior Vice President and General Counsel of Traffic.com (at the time, a public company), a former partner company of Safeguard that is a leading provider of accurate, real-time traffic information in the United States, from February 2006 until June 2007 (following its acquisition by NAVTEQ Corporation in March 2007); Chief Operating Officer from February 2005 to January 2006 of Halo Technology Holdings, Inc., a public holding company for enterprise software businesses (Halo Technology Holdings filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in August 2007); ran B/T Business and Technology, an advisor and strategic management consultant to a variety of public and private companies, from January 2002 to February 2005; and was a Managing Director from April 2000 to January 2002, of Katalyst, LLC, a venture capital and consulting firm. Mr. Sisko also previously served as Senior Vice President—Corporate Development and General Counsel of National Media Corporation, at the time a New York Stock Exchange-listed multi-media marketing company with operations in 70 countries, and as a partner in the corporate finance, mergers and acquisitions practice group of the Philadelphia-based law firm, Klehr, Harrison, Harvey, Branzburg & Ellers LLP.

Mr. Zarrilli joined Safeguard as Senior Vice President and Chief Financial Officer in June 2008. Prior to joining Safeguard, Mr. Zarrilli co-founded, in 2004, the Penn Valley Group, a middle-market management advisory and private equity firm, and served as a Managing Director until June 2008, and continues to serve as non-executive chairman of the Penn Valley Group. While at the Penn Valley Group, Mr. Zarrilli also served as Acting Senior Vice President, Acting Chief Administrative Officer and Acting Chief Financial Officer of Safeguard from December 2006 to June 2007. Mr. Zarrilli also served as the Chief Financial Officer, from 2001 to 2004, of Fiberlink Communications Corporation, a provider of remote access VPN solutions for large enterprises; as the Chief Executive Officer, from 2000 to 2001, of Concellera Software, Inc., a developer of content management software; as the Chief Executive Officer, from 1999 to 2000, and Chief Financial Officer, from 1994 to 1998, of US Interactive, Inc. (at the time a public company), a provider of internet strategy consulting, marketing and technology services; and, previously, with Deloitte & Touche from 1983 to 1994. Mr. Zarrilli is a director and Chairman of the Audit Committee of NutriSystem, Inc. and a director of Clarient, Inc.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Safeguard’s common stock is listed on the New York Stock Exchange (Symbol: SFE). The high and low sale prices reported within each quarter of 2007 and 2008 are as follows:

		High				Low
Fiscal year 2007:
First quarter		$	3.15			$	2.31
Second quarter			3.28				2.40
Third quarter			2.77				1.87
Fourth quarter			2.55				1.74
Fiscal year 2008:
First quarter		$	1.94			$	1.31
Second quarter			1.74				1.21
Third quarter			1.52				1.07
Fourth quarter			1.26				.46

The high and low sale prices reported in the first quarter of 2009 through March 16, 2009 were $0.86  and $0.34, respectively, and the last sale price reported on March 16, 2009, was $0.40. No cash dividends have been declared in any of the years presented, and Safeguard has no present intention to declare cash dividends.

As of March 16, 2009, there were approximately 32,000 beneficial holders of Safeguard’s common stock.

The following graph compares the cumulative total return on $100 invested in our common stock for the period from December 31, 2003 through December 31, 2008 with the cumulative total return on $100 invested for the same period in the Russell 2000 Index and the Dow Jones Wilshire 4500 Index. In light of the diverse nature of Safeguard’s business and based on our assessment of available published industry or line-of-business indices, we determined that no single industry or line-of-business index would provide a meaningful comparison to Safeguard. Further, we did not believe that we could readily identify an appropriate group of industry peer companies for this comparison. Accordingly, under SEC rules, we selected the Dow Jones Wilshire 4500 Index, a published market index in which the median market capitalization of the included companies is similar to our own. Safeguard’s common stock is included as a component of the Russell 2000 and Dow Jones Wilshire 4500 indices.

Comparison of Cumulative Total Returns

•

Assumes reinvestment of dividends. We have not distributed cash dividends during this period.

•

Assumes an investment of $100 on December 31, 2003.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Total Number of Shares

Maximum Number of

Average

Purchased as Part of

Shares that May Yet Be

Total Number of

Price Paid

Publicly Announced Plans

Purchased Under the Plans

Period

Shares Purchased

Per Share

or Programs

or Programs

November 17, 2008 (1)

35,000

$

0.5880

N/A

N/A

November 21, 2008 (1)

39,000

$

0.5277

N/A

N/A

Item 6. Selected Consolidated Financial Data

The following table sets forth our selected consolidated financial data for the five-year period ended December 31, 2008. The selected consolidated financial data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Consolidated Financial Statements and Notes thereto included in this report. The historical results presented herein may not be indicative of future results. During the five-year period ended December 31, 2008, certain consolidated partner companies, or components thereof, were sold. These businesses are reflected in discontinued operations through their respective disposal dates: Acsis, Inc., Alliance Consulting Group Associates, Inc. and Laureate Pharma, Inc. (May, 2008), Pacific Title & Art Studio (March 2007), Clarient’s technology business (March 2007), Mantas (October 2006), Alliance Consulting’s Southwest region business (July 2006), Laureate Pharma’s Totowa, New Jersey operation (December 2005) and CompuCom (October 2004).

		December 31,
		2008				2007				2006				2005				2004
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	75,051			$	96,201			$	60,381			$	117,633			$	138,332
Short-term investments			14,701				590				94,155				31,770				33,555
Restricted cash			—				—				—				1,098				561
Cash held in escrow			6,934				22,686				19,398				—				—
Working capital of continuing operations			88,400				97,184				133,643				139,877				164,092
Total assets of continuing operations			232,402				258,075				277,019				220,657				275,141
Long-term debt, net of current portion			345				906				1,939				2,073				5,440
Other long-term liabilities			9,600				9,111				9,276				12,571				10,273
Convertible senior debentures			86,000				129,000				129,000				150,000				150,000
Total shareholders’ equity			104,710				153,139				211,294				164,975				201,230

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

Consolidated Statements of Operations Data

		Year Ended December 31,
		2008				2007				2006				2005				2004
						(In thousands except per share amounts)
Revenue		$	73,736			$	42,995			$	27,723			$	11,439			$	3,516
Operating Expenses:
Cost of sales			33,007				26,914				19,824				10,959				5,939
Selling, general and administrative			60,744				50,783				44,924				34,172				34,752
Research and development			—				—				—				1				599
Total operating expenses			93,751				77,697				64,748				45,132				41,290
Operating loss			(20,015	)			(34,702	)			(37,025	)			(33,693	)			(37,774	)
Other income (loss), net			10,275				(5,089	)			5,402				7,073				38,687
Recovery (impairment) — related party			5				12				360				28				(3,400	)
Interest income			3,097				7,520				6,805				4,975				2,573
Interest expense			(4,732	)			(5,489	)			(5,203	)			(5,195	)			(9,131	)
Equity loss			(34,697	)			(15,178	)			(3,732	)			(6,597	)			(14,534	)
Minority interest			3,264				5,749				5,721				6,895				7,685
Net loss from continuing operations before income taxes			(42,803	)			(47,177	)			(27,672	)			(26,514	)			(15,894	)
Income tax benefit			26				696				1,270				—				—
Net loss from continuing operations			(42,777	)			(46,481	)			(26,402	)			(26,514	)			(15,894	)
Income (loss) from discontinued operations, net of tax			(9,236	)			(19,387	)			71,845				(5,556	)			(38,926	)
Net income (loss)		$	(52,013	)		$	(65,868	)		$	45,443			$	(32,070	)		$	(54,820	)
Basic and Diluted Income (Loss) Per Share:
Net loss from continuing operations		$	(0.35	)		$	(0.38	)		$	(0.22	)		$	(0.22	)		$	(0.13	)
Net income (loss) from discontinued operations			(0.07	)			(0.16	)			0.59				(0.05	)			(0.33	)
Net income (loss)		$	(0.42	)		$	(0.54	)		$	0.37			$	(0.27	)		$	(0.46	)
Shares used in computing basic and diluted income (loss) per share			122,767				122,352				121,476				120,845				119,965

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

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

Cautionary Note concerning Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially, include, among others, managing rapidly changing technologies, limited access to capital, competition, the ability to attract and retain qualified employees, the ability to execute our strategy, the uncertainty of the future performance of our partner companies, acquisitions and dispositions of companies, the inability to manage growth, compliance with government regulation and legal liabilities, additional financing requirements, labor disputes and the effect of economic conditions in the business sectors in which our partner companies operate, all of which are discussed in Item 1A. “Risk Factors.” Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Overview

Safeguard’s charter is to build value in growth-stage technology and life sciences businesses. We provide capital as well as a range of strategic, operational and management resources to our partner companies. Safeguard participates in expansion financings, corporate spin-outs, management buy-outs, recapitalizations, industry consolidations and early-stage financings. Our vision is to be the preferred catalyst for creating great technology and life sciences companies.

