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

Title of Each Class		Name of each exchange on which registered
Common Stock ($.10 par value)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

     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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filer o      Accelerated filer þ       Non-accelerated filer 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, 2005, the aggregate market value of the Registrant’s common stock held by non-affiliates of the registrant was $152,664,014 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 7 , 2006 was 119,934,803.

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 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

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

     We strive to create long-term value for our shareholders through 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:

      Information Technology – including companies focused on providing software, technology-enabled services and information technology services for analytics and business intelligence, enterprise applications and infrastructure; and

      Life Sciences – including companies focused on therapeutics and treatments, pharmaceutical services, drug formulation and delivery techniques, diagnostics and devices.

     Our management team has identified five strategic objectives for Safeguard:

	§		Reposition Safeguard from an operating company to a holding company;
	§		Time the acquisition and disposition of partner companies to achieve maximum risk-adjusted value;
	§		Ignite our transaction process, from sourcing partner company candidates through completing transactions;
	§		Augment our management team so that we can continue to provide support to our partner companies; and
	§		Execute these objectives boldly, with focused effort.

     During 2006, Safeguard will focus primarily 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 current partner companies:
			Majority
			Acsis, Inc.
			Alliance Consulting Group Associates, Inc.
			Clarient, Inc.
			Laureate Pharma, Inc.
			Mantas, Inc.
			Pacific Title & Art Studio, Inc.
			Minority
			eMerge Interactive, Inc.
			Neuronyx, Inc.
			NexTone Communications, Inc.
			PROMODEL Corporation
			Traffic.com, Inc.
			Ventaira Pharmaceuticals, Inc.
	§		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 are located at 435 Devon Park Drive, 800 Building, Wayne, Pennsylvania 19087.

Significant 2005 Highlights

     We are proud of our key accomplishments in 2005:

	§		We made key executive hires, with Peter Boni joining as our new CEO in August 2005, and Jim Datin joining as Executive Vice President and Managing Director of our Life Sciences Group in September 2005. We also promoted John Loftus to Executive Vice President and Managing Director of our Information Technology Group in September 2005. We made additional hires to supplement our deal sourcing, marketing and support capabilities.
	§		We acquired Acsis, Inc. (“Acsis”) for approximately $26 million in cash in December 2005.
	§		In November 2005, we supported the growth plans of Clarient, Inc. (“Clarient”) by purchasing $9 million of the $15 million of common stock Clarient offered in a private placement financing.
	§		We sold substantially all of our economic interests in eight TL Ventures and EnerTech Capital Partners private equity funds in December 2005. We received approximately $24 million in cash from the sale, and the buyers assumed approximately $9 million of our remaining unfunded capital commitments. We recorded a gain of $6 million on this transaction, and we intend to use up to $20 million of the proceeds from this sale to repurchase a portion of our outstanding convertible debt.
	§		In December 2005, Laureate Pharma, Inc. (“Laureate Pharma”) sold its Totowa, New Jersey operations to Discovery Laboratories, Inc. for $16 million in cash. Laureate Pharma recorded a gain of $7.7 million from the sale. Laureate Pharma used some of the proceeds to repay debt, and will use some of

			the proceeds to make capital investments to expand the capabilities and capacity of its Princeton, New Jersey facility.
	§		In September 2005, we provided approximately $750,000 to Traffic.com, Inc. (“Traffic.com”) to support its capital needs in advance of its initial public offering. Traffic.com completed its initial public offering on January 25, 2006 at a price of $12.00 per share. We own approximately 2% of Traffic.com’s common stock directly (after giving effect to its initial public offering) and some additional shares indirectly through several private equity funds.
	§		We continued our support of Ventaira Pharmaceuticals, Inc. (“Ventaira”) by providing an additional $1 million in Ventaira’s $8.5 million equity financing transaction in March 2005.
	§		In November 2005, we continued our support of NexTone Communications, Inc. (“NexTone”) by participating in NexTone’s $35 million equity financing, buying an additional $2.3 million of preferred stock.
	§		In July 2005, we provided strategic, analytical and administrative support to Clarient in obtaining a five-year exclusive distribution agreement with Dako A/S (“Dako”), a leading global supplier of system solutions for cancer diagnostics and cell analysis based in Denmark.
	§		We assisted Clarient in its transition to a new integrated facility, providing essential project management support to Clarient during the selection, negotiation, build-out and move-in phases of the project, allowing Clarient to devote its management resources to focusing on its core business operations.

Our Strategy

     Safeguard’s business strategy is to build value in revenue-stage information technology and life sciences businesses. 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—existing technologies, solutions and therapies are reaching the end of their designed life or patent protection; the population of the U.S. is aging; businesses based on once-novel technologies are now facing consolidation and other competitive pressures.
	§		Migration—technology platforms are migrating to newer technologies and facing changing cost structures; medical treatments are moving toward earlier stage intervention; and business models are migrating toward different revenue-generation models integrating technologies and services.
	§		Convergence—information technology and life sciences are intersecting, in fields like medical devices and targeted diagnostics for targeted therapies.
	§		Compliance—business spending is being driven by new or increased regulation in both information technology (USA PATRIOT Act and Sarbanes-Oxley) and life sciences (FDA and HIPAA).
	§		Cost containment—both information technology and life sciences are facing increasing pressure for cheaper, yet better solutions.

     Our economy breeds these themes, which attract entrepreneurs who need capital support and strategic guidance. Safeguard deploys growth capital along with management expertise, process excellence and marketplace insight designed to provide tangible benefits to management and investors in growth companies.

     Our corporate staff (31 employees at December 31, 2005) 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

      Marketing and Sourcing. Safeguard’s marketing and sourcing activities are designed to generate a large volume of high-quality partnering opportunities. Safeguard uses a variety of methods to identify and qualify potential partner companies, including:

	§		our internal business development team;
	§		active, targeted market research;
	§		support from investment banking professionals and other transaction intermediaries;
	§		leads provided by our partner companies;
	§		leads provided by an extensive network of business, legal, finance, accounting and other professional contacts; and
	§		direct responses to our expanding marketing activities (including trade show sponsorship and attendance, presentations and our website).

We have in the past paid intermediaries for their assistance in locating candidate companies that we acquired, and we anticipate doing so in the future.

      Acquisition Criteria. As described above, our primary focus is on acquiring majority or minority stakes in revenue-stage companies within the information technology and life sciences industries with attractive growth prospects. In addition, we prefer candidates:

	§		operating in large 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 strategy for achieving growth.

     Our sourcing efforts are guided by a recognition of our preference for new partner companies to be close to our headquarters or our other companies. Being relatively close to our partner companies allows us to more efficiently interact with their management teams. We target our sourcing efforts on the Northeast/Mid-Atlantic of the U.S. — although we evaluate candidate companies opportunistically throughout the U.S. and southern Canada.

     Our Information Technology Group, actively focuses on companies:

§

in these vertical markets —

	•		financial services
	•		healthcare/life sciences
	•		supply-chain/logistics

§

in these segments —

	•		analytics and business intelligence
	•		enterprise applications
	•		information technology infrastructure solutions

§

and with these business models —

	•		software-as-a-service
	•		technology-enabled service
	•		business-to-business Internet.

     Our Life Sciences Group actively targets companies:

§

in these segments —

	•		therapeutics and treatments
	•		pharmaceutical services
	•		drug formulation and delivery techniques
	•		diagnostics
	•		devices

§

and with these business models —

	•		product sales
	•		licensing
	•		science- or intellectual property-enabled services (project or fee-based).

     We believe there are many opportunities meeting our criteria, and our sourcing activities are focused on locating and evaluating candidate companies to assess 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 when we will complete more acquisitions or other transactions.

      Completing Transactions. Once identified, a candidate company is carefully evaluated to determine whether it meets our acquisition criteria. If so, our management commences informal discussions with the candidate company’s management and, if appropriate, its owners to learn more about the company and to discuss the possibility of a transaction. These discussions are often accompanied by the parties entering into customary confidentiality agreements. If the discussions progress, we typically commence extensive due diligence, financial modeling and deal structuring, legal negotiation of transaction documents and other transaction work with a view towards signing definitive agreements and completing the acquisition. Among the reasons for a transaction not to be pursued by us or by the candidate company are differences in assessment of the candidate company’s strategy, capabilities, market opportunities, management strengths, capital needs and valuation. In addition, the objectives and interests of the management of a candidate company may vary widely from that of its owners. For these reasons, among others, it is anticipated that we will need to locate and evaluate a large number of candidate companies in order to complete any transactions. Our senior management supervises the sourcing of candidates and is directly involved in decision-making on candidate companies. Senior management continues its active direction through the structuring and completion of the transaction.

      Competition for Acquisitions. We face intense competition from companies with similar business strategies and from other companies that acquire or provide capital to information technology and life sciences businesses. Competitors include venture capital and private equity investors, as well as corporations 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 alternative for revenue-stage companies because our strategy and capabilities offer:

	§		real-time operational assistance, including strategy design and execution, business development, corporate development, sales, marketing, finance, facilities, human resources and legal;
	§		the flexibility to structure minority or majority transactions with equity and debt;
	§		liquidity opportunities for founders and investors;
	§		a focus on 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 Build Value

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

	§		applying our expertise to support the company’s introduction of new products and services;
	§		leveraging our market knowledge and presence to generate additional growth opportunities;
	§		leveraging our business contacts and relationships; and
	§		pursuing potential acquisitions and business combinations to accelerate growth.

      Strategic Support. 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 the company’s success; and
	§		providing capital to drive growth.

By helping our partner companies’ management teams remain focused on critical objectives through provision of human, financial and strategic resources, we believe we are able to accelerate their development and success.

      Management and Operational Support. We offer management and operational support to our partner companies in order to accelerate their growth. We believe these services provide our partner companies with significant competitive advantages in their individual markets. The resources that we can provide our partner companies include:

	§		Management – recruiting an effective management team and experienced staff; developing employee compensation plans and performance assessment programs;
	§		Operations – improving a company’s business operations, ranging from establishing facilities and administrative processes to implementing operations and financial infrastructures;
	§		Science and Technology – assessing science and technology market opportunities and trends; designing proprietary technology solutions; assisting in the intellectual property and global protection strategies; accessing complementary technologies and strategic partnerships;
	§		Business Development – accessing initial reference customers, external marketing channels, strategic partnerships and joint ventures;
	§		Corporate Development – sourcing, negotiating and completing strategic acquisitions, joint ventures and other non-organic growth;
	§		Marketing – identifying the company’s market position and developing effective market penetration, branding and marketing strategies; and
	§		Legal and Financial – developing appropriate corporate, legal and financial structures, including internal controls; implementing global intellectual property protection activities; and completing a wide variety of corporate and financial transactions.

     We engage in ongoing planning and assessment of the development of our partner companies and their management teams. Our executives provide mentoring, advice and guidance to develop the management of our partner companies. Our executives generally serve as directors of our partner companies and work with them to develop and implement strategic and operating plans. We measure and monitor achievement of these plans through regular performance measurements and financial results.

      Realizing Value from our Efforts

     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. To the extent we believe that a partner company’s further growth and development can best be supported in 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 expect to use the proceeds from any sales of companies or other assets primarily to pursue other candidate company opportunities or for other working capital purposes.

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 our majority-owned partner companies.

      Acsis

      Safeguard Opportunity. We acquired 94.3% of Acsis, Inc. in December 2005 because we believe Acsis is and will be integral to the migration of mature supply-chain management systems to newer technologies, such as radio-frequency identification (“RFID”). An impressive roster of Fortune 1000 clients already leverage Acsis’ solutions. We believe that powerful industry trends—business process automation, RFID compliance mandates, and compliance with regulations mandating tracking of food and drug products, and cost containment—provide a large market and growth opportunity for Acsis. Spending on enterprise data collection software and services has been growing significantly, and Acsis believes it currently exceeds $700 million annually. Recent mandates from major national retailers as well as government agencies have prompted manufacturers to upgrade their existing data collection infrastructure with RFID technology.

      General. Acsis (www.acsisinc.com) is a leading provider of software and service solutions that assist manufacturing companies in improving efficiencies throughout the entire supply-chain. Its solutions enable manufacturers to automate plant floor/warehouse operations and take advantage of emerging automated-ID technologies, including RFID and barcode. Acsis’ solutions provide the critical data links between the activities and material movements that take place on the shop floor and enterprise resource planning (“ERP”) systems. They are used by leading companies across a variety of industries to improve visibility of goods throughout their supply-chains, ultimately resulting in increased revenues and reduced costs. Founded in 1996, Acsis offered one of the first solutions to facilitate the control and integration of plant floor and warehouse devices with SAP’s ERP software.

      Strategy. Acsis’ strategy is to leverage its wide and deep experience in a variety of vertical industries, such as automotive, chemical, pharmaceutical, paper and consumer packaged goods, to craft real-time supply-chain solutions for SAP™ R/3 ^® as well as other enterprise systems. Acsis’ knowledge of the business processes and typical transactions in these industries allows it to deliver tailored solutions. Acsis couples this with broad expertise in SAP R/3 implementations, automated data-collection and integration solutions, and a proven track record providing large enterprises with solutions that automate processes on the shop floor and improve supply-chain efficiencies.

     Acsis has strategic partnerships with leading technology providers and consultants. As an example, Acsis recently announced that it was the first to successfully complete the integration testing between its Data-Link software and SAP’s Auto-ID Infrastructure component of the SAP NetWeaver™ open integration and application platform.

     Manufacturers are upgrading and enhancing their existing infrastructure with RFID technology not only in response to governmental and retailer mandates, but also to maximize the benefits of their just-in-time inventory practices. Acsis believes its solutions provide them with better ways to:

	§		constantly view and manage every link in their supply-chain in real time;
	§		communicate and control changes in their supply-chain;
	§		collect and integrate critical data from any source; and
	§		protect their processes from interruption.

     Despite the complexities of today’s supply-chain and ERP systems, global manufacturers are able to automate processes from the factory floor to warehouses by leveraging Acsis’ software to collect data from disparate devices, including barcode scanners, optical eyes, scales and RFID devices.

      Solutions. Acsis draws from a variety of technologies and service offerings to create a solution that matches the client’s business, budget and IT environment. Solutions range from value-added services for implementing SAPConsole, to its proven DataPass middleware offering, to the next generation of shop floor process automation and data collection using their Data-Link enterprise solution suite. If requested, Acsis will procure all necessary hardware and software to deliver a turnkey data-collection system.

     Acsis’ key internally-developed software solution components are DataPass, Data-Link and DPExchange:

	§		DataPass . DataPass inputs supply-chain data in real time, providing immediate access to critical information. DataPass operates through a wide range of radio frequency devices, including Windows CE based products from leading manufacturers. It is simple to install, easy to use, and can be tailored to specific data-collection processes.
	§		Data-Link . Data-Link is an enterprise software solution that enables data collection from any device in the supply-chain, such as scales, printers and RFID tags, and formats it into a common language. Data-Link utilizes industry standard web services to provide a standard integration capability across the enterprise and the external partner environment, regardless of platform, application or implementation.
	§		DPExchange . DPExchange is a web-based solution providing real-time synchronization of data captured across the entire supply-chain. Contract manufacturers, third-party warehouses, suppliers and other trading partners are able to connect directly to an organization’s supply-chain management system to provide event updates on materials movements and other activities to improve real-time visibility and management of key processes.

