10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the Fiscal Year Ended December 31, 2004

Commission File Number 1-5620

Safeguard Scientifics, Inc.

(Exact name of Registrant as specified in its charter)

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

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

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 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 R No £

     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. R

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes R No £

     The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2004 was $273,612,370. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the New York Stock Exchange on June 30, 2004. For purposes of determining this amount only, Registrant has defined affiliates as including the executive officers and directors of Registrant on June 30, 2004.

     The number of shares outstanding of the Registrant’s Common Stock, as of March 10, 2005 was 119,890,738.

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 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

SAFEGUARD SCIENTIFICS, INC.
FORM 10-K
DECEMBER 31, 2004

	PART I
Item 1.	Business	3
Item 2.	Properties	22
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	24
Annex to Part I	Executive Officers of the Registrant	24
	PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Consolidated Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 8.	Financial Statements and Supplementary Data	64
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures	113
Item 9A.	Controls and Procedures	113
Item 9B.	Other Information	113
	PART III
Item 10.	Directors and Executive Officers of the Registrant	114
Item 11.	Executive Compensation	114
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	114
Item 13.	Certain Relationships and Related Transactions	115
Item 14.	Principal Accounting Fees and Services	115
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	116
GUARANTY DATED MAY 10, 2002 BY SAFEGUARD SCIENTIFICS, INC.
LOAN AGREEMENT DATED SEPTEMBER 25, 2003
FIRST AMENDMENT DATED DECEMBER 12, 2003 TO LOAN AGREEMENT
SECOND AMENDMENT DATED MAY 27, 2004 TO LOAN AGREEMENT
THIRD AMENDMENT DATED AUGUST 9, 2004 TO LOAN AGREEMENT
FIFTH AMENDMENT DATED MARCH 11, 2005 TO LOAN AGREEMENT
AMENDED & RESTATED LOAN & SECURITY AGREEMENT DATED AS OF DECEMBER 15, 2002
FIRST AMENDMENT DATED AS OF MARCH 19, 2004, TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
SECOND AMENDMENT DATED AS OF MARCH 31, 2004, TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
UNCONDITIONAL GUARANTY DATED MARCH 31, 2004 TO COMERICA BANK
FOURTH AMENDMENT DATED AS OF MARCH 14, 2005, TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
CODE OF ETHICS
LIST OF SUBSIDIARIES
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - KPMG LLP
CERTIFICATION OF ANTHONY L. CRAIG PURSUANT TO RULES 13a-15(e) AND 15d-15(e)
CERTIFICATION OF CHRISTOPHER J. DAVIS PURSUANT TO RULES 13a-15(e) AND 15d-15(e)
CERTIFICATION OF ANTHONY L. CRAIG, PURSUANT TO SECTION 906
CERTIFICATION OF CHRISTOPHER J. DAVIS, PURSUANT TO SECTION 906

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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 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 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 companies operate, all of which are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Factors that May Affect Results.” 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 Scientifics, Inc. (referred to as “Safeguard,” the “Company,” “we,” “us” and “our”) is focused on owning and operating growth businesses engaged in a number of diverse business activities. We focus primarily on companies in the Time-To-Volume stage of development. Time-To-Volume companies generally are generating revenues from commercially viable products or services and are facing new challenges as they scale their businesses to take advantage of market opportunities. We were incorporated in the Commonwealth of Pennsylvania in 1953. Our corporate headquarters are located at 800 The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.

     We seek to create long-term shareholder value by helping companies (primarily in the information technology and life sciences industries) develop through superior operations and management. Safeguard’s value creation strategy is designed to drive superior growth at our companies by providing leadership and counsel, capital support and financial expertise, strategic guidance and operating discipline, and access to best practices and industry knowledge. We offer a range of operational and management assistance to each of our companies through a team of dedicated professionals. Our primary focus is on the operations of our consolidated, majority-owned companies and helping them to increase market penetration, grow revenue and improve cash flow in order to create long-term value.

     We see growing market opportunities for companies that operate in the following two categories:

•   Information Technology – including companies focused on complex information technology, software and service solutions; and

•   Life Sciences – including companies focused on drug formulation or delivery techniques, bioprocessing, specialty pharmaceuticals, diagnostics or devices.

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     We generally acquire majority ownership positions in companies through expansion capital, buyouts, carve-outs, recapitalizations or other structures. In general, we hold our ownership interest in a company as long as we believe that we can leverage our resources to assist the company in achieving superior growth in financial performance and value. On an ongoing basis, we review the current value and prospects of each of our companies in order to determine whether our long-term interests can best be served by holding the company or by realizing the value (or a portion of the value) of the company. As a result, from time-to-time, we may sell an entire company or some or all of our interests in a company and redeploy the capital realized in other opportunities. We may achieve these liquidity events through private transactions with strategic buyers, initial public offerings or other means. In the case of our public companies, we may sell our interests from time to time in the open market, in privately negotiated sales or in public offerings. Consistent with that strategy, during 2005, we will continue to assess our companies, consider the strategy of each company, its fit within our strategic focus and its opportunities for growth. As a result of these assessments, we may undertake liquidity events during the course of the year.

     During 2005, Safeguard intends to focus primarily on additional market penetration, revenue growth, cash flow improvement and growth in the long-term value of Alliance Consulting Group Associates, Inc. (“Alliance Consulting”), ChromaVision Medical Systems, Inc. (“ChromaVision”) (soon-to-be called Clarient, Inc.), Mantas, Inc. (“Mantas”), Pacific Title and Arts Studio, Inc. (“Pacific Title”) and Laureate Pharma, Inc. (“Laureate Pharma”). In addition, Safeguard will continue to pursue potential acquisitions and business combinations. Safeguard anticipates that any new acquisitions will involve companies that are either in the information technology or life sciences industries or are complementary to Safeguard’s existing companies.

Significant 2004 Highlights

     Having completed in 2004 many changes we believe were crucial to our long-term strategy, we are focusing our efforts on growth of our operating companies and identifying opportunities to expand our group of companies. Key accomplishments in 2004 included:

•   In February 2004, we refinanced and extended the maturity of our long-term debt through the issuance of $150 million aggregate principal amount of 2.625% convertible senior debentures with a stated maturity of 2024. The net proceeds were used to retire most of our 5% convertible notes due 2006. We retired the remainder of the 2006 notes with a portion of the net proceeds from the sale of our interest in CompuCom Systems, Inc. (“CompuCom”).

•   In October 2004, CompuCom (which had been our largest company) was acquired by Platinum Equity, L.L.C. Safeguard had been developing CompuCom since our initial investment in 1984. As a result of our assessment of CompuCom’s strategy and growth potential, we decided to sell our interest in CompuCom. We received approximately $128 million in gross cash proceeds from this transaction, and used approximately $55 million to retire the remaining balance of 2006 notes (together with redemption premiums) (as noted above) and another approximately $17 million to fund our interest obligations on the 2024 debentures through March 2009.

•   We expanded our management team with key hires to supplement our deal sourcing and execution, investor relations and legal support capabilities.

•   We assisted ChromaVision with a fundamental reevaluation of its business strategy, culminating in the launch, in the second half of 2004, of its new laboratory services business. This process was implemented by dedicating a Safeguard executive as Acting Chief Executive Officer for a portion of 2004 and assisting ChromaVision with its search for a permanent Chief Executive Officer, who was added in July 2004.

•   We assisted Mantas in organizing its domain expertise and custom solutions into a comprehensive product platform. With the introduction of its Mantas 4.0 platform in 2004 (recently updated to Mantas 4.1), we believe Mantas is positioned for further growth.

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•   In February 2004, Tangram Enterprise Solutions, Inc. was acquired by Opsware, Inc. We received $6.5 million in cash proceeds related to our subsequent sale of Opsware common stock.

•   In April 2004, Sanchez Computer Associates, Inc. was acquired by Fidelity National Financial. We received cash proceeds (including proceeds from shares of stock which we subsequently sold) from this transaction of approximately $40 million.

•   In October 2004, Alliance Consulting obtained offshore capabilities and operating leverage potential through the acquisition of Mensamind, Inc., a software development and consulting business based in Hyderabad, India. Also during 2004, Alliance’s management team was strengthened with the addition of a new Chief Executive Officer and Chief Administrative Officer, sourced from within our staff. Through their efforts and our support, Alliance is expanding its service offerings.

•   In December 2004, we acquired the business of Laureate Pharma for approximately $29.5 million.

     Additional information on these accomplishments and our companies is included in this report.

Our Strategy

     Safeguard’s business strategy is to create long-term shareholder value by acquiring controlling interests primarily in information technology and life sciences companies and helping them to develop through superior operations and management. Safeguard’s value creation strategy is designed to drive superior growth at our companies by providing leadership and counsel, capital support and financial expertise, strategic guidance and operating discipline, and access to best practices and industry knowledge.