We strive to create long-term value for our shareholders by building value in our partner companies. We help our partner companies in their efforts to increase market penetration, grow revenue and improve cash flow in order to create long-term value. We concentrate on companies that operate in two categories:

Technology — including companies focused on providing software as a service (SaaS), technology-enabled services and vertical software solutions for the financial services sector, internet-based businesses, healthcare information technology; and

Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices, regenerative medicine and specialty pharmaceuticals.

Principles of Accounting for Ownership Interests in Partner Companies

We account for our interests in our partner companies and private equity funds using three methods: consolidation, equity or cost. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by on our voting interest in the entity.

Consolidation Method. We account for our partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities using the consolidation method of accounting. We reflect the participation of other partner company stockholders in the income or losses of our consolidated partner companies as Minority Interest in the Consolidated Statements of Operations. Minority interest adjusts our consolidated operating results to reflect only our share of the earnings or losses of the consolidated partner companies. If there is no minority interest balance remaining on the Consolidated Balance Sheets related to the respective partner company, we record 100% of the consolidated partner company’s losses; we record 100% of subsequent earnings of the partner company to the extent of such previously recognized losses in excess of our proportionate share.

Equity Method. We account for partner companies whose results are not consolidated, but over whom we exercise significant influence, using the equity method of accounting. We also account for our interests in some private equity funds under the equity method of accounting, depending on our respective general and limited partner interests. Under the equity method of accounting, our share of the income or loss of the company is reflected in Equity Loss in the Consolidated Statements of Operations. We report our share of the income or loss of the equity method partner companies on a one quarter lag.

When the carrying value of our holding in an equity method partner company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional funding to the equity method partner company. When the equity method partner company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized.

Cost Method. We account for partner companies which are not consolidated or accounted for under the equity method using the cost method of accounting. Under the cost method, our share of the income or losses of such partner companies is not included in our Consolidated Statements of Operations. However, the effect of the change in market value of cost method partner company holdings classified as trading securities is reflected in Other income (loss), net in the Consolidated Statements of Operations.

Critical Accounting Policies and Estimates

Accounting policies, methods and estimates are an integral part of the Consolidated Financial Statements prepared by management and are based upon management’s current judgments. These judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements as described in Note 1 to our Consolidated Financial Statements, areas that are particularly significant include the following:

•

Revenue recognition;

•

Allowance for doubtful accounts and bad debt expense;

•

Impairment of long-lived assets;

•

Goodwill impairment;

•

Impairment of ownership interests in and advances to companies;

•

Income taxes;

•

Commitments and contingencies; and

•

Stock-based compensation.

Revenue Recognition

During 2008, 2007 and 2006, our revenue from continuing operations was attributable to Clarient.

Revenue for Clarient’s diagnostic testing and interpretive services is recognized at the time of completion of such services. Clarient’s services are billed to various payors, including Medicare, health insurance companies and other directly billed healthcare institutions and patients. Clarient reports revenue from contracted payors, including certain health insurance companies and healthcare institutions, based on the contracted rate or, in certain instances, Clarient’s estimate of such rate. For billings to Medicare, Clarient utilizes the published fee schedules, net of standard discounts commonly referred to as “contractual allowances” . Clarient reports revenue from non-contracted payors, including certain insurance companies and patients, based on the amount expected to be collected for services provided. Adjustments resulting from actual collections compared to Clarient’s estimates are recognized in the period realized.

Allowance for Doubtful Accounts and Bad Debt Expense

An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from various payor groups such as Medicare and private health insurance companies. The process for estimating the allowance for doubtful accounts associated with Clarient’s diagnostic services involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts is adjusted periodically, based upon an evaluation of historical collection experience. Clarient also reviews the age of receivables by payor class to assess its allowance at each period end. The payment realization cycle for certain governmental and managed care payors can be lengthy, involving denial, appeal and adjudication processes, and is subject to periodic adjustments that may be significant. Accounts receivable are periodically written off when identified as uncollectible and deducted from the allowance for doubtful accounts after appropriate collection efforts have been exhausted. Additions to the allowance for doubtful accounts are charged to bad debt expense within Selling, general and administrative expense in the Consolidated Statements of Operations.

Impairment of Long-Lived Assets

We test long-lived assets, including property and equipment and amortizable intangible assets, for recoverability whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We evaluate the recoverability of an asset by comparing its carrying amount to the undiscounted cash flows expected to result from the use and eventual disposition of that asset. If the undiscounted cash flows are not sufficient to recover the carrying amount, we measure any impairment loss as the excess of the carrying amount of the asset over its fair value.

The carrying value of net property and equipment at December 31, 2008 was $12.4 million.

Impairment of Goodwill

We conduct an annual review for impairment of goodwill as of December 1st and as otherwise required by circumstances or events. Additionally, on an interim basis, we assess the impairment of goodwill whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors that we consider important which could trigger an impairment review include significant underperformance relative to historical or expected future operating results, significant changes in the manner or use of the acquired assets or the strategy for the overall business, significant negative industry or economic trends, or a decline in a company’s stock price for a sustained period.

We test for impairment at a “reporting unit” level (which for us is the same as an operating segment). If we determine that the fair value of a reporting unit is less than its carrying value, we assess whether goodwill of the reporting unit is impaired. To determine fair value, we use a number of valuation methods including quoted market prices, discounted cash flows, valuations of comparable public companies and valuations of acquisitions of comparable companies. Depending on the complexity of the valuation and the significance of the carrying value of the goodwill to the Consolidated Financial Statements, we may engage an outside valuation firm to assist us in determining fair value. As an overall check on the reasonableness of the fair values attributed to our reporting units, we will consider comparing the aggregate fair values for all reporting units with our average total market capitalization for a reasonable period of time.

The carrying value of goodwill at December 31, 2008 was $12.7 million and relates entirely to our Clarient segment. Based on quoted market prices of Clarient’s common stock, the fair value of our holdings in Clarient exceeds its carrying value, inclusive of goodwill.

Our partner companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of goodwill could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying value of our goodwill is not impaired, there can be no assurance that a significant write-down or write-off will not be required in the future.

Impairment of Ownership Interests In and Advances to Companies

On a periodic basis (but no less frequently than at the end of each quarter) we evaluate the carrying value of our equity and cost method partner companies for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions, and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the value of our ownership interest in the company. Impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value.

The fair value of privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuations of comparable public companies and valuations of acquisitions of comparable companies. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets and estimated future proceeds from sales of investments provided by the funds’ managers.

The new carrying value of a partner company is not increased if circumstances suggest the value of the partner company has subsequently recovered.

Our partner companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests in and advances to companies could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and cost method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

Total impairment charges related to ownership interests in and advances to our equity and cost method partner companies were as follows:

		Year Ended December 31,
Accounting Method		2008				2007				2006
		(In millions)
Equity		$	6.6			$	—			$	—
Cost			2.3				5.3				—
Total		$	8.9			$	5.3			$	—

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

Income Taxes

We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period, we must include an expense within the tax provision in the Consolidated Statements of Operations. We have recorded a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized in future years. If we determine in the future that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

Commitments and Contingencies

From time to time, we are a defendant or plaintiff in various legal actions which arise in the normal course of business. Additionally, we have received distributions as both a general partner and a limited partner from certain private equity funds. In certain circumstances, we may be required to return a portion or all the distributions we received as a general partner of a fund for a further distribution to such fund’s limited partners (the “clawback”). We are also a guarantor of various third-party obligations and commitments and are subject to the possibility of various loss contingencies arising in the ordinary course of business (See Note 17). We are required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease our earnings in the period the changes are made.

Stock-Based Compensation

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” prior to January 1, 2006, we accounted for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we recorded no compensation expense for stock options issued to employees at fair market value.

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

We estimate the grant date fair value of stock options using the Black-Scholes option-pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the expected term of the award and the estimated volatility of our stock price over the expected term. Changes in these assumptions and in the estimated forfeitures of stock option awards can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations. The requisite service periods for market-based stock option awards are based on our estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Changes in the derived requisite service period or achievement of market capitalization targets earlier than estimated can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations. The requisite service periods for performance-based awards are based on our best estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Changes in the requisite service period or the estimated probability of achievement of performance conditions can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations.