     Acsis maintains a highly-experienced and trained professional services group to provide consulting and technical services. Typical professional service engagements include:

	§		problem analysis and business case development;
	§		enterprise systems design;
	§		data modeling;
	§		process evaluations and recommendations;
	§		hardware and software evaluation;
	§		help desk;
	§		application maintenance and enhancements; and
	§		communications and connectivity.

      Offices and Employees. Acsis employs approximately 100 people at its headquarters in Marlton, New Jersey, and has a small office in Munich, Germany.

      Sales and Marketing; Customers. Acsis now has a track record including more than 550 implementations in 26 countries. Acsis’ typical customers are large manufacturing, pharmaceutical or consumer packaged goods businesses with more than $1 billion in revenue and substantial international operations. In 2005, two customers each represented more than 10% of Acsis’ revenue.

     Sales are typically made in warehouse, logistics, fulfillment or operations units of its clients with a customary sales cycle of three to six months. At the end of a sales cycle, Acsis provides consulting, blueprinting and implementation services, go-live support and ongoing help desk support. Acsis then works with customers on a regular and ongoing basis to support their operations and provide further benefits with additional solutions or by implementing solutions at additional sites. Approximately half of Acsis’ customer base utilizes multiple solutions provided by Acsis, and many customers are using Acsis’ solutions in multiple sites across the world.

      Competition. Acsis’ competition generally comes from large, diversified consulting businesses or niche providers with a variety of individual solutions for barcode, RFID or other data collection systems. Acsis seeks to differentiate itself by proving a single, integrated platform which can be used across the enterprise to increase efficiencies and reduce operational costs.

      Alliance Consulting

      Safeguard Opportunity. We acquired Alliance Consulting Group Associates, Inc. (“Alliance Consulting”) in December 2002 because we saw a growing, but highly fragmented, market in which we believed Alliance Consulting could achieve meaningful growth. Capitalizing on its deep domain expertise in the pharmaceutical, healthcare, financial services, manufacturing and distribution industries, its extensive staff resources and strong customer relationships, we believe that Alliance Consulting can continue to grow its profitability. At December 31, 2005, we owned 100% of Alliance Consulting.

      General. Alliance Consulting (www.alliance-consulting.com) is a leading national business intelligence solutions consultancy providing services to primarily Fortune 2000 clients in the pharmaceutical, financial services and manufacturing industries. Alliance specializes in two practice areas:

	§		Information Management, which is comprised of a full range of business intelligence solutions from data acquisition and warehousing to master data management, analytics and reporting; and
	§		Application Services, which includes software development, integration, testing and application support, delivered through a high quality and cost effective hybrid global delivery model.

      Strategy. Alliance Consulting has developed a strategy focused on enabling business intelligence through the application of deep domain experience and custom-tailored project teams to deliver software solutions and consulting services. Alliance Consulting believes that its growth opportunities benefit from the following industry trends:

	§		The volume of data being processed by businesses is increasing at an exponential rate, making businesses dependent upon the effective and efficient processing of this data and requiring significant and ongoing investment in technology infrastructure and resources, but with continuing decreases in the cost of computing power, storage and communication systems.
	§		The complexity of this data is increasing, with multiple and diverse inflow sources containing a wide variety of structured and unstructured information.
	§		The value to the business of this data is increasing, driven, in part, by regulatory and compliance requirements and strategic and competitive pressures, yet businesses are facing continuing budget constraints, prompting the need to maximize cost-effective solutions.

      Services. Through an integrated network of local branch offices in North America, and its offshore development center located in Hyderabad, India, Alliance Consulting provides a flexible engagement approach to its clients, using fixed bid or time and materials pricing models; teams or individual consultants; on-site, off-site or offshore delivery; and short- or long-term support.

     Alliance Consulting’s services are targeted to:

	§		Business intelligence and data management – using data warehousing technologies to develop complete business intelligence infrastructures, applications and processes to enhance the competitiveness of clients.
	§		Corporate performance management – using enterprise-wide reporting and analysis, forecasting and budgeting and other tools to provide real-time information, enabling corporate managers to better monitor critical operating performance metrics and implement rapid, targeted adjustments to increase effectiveness, efficiency and profitability.
	§		Application development – using assessment tools, architecture design and implementation of advanced, scalable and flexible, customized software solutions to leverage existing software assets through the integration of state-of-the-art web-based technologies.
	§		Outsourcing – working with clients to understand the IT support needs of the business, costs and internal/external service capabilities and then implementing outsourcing solutions for data center operations, applications development and maintenance, distributed and desktop processing, voice and data networks, Internet and web hosting and help/service desk functions.

     Alliance Consulting maintains a full-time core staff complemented by a flexible combination of hourly and salaried employees, as well as independent contractors, which provide clients with specialized engagement teams tailored to their specific business requirements. This approach, marketed to clients as Assemble To Order (or “ATO”), enables Alliance Consulting to offer a precise combination of technical, industry, and process knowledge to support each engagement. In addition, this approach to resource management allows Alliance Consulting to maximize utilization of its staff and contracting consultants. Alliance Consulting’s employee and independent contractor resources are supplemented on an ongoing basis through internal and external recruiting targeted at high-quality, experienced professionals with significant product and industry expertise.

      Offices and Employees. At December 31, 2005, Alliance Consulting had its headquarters in Conshohocken, Pennsylvania and operated eight other regional offices throughout the United States. Alliance Consulting supplements its full-time employees by utilizing subcontractors. At December 31, 2005, Alliance Consulting had approximately 525 full-time employees and 300 subcontractors. Alliance Consulting believes its relationship with its employees and subcontractors is good. Alliance Consulting’s resource managers work closely with a network of subcontractors to ensure availability of necessary skills on a timely basis. Alliance Consulting believes its growth and success are dependent on the caliber of its people and will continue to dedicate significant resources to hiring, training and development, and career advancement programs.

      Sales and Marketing; Customers. Alliance Consulting uses a customer relationship-based approach to generating new clients and new engagements with existing clients. Some of Alliance Consulting’s clients include DHL Information Services, JP Morgan Chase, Fidelity Investments, Wyeth Pharmaceuticals, Pfizer Pharmaceuticals, Caremark and EMC. Alliance Consulting markets its services through a direct sales force, which is based in branch offices and regional areas. Account executives are assigned to a limited number of accounts so they can develop an in-depth understanding of each client’s individual needs and form strong client relationships. In 2005, one customer represented more than 10% of Alliance Consulting’s revenue. In 2004, a different customer represented more than 10% of Alliance Consulting’s revenue.

     In accordance with industry practice, many of Alliance Consulting’s orders are terminable by either the client or Alliance Consulting on short notice. Because many clients can cancel or reduce the scope of their engagements on short notice, Alliance Consulting does not believe that backlog is a reliable indication of future business.

      Competition. Alliance Consulting’s revenue potential is largely dependent upon target customers’ spending for IT services and its ability to compete with local, national and offshore providers of consulting services. Many of these competitors (such as major IT consulting firms) have greater financial and human resources than Alliance Consulting. Alliance Consulting believes that the basis for competition in its industry includes the ability to create an integrated solution that best meets the needs of an individual customer, provide competitive cost pricing models, develop strong client relationships, provide high-quality consultants with industry and process specific technical expertise, and offer flexible client-service delivery options.

      Clarient

      Safeguard Opportunity. Safeguard commenced its ownership of an interest in Clarient in 1996, and we have increased our ownership position to 56.5 percent at December 31, 2005. Shares of Clarient’s common stock trade on the NASDAQ Capital Market under the symbol “CLRT.”

     We believe that increasingly specific targeted cancer therapies will need more specialized and complex diagnostic tests in order to improve cancer therapy outcomes. The continued aging of the U.S. and European populations, coupled with the higher incidence of cancer among seniors, support an expanding market for Clarient’s products and services. Clarient is now leveraging its technical expertise, proprietary systems and capital investment to provide its diagnostic products and services to a larger customer base.

      General . Clarient (www.clarientinc.com) is a comprehensive cancer diagnostics company providing cellular assessment and cancer characterization to three major customer groups:

	§		community pathologists;
	§		academic researchers and university hospitals; and
	§		bio pharmaceutical companies.

Clarient addresses these customers’ needs by leveraging its proprietary bright field microscopy technology. Its highly reliable ACIS ^® (Automated Cellular Imaging System) is a premiere digital cellular imaging solution selected by clinicians and researchers conducting cell-based analysis around the world. ACIS ^® provides the precise, reproducible results that targeted cancer therapies and drug discovery efforts require.

      Strategy Clarient’s mission is to combine innovative technologies, meaningful test results and world class expertise to improve patient outcomes. Building upon its core image analysis capabilities, Clarient began to transform its operations by launching two new business initiatives in 2005. The first of these involved establishing a laboratory facility for its Access technical (stain and scan only) services. This operational base, together with regulatory approval received in late 2005, allows Clarient to provide a broad range of oncology testing services for the community pathologist focused on cancer diagnosis and prognosis. Clarient believes that its focus on the community pathologist is an important departure from the traditional reference laboratory approach of establishing a competitive front against these community-based physicians. The goal of these services is to support these professionals with a broad range of technologies and educational services that are efficiently distributed via Clarient’s PATHSiTE Internet program. This web-based strategy allows rapid turn around time for results reporting and provides the community pathologist the opportunity to score results locally allows the pathologist to share in the revenue stream. The second of these new business initiatives was the establishment of a biopharmaceutical services operation in order to partner and extract value from the work that Clarient performs for the biopharmaceutical companies in support of the development of new cancer therapies. These two business initiatives and its legacy instrument systems business are now structured around two independent, yet synergistic, business groups:

§

Services Group

			Diagnostic Services – provides a wide variety of cancer diagnostics and consultative services, ranging from technical laboratory services to professional interpretation. By combining Clarient’s core competencies in image analysis and data quantification with its knowledge of virtual environments, Clarient has created a unique service offering to community pathologists in the U.S. Clarient believes that the growing need for precise diagnosis combined with the ability to put comprehensive information into a single, coherent computer-accessible platform for clinicians creates development opportunities for new directed diagnostic services using the image analysis platform.
			BioAnalytical Services – provides a complete compliment of commercial services to biopharmaceutical companies and other research organizations to assist their efforts, ranging from drug discovery to the development of directed diagnostics through clinical trials. Through these services Clarient seeks to apply its intellectual property and proprietary software to the ongoing development of custom applications with FDA-cleared reagents using its image analysis platform. Clarient believes that this in turn will allow it to develop a much larger menu of applications for its Instrument Systems and drive higher demand for its Diagnostic Services.

§

Technology Group

			Instrument Systems – provides hardware, software and web-enabled cellular image analysis systems using FDA-cleared proprietary algorithms. The primary focus of the Technology Group is to build on the legacy of its proprietary ACIS ® technology by providing versatile, innovative analysis platforms and software for the cancer diagnostics marketplace. The ACIS ® combines an automated microscope and a digital camera with computer-based color imaging technology, originally developed for the United States government’s “Star Wars” program, to detect and characterize cellular features. It achieves greater sensitivity than other existing test methods through its ability to discriminate among millions of colors and up to 256 levels of intensity of color. The ACIS ® system scans and processes the stained slides and creates a single image that reconstructs the entire tissue section. Clarient has also developed the Access Remote Pathology program, allowing community pathologists to take advantage of this new technology despite having limited in-house staining capability or a low volume of slides that would not justify having a full ACIS ® system.
			Core R&D – by combining Clarient’s proprietary intellectual property with the newly acquired Support Vector Machines, this group develops new applications and biomarkers to better assess and characterize cancers for both the biopharmaceutical and clinical markets.

      Sales and Marketing . Clarient dedicates the majority of its sales resources to its new Diagnostic Services effort, and in 2005, completed a distribution and development agreement with the world’s largest antibody reagent and immunohistochemistry provider, Dako. Dako serves as Clarient’s dedicated Instrument Systems sales organization for both the clinical and research markets. Dako has a world-wide reach that Clarient believes will allow it to penetrate existing clients and markets more deeply in addition to opening up additional clients and markets.

      Patents and Proprietary Technology . Clarient files patent applications to protect technology, innovations and improvements that it considers important to the development of its business. Currently, Clarient has 25 patent applications pending with the U.S. Patent and Trademark Office and eight foreign patent applications pending. Clarient has 21 issued patents in the United States and eight foreign patents, all related to the system and method for cellular specimen grading performed by the ACIS ^® or related technologies. Clarient also relies on trade secrets and proprietary know-how that it seeks to protect, in part, through confidentiality agreements with employees and consultants. If Clarient is unable to protect its patents and proprietary rights, its reputation and competitiveness in the marketplace could be materially damaged.

      Competition .

     Technology Group. With the growing acceptance of image analysis in research and clinical markets, the number of competitors has increased. Large companies with established positions in adjacent markets as well as small, niche companies are targeting this space. In the clinical market, Clarient’s primary competition is the continued use of manual microscopy in approximately 80% of breast cancer testing. Clarient faces increased competitive risk from autostainer and reagent companies that are working to expand into image analysis to stabilize their installed base or enter the market. There are also numerous products that compete in one or two specific areas, such as scanning hardware or image analysis software. A large number of researchers still use “home grown” systems. Clarient’s new relationship with Dako is centered around the joint development of the ACIS III to improve Clarient’s competitive position and help maintain their current strong market position in the US clinical market. Clarient believes its comprehensive capabilities, demonstrated reliability, complete solution and work flow advantages make its offerings competitive.

     Services Group. The clinical laboratory business is highly competitive and dominated by several national laboratories, as well as many smaller niche and regional organizations. Clarient’s primary competitors include large independent laboratories that offer a wide test and product menu on a national scale. These large national independent laboratories have significantly greater financial, sales and logistical resources than Clarient and may be able to achieve greater economies of scale, or establish contracts with payor groups on more favorable terms. Clarient also competes with smaller niche laboratories that address a narrow segment of the esoteric market by offering very specific assay menus. Finally, institutions that are affiliated with large medical centers or universities compete with Clarient on the limited basis of perceived quality of service.

      Collaborations and Partnerships. In the summer of 2005, Clarient entered into a development and distribution agreement with a valued partner for the development and marketing of advanced image analysis products and services. This new collaboration with Dako, allows for more rapid market acceptance and to better position Clarient as an “automated solutions” provider. This relationship will provide necessary investment to aid in the development of next generation Image Analysis products. Clarient has entered into and will continue to use scientific collaborations to assist in identifying and validating applications of its technology and enhancing its marketing and distribution capabilities.

      Research & Development. To date, Clarient’s core competency has been in the area of advanced imaging as applied to the detection and quantification of reagent-stained cellular material. Clarient’s research and development is focused on achieving a balance between research and development, innovation and support of focused, market-driven requirements. Research and development spending by Clarient was approximately $3.7 million, $4.1 million and $4.5 million in 2005, 2004, and 2003, respectively.

      Manufacturing . The ACIS ^® is currently manufactured at Clarient’s facility in San Juan Capistrano, California. Clarient’s employees assemble the components, optically align the microscope, load the software and quality test the system. Components of the system are manufactured internally, purchased off-the-shelf, or manufactured by subcontractors to Clarient specifications. The system uses an off-the-shelf charged couple device (CCD) camera and personal computer. The system can be adapted for use with most popular microscopes and related optical accessories. The ACIS ^® has been designed to be fully modular to take advantage of improvements in microscopy and computer hardware.