     We believe a number of key trends support our strategy, including:

•   Indications of U.S. economic recovery and expansion are continuing, with caution concerning the rate and depth of improvement, fostering an interest in growth and expansion.

•   Increasingly pervasive and complex regulatory requirements across many industries are mandating cost-efficient compliance measures.

•   Availability of low-cost computing, storage and communication technology is driving industry to further deployment of complex software solutions in order to more effectively, efficiently and responsively manage business.

•   Public market investors are demanding greater transparency and enhanced corporate governance, forcing companies to defer going public until the size and sophistication of the businesses are enhanced to support the significant additional costs of being a publicly-traded company.

•   Private company management and investors have greater sophistication and awareness of their needs.

•   Competition for acquisition candidates is increasingly focused on industry, domain and/or region specialization.

     We believe these trends have resulted in a gap developing in the typical company life cycle. In the past, it was common for new businesses to grow over an initial period of years and then, as they begin to shift from early-stage to growth models, undergo a “funding hand-off” through an initial public offering or strategic business combination. In recent years, however, with the significant decrease in initial public offering activity across market sectors, the time for this funding hand-off is being deferred for multiple years. The resulting gap has placed significant stress on capital resources and liquidity demands for these companies and their investors. We believe these companies have experienced difficulty in retaining and incentivizing management teams, providing liquidity opportunities for early investors and management and maintaining operating and strategic business focus.

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     Safeguard provides a solution to many of these problems. As a value-added capital provider, we can deploy management expertise, process excellence and marketplace insight, along with growth capital, to provide tangible benefits to management and investors of growth companies.

     Our corporate staff (32 employees at December 31, 2004) is dedicated to creating long-term value for our shareholders by helping our companies grow and by finding additional acquisition opportunities.

  Time-to-Volume

     We focus on acquiring companies in the “Time-To-Volume” stage of development, which is where we believe our expertise and capabilities can add the most value. Time-To-Volume is the stage in a company’s life cycle in which it has a commercially viable product, service or solution with a sales distribution channel and a corporate infrastructure that has the potential to grow rapidly and achieve market success. However, these companies are facing new, and sometimes daunting, challenges in realizing the opportunities available.

     Once a company has established a viable product, service or solution, which is often evidenced by initial sales to key customers, it is likely to need growth capital, management support and operational expertise to become a market leader in its sector. We believe these companies are likely to face some or all of the following challenges:

•   the need to assess market opportunities and trends realistically;

•   the need to access complementary technologies and strategic partnerships;

•   the need to identify the company’s market position and implement effective branding, intellectual property protection, licensing, pricing, distribution and marketing strategies;

•   the need to create relationships that provide access to customers, external marketing channels and growth through strategic partnerships, joint ventures or acquisitions;

•   the need to design and develop distribution capabilities, for some companies on a global basis;

•   the need to recruit, incentivize and retain experienced and effective senior management to complement the existing management team;

•   the need to develop appropriate corporate, legal and financial structures and to develop the expertise to execute a wide variety of corporate and financial transactions; and

•   the need to establish facilities and administrative and operational processes to support the growing enterprise.

     These companies typically have opportunities to leverage their technology and resources to drive significant increases in revenue growth and profitability. Developing and implementing strategies to scale their business models to take advantage of these opportunities may require the addition of complementary management skills. We offer the financial, managerial and operational resources to address these and other challenges facing Time-To-Volume companies.

  Identifying Opportunities

     Marketing and Sourcing. The primary focus of Safeguard’s marketing and sourcing activities is to generate a high volume of high-quality acquisition candidates. Safeguard uses a variety of methods and sources to locate, identify and qualify potential acquisition candidates, including, among others, our internal business development team, market research, support from investment banking professionals and other transaction intermediaries, leads provided by an extensive network of business, legal, finance, accounting and other contacts and intermediaries as well as direct responses to our expanding marketing activities (including trade show sponsorship and attendance, presentations and our website). In past transactions, we have sometimes paid intermediaries for their assistance in locating a candidate that we acquired, and it is anticipated that we may do so in the future.

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     Acquisition Criteria. We have established guidelines for our acquisition strategy, focusing on industry, market, candidate and opportunity factors. As described above, our primary focus is on companies in the Time-To-Volume stage in the information technology and life sciences industries. We also look for companies operating in attractive markets. These are companies:

•   operating in large or growing markets, with growth based on mega-trends in the industry or general economy;

•   with assets that create meaningful barriers to entry by competitors, such as proprietary technology and intellectual property, or other competitive advantages; and

•   that demonstrate a clear strategy and plan for achieving revenue growth and profitability.

In addition, we prefer candidates with:

•   products or services integral to mega-trends in the industry;

•   manageable capital requirements;

•   opportunity for operating leverage;

•   reduced technology risk (relative to early-stage, pre-revenue companies);

•   market acceptance of their technology, products or services;

•   a focus on utilizing technology to create, deliver or improve products or services;

•   potential strategic synergies with existing Safeguard companies; and

•   an interest in having Safeguard in a control ownership position.

     We believe there are numerous potential candidates which will meet our criteria, and our sourcing activities are focused on locating and evaluating candidates to assess the degree to which they align with our criteria. However, we recognize that we may have difficulty identifying ideal candidates and completing transactions on terms we believe appropriate. As a result, we cannot be certain when or if we will complete further acquisitions.

     Completing Transactions. Once identified, a prospective candidate company is carefully evaluated to determine whether it meets our acquisition criteria. If so, our management commences informal discussions with the target company’s management and, if appropriate, its investors 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 target company are differences in assessment of the target company’s strategy, capabilities, market opportunities, management strengths, capital needs and valuation. In addition, the objectives and interests of the management of a potential candidate may vary widely from that of its investors. For these reasons, among others, it is anticipated that we will need to locate and evaluate a large number of candidates in order to complete any transactions. Our senior management supervises the sourcing of potential candidates and is directly involved in decision-making on candidates. Senior management continues its active direction through the structuring and completion of the acquisition.

     Competition for Acquisitions. We face intense competition from companies with business strategies similar to our own and from other companies that provide capital to, and take ownership interests in, information technology and life sciences businesses. Competitors include later-stage venture capital and private equity investors and corporations seeking to make strategic acquisitions in the technology industry. Many providers of growth capital

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also offer strategic guidance, networking access for recruiting and general advice and equity incentives for management of the target company. We believe that our strategy and capabilities make us a very attractive alternative for Time-To-Volume companies, including:

•   real-time operational assistance, including strategy design and execution, business development, corporate development, sales, marketing, finance, facilities, human resources and legal;

•   liquidity opportunities for founders and investors;

•   interim corporate-level management support, as needed; and

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

  Helping our Companies Grow

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

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

•   leveraging our market knowledge and presence to generate additional growth opportunities; and

•   pursuing potential acquisitions and business combinations to promote increased market penetration.

     Strategic Support. Once we acquire a company, we play an active role in its strategic direction. Through our experience in developing and operating companies, we have developed a methodology for accelerating our companies’ success. This methodology is applied to a company throughout its life cycle with us and includes:

•   defining short- and long-term strategic goals;

•   identifying and planning for the key milestones to reach these goals;

•   identifying and addressing the challenges and operational improvements required to reach the key milestones and, ultimately, the strategic goals;

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

•   identifying and exploring operational and strategic leverage available from our network of companies.

     By helping our companies’ management teams remain focused on critical objectives by providing them with human, financial and strategic resources, we believe we are able to significantly accelerate their development and success.

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

•   Management – the recruitment of an effective management team and experienced staff; the development and implementation of employee compensation plans and programs and employee performance objectives and assessment systems;

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•   Operations – significant management interaction to optimize a company’s business, ranging from the establishment of facilities and administrative processes to the operations and financial infrastructure a growing enterprise requires;

•   Technology – the strategic assessment of technology market opportunities and trends; the design, development and commercialization of proprietary technology solutions; the assessment of intellectual property and design of global protection strategies; and access to complementary technologies and strategic partnerships;

•   Business Development – providing access to the initial reference customers and external marketing channels that generate growth opportunities through strategic partnerships, joint ventures or acquisitions;

•   Corporate Development – providing sourcing, negotiation and execution support for strategic acquisitions, joint ventures and other non-organic growth;

•   Marketing – the identification of the company’s market position and the development and implementation of effective market penetration, branding and marketing strategies; and

•   Legal and Financial – the development of appropriate corporate, legal and financial structures, including internal controls; the implementation of global intellectual property protection activities; and the expertise to execute a wide variety of corporate and financial transactions.

     We engage in an ongoing planning and assessment process through our involvement and engagement in the development of our companies. Our executives provide mentoring, advice and guidance to develop the management of our companies. Our executives generally serve on the boards of directors of our companies and work with them to develop and implement strategic and operating plans. Achievement of these plans is measured and monitored through reporting of performance measurements and financial results.