Results of Operations

During the third quarter 2008, we increased our ownership interest in Authentium to the 20.0% threshold at which we believe we exercise significant influence. Accordingly, we adopted the equity method of accounting for our holdings in Authentium. We have adjusted the financial statements for prior periods contained in this Form 10-K to retrospectively apply the equity method of accounting for our holdings in Authentium since the initial date of acquisition in April 2006.

On May 6, 2008, we consummated a transaction (the “Bundle Transaction’) pursuant to which we sold all of our equity and debt interests in Acsis, Inc. (“Acsis”), Alliance Consulting Group Associates, Inc. (“Alliance Consulting”), Laureate Pharma, Inc. (“Laureate Pharma”), ProModel Corporation (“ProModel”) and Neuronyx, Inc. (“Neuronyx”) (collectively, the “Bundle Companies”). Of the companies included in the Bundle Transaction, Acsis, Alliance Consulting and Laureate Pharma were majority-owned partner companies; Neuronyx and ProModel were minority-owned partner companies. We have presented the results of operations of Acsis, Alliance Consulting and Laureate Pharma as discontinued operations for all periods presented.

We present Clarient, our publicly traded consolidated partner company, as a separate segment. The results of operations of our other partner companies in which we have less than a majority interest are reported in our Life Sciences and Technology segments. The Life Sciences and Technology segments also include the gain or loss on the sale of respective partner companies, except for gains and losses included in discontinued operations.

Our management evaluates the Clarient segment’s performance based on revenue, operating income (loss) and income (loss) before income taxes, which reflects the portion of income (loss) allocated to minority shareholders. Our management evaluates the Life Sciences and Technology segments’ performance based on equity income (loss) which is based on the number of partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies and Other income or loss associated with cost method partner companies.

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

The following tables reflect our consolidated operating data by reportable segment. Segment results include the results of Clarient, our consolidated partner company, and our share of income or losses for entities accounted for under the equity method, when applicable. Segment results also include impairment charges and gains or losses related to the disposition of partner companies, except for those reported in discontinued operations. All significant inter-segment activity has been eliminated in consolidation. Accordingly, segment results reported by us exclude the effect of transactions between us and our consolidated partner company. Our operating results, including net income (loss) before income taxes by segment, were as follows:

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Clarient		$	805			$	(7,379	)		$	(7,481	)
Life Sciences			(23,858	)			(15,229	)			(2,456	)
Technology			(12,947	)			(5,249	)			(863	)
Total segments			(36,000	)			(27,857	)			(10,800	)
Other items:
Corporate operations			(6,803	)			(19,320	)			(16,872	)
Income tax benefit			26				696				1,270
Total other items			(6,777	)			(18,624	)			(15,602	)
Net loss from continuing operations			(42,777	)			(46,481	)			(26,402	)
Income (loss) from discontinued operations, net of tax			(9,236	)			(19,387	)			71,845
Net income (loss)		$	(52,013	)		$	(65,868	)		$	45,443

There is intense competition in the markets in which our partner 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 introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing markets.

Clarient

The financial information presented below does not include the results of operations of Clarient’s technology business, which is included in discontinued operations for all periods presented. Clarient sold this business (which developed, manufactured and marketed the ACIS Automated Image Analysis System) and related intellectual property to Carl Zeiss MicroImaging, Inc. (the “ACIS Sale”) for cash proceeds of $11.0 million, excluding contingent purchase price of $1.5 million. In 2007 and 2006, prior to its sale in February 2007, the technology business generated revenue of $0.8 million and $5.7 million, and net loss from operations of $0.6 million and $8.7 million, respectively.

See Note 19 for a discussion of certain current and prior year adjustments of expense classifications between Selling, general and administrative expense and Cost of sales.

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Revenue		$	73,736			$	42,995			$	27,723
Operating expenses:
Cost of sales			33,007				26,914				19,824
Selling, general and administrative			42,329				28,000				20,578
Total operating expenses			75,336				54,914				40,402
Operating loss			(1,600	)			(11,919	)			(12,679	)
Other loss			—				—				(39	)
Interest, net			(859	)			(1,209	)			(484	)
Minority interest			3,264				5,749				5,721
Net income (loss) from continuing operations before income taxes		$	805			$	(7,379	)		$	(7,481	)

Clarient operates primarily in one business, the delivery of critical oncology testing services to community pathologists, biopharmaceutical companies and other researchers.

As of December 31, 2008, we owned a 60.4% voting interest in Clarient.

Year Ended December 31, 2008 versus December 31, 2007

Revenue. Revenue of $73.7 million for the year ended December 31, 2008 increased 71.5% or $30.7 million from $43.0 million in the prior year. The increased revenue resulted from increased volume and favorable mix of oncology diagnostic services provided to Clarient’s existing clients and the addition of new clients. Clarient’s client base increased to approximately 900 active clients at December 31, 2008, from approximately 675 active clients at December 31, 2007.

During the first quarter of 2008 Clarient expanded the breadth of its diagnostic services to include cancer markers for tumors of the colon, prostate, and lung. Clarient expects to steadily increase its menu of oncology diagnostic services to include markers for additional tumor types and to deepen its market penetration for the diagnostic services that it currently provides. A number of recently published clinical findings have promoted the use of certain biomarkers to predict patient response to a class of colorectal cancer drugs that are focused on blocking the epidermal growth factor receptor (EGFR) signaling pathway. Clarient’s ability to perform tests such as K-ras (a newly emerging biomarker) to outline alterations in this major pathway are therefore becoming a more recognized tool in the medical community for predicting an individual’s response to drug therapies for colorectal cancers.

Clarient has also steadily increased the depth of its diagnostic services for certain cancer types that Clarient has previously provided, including lymphoma/leukemia. Clarient’s expanding capabilities in IHC, flow cytometry, FISH and molecular/PCR, and its marketing of such capabilities, has enabled its revenue growth in the year ended December 31, 2008 as compared to the prior year. Clarient anticipates that its revenue will continue to increase as Clarient further executes its operational strategy of expanding the breadth and depth of its oncology diagnostic services, and the means by which its services are marketed and delivered to its customers.

Another contributor to its revenue growth has been an overall increase in Medicare reimbursement rates which include cancer diagnostic services, effective January 1, 2008. In addition, many of Clarient’s third-party contract rates are based upon Medicare rates, which consequently, also increased. In July 2008, the Medicare rate increase for Technical CPT codes under the Physician Fee Schedule that retroactively took effect as of January 1, 2008 was extended eighteen months through December 31, 2009. Effective January 1, 2009, numerous other CPT codes under the Physician Fee Schedule and Clinical Fee Schedule for services Clarient performs generally increased through December 31, 2009.

Cost of Sales. Cost of sales for the year ended December 31, 2008 was $33.0 million compared to $26.9 million in the prior year, an increase of 22.6%. The $6.1 million increase was driven by an overall increase in revenue, and was primarily related to: additional laboratory personnel costs of $2.1 million, increased laboratory reagents and other supplies expense of $1.4 million, increased allocated facilities expense of $0.4 million, increased cost of tests performed on its behalf by other laboratories of $1.7 million and an increase in shipping expense of $1.2 million.

Gross margin for the year ended December 31, 2008 was 55.2% compared to 37.4% in the prior year. The increase in gross margin was primarily driven by an overall increase in revenue, including higher value oncology diagnostic services. In addition, employee productivity continues to improve based on Clarient’s metrics of specimens prepared and tested by month per full-time equivalent employee. Clarient has also realized greater economies of scale in operations through its business growth as compared to the prior year.

Clarient anticipates that gross margins will improve as its testing volume increases, Clarient more effectively utilizes its operating capacity, and more efficiently manages its operations. If the adjusted Medicare reimbursement rates (effective January 1, 2009) are decreased after December 31, 2009, gross margins could be adversely affected.