      Governmental Regulation . Clarient is subject to governmental regulation in the U.S., in individual states and in other countries. These regulations govern, among other matters, the testing, manufacture, labeling, storage, record keeping, distribution, sale, marketing, advertising and promotion, and importing and exporting of medical devices. In addition, Clarient’s facilities have been issued licenses to manufacture medical devices and provide laboratory diagnostic services in California. The State of California could prohibit manufacturing of medical devices or provision of laboratory services if Clarient failed to maintain or renew these licenses. Additionally, requirements of states where laboratory services may be provided have various application and provisional requirements that must be satisfied. Laws and regulations pertaining to the products and/or services provided by Clarient are subject to change and depend heavily on administrative interpretations by federal and state agencies. In anticipation of marketing its ACIS ^® products in the European Union, Clarient applied for and received the required certification.

      Facilities . In January of 2006, Clarient’s Services organization moved into a new facility in Aliso Viejo, California to expand its capacity and allow for the ongoing growth. In April of 2006, Clarient’s Technology Group, currently housed in a 24,000 square foot facility in San Juan Capistrano, will move into the Aliso Viejo location to join the Services Group.

      Employees. As of December 31, 2005, Clarient had 139 employees. 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 and foreign sales, marketing and administrative activity.

      Laureate Pharma

      Safeguard Opportunity. We acquired 100% of the business and assets operated by Laureate Pharma in December 2004 for approximately $29.5 million in cash. We made this acquisition because we recognized that the substantial growth in sales of biotechnology products has spurred a significant investment by large pharmaceutical companies and smaller biotechnology companies in the development of new biotechnology products for human therapeutics. These companies, particularly biotechnology companies, are highly dependent on funding to develop new drugs from basic research through clinical trials. Few have the resources or expertise to build the facilities, equipment and staff needed to manufacture the quantities of drug product needed to conduct clinical trials and commercialize approved products. Laureate Pharma provides its customers with a cost-effective, lower-risk alternative, which also improves the quality of their products and processes and reduces time-to-market.

      General. Laureate Pharma (www.laureatepharma.com) is a life sciences company dedicated to providing services critical to biopharmaceutical product development and manufacturing. Laureate Pharma manufactures small- and medium-scale quantities of biopharmaceutical products in its FDA-registered facility. Laureate Pharma’s clients use these supplies (depending on their regulatory status) for preclinical studies, clinical trials or commercial sales. Laureate Pharma seeks to become a leader in the biopharmaceutical industry by delivering superior development and manufacturing services to its customers. Laureate Pharma’s headquarters and manufacturing facility is located in Princeton, New Jersey.

      Strategy. Laureate Pharma’s strategy is to build on its strong customer relationships and generate new customers, to increase its new services and products, and to maintain its reputation for high quality in the use of state-of-the-art technology to deliver products and services that meet applicable regulatory, environmental and safety requirements, including current Good Manufacturing Practices (cGMPs).

     Laureate Pharma believes its growth opportunities are driven by the following industry trends:

	§		Substantial growth in the development of biotechnology products for human therapeutics, representing an increasing percentage of the total pharma pipeline.
	§		Demand for manufacturing capacity, along with the significant capital required to build capacity, creating increased opportunities for outsourced services.
	§		Need for product development support, equipment and facilities by biotechnology companies without existing capabilities.

     We believe Laureate Pharma’s broad range of services and deep development expertise position it to benefit from these trends.

      Services. Laureate Pharma’s services include:

§

Bioprocessing , which focuses on clinical stage and small-to medium-sale commercial biopharmaceutical products and comprises the essential steps to support the development and commercialization of customers’ products, including:

Cell Line Development and Optimization – to improve and maximize protein productivity of production cell lines in optimal growth media; cell lines produce the protein that is the biologic product.

			Process Development – to bring the product from clinical laboratory scale to pilot production and on to clinical- and commercial-scale production; essential to make sufficient product to support clinical trials and smaller quantity commercial scale production.
			Purification Development – to design and validate procedures for removal of impurities and purification of products that comply with regulatory requirements.
			Bioreactor Production – using stirred-tank, disposable bag and hollow-fiber mammalian cell culture bioreactors ranging from 20 to 2500 liters to produce biopharmaceutical protein products, with considerable expertise in monoclonal antibody products.
			Downstream Processing – using specialized equipment, Laureate Pharma develops and operates robust purification processes for cGMP manufacture of client’s products. Laureate Pharma also performs process validation studies as may be required for each client’s product.
			Aseptic Filling – aseptic vial filling of biopharmaceutical and drug products in batch sizes up to 10,000 vials or 200 liters of bulk volume.

	§		Quality Control , which includes analytical and microbiology testing of raw materials, in-process and finished products.
	§		Quality Assurance , which includes preparation, control and review of documentation, including standard operating procedures (SOPs), master batch records, test procedures, and specifications. Laureate Pharma reviews and releases all controlled materials, including raw materials, intermediates and products.

      Sale of Totowa Operations. In 2005, Laureate Pharma operated a second facility located in Totowa, New Jersey. This facility was dedicated to drug delivery services, and generated a smaller portion of Laureate Pharma’s contract manufacturing revenues. In December 2005, Laureate Pharma sold its Totowa operations to Discovery Laboratories for $16.0 million in cash, recognizing a $7.7 million gain. Discovery Laboratories had been an important contract manufacturing client of Laureate Pharma for more than two years, and the primary client for the Totowa facility. Laureate Pharma will continue to support Discovery Laboratories with manufacturing support services from its Princeton facility. The transaction will allow Laureate Pharma to focus on its core bioprocessing operations. Laureate Pharma used some of the proceeds to pay down existing debt, and plans to use some of the proceeds to increase the capabilities and capacity at its Princeton facility by adding new bioprocessing equipment and making capital improvements. Results of Laureate Pharma’s operations at the Totowa facility for the period prior to its sale are presented as discontinued operations in the consolidated financial statements.

      Raw Materials. Laureate Pharma’s customers supply the cell lines for bioprocessing operations. Laureate Pharma supplies a wide range of supporting materials, including cell growth media, excipients and filling components. These materials are purchased from many suppliers and Laureate Pharma is generally not dependent on any one supplier.

      Research and Development. Laureate Pharma’s research and development efforts are focused on improving its technology and developing processes for the manufacture of new products to meet customer requirements. The primary goals are to improve manufacturing processes to reduce costs, improve quality and increase capacity.

      Intellectual Property. Laureate Pharma relies primarily on know-how in its manufacturing processes and techniques not generally known to other life sciences companies to develop and maintain its market position. Laureate Pharma requires employees to sign confidentiality and other protective agreements where appropriate.

      Sales and Marketing; Customers. Laureate Pharma provides process development and manufacturing services on a contract basis to biopharmaceutical companies. Laureate Pharma’s customers generally include small to mid-sized biotechnology and pharmaceutical companies seeking outsourced bioprocessing manufacturing and development services. Laureate Pharma’s customers are often dependent on the availability of funding to pursue drugs that are in early stages of clinical trials, and thus have high failure rates. Losses of one or more customers can result in significant swings in profitability from quarter to quarter and year to year. Although there has been a trend among biopharmaceutical companies to outsource drug production functions, this trend may not continue. Although

clients tend to maintain one manufacturer through clinical trial phases and even early commercial production, many of Laureate Pharma’s contracts are short term in duration. As a result, Laureate Pharma seeks new contracts to sustain its revenue. In 2005, two customers each represented more than 10% of Laureate Pharma’s revenue from continuing operations.

      Competition. There are a number of primary competitors that focus on supplying clinical scale contract biopharmaceutical development and manufacturing services to biotechnology companies. Generally, the larger competitors focus on larger quantities and scale of manufacturing capacity. Laureate Pharma focuses on process development and manufacturing services for clinical and small- and medium-scale commercial production, and maintains a reputation for regulatory compliance, a commitment to quality and excellent early process development services. Laureate Pharma believes that customers in its target markets display loyalty to their initial services provider. Therefore, it may be difficult to generate sales to potential customers who have purchased development and manufacturing services from competitors. To the extent Laureate Pharma is unable to be the first to develop and supply new biopharmaceutical products for its clients, its competitive position may suffer.

      Employees. At December 31, 2005, Laureate Pharma had 74 full-time employees and believes its employee relations are good.

      Mantas

      Safeguard Opportunity. We commenced our ownership of Mantas, Inc. (“Mantas”) in 2001 and increased our ownership to 87.6% by December 31, 2005. We believe Mantas’ position as an industry pioneer will enable it to leverage its significant domain expertise and capital investment in its proprietary behavioral detection technology. Mantas’ comprehensive software solution based on this technology provides financial services companies with the means to create revenue generation opportunities and meet increased loss prevention, regulatory and compliance demands.

      General. Mantas (www.mantas.com) provides integrated, single-source, behavior detection software solutions for the global financial services industry. Mantas’ integrated Behavior Detection Platform™ addresses regulatory compliance, loss prevention and revenue generation opportunities using the industry’s most sophisticated suite of risk management, anti-money laundering, surveillance, fraud, employee surveillance and broker and trading compliance monitoring applications. The Behavior Detection Platform™ (currently versions 4.1 and 4.2, introduced in 2005) monitors granular, transaction level data and employs a single, integrated data model to deliver superior accuracy and complete, global and enterprise-wide operational transparency spanning disparate divisions, departments and geographies. The Mantas Behavior Detection Platform™ can analyze billions of accounts and transactions, all in the context of one another, in order to identify suspicious activities for further review. It also provides complete end-to-end case management and enterprise integration as well as real time analytics and reporting to customers in over 60 countries.

      Strategy. Mantas’ strategy is to provide clients competitive value by delivering a robust, comprehensive and accurate enterprise-wide behavior detection systems. This allows clients to improve the performance and transparency of businesses operating in multiple global markets where behavior detection technologies are revolutionizing everyday corporate management. Mantas expects to achieve its strategic objectives by:

	§		maintaining and leveraging its leading proprietary technology platform;
	§		extending the depth and breadth of usage within its current client base; and
	§		attracting new marquis clients, in the U.S. and elsewhere.

     Mantas believes that its business is being affected by the following industry trends:

§

Increased regulatory compliance requirements and concern for terrorist acts world-wide require banks, insurers, brokerage firms and other financial services businesses to implement rigorous screening systems to detect and prevent money laundering and other illegal activities.

	§		Mantas’ target customers receive and process huge volumes of data from multiple sources and utilize the data for numerous purposes, resulting in major differences in data content and data structure, and making data analysis and coherent information extraction more difficult.
	§		The resources needed to create and maintain internal solutions for these challenges may be difficult for businesses already under budgetary constraints, particularly as customer demands continue to grow in sophistication.
	§		Competitors provide niche or technology based solutions that both remain problematic to implement and are challenged to effectively solve enterprise, global and highly complex business challenges as Mantas.

      Products. Mantas has developed and marketed a suite of over 250 different “plug and play” scenarios to identify behaviors and increase operational transparency for the financial services industry. These scenarios cover trading compliance, anti-money laundering, best execution, fraud, broker compliance, mutual fund compliance, identity theft, supervision, suitability, operational risk, client analytics and employee surveillance. Some examples include insider trading, front-running, hidden relationships, client suitability, churning, rapid movement of funds, abusive squeezes, mutual fund switches and break-points and best execution – all supported in a single, robust and scalable Behavior Detection Platform. Its primary components are:

	§		Data Ingestion - receiving, processing and storing transaction, customer and other data in a format designed to streamline and accelerate detection. Data can exceed 150 million transactions a day and over 10,000 instances of market data a second.
	§		Behavior Detection - utilizing business sequences, links, rules and patterns to analyze the data to detect fraud and other illegal conduct, to assure regulatory compliance in business activities or many other customizable performance management or operational analysis needs.
	§		Alert Management – providing the user interface, visual graphics, dashboards, case management and other components to bring identified behaviors to the attention of appropriate compliance staff and management.
	§		Active Pages – enables the analysis of data in real time and presents information and data from any source in a single Enterprise Compliance and Risk Management Dashboard.
	§		Case Management – integrates information from Mantas, litigation databases, human resources or any other sources into a disciplined, organized and rigorous workflow to enable complete case tracking and closure.
	§		Real Time Filtering – integrated with Mantas’ watch list data base, the Real Time Filtering solution monitors settlement and wire information and identifies transactions that match to individuals on known watch lists. The solution also has the ability to stop payments on matched entities before the payment is made.

     These functions can be designed and deployed world-wide in a fully integrated network throughout the customer’s organization. Data management, behavior detection and management alert functions can be scheduled as frequently as daily or at other intervals to suit the customer’s needs. Mantas’ solutions are currently in production at 17 global financial service companies and their subsidiaries in North America, South America, Europe and Asia, that use our product to analyze data from over 200 jurisdictions around the world.

     Through 2005, Mantas also provided best value routing (“BVR”), revenue assurance and fraud detection software for major telecommunications service providers. Mantas’ fraud management solutions provided real-time detection, management and deterrence systems, and a life cycle solution for fixed line, mobile, VoIP and next generation networks. Because it is focusing its efforts on its much larger financial services business (where Mantas believes the opportunities for its technology are greater) Mantas recently sold its telecommunication line of business.

      Research and Development. Mantas maintains ongoing development of market-specific applications aligned against market trends, customer requirements and its product management strategy. When appropriate, Mantas also utilizes third parties, including outsourced development teams in India and the Ukraine, to expand the capacity and technical expertise of its internal research and development staff. Mantas believes this approach shortens time-to-

market and reduces its development costs without compromising competitive position or product quality. Mantas plans to continue to draw upon third-party resources as needed in the future.

      Product Support. Mantas believes that providing excellent customer service is fundamental to customer satisfaction. Mantas’ initial maintenance and support contracts are typically include maintenance pricing for one to five years, with annual renewals thereafter, and are priced as a percentage of the total license fees paid by a customer. Maintenance and support contracts generally entitle the customer to receive software patches, updates and enhancements, if and when available, and technical support during normal business hours. Mantas also offers extended and enterprise maintenance plans that give customers access to 24x7 support and additional support services.

      Customers; Sales and Marketing. Mantas’ products are used by global industry leaders, covering large wholesale banks, sophisticated global brokerages and retail brokerages. For the year ended December 31, 2005, one customer represented more than 10% of Mantas’ revenue. For the year ended December 31, 2004, three customers each represented more than 10% of Mantas’ revenue.

     Sales are made both through a direct sales force and, commencing in 2004, through distribution alliances with major value-added resellers (or VARs) and integration partners. The typical sales cycle lasts six to 12 months though Mantas has experienced quicker customer decisions. Key to Mantas’ success has been its ability to grow customer relationships at an enterprise level including: horizontally, through the sale of new behavior detection scenarios; functionally, as market or firm operations evolve; and vertically, as the Behavior Detection Platform™ is deployed to new geographies, locations or business units.

     As a leader in a developing market, Mantas focuses its marketing efforts on customer awareness of the competitive advantages of the Mantas platform, as well as Mantas’ reputation for execution and implementation excellence. Marketing programs are focused on creating awareness, maintaining market leadership as well as lead generation and customer references for Mantas’ products. These programs are targeted at key executives such as chief executive officers, chief compliance officers, chief information officers and information technology managers. Mantas’ marketing personnel engage in a variety of activities, including positioning its software products and services, conducting public relations programs, establishing and maintaining relationships with industry analysts, producing product collateral and generating qualified sales leads.