  Realizing Value from our Efforts

     In general, we intend to own a company as long as we believe that we can use our resources to create superior growth opportunities for the company and create value for Safeguard and our shareholders. From time to time, we engage in discussions with other companies interested in acquiring our businesses, typically for strategic growth opportunities for the acquirer. To the extent we believe that a company’s further growth and development can best be supported in a different ownership structure or if we otherwise believe it is in the company’s or our best interest, we may sell some or all of our interests in the company. To the extent we believe a company does not fit in our strategy and/or is under performing, we may continue to provide operational and management support, and possibly funding. In the alternative, we may consider selling an entire company or all or a portion of our interest in a company. We may achieve these liquidity events through privately negotiated sales and public offerings of the company’s securities and, in the case of our public companies, sales in the open market. The capital realized from sales of companies or other assets is expected to be used primarily to fund our other business activities, to pursue other acquisition and development opportunities or for other working capital purposes.

Our Consolidated Companies

     The following is a description of our consolidated companies. Our ownership positions in these companies is set forth as of December 31, 2004, and reflect the percentage of the vote that we are entitled to cast based on the issued and outstanding voting securities of each company, excluding the effect of options, warrants and convertible debt. Our ownership position may be entitled to, or may be subject to, preferential liquidation and dividend rights of outstanding preferred securities issued by the companies. We continually assess our interest in the companies, the respective opportunities for their growth and their fit within our strategy.

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       Alliance Consulting

     Safeguard Opportunity. We acquired 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 its growth. At December 31, 2004, we owned 98.9 percent of Alliance Consulting.

     General. Alliance Consulting (www.alliance-consulting.com) is an information technology services and consulting firm that provides custom software solutions and IT consulting services primarily to Fortune 2000 clients. Alliance Consulting’s business-driven solutions enable corporate performance management through the delivery of business intelligence and data management, custom application development and outsourcing, packaged software integration and strategic consulting services.

     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.

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     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 on-going basis through internal and external recruiting targeted at high-quality, experienced professionals with significant product and industry expertise.

     During 2004, Alliance Consulting acquired Mensamind, Inc., a CMM Level 5 certified software development and consulting company with its operations based in Hyderabad, India. CMM refers to Carnegie Mellon’s Software Capability Maturity Model as a standard of quality, and Level 5 is the highest ranking. The acquisition provides offshore capabilities and leverage in a supervised, quality-assured format.

     Offices and Employees. At December 31, 2004, Alliance Consulting had its headquarters in Philadelphia, Pennsylvania and operated five other regional and local offices throughout the United States. Alliance Consulting supplements its full-time employees by utilizing subcontractors. At December 31, 2004, Alliance Consulting had approximately 650 full-time employees and 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 2004, one customer accounted for more than 10 percent of Alliance Consulting’s revenue. In 2003, a different customer accounted for more than 10 percent 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 whom 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.

  ChromaVision (soon-to-be Clarient, Inc.)

     Safeguard Opportunity. Safeguard commenced its ownership of an interest in ChromaVision in 1996, and we have increased our ownership position to 56.5 percent at December 31, 2004. Shares of ChromaVision’s common stock trade on the NASDAQ SmallCap Market under the symbol “CVSN” (soon to be changed to “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 United States population, coupled with the higher incidence of cancer among seniors, support an expanding market for ChromaVision’s products and services. ChromaVision is now leveraging its technical expertise, proprietary systems and capital investment to provide its diagnostic products and services to a larger customer base.

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     General. ChromaVision (www.chromavision.com or www.clarientinc.com) has elevated the use of bright field microscopy in anatomic pathology to a new level. Its highly reliable ACIS® (Automated Cellular Imaging System) is a premiere digital imaging solution selected by clinicians and researchers in cell-based analysis around the world. ACIS® provides the precise, reproducible results that targeted cancer therapies and drug discovery efforts require. Effective as of March 15, 2005, ChromaVision will be changing its name to Clarient, Inc.

     Strategy. ChromaVision’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, ChromaVision began to transform its operations by launching two new business initiatives in 2004. The first of these involved the decision to create a laboratory facility for its Access technical (stain and scan only) services. From this base of operations, and upon receipt of the necessary licensure in late 2004, ChromaVision is now poised to provide a broad range of laboratory services focused on oncology diagnostics. The second of these new business initiatives was the establishment of a robust biopharmaceutical services operation in order to partner and extract value from the work that ChromaVision performs on behalf of the biopharmaceutical marketplace in support of the development of new cancer therapies. These two business initiatives and its legacy instrument systems business are now structured around three independent, yet synergistic, business groups:

•   Diagnostic Services – to provide a broad range of cancer diagnostics and consultative services, from technical laboratory services to professional interpretation. By combining ChromaVision’s core competencies in image analysis and data quantification with its knowledge of virtual environments, ChromaVision plans to create a unique service offering to community pathologists in the United States. The growing need for this expertise combined with the ability to put rich information into a virtual space for clinicians is expected to allow ChromaVision to extract immediate value from the dynamic growth in the cancer diagnostics arena and to provide a bridge to the development of new directed diagnostics using the image analysis platform.

•   Instrument Systems – to provide hardware, software and web-enabled cellular image analysis systems using FDA-cleared proprietary algorithms. The primary focus of the Instrument Systems 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. ChromaVision 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. With this program, a customer’s sample is sent to a central laboratory for tissue processing, scanning and image capture on an ACIS^® system. The images are then provided to the pathologist, either via the Internet or on a DVD to be analyzed using ChromaVision’s software in the pathologist’s own office.

•   BioAnalytical Services – to provide a full range of commercial services to biopharmaceutical companies and other research organizations to assist their efforts from drug discovery through clinical trials to the development of directed diagnostics. The ultimate opportunity is to connect ChromaVision’s intellectual property and proprietary software to the ongoing development of custom applications with FDA-cleared reagents on its image analysis platform, leading ChromaVision to a much larger menu of applications for its Instrument Systems and to drive higher demand for its Diagnostic Services.

     Sales and Marketing. ChromaVision has now dedicated the majority of its sales resources to its new Diagnostic Services effort, and also has a dedicated Instrument Systems sales organization for both the clinical and research markets. ChromaVision also has continued selected agreements with independent distributors to market the ACIS® throughout Europe. While ChromaVision has a recognized brand identity in image analysis, it has begun transitioning to a new name in the first quarter of 2005 – Clarient, Inc. – that better reflects its evolution to a more comprehensive provider of cancer diagnostic services and products.

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     Patents and Proprietary Technology. ChromaVision files patent applications to protect technology, innovations and improvements that it considers important to the development of its business. Currently, ChromaVision has 21 patent applications pending with the U.S. Patent and Trademark Office and 12 foreign patent applications pending. ChromaVision has 15 issued patents in the United States and 10 foreign patents, all related to the system and method for cellular specimen grading performed by the ACIS® or related technologies. ChromaVision also relies on trade secrets and proprietary know-how that it seeks to protect, in part, through confidentiality agreements with employees and consultants. If ChromaVision is unable to protect its patents and proprietary rights, its reputation and competitiveness in the marketplace could be materially damaged. Litigation may therefore be necessary in order to enforce patent rights.

     Competition. With the growing acceptance of image analysis in research and clinical markets, the number of competitors has increased. Both large companies with established positions in adjacent markets and small, niche companies are targeting this space. In the clinical market, ChromaVision’s primary competition is the continued use of manual microscopy in approximately 80% of breast cancer testing. ChromaVision 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 only. A large number of researchers still use “home grown” systems. ChromaVision’s comprehensive capabilities, demonstrated reliability, complete solution and work flow advantages create a strong value proposition to counter these offerings.

     The esoteric clinical laboratory business is highly competitive and dominated by several national laboratories, as well as many smaller niche and regional organizations. ChromaVision’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 ChromaVision and may be able to achieve greater economies of scale, or establish contracts with payor groups on more favorable terms. ChromaVision 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 ChromaVision on the limited basis of perceived quality of service.

     Collaborations and Partnerships. In the future, ChromaVision hopes to become a valued partner for the development and marketing of advanced image analysis products and services. To gain more rapid market acceptance and to better position ChromaVision as an “automated solutions” provider, ChromaVision expects to be pursuing arrangements with antibody reagent and automated staining providers or others who have the critical mass from a commercial perspective. ChromaVision 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, ChromaVision’s core competency has been in the area of advanced imaging as applied to the detection and quantification of reagent-stained cellular material. ChromaVision intends to continue to invest in the recruitment of experienced scientists and engineers with an emphasis on achieving a balance between research and development, innovation and support of focused, market-driven requirements. Research and development spending by ChromaVision was approximately $4.6 million, $4.8 million and $4.8 million in 2004, 2003, and 2002, respectively.