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $42.3 million for the year ended December 31, 2008 increased 51.2%, or $14.3 million, from $28.0 million for the prior year. The increase was primarily related to a $8.6 million increase in bad debt expense, additional administrative personnel costs of $2.6 million to support its business growth and new in house billing and collection department, additional sales and marketing personnel costs of $1.7 million, a $0.3 million increase in travel-related expenses and a $0.2 million increase in tradeshow and advertising expenses, partially offset by a $1.0 million decrease in third-party billing and collection fees. Accounting and legal fees increased by $0.8 million and $0.6 million, respectively. The increase in accounting fees was primarily associated with the testing of internal controls over financial reporting. The increase in legal fees was primarily associated with SEC compliance, corporate governance, financing arrangements and executive compensation

The increase in bad debt expense is primarily related to Clarient’s increase in revenue as compared to the prior year and the impact on cash collections of delays in Clarient’s internal billing and collection efforts. Bad debt expense was also impacted by higher loss experience, including significant uncollectible accounts identified during the second half of 2008 which were previously serviced by Clarient’s former third-party billing and collection service provider. Clarient expects that bad debt expense as a percentage of revenue in 2009 will be less as compared to 2008 as Clarient further staffs its in house billing and collection department, more effectively manages its billing and collection function and improves the quality of its billing and collection processes.

Interest, net. Interest expense in 2008 was $0.9 million, compared to $1.2 million in 2007. The decrease was due to lower outstanding borrowings under Clarient’s third party financing facilities.

Net Income (Loss). Net income in 2008 was $0.8 million compared to a net loss of $7.4 million in 2007. The improvement was primarily attributable to higher margins from increased revenue.

Year ended December 31, 2007 versus year ended December 31, 2006

Revenue. Revenue increased 55.1% or $15.3 million from $27.7 million for the year ended December 31, 2006 to $43.0 million for the year ended December 31, 2007. The increase resulted from the execution of Clarient’s marketing and sales strategy which resulted in increased sales to new and existing customers.

Cost of Sales. Cost of sales for the year ended December 31, 2007 was $26.9 million compared to $19.8 million for the year ended December 31, 2006, an increase of 35.8%, driven by a 55.1% increase in revenue. Gross margin was 37.4% in 2007 compared to 28.5% in 2006. The increase in gross margin in 2007 was attributable to a 55.1% increase in revenue and a shift to more profitable types of diagnostic services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2007 were $28.0 million compared to $20.6 million in the prior year, an increase of $7.4 million or 36.1%. The increase is primarily attributable to a $3.0 million increase in bad debt expense, $1.5 million increase in administrative personnel expenses, $0.9 million of non-capitalizable information technology expenses, $0.8 million increase in sales commissions and an increase of $0.6 million in depreciation, facilities and lease expense.

Interest, net. Interest expense in 2007 was $1.2 million, compared to $0.5 million in 2006. The increase was due to higher outstanding borrowings under Clarient’s third party financing facilities.

Net Loss. Net loss decreased $0.1 million, or 1.4% in 2007 as compared to 2006. The decline in net loss was primarily attributable to higher margins from increased revenue.

Life Sciences

The following partner companies were included in Life Sciences during the year ended December 31, 2008:

		Safeguard Ownership as of
Partner Company		December 31, 2008				Accounting Method
Advanced BioHealing			28.3	%		Equity Method
Alverix			50.0	%		Equity Method
Avid			13.9	%		Cost Method
Cellumen			40.6	%		Equity Method
Garnet			31.2	%		Equity Method
Molecular Biometrics			37.8	%		Equity Method
NuPathe			23.5	%		Equity Method
Rubicor			44.6	%		Equity Method
Tengion			4.5	%		Cost Method

The following partner companies were included in Life Sciences during the year ended December 31, 2007:

		Safeguard Ownership as of
Partner Company		December 31, 2007				Accounting Method
Advanced BioHealing			28.3	%		Equity Method
Alverix			50.0	%		Equity Method
Avid			14.2	%		Cost Method
Cellumen			40.3	%		Equity Method
Neuronyx			6.8	%		Cost Method
NuPathe			26.2	%		Equity Method
Rubicor			35.7	%		Equity Method

The following partner companies were included in Life Sciences during the year ended December 31, 2006:

		Safeguard Ownership as of
Partner Company		December 31, 2006				Accounting Method
Neuronyx			7.0	%		Cost Method
NuPathe			21.3	%		Equity Method
Rubicor			35.8	%		Equity Method
Ventaira Pharmaceuticals			12.8	%		Cost Method

Results for the Life Sciences segment were as follows:

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Equity loss		$	(23,858	)		$	(9,898	)		$	(2,456	)
Other loss			—				(5,331	)			—
Net loss before income taxes		$	(23,858	)		$	(15,229	)		$	(2,456	)

Equity Loss. Equity loss fluctuates with the number of Life Sciences partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies. We recognize our share of losses to the extent we have cost basis in the equity partner company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method partner companies on a one quarter lag basis.

Year ended December 31, 2008 versus year ended December 31, 2007

Equity loss for Life Sciences increased $12.5 million for the year ended December 31, 2008 compared to the prior year. Included in equity loss for the year ended December 31, 2008 was an impairment charge of $4.0 for Rubicor, which effectively halted operations in 2008 as a result of not being able to attract sufficient capital to continue operations, and expense of $2.3 million associated with acquired in-process research and development related to our acquisition of a 37% interest in Molecular Biometrics. In addition, we recognized a $1.3 million charge in the fourth quarter of 2008 related to an in-process research and development charge recorded by NuPathe. The increase in equity loss was also due to an increase in the number of equity method partner companies, each of which generated losses, and larger losses incurred at certain partner companies. Other loss for the year ended December 31, 2007 reflected an impairment charge for Ventaira Pharmaceuticals.

Year ended December 31, 2007 versus year ended December 31, 2006

Equity loss for Life Sciences increased $7.4 million for the year ended December 31, 2007 compared to the prior year. The increase in equity loss was primarily due to an increase in the number of equity method partner companies, each of which generated losses, and larger losses incurred at certain partner companies. Included in equity loss in 2007 were in-process research and development charges of $0.2 million and $0.2 million related to the allocations of purchase price of NuPathe and Cellumen, respectively. Included in equity loss in 2006 were in-process research and development charges of $1.0 million and $0.6 million related to the allocations of purchase price of NuPathe and Rubicor, respectively. Other loss for year ended December 31, 2007 reflects an impairment charge for Ventaira Pharmaceuticals.

Technology

The following partner companies were included in Technology during the year ended December 31, 2008:

		Safeguard Ownership as of
Partner Company		December 31, 2008				Accounting Method
Advantedge Healthcare Solutions			37.7	%		Equity Method
Authentium			20.0	%		Equity Method (1)
Beyond.com			37.1	%		Equity Method
Bridgevine			20.8	%		Equity Method
GENBAND			2.3	%		Cost Method
Kadoo			14.0	%		Cost Method
Portico Systems			46.8	%		Equity Method
Swaptree			29.3	%		Equity Method

The following partner companies were included in Technology during the year ended December 31, 2007:

		Safeguard Ownership as of
Partner Company			December 31, 2007			Accounting Method
Advantedge Healthcare Solutions			35.2	%		Equity Method
Authentium			19.9	%		Equity Method (1)
Beyond.com			37.1	%		Equity Method
Bridgevine			20.9	%		Equity Method
Kadoo			14.0	%		Cost Method
NexTone (now GENBAND)			16.5	%		Cost Method
Portico Systems			46.9	%		Equity Method
ProModel Corporation			49.7	%		Equity Method

The following partner companies were included in Technology during the year ended December 31, 2006:

		Safeguard Ownership as of
Partner Company			December 31, 2006			Accounting Method
Advantedge Healthcare Solutions			32.2	%		Equity Method
Authentium			12.4	%		Equity Method (1)
NexTone (now GENBAND)			16.5	%		Cost Method
Portico Systems			46.9	%		Equity Method
ProModel Corporation			49.7	%		Equity Method

Results for the Technology segment were as follows:

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Equity loss		$	(10,696	)		$	(5,249	)		$	(863	)
Other loss			(2,251	)			—				—
Net loss before income taxes		$	(12,947	)		$	(5,249	)		$	(863	)

Equity Loss. Equity loss fluctuates with the number of Technology partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies. We recognize our share of losses to the extent we have cost basis in the equity partner company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method partner companies on a one quarter lag.

Year ended December 31, 2008 versus year ended December 31, 2007

Equity loss for Technology increased $5.4 million for the year ended December 31, 2008 compared to the prior year. The increase was due principally to larger losses incurred at certain partner companies and an impairment charge of $2.6 million related to our holdings in Authentium. Other loss for the year ended December 31, 2008 reflects a $2.3 million impairment charge for Kadoo.

Year ended December 31, 2007 versus year ended December 31, 2006

Equity loss for Technology increased $4.4 million for the year ended December 31, 2007 compared to the prior year. The increase was due to an increase in the number of equity method partner companies, each of which generated losses, and larger losses incurred at certain partner companies.