      Intellectual Property and Other Proprietary Rights. Mantas’ success depends upon its proprietary technology. Mantas relies on a combination of patent, copyright, trademark, trade secret, confidentiality and licensing arrangements to establish and protect its intellectual property. Mantas has 10 patents pending, and as part of its confidentiality procedures, it enters into non-disclosure agreements with employees, distributors, suppliers and clients covering its software, documentation, other proprietary information and intellectual property rights.

      Competition. Mantas encounters competition from general consulting firms and software development companies focusing on compliance solutions for the financial services market, as well as from internal development. Many of Mantas’ current and potential competitors have significantly greater financial, technical, marketing and other resources. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products. Mantas believes that continuing market consolidation in the financial services software industry has intensified competition among software providers, causing increased pricing pressure, but also an increase in the competitive gap between market leaders and other participants. Competitive factors driving customer purchasing decisions have been primarily price, quality, reputation and product features, and a sense that the compliance and anti-money laundering requirements are not considered strategic. Mantas believes that it competes on the basis of its product platform, industry expertise and global reach.

      Employees. At December 31, 2005, Mantas had approximately 85 full-time employees working at offices in the United States (Virginia (corporate headquarters), New York and California), England, India and Singapore, supplemented with a development partner in the Ukraine and India and systems integration teams in nine other countries. Mantas considers its employee relations to be good.

      Pacific Title

      Safeguard Opportunity. We acquired an interest in Pacific Title & Art Studio, Inc. (“Pacific Title”) in 1997 and have increased our ownership position to 100% at December 31, 2005. Technology has driven fundamental changes in the production and post-production of motion picture and television content, with increased emphasis on special effects, digital color correction, 3D animation and many other sophisticated elements. As a pioneer since 1919 in the development and introduction of new methods, services and technologies, we believe Pacific Title is uniquely positioned to lead the continued expansion of digital technologies. Leveraging state-of-the-art equipment and significant domain expertise, Pacific Title can handle the enormous volume (measured in petabytes) and complex programming needed to meet the often changing and rush delivery needs of its clients.

      General. Pacific Title (www.pactitle.com) is a leading provider of a broad range of digital and photo-chemical services for post-production and archival applications in the Hollywood motion picture and television industry. Pacific Title provides a complete array of state-of-the-art digital post-production capabilities both for new releases and restoration of film libraries, leading the transformation from optical, analog image reproduction and processing to more dynamic, cost-effective and flexible digital image processing technologies.

      Strategy. Pacific Title seeks to meet the high-quality service and technological support needs of motion picture studios and production companies. Pacific Title believes that its past growth and future opportunities are being driven by the following industry trends:

	§		Increased world-wide demand for original film entertainment content and a strong pipeline of feature film projects;
	§		The development of new and expanding markets for existing film libraries, including remastering, high resolution scanning, archiving and restoration services.
	§		Increased demand for innovation and technological advances to support creative vision;
	§		Expanding application of digital technologies for content manipulation, as well as the anticipated deployment of digital distribution and display technologies (including emerging digital projection); and
	§		Increasing concern for the preservation, restoration and storage of aging film libraries.

     We believe Pacific Title’s services and industry stature have well positioned the company to continue its leadership in anticipating and meeting its customers’ needs.

      Services. Pacific Title maintains post-production facilities as components of its full range of integrated services. Pacific Title’s customers may choose one, several or all of these services based on their needs from project to project. These services include:

	§		High resolution pin registered film scanning (35mm, vista-vision, and 16mm);
	§		35mm, 65mm and vista-vision laser film recording;
	§		Tape to film image processing and laser recording (commercials);
	§		Proprietary use of image processing algorithms;
	§		2D image manipulation;
	§		Multi-layer compositing;
	§		3D animation;
	§		Special visual effects;
	§		Main & End title design;
	§		Subtitling (including multi-language);
	§		Digital color correction (Digital Intermediate);
	§		Proprietary dirt & scratch removal (“dust busting” systems);
	§		Data management;

	§		Digital trailer production;
	§		Film preservation and restoration; and
	§		Digital YCM’s (Rosetta Process), for long-term preservation of digital assets.

      Sales and Marketing; Customers. Pacific Title markets its services through a combination of industry referrals, formal advertising, trade show participation, special client events, and its Internet website. While it relies primarily on its reputation and business contacts within the industry for the marketing of its services, Pacific Title also maintains a direct sales force to communicate the capabilities and competitive advantages of its services to potential new customers. In addition to its traditional sales efforts directed at those individuals responsible for placing orders, Pacific Title also strives to negotiate “preferred vendor” relationships with its major customers. Through this process, Pacific Title negotiates discounted rates with large volume clients in return for being promoted within the client’s organization as an established and accepted vendor. Pacific Title negotiates such agreements periodically with major entertainment studios.

     Pacific Title’s clients include Walt Disney Company, 20 ^th Century-Fox, Universal Studios, Warner Bros., Sony Pictures Entertainment, Dreamworks SKG, Columbia/Tri-Star and Paramount Pictures, as well as many independent motion picture and television production companies. Pacific Title generally does not have exclusive service agreements with its clients. Because clients generally do not make arrangements with Pacific Title until shortly before its facilities and services are required, Pacific Title usually does not have a significant backlog of service orders. Pacific Title’s services are generally offered on an hourly or per unit basis based on volume and client demand. For 2005, four customers each represented more than 10% of Pacific Title’s revenues. For the year ended December 31, 2004, three customers each represented more than 10% of Pacific Title’s revenues.

     Pacific Title believes it has built its strong reputation in the market with a commitment to customer service. The sales and customer service staff develops strong relationships with clients within the studios and is trained to emphasize Pacific Title’s ability to meet difficult delivery time frames and provide reliable and cost-effective service.

      Competition. Pacific Title operates in a competitive, service-oriented industry. Certain competitors provide many of the services provided by Pacific Title, while others specialize in one or several of these services. Some of these companies have greater financial, operational and marketing resources than Pacific Title. Substantially all of Pacific Title’s competitors have a presence in the Hollywood, California area, which is the largest market for Pacific Title’s services. Pacific Title believes that it maintains a competitive edge in its market through the quality and scope of the services it provides and its proven tradition of providing timely delivery of these services. Pacific Title believes that prices for its services are competitive within its industry, although some competitors may offer certain of their services at lower rates than Pacific Title. The principal competitive factors affecting this market are reliability, timeliness, quality and price. Pacific Title also competes, to a lesser extent, with the in-house operations of major motion picture studios.

      Seasonality. Pacific Title’s business is subject to substantial variations as a result of seasonality, which the company believes is typical of the film post-production industry. Pacific Title believes that its exposure to seasonal industry trends may diminish in the future as a result of the broadening of its service offerings. Demand for Pacific Title’s service also has been adversely impacted on several occasions over the last three years as a result of actual or threatened labor stoppages in its customers’ film production industry.

      Employees. At December 31, 2005, Pacific Title had approximately 150 employees. Approximately 35 employees are represented by the International Alliance of Theatrical and Stage Employees pursuant to a collective bargaining agreement, which expires in July 2006. Pacific Title has never experienced a work stoppage and considers its relations with its employees to be good.

      Other Partner Companies and Funds

     In addition, we hold interests in a number of other companies and funds that do not currently operate in the categories described above or that operate in our primary categories but in which we own less than a majority interest. The following table provides a summary of our principal other companies, which are companies that we do not control and, therefore, are not consolidated in our results of operations. The ownership percentage is presented as of December 31, 2005 and reflects the percentage of the vote we are entitled to cast based on issued and outstanding voting securities, excluding the effect of options, warrants and convertible debt. From time to time we may seek to opportunistically increase our position or sell some or all of our interests in these companies.

     We participate in earlier stage technology development through our interests in several private equity funds. During 2005, we provided a total of $6.7 million in funding of previously committed and uncalled capital to these funds. We sold our interests in many of our private equity funds in 2005, and we may continue to opportunistically sell our remaining private equity fund interests.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

     Information on revenues, net income (loss) from continuing operations and assets for each operating segment of Safeguard’s business for each of the three years in the period ended December 31, 2005 is contained in Note 21 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 at 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) may also be obtained free of charge, upon written request to: Investor Relations, Safeguard Scientifics, Inc., 435 Devon Park Drive, 800 Building, Wayne, PA 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 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, 800 Building, 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 before making an investment decision. If any of the following risks actually occur, 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.

Risks Related to Our Business

      Our business depends upon the performance of our partner companies, which is uncertain.

     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:

	§		many of our partner companies have a history of operating losses or a limited operating history;
	§		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;
	§		inability to adapt to the rapidly changing marketplaces;

	§		inability to manage growth;
	§		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;
	§		inability to protect their proprietary rights and infringing on the proprietary rights of others;
	§		certain of our partner companies could face legal liabilities from claims made against their operations, products or work;
	§		the impact of economic downturns on their operations, results and growth prospects;
	§		inability to attract and retain qualified personnel; and
	§		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.

The identity of 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, change the partner companies on which we focus, sell some or all of our interests in any of our partner companies or otherwise change the nature of our interests in our partner companies. Therefore, the nature of our holdings in them could vary significantly from period to period.

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

	§		For the twelve months ended December 31, 2005, we consolidated the results of operations of Alliance Consulting, Clarient, Laureate Pharma, Mantas and Pacific Title.
	§		In December 2005, we completed the purchase of Acsis and we have consolidated the results of operations of the acquired business from the date of the transaction.

Our partner companies currently provide us with little cash flow from their operations so we rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations.

     We need capital to acquire new partner companies 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 funding committments to private equity funds. As a result, we have substantial cash requirements. Our partner companies currently provide us with little 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 partner companies may affect the price of our common stock.

     Fluctuations in the market price of the common stock of our publicly traded partner companies are likely to affect the price of our common stock. The market price of our publicly traded partner companies’ common stock has been highly volatile and subject to fluctuations unrelated or disproportionate to operating performance. The aggregate market value of our interests in our publicly-traded partner companies at December 31, 2005 (Clarient (Nasdaq: CLRT) and eMerge Interactive (Nasdaq: EMRG)) was approximately $48.2 million, and at March 7, 2006 (Clarient, eMerge Interactive and Traffic.com (Nasdaq: TRFC)) was $45.6 million.

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

     We face intense competition from companies with similar business strategies and from other capital providers as we acquire and develop interests in our partner companies. Some of our competitors have more experience identifying and acquiring companies and have greater financial and management resources, brand name recognition or industry contacts than we have. Although most of our acquisitions will be made at a stage when our partner companies are not publicly traded, we may pay higher prices for those equity interests because of higher trading prices for securities 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 our publicly-traded partner companies are small relative to our holdings. As a result, any significant divestiture by us of our holdings in these partner companies 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:

	§		the management of a partner company having economic or business interests or objectives that are different than ours; and
	§		partner companies not taking our advice with respect to the financial or operating difficulties they may encounter.

     Our inability to adequately 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 subsidiaries are generally considered “investment securities” for purpose of the Investment Company Act. We are a company that partners with revenue - stage information 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 may also 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.

Risks Related to Our Partner Companies

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

     Many 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 information 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 information 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 information technology and life sciences marketplaces are characterized by:

	§		rapidly changing technology;
	§		evolving industry standards;
	§		frequent new products and services;
	§		shifting distribution channels;
	§		evolving government regulation;
	§		frequently changing intellectual property landscapes; and
	§		changing customer demands.

     Our future success will depend on our partner companies’ ability to adapt to this rapidly evolving marketplace. 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.

Many of 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:

	§		rapidly improve, upgrade and expand their business infrastructures;
	§		scale-up production operations;
	§		develop appropriate financial reporting controls;
	§		attract and maintain qualified personnel; and
	§		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.

Our partner companies may need to raise 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.

     Our partner companies may need to raise additional funds in the future and we cannot be certain that they 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. If our partner companies need to, but are not able to raise capital from other outside sources, then they may need to cease or scale back operations.

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, 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 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 take 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’ revenues 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 revenues and profitability.

Our partner companies are subject to the impact of economic downturns.

     The results of operations of our partner companies are affected by the level of business activity of their clients, which in turn is affected by the levels of economic activity in the industries and markets that they serve. In addition, the businesses of certain of our information technology companies may lag behind economic cycles in an industry. Any significant downturn in the economic environment, which could include labor disputes in these industries, could result in reduced demand for the products and services offered by our partner companies which could

negatively impact their revenues and profitability. In addition, an economic downturn could cause increased pricing pressure which also could have a material adverse impact on the revenues and profitability of our partner companies.

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 will also need to continue to hire additional personnel as they expand. Some of our partner companies have employees represented by labor unions. Although these 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.

     If either the USA PATRIOT Act or the Basel Capital Accord are repealed, the demand for services and/or products of certain of our partner companies may be negatively impacted.

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 2. Properties

     Safeguard’s corporate headquarters and administrative offices in Wayne, Pennsylvania contain approximately 31,000 square feet of office space in one building. In October 2002, Safeguard sold this facility along with the office park in which our corporate headquarters and administrative offices are located. Safeguard leased back its corporate headquarters for a seven-year term with one five-year renewal option.

     Safeguard’s consolidated partner companies lease various facilities throughout the United States and in certain non-U.S. locations. The physical properties occupied by each of our consolidated partner companies, under leases expiring between 2006 and 2015, are summarized below:

     We believe that all of the existing facilities are suitable and adequate to meet the current needs of our respective partner companies. If new or additional space is needed, we believe each of our partner companies can readily obtain suitable replacement properties to support their needs on commercially reasonable terms. However, we note that Clarient’s laboratory services facility and Laureate Pharma’s manufacturing facility are operated under and subject to various federal, state and local permits, rules and regulations. As a result, any extended interruption in the availability of these facilities could have a material adverse effect on the results of operations of the respective companies.

Item 3. Legal Proceedings

      Safeguard Scientifics Securities Litigation

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

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

     These two cases were consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state a claim upon which relief may be granted. On October 24, 2002, the Court denied the defendants’ motions to dismiss, holding that, based on the

allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at that juncture. On December 20, 2002, plaintiffs filed with the Court a motion for class certification. On August 27, 2003, the Court denied plaintiffs’ motion for class certification. On September 12, 2003, plaintiffs filed with the United States Court of Appeals for the Third Circuit a petition for permission to appeal the order denying class certification. On November 5, 2003, the Third Circuit denied plaintiffs’ petition and declined to hear the appeal. On November 18, 2003, plaintiffs’ counsel moved to intervene new plaintiffs and proposed class representatives, which motion was denied by the Court on February 18, 2004. On July 12, 2004, a third putative class action complaint captioned Mandell v. Safeguard Scientifics, Inc., et al. was filed against us and Mr. Musser in the United States District Court for the Eastern District of Pennsylvania. The new complaint asserts similar claims to those asserted in the consolidated and amended class action complaint. The complaint also asserts individual claims on behalf of two individual plaintiffs who had attempted unsuccessfully to intervene in the consolidated action. We have not yet responded to the new complaint. On August 10, 2004, the Court entered an order staying all proceedings in the Mandell action pending the Court’s ruling on defendants’ summary judgment motion in the consolidated action, or until such later time as the Court may order. On November 23, 2004, the Court entered an order granting defendants’ motion for summary judgment. On December 17, 2004, the plaintiffs filed a notice of appeal with the Court, seeking to appeal the Court’s orders granting summary judgment to defendants, denying class certification and denying the motion to intervene new plaintiffs, among other matters. The Court has not taken any further action with respect to the Mandell action.