     Manufacturing. The ACIS^® is currently manufactured at ChromaVision’s facility in San Juan Capistrano, California. ChromaVision’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 ChromaVision specifications. The system uses an off-the-shelf charged couple device (CCD) camera and an Intel/Microsoft-based 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. ChromaVision is subject to governmental regulation in the United States, 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, ChromaVision’s facilities have been issued licenses to manufacture

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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 ChromaVision 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 ChromaVision are subject to change and depend heavily on administrative interpretations by federal and state government agencies. In anticipation of marketing its ACIS^® products in the European Union, ChromaVision applied for and received the required certification.

     Employees. As of December 31, 2004, ChromaVision had 116 employees, including 17 in product development, engineering and discovery positions, 15 in manufacturing, quality assurance and field services, 46 in lab diagnostics, 12 in finance, executive and administrative capacities and 26 in sales and marketing. ChromaVision believes that its relationship with its employees is good. In addition to full-time employees, ChromaVision utilizes the services of various independent contractors, primarily for certain product development and foreign sales, marketing and administrative activity.

  Mantas

     Safeguard Opportunity. We commenced our ownership of Mantas in 2001 and we have increased our ownership to 87.6 percent at December 31, 2004. 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 to provide financial services and telecommunications companies with a comprehensive software solution to meet increased regulatory and compliance demands.

     General. Mantas (www.mantas.com) is a global software company which provides integrated, single-source, compliance analytic applications for the global financial services and telecommunications markets. 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 platform (4.0 introduced in 2004 and, more recently, Mantas 4.1) can analyze billions of accounts and transactions, all in the context of one another, in order to identify suspicious activities for further review. In telecommunications, Mantas’ products provide real-time fraud detection as well as best value routing and revenue assurance for major carriers globally.

     Strategy. Mantas’ strategy is to provide competitive value in delivering analytic application software to enhance 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 through best-of-breed intellectual property, a reputation for execution and development and world-class sales methodologies, global distribution channels and innovative marketing.

     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, as well as telecommunications providers, 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.

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     Products. Mantas has developed and markets over 200 different 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 and employee surveillance. Some examples include insider trading, front-running, hidden relationships, client suitability, churning, rapid movement of funds, mutual fund switches and break-points and best execution – all supported in a single, robust and scalable Behavior Detection Platform™ (currently 4.1 version). 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.

     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. In the financial services industry, Mantas’ solutions are currently in production at 15 global companies and their subsidiaries in North America, South America, Europe and Asia, who use our product to analyze data from over 200 jurisdictions around the world.

     Mantas also provides best value routing (“BVR”), revenue assurance and fraud detection software for major telecommunications service providers. Mantas’ fraud management solutions provide real-time detection, management and deterrence systems, and a life cycle solution for fixed line, mobile, VoIP and next generation networks. The BVR solution is an advanced, automated routing system with integrated capacity detection, network inventory updates and vendor rate imports all in one platform. This application can detect network degradation in real time and re-route traffic based on specified parameters, including cost.

     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 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, retail brokerages and telecommunications carriers. For the year ended December 31, 2004, three customers represented individually in excess of 10 percent of Mantas’ revenue. For the year ended December 31, 2003, five customers represented individually in excess of 10 percent of Mantas’ revenue.

     Sales are made both through a direct sales force and, commencing in 2004, through distribution alliances with IBM, BearingPoint, Infosys Technologies, Fiserv Solutions, Iflex Solutions, and TEMENOS HOLDINGS. The typical sales cycle lasts six to twelve months though Mantas has experienced quicker customer decisions. Total contractual backlog (revenue not yet recognized from signed contracts) was $40 million as of December 31, 2004,

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up from $28.2 million at the end of 2003. Mantas’ contracts typically extend beyond one year, and may be subject to change of scope, early termination by the client or delay for many reasons. For these reasons, Mantas might not be able to fully realize its entire backlog as revenue.

     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. As part of its confidentiality procedures, Mantas 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 and telecommunications markets, 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 and telecommunication software industries 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, 2004, Mantas had approximately 170 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 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 in 1997 and have increased our ownership position to 93.2 percent at December 31, 2004. 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 post-production digital and photo-chemical services to 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.

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     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 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; 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.

     Customers; Sales and Marketing. 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, Metro-Goldwyn-Mayer 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

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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 the year ended December 31, 2004, three customers each represented more than ten percent of Pacific Title’s revenues. For 2003, two customers each represented more than ten percent 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, 2004, Pacific Title had approximately 147 employees. Approximately 34 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.

  Laureate Pharma

     Safeguard Opportunity. In December 2004, we acquired 100 percent of the business and assets operated by Laureate Pharma. 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 critical services to facilitate biopharmaceutical product development and manufacturing. Laureate Pharma seeks to become a leader in the biopharmaceutical and novel drug-delivery industry by delivering superior development and manufacturing services to its customers. Laureate Pharma operates facilities in Princeton (bioprocessing) and Totowa (drug delivery), 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:

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•   Substantial growth in the development of biotechnology products for human therapeutics, representing an increasing percentage of the total pharma pipeline.

•   High 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 biologic 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 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 – for in-process convenience and integrity, on-site vial filling of biopharmaceutical and drug products in batch sizes up to 10,000 vials or 200 liters of bulk volume.

•   Drug Delivery Services, which include state-of-the art formulation and production of clinical and commercial quantities of microparticle-encapsulation of a customer’s pharmaceutical products. This technology enables an existing product to be reformulated in an extended-release delivery format, thus improving the product’s performance and potentially extending its patent protection. Laureate Pharma’s services include formulation development (through a strategic partner), process development and scale-up, aseptic filling and quality assurance and testing.

•   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.

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     Raw Materials. Laureate Pharma’s customers supply the cell lines for bioprocessing and the active compounds for drug delivery. 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.

     Environmental and Safety Regulations. Certain products manufactured by Laureate Pharma involve the use, storage and transportation of toxic and hazardous materials. Laureate Pharma’s operations are subject to extensive federal, state and local laws and regulations relating to the storage, handling, emission, transportation and discharge of materials into the environment and the maintenance of safe conditions in the work place. Laureate Pharma maintains environmental and industrial safety and health compliance programs at its facilities, and believes that its manufacturing operations are in compliance with all applicable safety, health and environmental laws.

     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 manufacturing and development in the biopharmaceutical and drug delivery areas. 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 continually replace its contracts with new contracts to sustain its revenue.

     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 clinical scale process development and manufacturing services, and maintaining 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, its competitive position may suffer.

     Employees. At December 31, 2004, Laureate Pharma had 60 full-time employees at its Princeton facility and eight full-time employees at its Totowa facility (supplemented through a partnering arrangement providing up to 16 additional hourly union production personnel). Laureate Pharma believes its employee relations are good.

  Other 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 generally 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, 2004. From time to time we may seek to opportunistically increase our position or sell some or all of our interests in these companies.

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		% Owned By
Company	Description of Business	Safeguard
eMerge Interactive (NASDAQ:EMRG) (www.emergeinteractive.com)	eMerge Interactive, Inc. is a technology company serving the agricultural, foodservice and healthcare industries.		16	%
Mobility Technologies (www.mobilitytechnologies.com)	Mobility Technologies, Inc. is a technology company engaged in collecting, processing and distributing real-time vehicular traffic information. Mobility Technologies currently provides traffic information through satellite and terrestrial radio, television and on-board automobile navigation systems.		3	%
Neuronyx (www.neuronyx.com)	Neuronyx, Inc. is a development-stage biopharmaceutical company whose mission is to discover, develop and deliver new medicines by leveraging the ability of adult bone marrow-derived stem cells to repair, regenerate and remodel tissue in acute and chronic disease settings. Early collaborations have focused on cardiovascular repair.		6	%
NexTone Communications (www.nextone.com)	NexTone Communications, Inc. develops carrier-grade products that provide scalable session management of voice over IP (VoIP) and other real-time services.		24	%
ProModel Solutions (www.promodel.com)	ProModel Solutions combines professional services and innovative technology to deliver business process optimization and decision support solutions to the pharmaceutical, healthcare and manufacturing and logistics industries.		35	%
Ventaira Pharmaceuticals (www.ventaira.com)	Ventaira Pharmaceuticals, Inc., formerly BattellePharma, Inc., is a specialty pharmaceutical company that develops highly differentiated pharmaceutical products by combining novel applications of generic drugs with the superior delivery benefits of its MysticTM inhaled drug delivery technology.		11	%

     We participate in earlier stage technology development through our interests in several private equity funds. During 2004, we completed a total of $6.4 million in funding of previously committed and uncalled capital to these funds. We currently have no intention of increasing our commitments to private equity funds and may seek to reduce our current ownership interest in, and our existing commitments to, the private equity funds in which we hold interests. We may also seek to opportunistically sell some or all of our interests in these funds.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

     Information on net sales, net income and assets employed for each operating segment of Safeguard’s business for the three-year period ended December 31, 2004 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

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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 The Safeguard 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 Statement on Corporate Governance and our Code of Conduct. 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 The Safeguard Building, Wayne, Pennsylvania 19087. We also will post on our website any amendments to or waivers of our Code of Conduct that relate to our directors and executive officers.