Corporate Operations

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
General and administrative		$	(16,511	)		$	(19,058	)		$	(20,112	)
Stock-based compensation			(1,738	)			(3,530	)			(4,037	)
Depreciation			(166	)			(195	)			(197	)
Interest income			3,076				7,460				6,703
Interest expense			(3,852	)			(4,220	)			(4,617	)
Recovery (impairment) — related party			5				12				360
Other income, net			12,526				242				5,441
Equity loss			(143	)			(31	)			(413	)
		$	(6,803	)		$	(19,320	)		$	(16,872	)

General and Administrative. Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs.

General and administrative expenses decreased $2.5 million in 2008 as compared to 2007. The decrease is largely attributable to a $1.7 million decrease in employee costs, a $2.2 million decrease in professional fees and a $0.2 million decrease in insurance costs offset by an increase in severance costs of $1.5 million due to an increase in the actuarial liability for amounts payable to our former Chairman and CEO under an ongoing agreement. General and administrative expenses decreased $1.1 million in 2007 as compared to 2006. The decrease was primarily related to reduced severance charges of $1.0 million in 2007 as compared to 2006, partially offset by a $0.4 million increase in employee costs and a $0.5 million increase in professional fees in 2007 as compared to 2006. We expect corporate general and administrative expenses to decline slightly in 2009.

Stock-Based Compensation. Stock-based compensation consists primarily of expense related to grants of stock options, restricted stock and deferred stock units to our employees.

The $1.8 million decrease in 2008 as compared to 2007 relates to stock option forfeitures during 2008 and higher expense in the prior year period due to the acceleration of stock-based compensation expense related to the market-based stock options. The decrease of $0.5 million for 2007 as compared to 2006 was attributable primarily to higher expense in 2006 due to vesting of market-based awards and due to the acceleration of vesting for certain service-based awards in 2006. Stock-based compensation expense related to market-based awards was $0.4 million, $1.7 million and $1.9 million in 2008, 2007 and 2006, respectively. Stock-based compensation expense related to service-based awards was $1.1 million, $1.8 million and $1.9 million in 2008, 2007 and 2006, respectively. Stock-based compensation expense related to corporate operations is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.

Interest Income. Interest income includes all interest earned on cash and marketable security balances.

Interest income decreased $4.4 million in 2008 as compared to the prior year due to a decrease in interest rates and a decrease in average invested cash balances. Interest income increased $0.8 million in 2007 as compared to 2006 due to higher invested cash balances in 2007 as compared to 2006, partially offset by declining interest rates.

Interest Expense. Interest expense is primarily related to our 2024 Debentures.

Interest expense decreased $0.4 million in 2008 as compared to 2007. The decline was attributable to the repurchase of $43 million in face value of the 2024 Debentures in 2008. Interest expense decreased $0.4 million in 2007 as compared to 2006. The decline was attributable to the repurchase of $21 million in face value of the 2024 Debentures in 2006.

Recovery (Impairment) — Related Party. In May 2001, we entered into a loan agreement with Mr. Musser, our former CEO, and in December 2006, we restructured the obligation so that we could obtain new collateral. The excess of cash received from the sale of collateral over our carrying value of the loan was reflected as Recovery — related party in the Consolidated Statements of Operations. Future cash receipts in excess of the carrying value of the note will be recognized as Recovery — related party. The carrying value of the loan at December 31, 2008 was zero.

Other Income, Net. Other income, net in 2008 included a net gain of $9.0 million on the repurchase of $43 million in face value of the 2024 Debentures, a $2.5 million net gain on the sale of companies, including the receipt of escrowed funds from a legacy asset and $1.0 gain on distributions from private equity funds. Included in 2006 was a net gain of $4.3 million on the repurchase of $21 million in face value of the 2024 Debentures.

Income Tax (Expense) Benefit

Our consolidated net income tax benefit for 2008, 2007 and 2006 was $0.0 million, $0.7 million and $1.3 million, respectively. We recognized a $0.0 million, $0.7 million and $1.3 million tax benefit in 2008, 2007 and 2006, respectively, related to uncertain tax positions for which the statute of limitations expired during the respective period in the applicable tax jurisdictions. 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. Accordingly, the net operating loss benefit that would have been recognized in 2008, 2007 and 2006 was offset by a valuation allowance.

Discontinued Operations

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

In May 2008, we sold all of our equity and debt interests in Acsis, Alliance Consulting, Laureate Pharma, ProModel and Neuronyx. The gross proceeds from the Bundle Transaction were $74.5 million, of which $6.4 million is being held in escrow through April 2009. In the first quarter of 2008, we recognized an impairment loss of $3.6 million to write down the aggregate carrying value of the Bundle Companies to the total anticipated proceeds, less estimated costs to complete the Bundle Transaction. In the second quarter of 2008, prior to the completion of the Bundle Transaction, we recorded a net loss of $1.6 million in discontinued operations related to the operations of Acsis, Alliance Consulting and Laureate Pharma. In the second quarter of 2008 we recorded a charge of $0.9 million in discontinued operations to accrue for severance payments due to the former CEO of Alliance Consulting in connection with the Bundle Transaction and recorded a pre-tax gain on disposal of $1.4 million which is also recorded in discontinued operations.

In March 2007, we sold Pacific Title & Art Studio for net cash proceeds of approximately $21.9 million, including $2.3 million held in escrow. As a result of the sale, we recorded a pre-tax gain of $2.7 million in 2007. During 2008, we recorded charges totaling $2.7 million related to additional compensation paid to the former CEO of Pacific Title & Art Studio in connection with the March 2007sale and related legal fees.

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

In October 2006, we completed the sale of our interest in Mantas for net proceeds of $112.8 million, including $19.3 million held in escrow, to i-flex^® solutions, ltd., an affiliate of Oracle Corporation. As a result of the sale, we recorded a gain of $83.9 million in 2006. Mantas sold its telecommunications business and certain related assets and liabilities in the first quarter of 2006 for $2.1 million in cash. As a result of the sale, Mantas recorded a gain of $1.9 million in the first quarter of 2006 which is also reported in discontinued operations.

Alliance Consulting completed the sale of its Southwest region business in May 2006 for proceeds of $4.5 million, including cash of $3.0 million and stock of the acquirer valued at $1.5 million, which was subsequently sold. As a result of the sale, Alliance Consulting recorded a gain of $1.6 million in 2006.

The loss from discontinued operations in 2008 of $9.2 million was primarily attributable to operating losses incurred by Acsis, Alliance Consulting and Laureate Pharma, the impairment loss recognized in the first quarter of 2008 related to the write down of the aggregate carrying value of the Bundle Companies to the anticipated net proceeds, $0.9 million charge to accrue for severance payments due the former CEO of Alliance Consulting and additional compensation paid to the former CEO of Pacific Title & Art Studio in connection with the March 2007 sale and related legal fees. The loss from discontinued operations in 2007 of $19.4 million was attributable primarily to the operating losses incurred by Acsis, Alliance Consulting and Laureate Pharma, partially offset by the gain on the sale of Pacific Title & Art Studio and Clarient’s technology group.

The income from discontinued operations in 2006 of $71.8 million was attributable primarily to the gain on the sale of Mantas and the gain on sale of Alliance Consulting’s Southwest region business partially offset by the operating losses incurred by Acsis and Laureate Pharma.

Liquidity And Capital Resources

Parent Company

We fund our operations with cash on hand as well as proceeds from sales of and distributions from partner companies, private equity funds and marketable securities. In prior periods, we have also used sales of our equity and issuance of debt as sources of liquidity and may do so in the future. Our ability to generate liquidity from sales of partner companies, sales of marketable securities and from equity and debt issuances has been adversely affected from time to time by adverse circumstances in the U.S. capital markets and other factors.

As of December 31, 2008, at the parent company level, we had $73.2 million of cash and cash equivalents and $14.7 million of marketable securities for a total of $87.9 million. In addition to the amounts above, we had $2.0 million in escrow associated with our interest payments due on our 2024 Debentures through March 2009, $6.9 million of cash held in escrow, including accrued interest, and Clarient, our consolidated partner company, had cash and cash equivalents of $1.8 million.

The Bundle Transaction was consummated on May 6, 2008. Gross proceeds were $74.5 million in cash, of which $6.4 million is being held in escrow through April 2009, plus amounts advanced to certain of the Bundle Companies during the time between the signing of the Bundle Transaction agreement and its consummation. Guarantees of partner company facilities of $31.5 million were eliminated upon the closing of the Bundle Transaction.

In April 2008, we received net cash proceeds of $20.5 million that were released from escrow related to our October 2006 sale of Mantas, Inc. and in September 2008, we received $1.8 million cash proceeds that were released from escrow related to our March 2007 sale of Pacific Title & Art Studio.