     The outcome of this litigation is uncertain, and while we believe that we have valid defenses to plaintiffs’ claims and intend to defend the lawsuits vigorously, no assurance can be given as to the outcome of these lawsuits. An adverse outcome could have a material adverse effect on our consolidated financial statements and results of operations.

      CompuCom Systems Litigation

     On May 28, 2004, June 1, 2004 and June 10, 2004, three substantially similar complaints were filed in the Chancery Court of the State of Delaware by purported stockholders of CompuCom Systems, Inc. (“CompuCom”), allegedly on behalf of a class of holders of CompuCom’s common stock. By order dated July 22, 2004, these three actions were consolidated for all purposes. On July 27, 2004, the plaintiffs filed an amended class action complaint ( the “Amended Complaint”) that names us, CompuCom and its directors as defendants. Among other things, the Amended Complaint alleged that we, CompuCom and its directors (i) breached fiduciary duties in connection with the merger agreement relating to CompuCom’s acquisition by an affiliate of Platinum Equity, LLC, (ii) aided and abetted one another in the course of committing the alleged breach, (iii) failed to obtain the best transaction reasonably available and (iv) diverted merger consideration from CompuCom’s minority stockholders to us and CompuCom’s directors and certain of its officers. It is also alleged that CompuCom failed to disclose, or only partially disclosed, certain matters in CompuCom’s proxy statement. On July 27, 2004, the plaintiffs filed a motion for expedited proceedings and discovery in connection with the injunctive relief sought and requested that a preliminary injunction hearing be held before August 19, 2004, the originally scheduled date of the special meetings of our shareholders and the stockholders of CompuCom. The defendants filed their opposition to the motion on July 28, 2004. On July 29, 2004, the Court denied the plaintiffs’ motion to expedite. On September 13, 2004, the plaintiffs filed a Second Amended Complaint alleging substantially similar claims. On November 5, 2004, the defendants filed motions to dismiss the Second Amended Complaint. On September 29, 2005, the Court dismissed the Second Amended Complaint. The time for any appeal has expired.

      General

     Finally, 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.

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 2005.

ANNEX TO PART I — EXECUTIVE OFFICERS OF THE REGISTRANT

Name		Age				Position		Executive Officer Since
Peter J. Boni			60			President, Chief Executive Officer and Director			2005
James A. Datin			43			Executive Vice President and Managing Director, Life Sciences			2005
Christopher J. Davis			53			Executive Vice President and Chief Administrative and Financial Officer			2001
John A. Loftus			44			Executive Vice President and Managing Director, Information Technology			2004
Steven J. Feder			42			Senior Vice President and General Counsel			2004

     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 1999 to 2001. Mr. Boni is currently non-executive Chairman of Intralinks, Inc. and a director of Clarient, Inc.

     Mr. Datin joined Safeguard as Executive Vice President and Managing Director, Life Sciences 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 Intralinks, Inc. and Clarient, Inc.

     Mr. Davis joined Safeguard as Vice President, Strategic Development in March 2000 and became Executive Vice President and Chief Financial Officer in August 2001, Managing Director and Chief Financial Officer in January 2002 and Executive Vice President and Chief Administrative and Financial Officer in May 2004. Prior to joining Safeguard, Mr. Davis served for three years as President and Chief Executive Officer of LFC Financial Corporation, a privately held financial services company engaged in complex financing transactions, and as Chief Financial Officer for the preceding nine years. Mr. Davis began his career at Coopers & Lybrand as a certified public accountant and also has been an independent consultant for early stage, technology-oriented companies.

     Mr. Loftus joined Safeguard in May 2002, became Senior Vice President and Chief Technology Officer in December 2003 and Executive Vice President and Managing Director, Information Technology in September 2005. Mr. Loftus is a founder of Gestalt LLC where he served as Chief Technology Officer from September 2001 to May 2002. Mr. Loftus served as Senior Vice President, e-Solutions of Breakaway Solutions from May 1999 until August 2001 (Breakaway Solutions filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in September 2001); and served as Senior Vice President and Chief Technology Officer of WPL Laboratories from

February 1997 to May 1999. Mr. Loftus spent the first 14 years of his career in a variety of executive, management, and engineering positions at GE and PECO Energy.

     Mr. Feder joined Safeguard in November 2004 as Senior Vice President and General Counsel. Prior to joining Safeguard, Mr. Feder was a partner with the law firm of Pepper Hamilton LLP in its Berwyn, Pennsylvania office from May 2000 to November 2004. He was a partner from March 1998 to May 2000 at the law firm of White and Williams LLP in Philadelphia, Pennsylvania and a senior associate from July 1995 to March 1998 at the law firm of Ballard Spahr Andrews and Ingersoll in Philadelphia, Pennsylvania. From 1990 to June 1995, Mr. Feder was corporate counsel for MEDIQ Incorporated, formerly an AMEX-listed diversified healthcare company. Mr. Feder is a director of Clarient, Inc.

PART II.

     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 report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, 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. Business under the caption “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 revenue-stage information technology and life sciences businesses. We provide growth capital as well as a range of strategic, operational and management resources to our partner companies. Safeguard participates in expansion financings, carve-outs, management buy-outs, recapitalizations, industry consolidations and early-stage financings. Our vision is to be the preferred catalyst for creating great information technology and life sciences companies.

     We strive to create long-term value for our shareholders through building value in our partner companies. We help our partner companies in their efforts 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:

      Information Technology – including companies focused on providing software, technology-enabled services and information technology services for analytics and business intelligence, enterprise applications and infrastructure; and

      Life Sciences – including companies focused on therapeutics and treatments, pharmaceutical services, drug formulation and delivery techniques, diagnostics and devices.

Principles of Accounting for Ownership Interests in Partner Companies

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

      Consolidation Method. Partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities are accounted for under the consolidation method of accounting. Participation of other

partner company shareholders in the income or losses of our consolidated partner companies is reflected 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 company. However, 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. The partner companies whose results are not consolidated, but over whom we exercise significant influence, are accounted for under the equity method of accounting. We also account for our interests in some private equity funds under the equity method of accounting, based on our respective general and limited partner interests. Under the equity method of accounting, our share of the income or loss of the company is reflected in Equity Loss in the Consolidated Statements of Operations.

     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 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. Partner companies not consolidated or accounted for under the equity method are accounted for under the cost method of accounting. Under the cost method, our share of the income or losses of such entities is not included in our Consolidated Statements of Operations. However, the effect of the change in market value of cost method holdings classified as trading securities is reflected in 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 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;
	•		Recoverability of goodwill;
	•		Recoverability of long-lived assets;
	•		Recoverability of ownership interests in and advances to companies;
	•		Income taxes;
	•		Allowance for doubtful accounts; and
	•		Commitments and contingencies.

Revenue Recognition

     During 2005, 2004 and 2003, our revenue from continuing operations was primarily attributable to Alliance Consulting, Clarient, Laureate Pharma (2005 only), Mantas and Pacific Title. Acsis, which was acquired in December 2005, is expected to contribute to our revenue in 2006.

     Acsis recognizes revenue from software licenses, related consulting services and post contract customer support (PCS). Revenue from software license agreements are recognized upon delivery, provided that all of the following conditions are met: a non-cancelable license agreement has been signed; the software has been delivered; no significant production, modification or customization of the software is required; the vendor’s fee is fixed or determinable; and collection of the resulting receivable is deemed probable. In software arrangements that include

rights to software products, hardware products, PCS, and/or other services, Acsis allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence using the residual method. Revenue from maintenance agreements is recognized ratably over the term of the maintenance period, generally one year. Consulting and training services provided by Acsis that are not considered essential to the functionality of the software products are recognized as the respective services are performed.

     Alliance Consulting generates revenue primarily from consulting services. Alliance Consulting generally recognizes revenue when persuasive evidence of an arrangement exists, services are performed, the service fee is fixed or determinable and collectibility is probable. Revenue from services is recognized as services are performed. Alliance Consulting also performs certain services under fixed-price service contracts related to discrete projects. Alliance Consulting recognizes revenue from these contracts using the percentage-of-completion method, primarily based on the actual labor hours incurred to date compared to the estimated total hours of the project. Any losses expected to be incurred on jobs in process are charged to income in the period such losses become known. Changes in estimates of total costs could result in changes in the amount of revenue recognized.

     Clarient generates revenue from diagnostic services, system sales and fee-per-use charges. Clarient recognizes revenue for diagnostic services at the time of completion of services at amounts equal to the contractual rates allowed from third parties including Medicare, insurance companies and, to a small degree, private patients. These expected amounts are based both on Medicare allowable rates and Clarient’s collection experience with other third party payors.

     Clarient recognizes revenue for fee-per-use agreements based on the greater of actual usage fees or the minimum monthly rental fee. Under this pricing model, Clarient owns most of the ACIS ^® instruments that are engaged in service and, accordingly, all related depreciation and maintenance and service costs are expensed as incurred. For those instruments that are sold, Clarient recognizes and defers revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by Statement of Position No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Arrangements.” At the outset of the arrangement with the customer, Clarient defers revenue for the fair value of its undelivered elements (e.g., maintenance) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (e.g., software license) when the basic criteria in SOP 97-2 have been met. Maintenance revenue is recognized ratably over the term of the maintenance contract, typically twelve months.

     Clarient recognizes revenue on system sales in accordance with Staff Accounting Bulletin No. 101, as amended by Staff Accounting Bulletin No. 104, when all criteria for revenue recognition have been met. Such criteria includes, but are not limited to: existence of persuasive evidence of an arrangement; fixed and determinable product pricing; satisfaction of the terms of the arrangement including passing title and risk of loss to their customer upon shipment; and reasonable assurance of collection from their customer in accordance with the terms of the arrangement. For system sales delivered under Dako distribution and development agreement, Clarient recognizes revenue when those ACIS ^® instruments have been delivered and accepted by an end-user customer. Systems sold under a leasing arrangement are accounted for as sales-type leases pursuant to SFAS No. 13, “Accounting for Leases,” if applicable. Clarient recognizes the net effect of these transactions as a sale because of the bargain purchase option granted to the lessee. Clarient recognizes revenue from research and development agreements over the contract performance period, starting with the contract’s commencement. The upfront payment is deferred and recognized on a straight-line basis over the estimated performance period. Milestone payments will be recognized as revenue when they are due and payable, but not prior to the removal of any contingencies for each individual milestone.

     Laureate Pharma’s revenue is primarily derived from contract manufacturing work, process development services, and formulation and filling. Laureate Pharma enters into revenue arrangements with multiple deliverables in order to meet its customers’ needs. Multiple element revenue agreements are evaluated under Emerging Issues Task Force (“EITF”) Issue Number 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. Deliverables in an arrangement that do not meet the separation criteria in EITF 00-21 are treated as one unit of accounting for purposes of revenue recognition. Revenue

is generally recognized upon the performance of services. Certain services are performed under fixed price contracts. Revenue from these contracts are recognized on a percentage of completion basis. When current cost estimates indicate a loss is expected to be incurred, the entire loss is recorded in the period in which it is identified. Changes in estimates of total costs could result in changes in the amount of revenue recognized.

     Mantas recognizes revenue from software licenses, related consulting services and post contract customer support (PCS). Revenue from software license agreements and product sales are recognized upon delivery, provided that all of the following conditions are met: a non-cancelable license agreement has been signed; the software has been delivered; no significant production, modification or customization of the software is required; the vendor’s fee is fixed or determinable; and collection of the resulting receivable is deemed probable. In software arrangements that include rights to software products, hardware products, PCS, and/or other services, Mantas allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence using the residual method. Revenue from maintenance agreements is recognized ratably over the term of the maintenance period, generally one year. Consulting and training services provided by Mantas that are not considered essential to the functionality of the software products are recognized as the respective services are performed.

     For Mantas’ software installations or implementations that include significant production, development or customization, Mantas recognizes revenue using the percentage-of-completion method. Mantas measures progress toward completion by reference to total costs incurred compared to total estimated costs to be incurred in completing the services. Changes in the estimates of total cost could result in changes in the amount of revenue recognized. Mantas’ revenue recognized using the percentage-of-completion method is limited by the existence of customer acceptance provisions of contractually defined milestones and corresponding customer rights to refund for certain portions of the fee. In cases where acceptance provisions exist, Mantas defers revenue recognition of the portion of the fee subject to refund until Mantas has evidence that the acceptance provisions have been met. When current analysis of cost estimates indicate a loss is expected to be incurred, the entire loss is recorded in the period in which it is identified.

     Pacific Title’s revenue is primarily derived from providing archival and post-production services to the motion picture and television industry. Pacific Title recognizes revenue generally upon the performance of services. Pacific Title performs certain services under fixed-price contracts. Revenue from these contracts is recognized on a percentage-of-completion basis based on costs incurred to total estimated costs to be incurred. Changes in the estimates of total cost could result in changes in the amount of revenue recognized. Any anticipated losses on contracts are expensed when identified. Pacific Title also generated revenue from manufacturing, installing and selling large format film projector systems through June 2003. Pacific Title recognized revenue for projector systems when persuasive evidence of an arrangement existed, delivery and customer acceptance had occurred, the sales price was fixed or determinable and collectibility was reasonably assured.

    Recoverability of Goodwill

     We conduct a review for impairment of goodwill at least annually on December 1st. Additionally, on an interim basis, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important which could trigger an impairment review include significant 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 level referred to as a reporting unit (same as or one level below an operating segment as defined in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”). 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 and revenue and acquisition multiples. 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 and contrasting 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, 2005 was $100 million.

     We 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 values of our companies are not impaired, there can be no assurance that a significant write-down or write-off will not be required in the future.

         Recoverability 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. When events or changes in circumstances indicate an impairment may exist, we evaluate the recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to recover the carrying value, we measure any impairment loss as the excess of the carrying amount of the asset over its fair value.

     The carrying value of net intangible assets at December 31, 2005 was $16 million. The carrying value of net property and equipment at December 31, 2005 was $40 million.

    Recoverability of Ownership Interests In and Advances to Companies

     On a continuous basis (but no less frequently than at the end of each quarterly period) we evaluate the carrying value of our equity and cost method companies for possible impairment based on achievement of business plan objectives and milestones, the fair value of each company relative to its carrying value, the financial condition and prospects of the company and other relevant factors. We then determine whether there has been an other than temporary decline in the carrying value of our ownership interest in the company. Impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.

     The fair value of privately held 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, valuation of comparable public companies and the valuation of acquisitions of similar 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 cost basis of a company is not written-up if circumstances suggest the value of the company has subsequently recovered.

     We 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 partner companies, including goodwill, could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and cost method partner 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 of the carrying value will not be required in the future.

     Total impairment charges related to investments, including impairment charges related to goodwill of consolidation method companies, are included in the following table:

     Impairment charges related to equity method companies are included in Equity Loss in the Consolidated Statements of Operations. Impairment charges related to goodwill of consolidation method companies are included in Impairment in the Consolidated Statements of Operations. Impairment charges related to cost method 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.

    Allowance for Doubtful Accounts

     The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios. When evaluating the adequacy of the allowance for doubtful accounts, we specifically analyze trade receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. If the financial condition of customers or vendors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should we determine that we would be able to realize more of our receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.

    Commitments and Contingencies

     From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. Additionally, we have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions we received as a general partner to the fund for a further distribution to the fund’s limited partners (the “clawback”). 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. 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.