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 companies lease various facilities throughout the United States and in certain non-U.S. locations. The physical properties occupied by each of our consolidated companies, under leases expiring between 2005 and 2014, are summarized below:

			Approximate
Company	Locations	Use	Square Footage
Alliance Consulting	Pennsylvania and other locations in the U.S. and India (7 facilities)	Office/Sales/Development	83,000
ChromaVision	California (2 facilities)	Office/Manufacturing/Laboratory Services	32,000
Mantas	Virginia and other locations in the U.S., India and United Kingdom (5 facilities)	Office/Sales/Service/Research & Development	47,000
Pacific Title	California (2 facilities)	Office/Production	36,000
Laureate Pharma	New Jersey (2 facilities)	Office/Manufacturing	78,000

     We believe that all of the existing facilities are suitable and adequate to meet the current needs of our respective companies. If new or additional space is needed, we believe each of our companies can readily obtain suitable replacement properties to support their needs on commercially reasonable terms. However, we note that ChromaVision’s laboratory services facility and Laureate Pharma’s manufacturing facilities 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.

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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, plaintiffs filed an amended class action complaint under the caption of one of the three actions (the “Amended Complaint”) that names us, CompuCom and its directors as defendants. The Amended Complaint alleges that CompuCom, its directors, and we breached fiduciary

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duties in connection with the merger agreement relating to the acquisition of CompuCom by an affiliate of Platinum Equity, LLC and aided and abetted one another in the course of committing the alleged breach. Among other things, the Amended Complaint alleges that the defendants failed to obtain the best transaction reasonably available and 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. The Amended Complaint seeks (i) an injunction against the proposed transaction, (ii) an order invalidating the proposed transaction in the event it is consummated, (iii) an order directing CompuCom’s directors to obtain a transaction that is in the best interests of all of its stockholders and to disclose all material information to stockholders in connection with any transaction, and (iv) the imposition of a constructive trust, in favor of plaintiffs, upon any benefits improperly received by defendants. On July 27, 2004, 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. 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, plaintiffs filed a Second Amended Complaint alleging substantially similar claims. On November 5, 2004, defendants filed motions to dismiss the Second Amended Complaint.

     The outcome of this litigation is uncertain, and while we believe that we and CompuCom 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.

  General

     Finally, we, as well as our 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 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 2004.

ANNEX TO PART I — EXECUTIVE OFFICERS OF THE REGISTRANT

Name	Age		Position(s)	Executive Officer Since
Anthony L. Craig		59	President, Chief Executive Officer and Director		2001
Michael F. Cola		45	Group President, Life Sciences		2002
Christopher J. Davis		52	Executive Vice President and Chief Administrative and Financial Officer		2001
Steven J. Feder		41	Senior Vice President and General Counsel		2004
John A. Loftus		43	Senior Vice President and Chief Technology Officer		2004

     Mr. Craig became president and chief executive officer of Safeguard in October 2001. Before joining Safeguard, Mr. Craig was chief executive officer from December 1999 to October 2001, and remains chairman, of Arbinet-thexchange, a leading electronic market for trading, routing and settling communications capacity. Before Arbinet, he served as president and chief executive officer of Global Knowledge Network, a premier provider of technology

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learning services, from January 1997 to December 1999. Mr. Craig has also served as corporate vice president for Digital Equipment Corporation, senior vice president for Oracle Systems Corporation, and president and chief executive officer of Prime Computer. Mr. Craig has also held the positions of vice president of General Electric Company and president and chief executive officer of GE Information Services, as well as a series of executive assignments internationally at IBM Corporation. Mr. Craig is a director of ChromaVision.

     Mr. Cola joined Safeguard as vice president of operations and management services in February 2000 and became managing director in January 2002 and Group President, Life Sciences in May 2004. Prior to joining Safeguard, Mr. Cola spent nine years in various leadership positions at AstraMerck, Astra Pharmaceuticals, and AstraZeneca. During this time period he was responsible for the spinout of AstraMerck, US product development, and Global Clinical Operations. Prior to AstraMerck Mr. Cola was responsible for re-engineering processes and systems in manufacturing and product development at Campbell Soup Company. Mr. Cola is currently a director and Chairman of, and from February 2004 to July 2004 served as interim Chief Executive Officer of, ChromaVision.

     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 has also been an independent consultant for early stage, technology-oriented companies.

     Mr. Loftus joined Safeguard in May 2002 and became senior vice president and chief technology officer in December 2003. 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.

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PART II.

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

     The Company’s common stock is listed on the New York Stock Exchange (Symbol: SFE). The high and low sale prices reported within each quarter of 2004 and 2003 are as follows:

	High		Low
Fiscal year 2004:
First quarter	$	6.25	$	3.23
Second quarter		3.95		2.05
Third quarter		2.34		1.61
Fourth quarter		2.45		1.48
Fiscal year 2003:
First quarter	$	1.80	$	1.16
Second quarter		3.34		1.38
Third quarter		3.95		2.40
Fourth quarter		4.42		3.11

     The high and low sale prices reported in 2005 through March 10 were $2.17 and $1.36, respectively, and the last sale price reported on March 10, 2005, was $1.40. No cash dividends have been declared in any of the years presented, and the Company has no present intention to declare cash dividends.

     As of March 10, 2005, there were approximately 64,000 beneficial holders of the Company’s common stock.

Item 6. Selected Consolidated Financial Data

     The following table sets forth our selected consolidated financial information for the five years in the period ended December 31, 2004. The selected consolidated financial data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Consolidated Financial Statements and Notes thereto included in this report. The historical results presented herein may not be indicative of future results. As a result of the sale of CompuCom on October 1, 2004, the operating results of CompuCom are shown as a discontinued operation for all periods presented.

	December 31,
	2004		2003		2002		2001		2000
	(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	146,874	$	136,715	$	126,740	$	174,945	$	118,344
Short-term investments		33,555		7,081		9,986		—		51,230
Restricted cash		1,119		1,069		3,634		8,033		35,000
Working capital of continuing operations		169,488		131,213		121,111		258,591		202,495
Total assets of continuing operations		453,812		374,108		421,173		745,544		1,211,257
Long-term debt, net of current portion		9,352		2,128		932		19,599		13,422
Capital leases, net of current portion		1,858		409		1,066		539		71
Other long-term liabilities		11,785		13,152		14,018		11,579		164,765
Convertible subordinated notes		—		200,000		200,000		200,000		200,000
Convertible senior debentures		150,000		—		—		—		—
Total shareholders’ equity		205,803		236,171		272,287		418,796		910,627

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Consolidated Statements of Operations Data

	Year Ended December 31,
	2004			2003			2002			2001			2000
	(In thousands except per share amounts)
Revenue
Product sales	$	8,397		$	17,822		$	20,241		$	20,173		$	18,466
Service sales		148,312			149,616			94,235			90,732			42,602
Total revenue		156,709			167,438			114,476			110,905			61,068
Operating Expenses
Cost of sales — product		2,728			6,879			4,375			3,467			3,936
Cost of sales — service		102,271			93,278			44,848			43,184			11,931
Selling, general and administrative		103,771			110,812			118,894			112,876			120,158
Amortization of intangibles		5,129			9,499			7,660			11,740			7,232
Impairment		—			15,968			6,575			—			—
Total operating expenses		213,899			236,436			182,352			171,267			143,257
Operating loss		(57,190	)		(68,998	)		(67,876	)		(60,362	)		(82,189	)
Other income (loss), net		38,804			48,930			(5,149	)		(41,332	)		92,115
Impairment — related party		(3,400	)		(659	)		(11,434	)		—			—
Interest income		2,628			2,197			6,313			12,339			18,097
Interest expense		(9,761	)		(12,173	)		(21,661	)		(26,826	)		(26,619	)
Equity loss		(14,534	)		(17,179	)		(51,004	)		(395,947	)		(319,922	)
Minority interest		8,428			6,754			10,172			557			973
Net loss from continuing operations before income taxes and change in accounting principle		(35,025	)		(41,128	)		(140,639	)		(511,571	)		(317,545	)
Income taxes (expense) benefit		24			(209	)		(46	)		9,727			102,461
Net loss from continuing operations before change in accounting principle		(35,001	)		(41,337	)		(140,685	)		(501,844	)		(215,084	)
Discontinued operations, net of taxes		(19,819	)		8,006			12,017			2,744			2,680
Cumulative effect of change in accounting principle		—			—			(21,815	)		—			—
Net Loss	$	(54,820	)	$	(33,331	)	$	(150,483	)	$	(499,100	)	$	(212,404	)
Basic Income (Loss) Per Share:
Loss from continuing operations	$	(0.29	)	$	(0.35	)	$	(1.19	)	$	(4.28	)	$	(1.88	)
Income (loss) from discontinued operations		(0.17	)		0.07			0.09			0.02			0.02
Cumulative effect of change in accounting principle		—			—			(0.18	)		—			—
Net loss	$	(0.46	)	$	(0.28	)	$	(1.28	)	$	(4.26	)	$	(1.86	)
Diluted Income (Loss) Per Share:
Loss from continuing operations	$	(0.29	)	$	(0.35	)	$	(1.20	)	$	(4.28	)	$	(1.88	)
Income (loss) from discontinued operations		(0.17	)		0.05			0.08			0.01			0.01
Cumulative effect of change in accounting principle		—			—			(0.18	)		—			—
Net loss	$	(0.46	)	$	(0.30	)	$	(1.30	)	$	(4.27	)	$	(1.87	)
Shares used in computing:
Basic and diluted income (loss) per share		119,965			118,486			117,736			117,290			114,068