In February 2004, we completed the sale of the 2024 Debentures. At December 31, 2008, we had $86.0 million in face value of the 2024 Debentures outstanding. Interest on the 2024 Debentures is payable semi-annually. At the holders’ option, the 2024 Debentures are convertible into our common stock before the close of business on March 14, 2024 subject to certain conditions. The conversion rate of the 2024 Debentures is $7.2174 of principal amount per share. The closing price of our common stock on December 31, 2008 was $0.69. The 2024 Debentures holders have the right to require repurchase of the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective face amount, plus accrued and unpaid interest. The 2024 Debentures holders also have the right to require repurchase of the 2024 Debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution, a change in control or the delisting of our common stock from the NYSE if we were unable to obtain a listing for our common stock on another national or regional securities exchange. Subject to certain conditions, we have the right to redeem all or some of the 2024 Debentures commencing March 20, 2009.

During 2008, we repurchased $43.0 million in face value of the 2024 debentures for $33.5 million in cash, including accrued interest. In connection with the repurchases, we recorded $0.5 million of expense related to the acceleration of deferred debt issuance costs associated with the 2024 Debentures, resulting in a net gain of $9.0 million which was included in other income. During 2006, we repurchased $21.0 million in face value of the 2024 Debentures for $16.4 million in cash, including accrued interest.

In May 2008, our Board of Directors authorized us, from time to time and depending on market conditions, to repurchase shares of our outstanding common stock, with up to an aggregate value of $10.0 million, exclusive of fees and commissions. During the year ended December 31, 2008, we repurchased approximately 975 thousand shares of common stock at a cost of $1.3 million. These repurchases, as well as any repurchases of 2024 Debentures, have been and will be made in open market or privately negotiated transactions in compliance with the U.S. Securities and Exchange Commission regulations and other applicable legal requirements. The manner, timing and amount of any purchases have been and will be determined by us based upon an evaluation of market conditions, stock price and other factors. Our Board of Directors’ authorizations regarding common stock and 2024 Debentures repurchases do not obligate us to acquire any particular amount of common stock or 2024 Debentures and may be modified or suspended at any time at our discretion.

At December 31, 2008, we maintained a revolving credit facility that provided for borrowings and issuances of letters of credit and guarantees up to $30.0 million. Borrowing availability under the facility was reduced by the amounts outstanding for our borrowings and letters of credit and amounts guaranteed under Clarient’s facility maintained with that same lender. This credit facility bore interest at the prime rate (3.25% at December 31, 2008) for outstanding borrowings. The credit facility was subject to an unused commitment fee of 0.125% per annum, subject to reduction based on deposits maintained at the bank. The credit facility required us to maintain an unrestricted cash collateral account at that same bank, equal to our borrowings and letters of credit and amounts borrowed by Clarient under the guaranteed portion of its facility maintained with that same bank. At December 31, 2008, the required cash collateral pursuant to the credit facility agreement was $17.9 million, which amount is included within Cash and cash equivalents on our Consolidated Balance Sheet as of December 31, 2008.

Availability under our revolving credit facility at December 31, 2008 was as follows:

		Total
		(In Thousands)
Size of credit facility		$	30,000
Guarantees of Clarient’s facility at same bank (a)			(12,300	)
Outstanding letter of credit (b)			(6,336	)
Amount available at December 31, 2008		$	11,364

On February 6, 2009 we entered into a new loan agreement with a different commercial bank which provides us with a revolving credit facility in the maximum aggregate amount of $50 million. Actual availability under the credit facility will be based on the amount of cash we maintain at the bank as well as certain percentages of the value of our public and private partner company interests. This credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase in certain circumstances. Other than for limited exceptions, we are required to maintain all of our depository and operating accounts and not less than 75% of our investment and securities accounts at the bank. The credit facility matures on December 31, 2010.

In conjunction with the execution of our new loan agreement, we are terminating our prior revolving credit facility. Notwithstanding such termination, we will continue to guaranty the obligations of Clarient under its continuing credit facility with the bank, which matures on March 30, 2010, and will maintain a cash account at the bank in the minimum amount of $12.3 million to support such guaranty.

We have committed capital of approximately $8.1 million, including conditional commitments to provide non-consolidated partner companies with additional funding and commitments made to various private equity funds in prior years. These commitments will be funded over the next several years, including approximately $6.5 million which is expected to be funded in the next 12 months.

The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to acquire interests in technology and life sciences companies, provide additional funding to existing partner companies, or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in partner companies from time to time, 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 Warren V. Musser, our former Chairman and Chief Executive Officer. In December 2006, we restructured the obligation to reduce the amount outstanding to $14.8 million, bearing interest at a rate of 5.0% per annum. Cash payments, when received, are recognized as Recovery — related party in our Consolidated Statements of Operations. Since 2001 and through December 31, 2008, we received a total of $16.3 million in cash payments on the loan, of which $5 thousand was received during 2008. The carrying value of the loan at December 31, 2008 was zero.

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 of a fund for further distribution to such fund’s limited partners (the “clawback”). The maximum clawback we could be required to return for our general partner interest is $3.6 million, of which $2.5 million was reflected in accrued expenses and other current liabilities and $1.1 million was reflected in Other long-term liabilities on the Consolidated Balance Sheet at December 31, 2008. We paid $3.0 million of our estimated clawback liabilities in 2008.

Our previous ownership in the general partners of the funds that 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 and placing them in escrow and adding rights of set-off among certain funds. We believe our potential liability due to the possibility of default by other general partners is remote.

For the reasons we presented above, we believe our cash and cash equivalents at December 31, 2008, availability under our revolving credit facility and other internal sources of cash flow will be sufficient to fund our cash requirements for at least the next 12 months, including commitments to our existing companies and funds, possible additional funding of existing partner companies and our general corporate requirements. Our acquisition of new partner company interests is always contingent upon our availability of cash to fund such deployments, and our timing of monetization events directly affects our availability of cash.

Consolidated Partner Company

Clarient, our consolidated partner company, incurred operating losses in 2008 and may need additional capital to fund its operations. From time to time, Clarient may require additional debt or equity financing or credit support from us to fund planned expansion activities. If we decide not to, or cannot provide sufficient capital resources to allow them to reach a positive cash flow position, and they are unable to raise capital from outside resources, they may need to scale back their operations. As described below, we have renewed, expanded and extended a revolving line of credit to Clarient.

Clarient maintains a $12.0 million revolving credit agreement with a bank which was amended and restated on February 27, 2009. This facility contains financial and non-financial covenants and matures March 31, 2010.

On July 31, 2008, Clarient entered into a separate $8.0 million secured credit agreement with a finance company which was amended and restated on February 27, 2009. The secured credit agreement expires on January 31, 2010. Actual availability under the facility is limited by Clarient’s qualified accounts receivable and certain liquidity factors. Clarient reduced indebtedness to us under the Mezzanine Facility (defined below) with a portion of the proceeds borrowed under the revolving credit facility.

In March 2007, we provided a subordinated revolving credit line (the “Mezzanine Facility”) to Clarient. Under the Mezzanine Facility, we committed to provide Clarient access to up to $12.0 million in working capital funding, which was reduced to $6.0 million as a result of the ACIS Sale. The Mezzanine Facility originally had a term expiring on December 8, 2008. On March 14, 2008, the Mezzanine Facility was extended through April 15, 2009, and increased from $6.0 million to $21.0 million. In connection with the extension and increase of the Mezzanine Facility, the Company received from Clarient five-year warrants to purchase shares of Clarient common stock with an exercise price of $0.01 per share. The Company received 1.6 million of these warrants at the time of the extension of the Mezzanine Facility and the Company received an additional 1.7 million warrants through September 2, 2008, based on the amount of borrowings remaining outstanding under the Mezzanine Facility at certain interim dates. The Mezzanine Facility was subject to reduction to $6.0 million under certain circumstances involving the completion of replacement financing by Clarient. At December 31, 2008, $13.4 million was outstanding under the Mezzanine Facility.

On February 27, 2009 Clarient further refinanced, renewed and expanded the Mezzanine Facility. In connection with such renewal, Clarient issued us fully vested five-year warrants to purchase 500,000 shares of Clarient common stock at an exercise price of $1.376 (Clarient’s 20-day trailing close price of its common stock as of February 6, 2009). The Mezzanine Facility as amended has a maturity date of April 1, 2010, and provides Clarient with up to $30.0 million in working capital funding. Borrowings under the Mezzanine Facility will bear interest at an annual rate of 14.0%.