Results of Operations

     We present five of our consolidated partner companies as separate segments – Alliance Consulting, Clarient, Laureate Pharma, Mantas and Pacific Title. The results of operations of our other partner companies, including Acsis (which was acquired in December 2005), those companies in which we have less than a majority interest and our ownership in private equity funds are reported in a segment called “Other Companies.” For 2004, the results of Laureate Pharma, which was acquired in December 2004, were reported in “Other Companies.” This segment also includes the gain or loss on the sale of companies and funds, except for gains and losses included in discontinued operations. Beginning in the first quarter of 2006, we will present Acsis as a separate segment.

     Our management evaluates segment performance based on segment revenue, operating income (loss) and income (loss) before income taxes, which reflects the portion of income (loss) allocated to minority shareholders.

     Other items include certain expenses which are not identifiable to the operations of our operating business segments. Other items primarily consists of general and administrative expenses related to our corporate operations including, employee compensation, insurance and professional fees, including legal, finance and consulting. Other items also includes interest income, interest expense and income taxes, which are reviewed by management independent of segment results.

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

     Our operating results including net loss before income taxes by segment, are as follows:

     There is intense competition in the markets in which these companies operate, and we expect competition to intensify in the future. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent 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.

     Effective January 1, 2006, we will adopt SFAS 123(R). The pro forma information in Note 1 of the Notes to Consolidated Financial Statements presents on a historical basis the estimated compensation charges under SFAS No. 123, “Accounting for Stock-Based Compensation.” As a result of the provisions of SFAS 123(R) and SAB 107,

“Share-Based Payment” we currently expect to record compensation charges related to all segments stock options of approximately $6 million in 2006 excluding any option grants that may be made in 2006. However, our assessment of the estimated compensation charges is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the volatility of our stock price, employee stock option exercise behaviors, the actual number and amount of awards granted in 2006, forfeitures and modifications, if any. As such, our actual stock option expense may differ materially from this estimate.

Alliance Consulting

     We acquired Alliance Consulting in December 2002. Alliance Consulting’s operating results are included in our consolidated operating results subsequent to the acquisition.

     Alliance Consulting is a leading national business intelligence consultancy providing services primarily to clients in the Fortune 2000 market in the pharmaceutical, financial services and manufacturing industries. Alliance Consulting specializes in information management, which is comprised of a full range of business intelligence solutions from data acquisition and warehousing to master data management, analytics and reporting; and application services, which includes software development, integration, testing and application support delivered through a high quality and cost effective hybrid global delivery model. Alliance Consulting has developed a strategy focused on enabling business intelligence through the application of deep domain experience and custom-tailored project terms to deliver software solutions and consulting services.

     Alliance Consulting’s fiscal year generally consists of a 52-week period and periodically consists of a 53-week period because the fiscal year ends on the Saturday closest to December 31. Fiscal years 2005, 2004 and 2003 ended on December 31, 2005, January 1, 2005 and December 27, 2003, respectively. Fiscal year 2004 was a 53-week period. References to a year included in this section refer to a fiscal year rather than a calendar year.

     Alliance Consulting recognizes revenue upon the performance of services. Contracts for such services are typically for one year or less. Alliance Consulting performs certain services under fixed-price service contracts related to discrete projects. Alliance Consulting recognizes revenue from these contracts using the percentage-of-completion method based on the percentage of labor hours incurred to date compared to the estimated total hours of the project. Losses expected to be incurred on jobs in process are charged to income in the period such losses become known.

     While global economic conditions continue to cause companies to be cautious about increasing their use of consulting and IT services, Alliance Consulting continues to see growing demand for its services. However, Alliance Consulting continues to experience pricing pressure from competitors as well as from clients facing pressure to control costs. In addition, the growing use of offshore resources to provide lower cost service delivery capabilities within the industry continues to place pressure on pricing and revenue. Alliance Consulting expects to

continue to focus on maintaining and growing its blue chip client base and providing high quality solutions and services to its clients.

     In October 2004, Alliance Consulting acquired Mensamind, Inc. (“Mensamind”), a software development company based in Hyderabad, India. This acquisition enables Alliance Consulting to provide offshore capabilities to its existing and new clients.

        At December 31, 2005, we owned 100% of Alliance Consulting.

Year Ended December 31, 2005 Versus 2004

Revenue . Revenue, including reimbursement of expenses, increased $0.7 million, or 0.7%, to $93.8 million in 2005 as compared to $93.1 million in 2004. This increase was due to growth in existing accounts as well as the development of new key accounts, expansion of Alliance Consulting’s outsourcing services and new service offerings introduced in 2004, Master Data Management and Global Delivery. Master Data Management includes business intelligence and data management as well as corporate performance management. Global Delivery is Alliance Consulting’s high quality, lower-priced offshore delivery and support service. Revenue associated with these new services generated an aggregate of $11.7 million during 2005 as compared to $2.1 million in 2004. These increases were partially offset by Alliance Consulting’s largest customer from 2004 which froze all third party work and reorganized itself during the course of 2005.

     Alliance Consulting’s top ten customers accounted for approximately 57% of total revenue in 2005 and approximately 56% of total revenue in 2004. One customer represented more than 10% of total revenue in 2005 and 2004 while a different customer represented more than 10% of total revenue during 2004.

     Revenue growth is expected to continue in 2006 from further penetration of newly developed accounts in the financial services sector despite no expected improvement in the overall market for IT services. In addition, Alliance Consulting is targeting mid-market pharmaceutical companies which we believe have higher potential for growth in IT spending as opposed to the large pharmaceutical manufacturers. Alliance Consulting will continue to leverage its Master Data Management and Global Delivery capabilities to facilitate growth in all of its vertical market sectors. While economic conditions have improved, clients continue to award projects in multiple phases resulting in extended sales cycles and gaps between phases. Alliance Consulting must compete against larger IT services companies with greater resources and more developed offshore delivery organizations.

Cost of Sales. Cost of sales decreased $1.2 million, or 1.9%, to $64.3 million in 2005 as compared to $65.6 million in 2004. This decrease was primarily a result of the decrease in reimbursable expenses and internal improvements surrounding project management which prevented cost overruns during the delivery process. Gross margin improved from 29.6% in 2004 to 31.4% in 2005 due to a shift in product mix more towards higher value, higher margin business, including Master Data Management and Global Delivery, and less reimbursable expenses combined with improvements in project management as well as improved utilization. Partially offsetting these improvements were discounts of $0.4 million made to customers in exchange for multi-year engagements.

     Alliance Consulting expects gross margins to improve in future periods due primarily to continued focus on higher value services. In 2006, Alliance Consulting expects gross margins to continue to be affected by general economic uncertainty, increases in overall pricing pressures within the industry, discounts required for longer-term engagements, increased employee and contractor costs resulting from greater competition within the talent pool due to declining unemployment levels, wage inflation in India as the demand for those resources increases, resource availability and ability to retain key resources and efficiency in project management.

Selling, General and Administrative. Selling, general and administrative costs decreased $4.2 million, or 13.1%, to $27.8 million in 2005 as compared to $32.0 million in 2004. Selling, general and administrative expenses were 29.7% of revenue in 2005 as compared to 34.4% of revenue in 2004. The decrease in dollars was due to the cost savings associated with reducing the non-billable workforce during 2004 and 2005, transitioning certain support functions to Alliance Consulting India, relocating Alliance Consulting’s corporate headquarters and staffing other sales offices appropriately to accommodate existing and projected staffing needs, and decreased depreciation

because more assets became fully-depreciated during 2004 and 2005 without offsetting capital expenditures being made. Alliance Consulting’s 2004 selling, general and administrative also included non-capitalizable expenses associated with the Mensamind acquisition of $0.9 million, severance associated with former executives, a restructuring charge relating to the buy out provisions of the Corporate facility and higher non-cash compensation costs for certain other executives. Offsetting these savings were incremental costs associated with recognizing a full year’s costs from the Mensamind acquisition, severance relating to a senior manager and increased variable compensation directly related to the improved financial performance as compared to 2004.

     Selling, general and administrative costs are expected to increase as Alliance Consulting’s business continues to grow; however, as a percentage of revenue, costs are expected to decrease as staffing additions made during 2004 and 2005 begin to generate a return on investment. Alliance Consulting also expects to realize benefits from cost savings initiatives including moving certain positions off-shore. Alliance Consulting is expecting to expand its facility requirements in Hyderabad during 2006 to accommodate the significant growth in its Global Delivery offering.

Amortization. Amortization expense associated with amortizable intangible assets increased $0.4 million or 63.2% to $1.0 million in 2005 as compared to $0.6 million in 2004. The increase was due to a full year of amortization expenses in 2005 of intangible assets as a result of Alliance Consulting’s acquisition of Mensamind during October 2004.

Interest, Net . Interest expense increased $0.4 million or 116.6% in 2005 as compared to 2004. Alliance Consulting attributes the increase to an increase in the average outstanding balances under Alliance Consulting’s facility as well as increased interest rates on outstanding borrowings.

Net Loss Before Income Taxes. Net loss decreased $5.2 million to $0.1 million in 2005 as compared to $5.3 million in 2004. The improvement is directly related to the growth in higher margin revenue and the decrease in selling, general and administrative expenses.

Year Ended December 31, 2004 Versus 2003.

Revenue. Revenue, including reimbursement of expenses, increased $5.5 million, or 6.3%, to $93.1 million in 2004 as compared to $87.6 million in 2003. This increase was driven by further penetration within key accounts where Alliance Consulting benefited from clients expanding their overall IT spending, acquisition related activities or increasing the amount of spending with Alliance Consulting relative to the their own internal staff and other service providers. Master Data Management and Global Delivery generated an aggregate of $2.1 million in 2004 revenue and provided increased gross profit of $0.1 million as compared to other services due to their lower cost of delivery. Revenue growth continues to be impacted by general economic uncertainty, causing many clients to delay project starts or award projects in multiple stages instead of one large project.

     Alliance Consulting’s top ten customers accounted for approximately 56% of total revenue in 2004 as compared to approximately 43% of total revenue in 2003. In 2004, one customer represented more than 10% of total revenue.

Cost of Sales. Cost of sales increased $4.2 million, or 6.8%, to $65.6 million in 2004 as compared to $61.4 million in 2003. This increase was a direct result of the increase in revenue. Gross Margin, remained flat year-over-year at 30%. The increase in overall pricing pressures within the industry, increased employee and contractor costs as competition for talent has increased with declines in unemployment levels and discounts provided to customers in exchange for greater volume were offset by the introduction of higher margin service offerings during the year and internal improvements surrounding project management that prevented cost overruns during the delivery process.

Selling, General and Administrative. Selling, general and administrative costs increased $3.9 million, or 14.0%, to $32.0 million in 2004 as compared to $28.1 million in 2003. The increase was due to expansion and enhancement of the senior management team positioning Alliance Consulting for future growth, costs associated with acquiring off-shore capabilities, severance related to former executive employees, non-cash compensation costs for certain executives and lease restructuring charges. Partially offsetting these increases were savings associated with restructuring charges, primarily rental expense, taken during 2003 associated with consolidating corporate and sales

offices. In addition, depreciation expense decreased as a result of reduced capital expenditures for equipment. Selling, general and administrative expenses were 34.4% of revenue in 2004 as compared to 32.0% of revenue in 2003.

Amortization. Amortization expense associated with amortizable intangible assets increased $0.1 million or 9.0% to $0.6 million in 2004 as compared to $0.5 million in 2003. The increase was due to amortization expense from intangible assets as a result of Alliance Consulting’s acquisition of Mensamind in October 2004.

Impairment. In December 2003, we engaged a third party valuation firm to assist us in determining the fair value of Alliance Consulting. The fair value was determined by using a discounted cash flow approach and by reviewing the valuation of comparable public companies and the valuation of acquisitions of similar companies. The fair value of Alliance Consulting was then compared to the carrying value, indicating that an impairment may exist.

     The fair value of Alliance Consulting was then allocated to the assets and liabilities of Alliance Consulting. This amount was then deducted from the total fair value of Alliance Consulting to determine the implied fair value of goodwill. Because the carrying value of the goodwill exceeded its implied fair value, we reported a $16.0 million impairment charge in 2003.

Interest, Net . Interest expense increased $0.1 million or 62.6% to $0.4 million in 2004 as compared to $0.2 million in 2003 as a result of Alliance Consulting carrying a larger debt balance associated with funding working capital, its losses and the Mensamind acquisition. In addition, the facility’s interest rate, which is based on a variable rate indexed to the prime rate, increased during the year.

Net Loss Before Income Taxes. Net loss decreased $13.2 million or 71.3% to $5.3 million in 2004 as compared to $18.6 million in 2003. The improvement was primarily due to the favorable change in impairment charges and an increase in gross profit, partially offset by the increase in general and administrative expenses.

     Clarient is a comprehensive cancer diagnostics company providing cellular assessment and cancer characterization to community pathologists, academic researchers, university hospitals and bio pharmaceutical companies. Clarient addresses these customers’ needs through applications of its proprietary bright field microscopy technology. Its ACIS ^® instrument is a premiere digital cellular imaging solution that provides precise, reproducible results required by targeted cancer therapies and drug discovery efforts. Clarient leverages ACIS ^® to provide a broad range of oncology testing services (for community pathologists focused on cancer diagnosis and prognosis) and biopharmaceutical services (in support of companies and researchers developing new cancer therapies).

     Clarient recognizes revenue based on the greater of actual usage fees or the minimum monthly rental fee. Revenue on system sales is recognized upon acceptance by the customer subsequent to a testing and evaluation

period. For system sales delivered under the Dako distribution and development agreement, Clarient recognizes revenue when those ACIS ^Ò instruments have been delivered and accepted by an end-user customer. Revenue for diagnostic services is recognized at the time of completion of services at amounts equal to contractual rates from third parties including Medicare, insurance companies and to a small degree, private patients. The expected amount is based on both Medicare allowable rates and Clarient’s collection experience with other third party payors.

     The decision to provide in-house laboratory services was made in 2004 to give Clarient an opportunity to capture a significant service-related revenue stream over the much broader and expanding cancer diagnostic testing marketplace while also optimizing the level of service and accuracy provided to remote pathology customers. Clarient believes that they are positioned to participate in this growth because of their proprietary analysis capabilities, depth of experience of the staff in their diagnostic laboratory, relationships with the pharmaceutical companies, and demonstrated ability to develop unique assays to support new diagnostic tests.

     As of December 31, 2005, we owned a 57% voting interest in Clarient.

Year Ended December 31, 2005 Versus 2004

Revenue. Revenue increased $10.4 million, or 106.3%, in 2005 as compared to 2004. Clarient attributes this increase to its new diagnostic services offerings, which totaled $11.4 million compared to $2.2 million in 2004, when Clarient first began to offer their laboratory services. Revenue generated from system sales increased $2.6 million in 2005 as compared to 2004. A total of 44 ACIS ^® systems were sold in 2005 as compared to 12 system sales in 2004. The increases were partially offset by a decline in fee-per-use revenue caused by a reduction in the aggregate of ACIS ^® placements as a result of customers electing to purchase the equipment following the expiration of their lease and certain customers returning their ACIS ^® equipment in order to utilize the services of Clarient’s diagnostic services laboratory.