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

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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 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 companies operate, all of which are discussed below under the caption “Factors that May Affect Results.” 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

     We are focused on owning and operating growth businesses engaged in a number of diverse business activities. We focus primarily on companies in the Time-To-Volume stage of development. Time-to-Volume companies generally are generating revenues from commercially viable products or services and are facing new challenges as they scale their businesses to take advantage of market opportunities. We seek to create long-term shareholder value by helping companies primarily in the information technology and life sciences industries develop through superior operations and management. Our primary focus is on the operations of our consolidated, majority-owned companies and helping them increase market penetration, grow revenue and improve cash flow in order to create long-term value.

     We see growing market opportunities for companies that operate in the following two categories:

•   Information Technology. Including companies focused on complex information technology, software and service solutions; and

•   Life Sciences. Including companies focused on drug formulation or delivery techniques, specialty pharmaceuticals, diagnostics or devices.

     Our strategy is to acquire majority ownership positions in companies through expansion capital, buyouts, carve-outs, recapitalizations or other structures. In addition, we hold interests in a number of other companies, that do not currently operate in the categories described above or that operate in these categories but in which we generally own less than a majority interest. We also participate in earlier stage technology development through our interests in several private equity funds.

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     During 2005, we intend to focus our resources on the operations of our consolidated companies — Alliance Consulting, ChromaVision (soon-to-be called Clarient, Inc.), Mantas, Pacific Title and Laureate Pharma. In addition, we will continue to pursue potential acquisitions and business combinations. We anticipate that any new acquisitions will involve companies that are either in the information technology or life sciences industries or are complementary to our existing companies.

     Many of our companies are technology-related companies that have incurred substantial losses in 2004 and in prior periods. We expect some of these losses to continue in 2005. In addition, we expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. We also expect certain of our existing companies to continue to invest in their products and services and to recognize operating losses related to those activities. As a result, our operating losses attributable to our corporate operations and our companies could continue to be significant. Our financial results also are affected by acquisitions or dispositions of companies or equity or debt interests in companies. These transactions have resulted in significant volatility in our financial results, which we expect will continue.

Significant 2004 Highlights

     Key accomplishments of 2004 included:

•   In February 2004, we refinanced and extended the maturity of our long-term debt through the issuance of $150 million aggregate principal amount of 2.625% convertible senior debentures due 2024. The net proceeds were used to retire most of our 6% convertible notes due 2006. We retired the remainder of the 2006 debentures with a portion of the net proceeds from the sale of our interest in CompuCom.

•   In October 2004, CompuCom (which had been our largest company) was acquired by Platinum Equity, L.L.C. As a result of our assessment of CompuCom’s strategy and growth potential (CompuCom had grown to $1.5 billion in revenues and achieved a mature market position as a national leader in helping companies plan, implement and manage their computing environments), we decided to sell our interest in CompuCom. We received approximately $128 million in gross cash proceeds from this transaction, and used approximately $55 million to retire the remaining balance of 2006 notes (together with redemption premiums) (as noted above) and another approximately $17 million to fund our interest obligations on the 2024 debentures through March 2009.

•   We expanded our management team with key hires to supplement our deal sourcing and execution, investor relations and legal support capabilities.

•   We guided ChromaVision through a fundamental reevaluation of its business strategy, culminating in the launch, in the second half of 2004, of its new laboratory services business. This process was implemented by dedicating a Safeguard executive as Acting Chief Executive Officer for a portion of 2004 and assisting ChromaVision with its search for a permanent Chief Executive Officer, who was added in July 2004.

•   We assisted Mantas in organizing its extensive domain expertise and custom solutions into a robust and comprehensive product platform. With the introduction of its Mantas 4.0 platform, we believe Mantas is positioned for further growth.

•   In February 2004, Tangram Enterprise Solutions, Inc. was acquired by Opsware, Inc. in a stock and debt for stock exchange. We received $6.5 million in net cash proceeds related to our sale of Opsware common stock.

•   In April 2004, Sanchez Computer Associates, Inc. was acquired by Fidelity National Financial. We received cash proceeds (including proceeds from shares of stock which we subsequently sold) from this transaction of approximately $40 million.

•   In October 2004, we expanded Alliance Consulting’s offshore capabilities and operating leverage potential through Alliances’ acquisition of Mensamind, Inc., a software development and consulting business based in

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Hyderabad, India. Also during 2004, Alliance’s management team was strengthened with the addition of a new Chief Executive Officer and Chief Administrative Officer, sourced from within our staff.

•   In December 2004, we acquired the business of Laureate Pharma for approximately $29.5 million.

Principles of Accounting for Ownership Interests in Companies

     The various interests that we acquire in our 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 voting interest in the entity.

     Consolidation Method. The 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 company shareholders in the income or losses of our consolidated 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 company. However, if there is no minority interest balance remaining on the Consolidated Balance Sheets related to the respective company, we record 100% of the consolidated company’s losses.

     Equity Method. The 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 our investment in an equity method 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 company subsequently reports income, we will not record our share of such income until it equals the amount of the Company’s share of losses not previously recognized.

     Cost Method. 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

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•   Recoverability of notes receivable — related party

•   Income taxes

•   Allowance for doubtful accounts

•   Commitments and contingencies

  Revenue Recognition

     During 2004, 2003 and 2002, our revenue from continuing operations was primarily attributable to Alliance, ChromaVision, Mantas and Pacific Title.

     Alliance generates revenue primarily from consulting services. Revenue is generally recognized upon the performance of services. Certain services are performed under fixed-price service contracts related to discrete projects. Revenue from these contracts are recognized 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.

     ChromaVision generates revenue from Diagnostic Services, instrument sales and fee-per-use charges. ChromaVision recognizes revenue for Diagnostic Services at the time of completion of services at amounts equal to those amounts expected for collection 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 ChromaVision’s collection experience with other third party payors.

     ChromaVision places most of its ACIS^® units with users on a “fee-per-use” basis. ChromaVision recognizes revenue based on the greater of actual usage fees or the minimum monthly rental fee. Under this pricing model, ChromaVision 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, ChromaVision 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, ChromaVision 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. Revenue on system sales is recognized upon acceptance by the customer, often subsequent to a testing and evaluation period.

     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, specified upgrades, PCS, and/or other services, Mantas allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence. Revenue from maintenance agreements is recognized ratably over the term of the maintenance period, generally one to five years. 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, revenue is recognized 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 development effort. Mantas’ revenue calculated using the percentage completion method is limited by the existence of customer acceptance provisions of contractually defined milestones and corresponding customer rights to refund

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for certain portions of the fee. In cases where acceptance provisions exist, Mantas defers revenue recognition 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 post-production services to the motion picture and television industry. 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. 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.

  Recoverability of Goodwill

     We conduct a review for impairment of goodwill at least annually. 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 the recoverability of these assets. 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 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, 2004 was $93 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, 2004 was $11 million. The carrying value of net property and equipment at December 31, 2004 was $45 million.

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  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 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. 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 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 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, are included in the following table:

	Year Ended December 31,
Accounting Method	2004		2003		2002
	(in millions)
Equity	$	3.7	$	6.8	$	20.0
Consolidation		—		16.0		6.6
Cost		3.2		2.5		6.7
Total	$	6.9	$	25.3	$	33.3

     Impairment charges related to equity method companies are included in Equity Loss on the Consolidated Statements of Operations. Impairment charges related to Consolidation method companies are included in Impairment on the Consolidated Statements of Operations. Impairment charges related to cost method companies are included in Other Income (Loss) on the Consolidated Statements of Operations.