In September 2006, Clarient entered into a $5.0 million senior secured revolving credit agreement with a third party lender. Borrowing availability under the agreement was based on the amount of Clarient’s qualified accounts receivable, less certain reserves. The agreement bore interest at variable rates based on the lower of 30-day LIBOR plus 3.25% or the prime rate plus 0.5%. On March 17, 2008, Clarient borrowed $4.6 million under the Mezzanine Facility to repay and terminate this facility, and borrowed $2.8 million under the Mezzanine Facility to repay and terminate its equipment line of credit with the same lender.

As reported in its Form 10-K for the year ended December 31, 2008, Clarient’s independent auditors have determined that there is substantial doubt about Clarient’s ability to continue as a going concern. Clarient’s credit facilities with its lenders contain certain covenants which require compliance. In order for Clarient to comply with its financial covenants contained within its credit facilities with its third party lenders, as amended in February 2009 (see Note 7), its results of operations and level of cash collections in 2009 and beyond must exceed its 2008 results, and such outcome is uncertain.

Failure to maintain compliance with the financial and/or certain other covenants contained within Clarient’s credit facilities would constitute an event of default under the respective credit facility and by agreement, would result in a cross-default for the other credit facilities. If Clarient were not able to obtain a waiver of default from its lenders, Clarient’s borrowings under the respective credit facilities would immediately become due and payable. There can be no assurance that Clarient would be able to obtain waivers from existing third party lenders or fully access its existing financing sources in the event of default.

At December 31, 2008, Clarient did not have sufficient cash availability to repay its credit facilities which will be due in the first quarter of 2010. In addition, Clarient has incurred recurring losses and negative cash flows from operations. Clarient is currently in the process of evaluating certain financing alternatives in light of the stated maturity dates of its current credit arrangements. Due to Clarient’s financial condition and the ongoing turmoil in the financial and credit markets, Clarient’s ability to obtain extensions to its existing third party credit facilities, or to obtain new credit facilities, may be adversely affected. There can be no assurance that Clarient will be able to obtain financing on terms that are favorable to Clarient, or obtain additional or extended financing at all. As a result, there is a substantial doubt about Clarient’s ability to continue as a going concern.

Analysis of Parent Company Cash Flows

Cash flow activity for the Parent Company was as follows:

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Net cash used in operating activities		$	(14,124	)		$	(16,777	)		$	(12,039	)
Net cash provided by (used in) investing activities			27,327				50,788				(16,159	)
Net cash provided by (used in) financing activities			(34,675	)			741				(20,169	)
		$	(21,472	)		$	34,752			$	(48,367	)

Cash Used In Operating Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash used in operating activities decreased $2.7 million in 2008 as compared to 2007. The decrease was primarily due to lower corporate operating expenditures.

Year ended December 31, 2007 versus year ended December 31, 2006. Cash used in operating activities increased $4.7 million in 2007 as compared to 2006, The increase was primarily due to cash payments of $2.0 million for severance in 2007 and professional fees related to the Bundle Transaction and changes in working capital.

Cash Provided by (Used In) Investing Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash provided by investing activities decreased $23.5 million in 2008 as compared to 2007. The decrease was attributable to a $107.7 million net increase in marketable securities and a $12.6 million increase in advances to partner companies offset by a $64.9 million increase in proceeds from the sale of discontinued operations and a $30.5 million decrease in the acquisition of ownership interests in companies and funds, net of cash acquired.

Year ended December 31, 2007 versus year ended December 31, 2006. Cash provided by investing activities increased $66.9 million in 2007 compared to 2006. The increase was primarily due to a $155.9 million net decrease in marketable securities partially offset by a $73.8 million decrease in proceeds from sale of discontinued operations and an $8.4 million increase in the acquisition of ownership interests in companies and funds, net of cash acquired.

Cash Provided by (Used In) Financing Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash used in financing activities increased $35.4 million in 2008 as compared to 2007. The increase was primarily attributable to $33.5 million in repurchases of our 2024 Debentures, excluding accrued interest and $1.3 million in purchases of treasury stock.

Year ended December 31, 2007 versus year ended December 31, 2006. Cash provided by financing activities increased $20.9 million in 2007 as compared to 2006, primarily due to the repurchase of our 2024 Debentures, excluding accrued interest, for $16.2 million and the repayment of intercompany advances from a partner company of $5.5 million in 2006.

Consolidated Working Capital From Continuing Operations

Consolidated working capital from continuing operations decreased to $88.4 at December 31, 2008 compared to $97.2 at December 31, 2007. The decrease was primarily due to the Bundle transaction (see Note 2).

Analysis of Consolidated Cash Flows

Cash flow activity was as follows:

		Year Ended December 31,
		2008				2007				2006
		(In thousands)
Net cash used in operating activities		$	(21,514	)		$	(36,253	)		$	(18,379	)
Net cash provided by (used in) investing activities			32,805				53,063				(27,590	)
Net cash provided by (used in) financing activities			(31,386	)			17,500				(5,527	)
		$	(20,095	)		$	34,310			$	(51,496	)

Cash Used In Operating Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash used in operating activities decreased $14.7 million in 2008 as compared to 2007. The decrease was primarily attributable to a $7.0 million increase in accounts payable and accrued expenses, $4.9 million decrease in the cash outflows from discontinued operations and a $13.9 million decrease in net loss, partially offset by a $14.2 million increase in accounts receivable.

Year ended December 31, 2007 versus year ended December 31, 2006. Net cash used in operating activities increased $17.9 million in 2007 as compared to 2006. The increase was primarily due to the current year results of continuing operations and unfavorable changes in working capital.

Cash Provided by (Used In) Investing Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash provided by investing activities decreased $20.3 million in 2008 as compared to 2007. The decrease was attributable to a $107.7 million net increase in marketable securities offset by a $53.8 million increase in proceeds from the sale of discontinued operations, a $4.9 million decrease in cash used in discontinued operations and a $30.5 million decrease in the acquisition of ownership interests in companies and funds, net of cash acquired.

Year ended December 31, 2007 versus year ended December 31, 2006. Net cash provided by investing activities increased $80.7 million in 2007 as compared to 2006. The increase was primarily due to a $156.0 million net decrease in marketable securities, an $8.5 million decrease in the cash used in discontinued operations offset by a $65.1 million decrease in proceeds from sale of discontinued operations and a $17.5 million increase in the acquisition of ownership interests in companies and funds, net of cash acquired.

Cash Provided by (Used In) Financing Activities

Year ended December 31, 2008 versus year ended December 31, 2007. Net cash used in financing activities increased $48.9 million in 2008 as compared to 2007. The increase was attributable to a $33.5 million in repurchases of our 2024 Debentures, excluding accrued interest, $6.8 million increase in net repayments on revolving credit facilities, $1.3 million in purchases of treasury stock and a $6.9 million decrease in the cash inflows from financing activities of discontinued operations.

Year ended December 31, 2007 versus year ended December 31, 2006. Cash provided by financing activities increased $23.0 million in 2007 as compared to 2006, primarily due to the repurchase of a portion of our 2024 Debentures for $16.2 million, excluding accrued interest, in 2006. Also contributing to the current year increase in cash provided by financing activities was a $2.6 million net increase in borrowings under revolving credit facilities and a $2.6 million net increase in borrowings on term debt.

Contractual Cash Obligations and Other Commercial Commitments

The following table summarizes our contractual obligations and other commercial commitments as of December 31, 2008, by period due or expiration of the commitment.

		Payments Due by Period
										2010 and				2012 and				Due after
		Total				2009				2011				2013				2013
		(In millions)
Contractual Cash Obligations:
Lines of credit(a)		$	14.1			$	14.1			$	—			$	—			$	—
Capital leases			0.6				0.3				0.3				—				—
Convertible senior debentures(b)			86.0				—				—				—				86.0
Operating leases			14.6				2.1				4.4				4.4				3.7
Funding commitments(c)			8.1				6.5				1.6				—				—
Potential clawback liabilities(d)			3.6				2.5				1.1				—				—
Other long-term obligations(e)			4.2				0.8				1.5				1.5				0.4
Total Contractual Cash Obligations		$	131.2			$	26.3			$	8.9			$	5.9			$	90.1

		Amount of Commitment Expiration by Period
										2010 and				2012 and				After
		Total				2009				2011				2013				2013
		(In millions)
Other Commitments:
Letters of credit(f)		$	8.6			$	—			$	—			$	—			$	8.6

We have agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or if the employee terminates his employment for “good reason.” The maximum aggregate cash exposure under the agreements was approximately $8 million at December 31, 2008.