     Clarient anticipates that diagnostic services revenue will continue to increase in 2006 based on a more comprehensive suite of advanced cancer diagnostic tests available since the prior year and planned expansion to their sales force in 2006. Clarient expects revenue from sales of systems to increase in 2006 as a result of the sale of systems through the Dako distribution agreement, development fees earned for the ongoing development of a new generation of the ACIS ^® system and from the recent sale of their ACIS ^® equipment lease portfolio to Med One.

Cost of Sales. Cost of sales increased $3.8 million or 50.3% in 2005 as compared to 2004. Clarient attributes this increase primarily to cost of sales related to diagnostic services, which was $8.8 million in 2005. These services commenced late in the second quarter of 2004. Costs were approximately 77% of diagnostic services revenue in the current year producing a gross margin of 23%. Cost of sales related to system sales and fee-per-use declined in 2005 as compared to 2004. Gross margins for instrument systems were 72% in 2005 as compared to 51% in 2004. The improvement was due primarily to lower costs for systems sold, which in many cases were refurbished older systems and also due to lower costs of field service.

     Clarient believes that as the diagnostic services operation increases in size, margins for this business will increase to target levels of approximately 40%. However, depending on revenue growth for these services and the incremental costs of the new facility Clarient moved to in the first quarter of 2006, it may take one year or longer for Clarient to fully realize gross margins of this size. Clarient expects that margins for 2006 will be consistent with those achieved in 2005 from the sale of systems in non-exclusive markets (such as to pharmaceutical companies) where Clarient places the systems directly with their customers. Clarient also expects that the margins for systems sold through the Dako distribution agreement will be lower as a result of the pricing terms of our arrangement with Dako. The Dako pricing terms reflect the reduction of certain expenses, including commissions on sales to Dako which Clarient would normally incur on their direct sales to end users.

Selling, General and Administrative. Selling, general and administrative costs increased $2.0 million or 11.3% in 2005 as compared to 2004. Clarient attributes this increase primarily to diagnostic services administration. The expense is $2.8 million higher in 2005 as compared to 2004. Partially offsetting this increase is a decrease due to higher expenses in the prior year from non-cash compensation charges related to stock options and restricted stock, outside consulting costs for interim CEO management services, and the reduction of personnel as a result of the fourth quarter 2004 workforce reduction.

     Clarient anticipates that selling, general and administrative costs will increase in the future with the addition of sales resources to support its projected increase in service revenues and due to higher collection costs from a third party billing and collection company on anticipated increased revenue.

Research and Development. Research and development costs decreased $0.4 million or 10.5% in 2005 as compared to 2004. Clarient attributes the decline primarily to the reduction in personnel that resulted from their fourth quarter 2004 workforce reduction.

     Clarient expects these costs to increase over the next several quarters to support the new development activity contemplated in their distribution and development agreement with Dako. A portion of these expenses will be funded by Dako under the terms of Clarient’s distribution and development agreement. These new development activities, which are intended to produce features that could expand the volume of clinical tests supported by ACIS ^® and increase the utility of the ACIS ^® as a tool for researchers, are important to increasing clinical system test volume, expanding the number of clinical system placements, and increasing research system sales.

Net Loss Before Income Taxes . Net loss before income taxes decreased $3.1 million or 24.3% in 2005 as compared to 2004. The decline is primarily attributable to the reasons discussed above, partially offset by a $1.8 million decline in minority interest.

Year Ended December 31, 2004 Versus 2003

Revenue. Revenue declined $2.2 million, or 18.1%, for the year ended December 31, 2004 as compared to the prior year. The decline is primarily attributable to the decline in fee-per-use revenue, which decreased by $5.3 million from $10.9 million in 2003 to $5.6 million in 2004. The decline primarily relates to a decline in the aggregate number of ACIS ^Ò placements and to a significant reduction in the average monthly revenue for ACIS ^Ò placements and remote viewing stations. The number of systems in the field generating fee-per-use charges decreased from 261 in 2003 to 240 in 2004. The decline in average monthly revenue for ACIS ^Ò placements and remote viewing stations is primarily due to lower pricing offered to customers in response to lower reimbursement levels from 2003 to 2004. These lower reimbursement levels also had an impact on lowering the number of revenue generating systems throughout 2004 due to system returns from customers. The total decrease in revenue was partially offset by an increase in system sales of approximately $0.8 million from $1.0 million in 2003 to $1.8 million in 2004, which is primarily attributable to an increase in the number of units sold. A total of 12 systems were sold in 2004 compared to six systems in 2003. Also offsetting the overall decline in revenue is $2.2 million related to diagnostic services. Diagnostic services began to be offered by Clarient in the second quarter of 2004. A total of $0.1 million of revenue generated through bioanalytical services in 2004 is also offsetting the decline.

Cost of Sales. Cost of sales increased $3.9 million, or 108.1%, in 2004 as compared to 2003. Clarient attributes this increase primarily to the substantial costs that were incurred to start up Clarient’s Diagnostic Services operations. These costs include the laboratory personnel, equipment, laboratory supplies and other direct costs such as shipping that were required to support the launch and service of this operation. Gross margin for Diagnostic Services was a loss of $1.6 million in 2004 and was negative primarily as a result of the costs incurred to launch the laboratory operation and the relatively fixed nature of Diagnostic Services’ cost structure.

Selling, General and Administrative. Selling, general and administrative costs increased $5.9 million, or 49.4%, in 2004 as compared to 2003. Clarient attributes the increase primarily to Diagnostic Services administration costs totaling $3.5 million in 2004. These costs include costs of senior medical staff, senior operations personnel, consultants and legal resources to facilitate implementation of these new operations. Also attributing to the increase are increased costs related to staffing, particularly in the sales force, non-cash compensation costs related to Clarient’s 2003 restricted stock grant retention program, relocation for new personnel, legal costs primarily related to litigation and compliance with Sarbanes-Oxley requirements.

Net Los s Before Income Taxes . Net loss increased $6.3 million, or 95.3%, in 2004 as compared to 2003. The increase is primarily attributable to costs incurred in 2004 relative to Clarient’s new Diagnostic Services as well as reduced revenues in 2004, partially offset by an increase in the amount of losses allocated to minority interest.

Laureate Pharma

     We acquired 100% of Laureate Pharma in December 2004. Results for the period from acquisition (December 3, 2004) through December 31, 2004 are included in the Other Companies segment. As a result, there is no comparative financial information presented for the prior year periods. The financial information presented below does not include the results of operations of the Totowa facility, which was sold in December 2005 and is presented as discontinued operations. For the year ended December 31, 2005, the Totowa operation generated revenue of $3.5 million and net income of $5.4 million, including a gain on the sale of $7.7 million.

     Laureate Pharma is a life sciences company dedicated to providing critical services to facilitate biopharmaceutical product development and manufacturing. Laureate Pharma seeks to become a leader in the biopharmaceutical industry by delivering superior development and manufacturing services to its customers.

     Laureate Pharma’s broad range of services includes: bioprocessing, quality control and quality assurance. Laureate Pharma provides process development and manufacturing services on a contract basis to biopharmaceutical companies. Laureate Pharma operates a facility in Princeton, New Jersey.

     Laureate Pharma’s customers generally include small to mid-sized biotechnology and pharmaceutical companies seeking outsourced bioprocessing manufacturing and development services. Laureate Pharma’s customers are often dependent on the availability of funding to pursue drugs that are in early stages of clinical trials, and thus have high failure rates. Losses of one or more customers can result in significant swings in profitability from quarter to quarter and year to year. Although there has been a trend among biopharmaceutical companies to outsource drug production functions, this trend may not continue. Many of Laureate Pharma’s contracts are short term in duration. As a result, Laureate Pharma must seek to replace these short-term contracts with new contracts to sustain its revenue.

     Laureate Pharma’s revenue is generated by the sale of contract manufacturing services to support the development and commercialization of pharmaceutical products. Revenue is generally recognized upon the performance of services. Certain services are performed under fixed-price contracts. Revenue from these contracts is recognized on a percentage of completion basis based on costs incurred to total estimated costs to be incurred. Any anticipated losses on contracts are expensed when identified.

     As of December 31, 2005, we owned a 100% voting interest in Laureate Pharma.

Year ended December 31, 2005.

Revenue . Revenue in the fourth quarter of 2005 increased by $0.4 million or 37.3% as compared to revenue in the third quarter of 2005 of $1.1 million. Laureate Pharma attributes this increase to a new client contract beginning in the fourth quarter, partially offset by the cancellation and timing delays related to other customers. Laureate Pharma did, however, sign four new contracts with existing customers and purchase orders from two new clients were received in the fourth quarter of 2005. These agreements are expected to generate approximately $4 million of revenue in 2006.

     In 2005, two customers each represented more than 10% of Laureate Pharma’s revenue from continuing operations.

Operating Expenses. Operating expenses increased $0.5 million or 11.3% in the fourth quarter of 2005 as compared to the third quarter of 2005 of $4.2 million. Laureate Pharma attributes the increase primarily to increased personnel added in the fourth quarter. During 2006, Laureate Pharma plans to increase the capabilities and capacity at its Princeton facility by adding new bioprocessing equipment and making capital improvements. Laureate Pharma expects operating expenses will increase due to higher depreciation expenses resulting from their capital expansion plans.

Mantas

     The financial information presented below does not include the results of operations of Mantas’ telecommunications business, which are included in discontinued operations for all periods presented as Mantas is pursuing the sale of that portion of their business. The telecommunications business generated revenue of $3.4 million, $3.6 million and $5.5 million and a net loss of $0.3 million, net income of $0.2 million and a net loss of $7.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.

     Mantas is a software company which provides integrated, single-source, behavior detection solutions for the global financial market. Mantas’ products are used by global industry leaders to help ensure the integrity of their enterprise and to provide adherence with industry regulations, operational transparency requirements and risk identification and mitigation. All of Mantas’ financial services products are based on its Behavior Detection Platform™ which utilizes proprietary analytical techniques to provide applications for anti-money laundering, trading and brokerage compliance and fraud management. The Mantas Behavior Detection Platform (currently versions 4.1 and 4.2, introduced in 2005) can analyze billions of accounts and transactions, all in the context of one another, in order to identify suspicious activities for further review. Mantas also provides complete end-to-end case management and enterprise integration as well as real time analytics and reporting to customers in over 60 countries.

     Mantas recognizes revenue from software licenses, post-contract customer support and related consulting services under contracts ranging from one to five years. Mantas encounters competition from general consulting firms and software development companies focusing on compliance solutions for financial services market, as well as from internal development. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products. Mantas believes that continuing market consolidation in the financial services industry has intensified competition among software providers, causing increased pricing pressure, but also an increase in the competitive gap between market leaders and other participants.

     As of December 31, 2005, we owned an 87.6% voting interest in Mantas.

Year Ended December 31, 2005 Versus 2004

Revenue. Total revenue increased $8.9 million or 40.1% in 2005 as compared to 2004 as a result of growth from new customers for projects which began in late 2004 and early 2005. Also, Mantas has recognized significantly higher revenue from their largest financial services customer due to additional services work and more product license acceptances among their global deployment.

     One customer represented more than 10% of total revenue in 2005. Three customers represented more than 10% of the total revenue in 2004.

     Mantas expects revenue to continue to increase in 2006 as it continues to provide additional products and services to its existing customer base and acquire new customers. Mantas also expects to and introduce new product offerings to the market.

Cost of Sales . Cost of sales increased $1.7 million or 13.3% in 2005 as compared to 2004 due to due to higher revenue. As expected, cost of sales – product has increased at the same rate as product sales. Cost of sales — service increased at a lower rate than services revenue. Services margins within financial services were approximately 49% and 42% for 2005 and 2004, respectively. The improvement is primarily due to replacing high cost subcontractors on certain engagements, more focused management in professional services and implementing a more stable product based on one platform as opposed to several.

Selling, General and Administrative . Selling, general and administrative expense decreased $4.8 million or 35.2% in 2005 as compared to 2004 due to restructuring the product management organization resulting in lower headcount as well as lower headcount in sales management in the Americas.

     Mantas expects these costs to increase slightly in 2006 due to hiring that began in the fourth quarter of 2005 and is currently taking place within the sales department.

Research and Development. Research and development expense increased $0.4 million or 6.5% in 2005 as compared to 2004 as a result of Mantas continuing to invest in development of product releases. Research and development spending decreased significantly once the $4.3 million of capitalized software development costs in 2004 are taken into account. The resulting decrease in overall research and development spending was due to the completion of Mantas 4.0 as well as lower headcount in the research and development organization.

     Mantas expects these costs to increase slightly in 2006 as it fills some open positions with the development team to address continued expansion in new products.

Net Loss from Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes decreased $12.1 million or 99.4% in 2005 as compared to 2004. This decrease is primarily due to Mantas’ higher gross margin as well as its lower selling, general and administrative expenses. During 2005, we recorded 100% of Mantas’ losses in our consolidated operating results, since minority interest has been reduced to zero during 2004.

Year Ended December 31, 2004 Versus 2003

Revenue. Total revenue increased $4.5 million, or 25.1%, year-over-year in 2004. Total product revenue in 2004 was unchanged compared to 2003. Total service revenue increased due to growth in implementations and maintenance revenues from expanding customer base.

Cost of Sales. Cost of sales increased $1.7 million, or 15.6%, in 2004 as compared to 2003. Cost of sales did not increase at the same rate as revenue. Mantas’ cost of sales for services and maintenance declined as a percentage of revenue due to improved cost control on financial services product implementations, an increase in financial services maintenance revenues resulting from growth in the installed product base, and a decrease in the cost of fulfilling maintenance obligations for financial services clients as Mantas leveraged certain of its lower cost resources. In addition the amortization of capitalized software costs decreased as a percentage of revenue in 2004 as

compared to 2003. These declines in cost of sales as a percentage of revenue were offset by product cost increases associated with third party licenses and other materials from outside vendors delivered to clients as part of Mantas implementations.

Selling, General and Administrative . Selling, general and administrative costs increased $1.7 million, or 13.7%, in 2004 as compared to 2003. This increase was due to rebuilding the product management and marketing function by adding resources in these areas at the management level as well as increased marketing costs. In addition, the Company invested $0.4 million to establish a direct sales presence in Singapore to service the Asia Pacific region.

Research and Development. Research and development expense decreased $1.2 million or 16.1% in 2004 as compared to 2003. The decrease in expense is primarily attributable to the capitalization of $4.3 million of software development costs in 2004 as compared to $1.2 million in 2003. The increase in overall research and development spending was due to building Mantas 4.0 single platform, which was completed in the third quarter of 2004.

Net Loss from Continuing Operations before Income Taxes. Net loss from continuing operations before income taxes increased $1.8 million, or 17.6%, for the year ended December 31, 2004 as compared to the prior year. The amount of minority interest related to Mantas was reduced to zero during 2004, and as a result, we recorded 100% of Mantas’ losses in our consolidated operating results. Also, increases in selling, general and administrative costs were partially offset by increased gross margins in 2004 as well as lower research and development costs.

     Pacific Title is a leading provider of a broad range of digital and photo-chemical services for post-production and archival applications in the Hollywood motion picture and television industry. Pacific Title provides a complete array of state-of-the art digital post-production capabilities both for new releases and restoration of film libraries, leading the transformation from optical, analog image reproduction and processing with digital image processing technologies, which we believe is more cost-effective and flexible. In 2005, Pacific Title introduced YCM, which is a proprietary method of archiving films, involving the transfer of the film to three color strips: (yellow, cyan and magenta), which can be stored for 100 years.