  Recoverability of Notes Receivable — Related Party

     A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In May 2001, we entered into a $26.5 million loan agreement with Mr. Musser, our former CEO. On a quarterly basis, we assess the recoverability of the loan, by reviewing the fair value of the liquid collateral supporting the loan and estimating future cash flows discounted at the loan’s effective rate, as well as determining whether there has been any significant, adverse, other than temporary, changes in the estimated fair value of other collateral that does not have readily available fair values. We do not accrue interest when a note is considered impaired. All cash receipts from impaired notes are applied to reduce the principal amount of such note until the principal has been fully recovered, and is recognized as interest income thereafter.

     As of December 31, 2004, the value of the collateral pledged by Mr. Musser to secure the loan had an approximate value of $1.4 million compared to the loan’s carrying value of $4.8 million. As a result, we recorded an impairment charge of $3.4 million to reduce the loan carrying value to the estimated fair value based on the value of the collateral. The collateral pledged includes $0.6 million of publicly traded securities, $0.3 million of privately

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held securities, and $0.5 million of private equity fund interests. The publicly traded securities are valued using quoted market prices, the privately held securities have been valued based on the price at which the privately held company has offered to pay shareholders to acquire the shares and the private equity fund interests are valued based upon the estimated fair value of the net assets of the fund. We will continue to evaluate the value of the collateral compared to the carrying value of the note on a quarterly basis.

     Total impairment charges on the related party note for the years ended December 31, 2004, 2003 and 2002 were $3.4 million, $0.7 million and $11.4 million, respectively.

  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 Sheet. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period, we must include an expense within the tax provision in the Consolidated Statements of Operations. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. 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 previously reported the following operating segments i) CompuCom, ii) Strategic Companies, and iii) Non-Strategic Companies. As a result of the October 2004 sale of our interest in CompuCom, which accounted for approximately 90% of our revenues in the last three years, we re-evaluated our operating segments in accordance with SFAS No. 131, “Disclosures About Segments of and Enterprise and Related Information.”

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     We now present four of our consolidated companies as separate segments – Alliance, ChromaVision, Mantas and Pacific Title. The results of operations of our other companies, including Laureate Pharma (which was acquired in December 2004) and those companies in which we have less than a majority interest, as well as our ownership in funds, are reported in a segment called “Other Companies.” This segment also includes the gain or loss on the sale of companies.

     All prior periods have been reclassified to reflect the revised segment presentation.

     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 the Company’s operating business segments. Other items primarily consists of general and administrative expenses related to 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. Segment results also include impairment charges, gains or losses related to the disposition of the companies and the mark to market of trading securities. All significant intersegment activity has been eliminated in consolidation. Accordingly, segment results reported by us exclude the effect of transactions between us and our subsidiaries and among our subsidiaries.

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

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Alliance	$	(5,336	)	$	(18,559	)	$	(3,037	)
ChromaVision		(12,829	)		(6,568	)		(8,058	)
Mantas		(11,904	)		(17,546	)		(10,415	)
Pacific Title		1,157			4,851			(1,294	)
Other companies		25,887			28,308			(70,728	)
Total segments		(3,025	)		(9,514	)		(93,532	)
Other items
Corporate operations		(32,000	)		(31,614	)		(47,107	)
Income tax benefit (expense)		24			(209	)		(46	)
Total other items		(31,976	)		(31,823	)		(47,153	)
Net loss from continuing operations		(35,001	)		(41,337	)		(140,685	)
Discontinued operations, net of taxes		(19,819	)		8,006			12,017
Cumulative effect of change in accounting principle		—			—			(21,815	)
Net Loss	$	(54,820	)	$	(33,331	)	$	(150,483	)

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

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Alliance

     We acquired Alliance in December 2002. Alliance’s operating results are included in our consolidated operating results subsequent to the acquisition. Shortly after the acquisition, we merged two of our wholly owned subsidiaries, aligne and Lever8, into Alliance. As a result, the 2002 results include a full year of results for aligne and Lever8 and less than one month of results for Alliance.

     At December 31, 2004, we owned 98.9% of Alliance.

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	93,148		$	87,648		$	28,564
Operating expenses
Cost of sales		65,575			61,417			21,166
Selling, general and administrative		32,020			28,089			10,412
Amortization of intangibles		592			518			14
Impairment		—			15,968			—
Total operating expenses		98,187			105,992			31,592
Operating loss		(5,039	)		(18,344	)		(3,028	)
Other income (loss), net		35			—			(28	)
Interest, net		(356	)		(219	)		17
Minority interest		24			4			2
Net loss before income taxes and cumulative effect of change in accounting principle		(5,336	)		(18,559	)		(3,037	)
Cumulative effect of change in accounting principle		—			—			(21,815	)
Net loss before income taxes	$	(5,336	)	$	(18,559	)	$	(24,852	)

     Alliance is an information technology services and consulting firm that provides custom software solutions and IT consulting services to clients in the Fortune 2000 market. Alliance’s business-driven solutions enable corporate performance management through the delivery of business intelligence and data warehousing, custom application development and outsourcing, packaged software integration and strategic consulting services. Over its ten-year history, Alliance has developed considerable domain expertise in the pharmaceutical, financial services, manufacturing, healthcare and distribution industries.

     Alliance’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 2004, 2003 and 2002 ended on January 1, 2005, December 27, 2003 and December 28, 2002, 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 recognizes revenue upon the performance of services. Contracts for such services are typically for one year or less. Certain services are performed under fixed-price service contracts related to discrete projects. Revenue from these contracts is recognized 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 continues to see growing demand for its services. However, Alliance 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 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 acquired Mensamind, Inc., a software development company based in Hyderabad, India. This acquisition enables Alliance to provide offshore capabilities to its existing and new clients. Since the transaction was completed in October 2004, the acquisition did not have a material effect on the consolidated

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operating results of Alliance for 2004. A total of $0.4 million of net loss was incurred in 2004 as a result of the Mensamind acquisition. Alliance expects that revenue from off-shore operations will increase substantially as compared to 2004, but will account for less than five percent of total revenue in 2005.

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 benefited from clients expanding their overall IT spending, acquisition related activities or increasing the amount of spending with Alliance relative to the their own internal staff and other service providers. Revenue in 2005 is expected to benefit from continued growth in two new service offerings – Master Data Management and Global Delivery – which were introduced during 2004. Master Data Management includes business intelligence and data management as well as corporate performance management. Global Delivery is Alliance Consulting’s low cost, high quality offshore delivery and support service. These new services 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’s top ten customers accounted for approximately 54% of total revenue in 2004 as compared to approximately 43% of total revenue in 2003. In 2004, one customer accounted for 11.2% 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 (revenue less cost of sales), 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 pricing concessions made 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. In 2005, gross margins are expected to continue to be impacted by general economic uncertainty, pricing pressures both with the client and the consultant, resource availability and efficiency in project management.

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 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. Costs are expected to continue to increase as the business continues to grow; however, as a percentage of revenue, costs are expected to decrease as headcount additions made during 2004 begin to generate a return on investment.

Amortization. Amortization expense associated with amortizable intangible assets increased $0.1 million or 14.3% to $0.6 million in 2004 as compared to $0.5 million in 2003. The increase was due to higher intangible assets as a result of Alliance’s acquisition of Mensamind.

Impairment. In accordance with SFAS No. 142, we completed our annual impairment review of goodwill in the fourth quarter of each year. In December 2003, we engaged a third party valuation firm to assist us in determining the fair value of Alliance. 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 was then compared to the carrying value, indicating that an impairment may exist.

     The fair value of Alliance was then allocated to the assets and liabilities of Alliance. This amount was then deducted from the total fair value of Alliance 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.

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     At December 2004, the fair value of the Alliance reporting unit exceeded is carrying value.

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 carrying a larger debt balance associated with funding working capital, the company’s 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 71.2% 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.

Year Ended December 31, 2003 Versus 2002

Alliance was acquired in December 2002. As a result, Alliance’s operating results are only included in our consolidated operating results subsequent to the acquisition. Shortly after the acquisition, we merged two of our wholly owned subsidiaries, aligne and Lever8, into Alliance.

Revenue. Revenue increased $59.1 million or 206.8% in 2003 as compared to 2002. The net impact of consolidating Alliance’s revenues subsequent to its acquisition, partially offset by a decline in revenue at aligne and Lever8 in 2003 compared to the 2002 period, accounted for the increase. The decline at aligne and Lever8 is due to reduced demand for IT services and market softness in early 2003, and reflects competitive challenges in the outsourcing advisory unit, a decline in the IBM mid-range services and the associated restructuring of that unit.

Cost of Sales. Cost of sales increased $40.3 million or 190.2% in 2003 as compared to 2002. The net impact of consolidating Alliance’s costs of sales subsequent to its acquisition, partially offset by a decline in cost of sales at aligne and Lever8 in 2003 compared to the 2002 period, accounted for $40.2 million of the increase. The decline at aligne and Lever8 is due to the decline in revenue.