As of December 31, 2008, Safeguard and its partner companies that are consolidated for tax purposes had federal net operating loss carryforwards and federal capital loss carryforwards of approximately $213 million and $182 million, respectively. The net operating loss carryforwards expire in various amounts from 2009 to 2026. The capital loss carryforwards expire in various amounts from 2009 to 2011. Limitations on utilization of both the net operating loss carryforwards and capital loss carryforwards may apply.

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

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, of adopting FSP FAS 142-3 on our Consolidated Financial Statements.

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

In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS157-3”) which clarifies the application of SFAS No. 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of FSP FAS157-3 did not have a material impact on our Consolidated Financial Statements.

In June 2008, the Emerging Issues Task Force (“EITF”) ratified Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entity’s own stock. The consensus will replace EITF 01-6 as a critical component of the literature applied to evaluating financial instruments for debt or equity classification and embedded features for bifurcation as derivatives. EITF 07-5 will become effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently analyzing the impact on our Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to choose, at specific election dates, to measure eligible financial assets and liabilities that are not otherwise required to be measured at fair value, at fair value. Under SFAS No. 159, companies would report unrealized gains and losses for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize up-front costs and fees related to those items in earnings as incurred. SFAS No. 159 became effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our Consolidated Financial Statements due to our election to not measure partner company holdings at fair value.

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

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

•

Acquisition costs will be generally expensed as incurred;

•

Non-controlling interests (formerly known as “minority interests” — see SFAS No. 160 discussion below) will be valued at fair value at the acquisition date;

•

Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

•

In-process research and development (IPR&D) will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

•

Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

•

Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

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

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of non-controlling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to non-controlling interests will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation are treated as equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 160 will result in the reclassification of minority interests from long-term liabilities to shareholders’ equity. Minority interest at December 31, 2008 was $0 million.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources for generally accepted accounting principles (“GAAP”) in the U.S. and lists the categories in descending order. An entity should follow the highest category of GAAP applicable for each of its accounting transactions. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 did not have any effect on our Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to equity price risks on the marketable portion of our securities. At December 31, 2008, these securities include our equity position in Clarient, our only publicly-traded partner company, which has experienced significant volatility in its stock price. Historically, we have not attempted to reduce or eliminate our market exposure on publicly-traded securities. Based on closing market prices at December 31, 2008, the fair market value of our holdings in Clarient was approximately $75.8 million. A 20% decrease in Clarient’s stock price would result in an approximate $15.2 million decrease in the fair value of our holdings in Clarient.

In February 2004, we completed the issuance of $150.0 million of our 2024 Debentures with a stated maturity of March 15, 2024. During 2008 and 2006, we repurchased $43.0 million and $21.0 million, respectively, in face value of the 2024 Debentures. Interest payments of approximately $1.1 million each are due March and September of each year. The holders of these 2024 Debentures have the right to require repurchase of the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount plus accrued and unpaid interest. On October 8, 2004, we used approximately $16.7 million of the proceeds from the CompuCom sale to escrow interest payments due through March 15, 2009.

																		Fair Value at
														After				December 31,
Liabilities		2009				2010				2011				2011				2008
2024 Debentures due by year (in millions)		$	—			$	—			$	—			$	86.0			$	60.0
Fixed interest rate			2.625	%			2.625	%			2.625	%			2.625	%			N/A
Interest expense (in millions)		$	2.3			$	2.3			$	2.3			$	27.6				N/A

Our outstanding debt at December 31, 2008, exclusive of our 2024 Debentures, totaled $14.7 million, which consisted of fixed-rate debt of $0.6 million and variable-rate debt of $14.1 million. Based on our 2008 average outstanding borrowings under our variable-rate debt, a one-percentage point increase in interest rates would negatively impact our annual pre-tax earnings and cash flows by approximately $0.1 million. The fair value of our debt, exclusive of our 2024 Debentures, approximates carrying value.

We have historically had very low exposure to changes in foreign currency exchange rates, and as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.

Item 8. Financial Statements and Supplementary Data

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

		Page
Report of Independent Registered Public Accounting Firm			53
Report of Independent Registered Public Accounting Firm			54
Consolidated Balance Sheets as of December 31, 2008 and 2007			55
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006			56
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2008, 2007 and 2006			57
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006			58
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006			59
Notes to Consolidated Financial Statements			60

Report of Independent Registered Public Accounting Firm

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

We have audited Safeguard Scientifics, Inc.’s (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Safeguard Scientifics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment: (i) ineffective policies and procedures for ensuring financial reporting risks, including changes therein, are identified timely and corresponding control activities are implemented, (ii)  inadequately designed controls to ensure the accuracy of pricing and contractual allowance information entered into the Company’s in-house billing system and (iii) inadequately designed and maintained controls over the estimate of the allowance for doubtful accounts.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Safeguard Scientifics, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), shareholder’s equity and cash flows for each of the years in the three-year period ended December 31, 2008. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated March 19, 2009, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, Safeguard Scientifics, Inc. has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 19, 2009

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc. (the “Company”) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 13 to the consolidated financials statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, effective January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Safeguard Scientifics, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 19, 2009 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 19, 2009

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS

		As of December 31,
		2008				2007
		(In thousands except
		per share data)
ASSETS
Current Assets:
Cash and cash equivalents		$	75,051			$	96,201
Cash held in escrow — current			6,433				20,345
Marketable securities			14,701				590
Restricted marketable securities			1,990				3,904
Accounts receivable, less allowances ($8,045— 2008; $3,370— 2007)			20,465				12,702
Prepaid expenses and other current assets			1,507				1,755
Assets held for sale			—				1,465
Current assets of discontinued operations			—				32,867
Total current assets			120,147				169,829
Property and equipment, net			12,369				11,714
Ownership interests in and advances to companies			85,561				90,038
Long-term restricted marketable securities			—				1,949
Goodwill			12,729				12,729
Cash held in escrow — long term			501				2,341
Other			1,095				2,342
Non-current assets of discontinued operations			—				99,420
Total Assets		$	232,402			$	390,362
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	14,104			$	13,997
Current maturities of long-term debt			263				1,510
Accounts payable			3,337				3,134
Accrued compensation and benefits			5,758				6,934
Accrued expenses and other current liabilities			8,285				14,203
Current liabilities of discontinued operations			—				50,132
Total current liabilities			31,747				89,910
Long-term debt			345				906
Other long-term liabilities			9,600				9,111
Convertible senior debentures			86,000				129,000
Minority interest			—				2,296
Non-current liabilities of discontinued operations			—				5,916
Commitments and contingencies
Redeemable consolidated partner company stock-based compensation			—				84
Shareholders’ Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 500,000 shares authorized; 121,589 and 121,123 shares issued and outstanding in 2008 and 2007, respectively			12,159				12,112
Additional paid-in capital			763,323				758,515
Accumulated deficit			(669,526	)			(617,513	)
Accumulated other comprehensive income (loss)			(29	)			25
Treasury stock, at cost			(1,217	)			—
Total shareholders’ equity			104,710				153,139
Total Liabilities and Shareholders’ Equity		$	232,402			$	390,362

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2008				2007				2006
		(In thousands except per share data)
Revenue		$	73,736			$	42,995			$	27,723
Operating Expenses:
Cost of sales			33,007				26,914				19,824
Selling, general and administrative			60,744				50,783				44,924
Total operating expenses			93,751				77,697				64,748
Operating loss			(20,015	)			(34,702	)			(37,025	)
Other income (loss), net			10,275				(5,089	)			5,402
Recovery — related party			5				12				360
Interest income			3,097				7,520				6,805
Interest expense			(4,732	)			(5,489	)			(5,203	)
Equity loss			(34,697	)			(15,178	)			(3,732	)
Minority interest			3,264				5,749				5,721
Net loss from continuing operations before income taxes			(42,803	)			(47,177	)			(27,672	)
Income tax benefit			26				696				1,270
Net loss from continuing operations			(42,777	)			(46,481	)			(26,402	)
Income (loss) from discontinued operations, net of tax			(9,236	)			(19,387	)			71,845
Net income (loss)		$	(52,013	)		$	(65,868	)		$	45,443
Basic and Diluted Income (Loss) Per Share:
Net loss from continuing operations		$	(0.35	)		$	(0.38	)		$	(0.22	)
Net income (loss) from discontinued operations			(0.07	)			(0.16	)			0.59
Net income (loss) per share		$	(0.42	)		$	(0.54	)		$	0.37
Shares used in computing basic and diluted income (loss) per share			122,767				122,352				121,476