     Pacific Title recognizes revenue on a percentage of completion basis based on costs incurred to total estimated costs to be incurred. Any anticipated losses on contracts are expensed when identified. Pacific Title also generated revenue from manufacturing, installing and selling large format film projector systems through June 2003. Revenue for projector systems was recognized when persuasive evidence of an arrangement existed, delivery and customer acceptance had occurred, the sales price was fixed and determinable and collectibility was reasonably assured.

     As of December 31, 2005, we owned a 100% voting interest in Pacific Title.

Year Ended December 31, 2005 Versus 2004

Revenue. Total revenue increased $5.7 million or 22.4% to $31.3 million in 2005 as compared to $25.6 million in 2004. Pacific Title attributed the increase to increases in the traditional business of trailer production due to the combination of a pricing increase in January and increased volume and third party scanning and recording, supplemented by revenue from two new business lines, digital intermediate and YCM revenue. Modest increases in visual effects and scanning and recording were offset by continued declines in analog and photochemical businesses.

     In 2005, four customers each represented more than 10% of Pacific Title’s revenue as compared to three customers in 2004.

     Pacific Title anticipates revenues to continue to increase in 2006 with the first full year of operations of digital intermediate and YCM.

Cost of Sales. Cost of sales increased $2.6 million or 13.9% to $21.3 million in 2005 as compared to $18.7 million in 2004. Pacific Title attributes this increase to increases in labor and film costs, mainly related to increased sales and increases in depreciation and maintenance expenses related to increased capital expenditures and warranties of newer equipment expiring. Gross margin increased to 32% in 2005 as compared to 27% in 2004, due to utilization of under-utilized capacity, offset by lower margins on their newer offerings until they achieve scale.

     Pacific Title expects costs of sales attributable to digital intermediate and YCM should continue to increase in 2006 with the first full year of operations, but at a slower rate than revenues as many of the costs are fixed.

Selling, General and Administrative. Selling, general and administrative expenses increased $0.7 million or 12.7% to $6.4 million in 2005 as compared to $5.7 million in 2004. Pacific Title attributes the increase to increases in sales staffing and wages, commissions and management performance bonuses due to improved company performance.

Net Income before Income Taxes. Net income increased $2.6 million in 2005. The increase is primarily due to increased revenues and improved gross profit margin.

Year Ended December 31, 2004 Versus 2003.

Revenue. Total revenue decreased $5.9 million, or 18.8%, to $25.6 million for the year ended December 31, 2004, from $31.5 million for the year ended December 31, 2003. Pacific Title attributes $4.5 million of this decrease to the sales of large format projectors in 2003, which they no longer sell. The remaining decrease in revenue is due to a normalized level of film production by the studios in 2004 after replenishing their inventory of films in 2003 that had been diminished during the threatened actors and writers strikes of 2002.

Cost of Sales. Cost of sales decreased $1.8 million, or 8.8%, in 2004 as compared to 2003. Pacific Title attributes $3.6 million of the decline to a decline in costs of sales related to its large format film projectors, which they no longer sell, partially offset by an increase of $2.4 million or 14.4% of costs related to post production services. This increase is attributable to increases in labor and benefits of $1.3 million, associated with increased staffing for a new business line related to the continued expansion of their digital offerings and expanded internal programming, increased depreciation expense related to equipment purchases in 2004 and increased computer lease and maintenance expenses in 2004.

Selling, General and Administrative. Selling, general and administrative costs increased $0.3 million, or 6.3%, in 2004 as compared to 2003. Pacific Title attributes the increase to increased legal fees for pending litigation and amortization expense related to deferred stock units partially offset by a reduced management bonuses in 2004 .

Net Income Before Income Taxes. Net income before income taxes was $1.2 million for the year ended December 31, 2004 as compared to $4.9 million in 2003. The change is due to decreased operating income as described above.

     Revenue for the other companies segment in 2005 reflects Acsis revenue of $2.0 million for the period from acquisition (December 2, 2005) to December 31, 2005. Beginning in the first quarter of 2006, we will present Acsis as a separate segment. Revenue for the Other Companies segment in 2004 and 2003 were primarily derived from Tangram, through its sale in February 2004. Revenue included software license sales of Tangram’s asset tracking software, software maintenance contracts and post-contract customer support consulting services. Also included in 2004 is Laureate Pharma revenue of $0.9 million from acquisition (December 3, 2004) to December 31, 2004. In 2005, Laureate Pharma’s full year results are included in the Laureate Pharma segment. The Other Companies segment also included the management fees generated by the management companies of certain private equity funds through August 2003 when they were sold. In 2003, this segment also included the operating results of Agari Mediaware and Protura Wireless, which were shut down in July 2003.

     Included in operating expenses in 2005, is $2.1 million associated with an in-process research and development charge related to the acquisition of Acsis in December 2005. There are currently three projects in development by Acsis. The amount of the charge was determined by management, which utilized a third party valuation firm to assist in the valuation of Acsis’ in-process research and development.

     Gain on sale of companies and funds for the year ended December 31, 2005 of $7.3 million, is primarily attributable to gains on the sales of certain interests in private equity funds in the third and fourth quarters of 2005. Total proceeds from the sale of certain interests in private equity funds during 2005 were $27.6 million. As a result of the sale, we were also relieved of $9.1 million of future fund commitments.

     Gain on sale of companies and funds for the year ended December 31, 2004 of $44.5 million includes a gain of $31.7 million related to the sale of our interest in Sanchez for cash and common shares of Fidelity National Financial, Inc. (“FNF”) and a gain of $8.5 million related to our sale of Tangram for common shares of Opsware. Also included is $2.7 million attributable to a distribution from a bankruptcy proceeding and $1.5 million relating to the final payment of an installment sale of a company sold in 1997. Total net cash proceeds for gains of companies and funds was $37.5 million in 2004.

     Gain on sale of companies and funds for the year ended December 31, 2003 of $50.8 million includes $5.9 million relating to the sale of DocuCorp, $19.2 million relating to the sales of all of our shares of Internet Capital Group, and $17.3 million relating to the sale of Kanbay. Also included is a $3.0 million gain related to proceeds received in 2003 for a company sold by us in 1997 and a $0.9 million gain related to the sale of a portion of our interest in a company. Total net cash proceeds for gains of companies and funds was $70.1 million in 2003.

     Loss on trading securities in 2005 reflects the loss on the sale of holdings in stock distributed from a private equity fund, which were sold during the second quarter of 2005. Gain (loss) on trading securities in 2004 primarily reflect the adjustment to fair value of our holdings in Opsware and the subsequent loss on sale of Opsware stock of $0.1 million. Total net cash proceeds related to our sales of Opsware and FNF common stock for the year ended December 31, 2004 was $14.8 million. Gain (loss) on trading securities in 2003 primarily reflects the adjustment to fair value of our holdings in Verticalnet, which were classified as trading securities and was sold in 2003 for $1.1 million in net cash proceeds.

     We have recorded impairment charges for certain holdings accounted for under the cost method determined to have experienced an other than temporary decline in value in accordance with our existing policy regarding impairment of investments.

      Equity Loss. Equity loss fluctuates with the number of 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 investee, 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.

Year Ended December 31, 2005 Versus 2004

     During 2005, we restructured our ownership holdings in four private equity funds from a general partner to a special limited partner interest. As a result of the change, we had virtually no influence on the operations of these funds, therefore, effective April 1, 2005, we began accounting for these funds on the cost method. In December 2005, we sold most of our holdings in certain private equity funds. These equity funds accounted for $3.4 million, $5.3 million and $0.9 million of equity loss in 2005, 2004 and 2003, respectively. We expect that equity loss related to our holdings in private equity funds will continue to decline in future periods as a result of the sales of a majority of our holdings in the private equity funds in 2005, as well as the possible sale of our remaining holdings in private equity funds.

Year Ended December 31, 2004 Versus 2003

     Equity loss decreased $3.1 million in 2004 as compared to 2003. Contributing to the decline was a $3.1 million decline in impairment charges related to our holdings in private equity funds in 2004 as compared to 2003. Also contributing to the decline is a $2.8 million decline in our share of private equity funds’ results of operations. This decline is primarily attributable to the sale of a private equity fund in 2003, partially offset by more realized gains recognized in 2004 as compared to 2003. These declines were partially offset by an increase in equity loss of $2.8 million in our share of equity method other partner companies’ results of operations in 2004 as compared to 2003. This increase in equity loss is primarily attributable to a $2.4 million increase in equity loss related to partner

companies whose carrying value was reduced to zero during 2004 and the remaining change is related to partner companies in which we no longer have an ownership interest.

General and Administrative Costs, Net. Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative costs decreased $0.2 million in 2005 as compared to 2004. The net decrease is primarily attributable to a decline in insurance expense related to director’s and officer’s liability coverage. We anticipate general and administrative expenses to be approximately $17.5 million in 2006. The decrease of $2.2 million for the year ended December 31, 2004 as compared to the prior year period is primarily due to a decrease in employee related costs, severance costs, legal costs and certain insurance costs, partially offset by increased professional fees including $1.9 million related to compliance with Sarbanes-Oxley requirements.

Stock Based Compensation . Stock based compensation consists primarily of expense related to vesting of restricted stock and deferred stock units (“DSUs”) granted to our employees. The expense decreased $1.0 million in 2005 as compared to 2004. The decline is attributable to more restricted stock and DSUs vesting in 2004. The 2004 period included $1.1 million of expenses for vesting of DSUs with performance criteria associated with the sale of CompuCom. This expense decreased for the year ended December 31, 2004 versus the same period in the prior year due to a decrease in amortization as more restricted stock vested in the 2003 period.

Interest Income. Interest income includes all interest earned on available cash balances as well as any interest income associated with any outstanding notes receivable to Safeguard. Interest income increased $2.5 million in 2005 as compared to 2004 due to increased interest rates earned on invested cash balances. Interest income increased $0.3 million in 2004 as compared to 2003 primarily due to increased invested cash balances, partially offset by interest earned in 2003 on a note receivable related to the sale of the corporate campus in October 2003 as well as the collection of an installment sale related to a partner company sold in 1997. Both the note and installment sale were paid in 2004.

Interest Expense. Interest expense is primarily comprised of interest associated with the $150 million, 2.625% convertible senior debentures with a stated maturity of 2024. Interest expense decreased $4.0 million in 2005 as compared to 2004. The decline is attributable to the retirement of the 2006 Notes in 2004, including $1.4 million due to the acceleration of the amortization relative to deferred issuance costs and $0.9 million related to the commissions and premiums paid. Interest expense decreased $2.5 million in 2004 as compared to 2003, due to the retirement of the 2006 Notes through privately negotiated transactions during the first and second quarters of 2004 and the call of the remaining debt in November 2004. Partially offsetting this decrease in 2004 is an increase of $4.2 million related to the 2024 Debentures issued in February 2004 which includes amortization of deferred financing costs.

Impairment — related party. In May 2001, we entered into a loan agreement with Mr. Musser, our former CEO. To date, we have impaired the loan by $15.7 million to the estimated value of the collateral that we held at each respective date. Impairment charges in the first half of 2005 of $0.3 million were offset by $0.3 million of cash paydowns received in excess of carrying value of the loan. Future cash receipts in excess of the carrying value of

the note will be recognized as a reduction of impairment expense. The carrying value of the loan at December 31, 2005 is zero.

Other – Included in this category for 2005 is a $1.0 million gain related to the sale of a legacy asset. Included in this category in 2004 are costs associated with the repurchases of our 2006 Notes, including $1.8 million related to the acceleration of the amortization relative to deferred issuance costs and $1.4 million related to the commissions and premiums paid.

Income Tax (Expense) Benefit

     Our consolidated income tax benefit recorded for the year ended December 31, 2005 was $43 thousand. The tax benefit primarily relates to our share of net state and foreign taxes recorded by subsidiaries. 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 benefit that would have been recorded in 2005 was offset by a valuation allowance.

Discontinued Operations

     In 2005, Laureate Pharma sold its Totowa, New Jersey facility for $16.0 million in cash and recorded a gain of $7.7 million on the transaction. The operating results of the Totowa location are reported in discontinued operations in 2005. As of December 31, 2005, Mantas was pursuing the sale of its telecommunication business and certain related assets and liabilities. The Mantas telecommunications business was classified as held for sale at December 31, 2005 and is reported in discontinued operations for all periods presented. Mantas sold its telecommunications business and certain related assets and liabilities in the first quarter of 2006. As a result of the sale, Mantas expects to record a gain of approximately $2 million in the first quarter of 2006. In 2004, we sold our interest in CompuCom for $128 million in gross cash proceeds and recorded a gain of $1.8 million on the sale. The results of CompuCom are presented as discontinued operations for all periods through its sale on October 1, 2004.

     The income from discontinued operations in 2005 of $5.1 million is primarily attributable to the gain on the sale of the Totowa, New Jersey facility by Laureate Pharma partially offset by losses from Totowa and the Mantas telecommunications business. The loss from discontinued operations in 2004 of $19.6 million is primarily attributable to impairment charges in 2004 related to the sale of CompuCom. The income from discontinued operations in 2003 of $0.8 million is primarily attributable to income from CompuCom of $8.0 million offset by losses related to Mantas’ telecommunications business of $7.2 million.

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 trading securities. In prior periods, we have also used sales of available-for-sale securities, sales of our equity and issuance of debt as sources of liquidity. Our ability to generate liquidity from sales of partner companies, sales of available-for-sale securities and from equity and debt issuances has been adversely affected from time to time by the decline in the US capital markets and other factors.

     In February 2004, we completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024 (the “2024 Debentures”). We used all of the net proceeds of this offering of approximately $146 million to retire a majority of the 2006 Notes through one or more privately negotiated transactions. The remainder of the 2006 Notes were retired subsequently in 2004.

     As of December 31, 2005, at the parent company level, we had $108.3 million of cash and cash equivalents, $1.1 million of restricted cash and $31.8 million of marketable securities for a total of $141.2 million. In addition to the amounts above, we have $13.3 million in escrow associated with our interest payments due on the 2024 Debentures through March 2009 and our consolidated subsidiaries had cash and cash equivalents of $19.5 million.

     Proceeds from sales of and distributions from partner companies and private equity funds were $28 million in 2005 and $39 million in 2004 and 2003. Proceeds from sales of available-for-sale and trading securities were $0.2 million in 2005, $15 million in 2004 and $39 million in 2003.

     In May 2005, we renewed our revolving credit facility that provides for borrowings, issuances of letters of credit and guarantees of up to $55 million. As part of the renewal, the revolving credit facility was amended such that the remaining $3.7 million available under the letters of credit is now classified as available under the revolving credit. In August 2005, we amended our credit facility, increasing the facility by $5 million for 180 days to $60 million on the same terms and conditions. This short-term increase expired on January 28, 2006, and we have decided not to extend the additional $5 million under the facility. Also, in August 2005, a subsidiary increased its facility by $3 million. Borrowing availability under the facility is reduced by the face amount of outstanding letters of credit, guarantees and all other loan facilities between the same lender and our subsidiaries. This credit facility matures in May 2006 and bears interest at the prime rate (7.25% at December 31, 2005) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.0125%, which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to one times any amounts outstanding under the facility. This facility provides us additional flexibility to implement our strategy and support our companies.

     Availability under our revolving credit facility at December 31, 2005 is as follows (in millions):