Selling, General and Administrative. Selling, general and administrative costs increased $17.7 million or 169.8% in 2003 as compared to 2002. The net impact of consolidating Alliance’s results after its acquisition in December 2002 partially offset by a decline in selling and service expense at aligne and Lever8 in 2003 compared to the 2002 period accounted for $16.4 million of the increase.

Amortization. Amortization expense associated with amortizable intangible assets increased $0.5 million in 2003 as compared to 2002. The increase is attributable to the amortization of the customer list acquired in the Alliance acquisition.

Interest, net. Interest expense increased $0.2 million in 2003 as compared to 2002. The increase is attributable to consolidating Alliance’s results after its acquisition in December 2002.

Cumulative Effect of Change in Accounting Principle. In connection with the transitional impairment test performed upon the adoption of SFAS No. 142, we were required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. We completed the required testing during the second quarter of 2002. As a result, we recorded a $21.8 million goodwill impairment loss shown as a cumulative effect of change in accounting principle.

Net Loss Before Income Taxes. Net loss decreased $6.3 million, or 25.3%, in 2003 as compared to 2002. The decrease is primarily attributable to the cumulative effect of a change in accounting principle in 2002, partially offset by a full year of operating results of Alliance in 2003.

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ChromaVision

     We acquired a controlling interest in June 2002. The results presented below for the 2002 period show our share of ChromaVision’s operating results on the equity method through May 2002 (under Equity loss), and show ChromaVision’s consolidated operating results starting in June 2002.

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	9,769		$	11,928		$	5,626
Operating expenses
Cost of sales		7,439			3,598			1,723
Selling, general and administrative		21,876			16,342			8,517
Amortization of intangibles		1,428			1,658			2,022
Total operating expenses		30,743			21,598			12,262
Operating loss		(20,974	)		(9,670	)		(6,636	)
Interest, net		(93	)		(47	)		(3,199	)
Minority interest		8,238			3,149			3,444
Equity loss		—			—			(1,667	)
Net loss before income taxes	$	(12,829	)	$	(6,568	)	$	(8,058	)

     ChromaVision is an advanced diagnostics technology and services company focused on improving the quality of patient care while reducing medical costs and speeding the discovery of new drugs to treat cancer. ChromaVision’s proprietary Automated Cellular Imaging System (ACIS^Ò) is a versatile automated microscope system that greatly improves the accuracy and reproducibility of cell imaging through its unique patented technology. ChromaVision also provides comprehensive laboratory services ranging from in-house pathology testing using the ACIS^Ò to other diagnostic technologies that assist physicians in managing cancer. In addition, ChromaVision develops ACIS^Ò-based tools for academic and biopharmaceutical company researchers, allowing them to perform cellular-level analyses much faster and with improved accuracy.

     ChromaVision places most of its ACIS^Ò units with users on a “fee-per-use” basis. Revenue is recognized based on the greater of actual usage fees or the minimum monthly rental fee specified in the contract with the customer. Revenue on product sales is recognized upon acceptance by the customer subsequent to a testing and evaluation period. Maintenance revenue is recognized ratably over the term of the maintenance contract, typically 12 months. Revenue for Diagnostic Services is recognized at those amounts expected for collection 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 ChromaVision’s collection experience with other third party payors.

     The decision to provide in-house laboratory services was made in 2004 to give ChromaVision 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. ChromaVision 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, 2004, we owned a 56.5% voting interest in ChromaVision.

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

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is primarily due to pricing concessions 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 twelve 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 ChromaVision 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.

     ChromaVision believes that while Medicare reimbursement rates for image analysis testing have increased in 2005 as compared to 2004, fee-per-use revenue per ACIS^Ò customer will not change significantly and that the number of system placements will not increase substantially. ChromaVision intends to increase their emphasis on selling ACIS^Ò systems to research accounts and anticipates that system sale revenue will increase in the future because of this increased emphasis as well as a result of ChromaVision’s recent expansion of a dedicated sales force to these efforts and ChromaVision’s continued development of ACIS^Ò system features that are more attractive to this customer segment. ChromaVision also anticipates that revenue from laboratory services will increase substantially in 2005 due to ChromaVision’s ability to offer a more comprehensive suite of advanced cancer diagnostic tests as well as offering the services for a full year in 2005.

Cost of Sales. Cost of sales increased $3.8 million, or 106.7%, in 2004 as compared to 2003. ChromaVision attributes this increase primarily to the substantial costs that were incurred to start up ChromaVision’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 $5.5 million, or 33.9%, in 2004 as compared to 2003. ChromaVision 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 ChromaVision’s 2003 restricted stock grant retention program, relocation for new personnel, legal costs primarily related to litigation and compliance with Sarbanes Oxley requirements.

Amortization. Amortization associated with acquired technology decreased $0.2 million, or 13.9%, in 2004 as compared to 2003. Amortization expense relates to patents, which have an estimated useful life of 10 years.

Interest, Net. Interest expense remained constant in 2004 as compared to 2003. Interest expense consists primarily of interest expense from borrowings under ChromaVision’s equipment financing agreement and their laboratory equipment loan facility.

Net Loss 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 ChromaVision’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.

Year Ended December 31, 2003 Versus 2002

Revenue. Revenue increased $6.3 million, or 112.0%, for the year ended December 31, 2003 as compared to the prior year. ChromaVision’s revenue is included in our consolidated operating results subsequent to our acquiring a controlling interest in June 2002. ChromaVision’s revenue in 2003 increased approximately $2.7 million over revenue for the full year 2002. ChromaVision attributes the increase primarily to an increase in fee-per-use revenue due to an increase in the aggregate number of ACIS^Ò placements but partially offset by a decrease in the average monthly revenue for ACIS placements and remote viewing stations. The number of systems in the field generating fee-per-use charges increased from 217 in 2002 to 261 in 2003. The decline in the average monthly revenue is

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primarily due to pricing concessions offered to customers in response to lower reimbursement levels and a decline in the monthly minimum revenue amount for certain customers. Revenue from system sales increased $0.6 million in 2003 as compared to 2002, due primarily to an increase in the number of units sold. A total of six systems were sold in 2003 compared to four systems sold in 2002.

Cost of Sales. Cost of sales increased $1.9 million, or 108.8%, in 2003 as compared to 2002. This increase is primarily attributable to consolidating ChromaVision’s results in June 2002. ChromaVision attributes the cost of sales increase of $0.7 million for the full year 2003 versus 2002 to an increase in system placements in 2003.

Selling, General and Administrative. Selling, general and administrative expenses increased $7.8 million, or 91.9%, in 2003 as compared to 2002. The increase is primarily attributable to consolidating ChromaVision’s results in June 2002. ChromaVision’s selling, general and administrative expenses increased approximately $0.3 million for the full year 2003 versus 2002, which is primarily attributable to increased severance and recruiting costs for senior executives and increased tradeshow and advertising expenditures.

Amortization. Amortization associated with acquired technology decreased $0.4 million, or 18.0%, in 2003 as compared to 2002. The decrease is primarily attributable to $1.1 million of In-Process Research and Development fees expensed in 2002 as a result of our acquisition of a minority interest in ChromaVision in June 2002.

Interest, Net. Interest expense decreased $3.2 million, or 98.5%, in 2003 as compared to 2002. Included in interest expense in 2002 is $0.5 million of accretion and a $2.7 million charge for a write-off of the unamortized discount on ChromaVision’s Series D Preferred Stock. These shares were converted into Common Stock in August 2002, which eliminated charges for accretion of the Series D Preferred Stock in subsequent periods.

Net Loss Before Income Taxes. Net loss decreased $1.5 million for the year ended December 31, 2003 as compared to the prior year. ChromaVision’s operating loss is included in our consolidated operating results subsequent to our acquiring a controlling interest in June 2002.

Mantas

     We acquired a controlling interest in Mantas in April 2002. The results presented below for the 2002 period show our share of Mantas results on the equity method through March 2002 (under Equity loss), and consolidated results from April 2002. In October 2003, SOTAS, Inc. (“SOTAS”) was merged into Mantas. All periods presented include the combined results of Mantas and SOTAS.

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	25,929		$	23,321		$	21,261
Operating expenses
Cost of sales		11,688			13,226			6,793
Selling, general and administrative		22,905			28,148			24,399
Amortization of intangibles		2,848			3,006			2,079
Total operating expenses		37,441			44,380			33,271
Operating loss		(11,512	)		(21,059	)		(12,010	)
Other income, net		1			92			43
Interest, net		(85	)		(117	)		(273	)
Minority interest		(308	)		3,538			3,783
Equity loss		—			—			(1,958	)
Net loss before income taxes	$	(11,904	)	$	(17,546	)	$	(10,415	)

     Mantas is a global software company which provides integrated, single-source, compliance analytic applications for the global financial services and telecommunications markets. Mantas’ products are used by global industry leaders in the financial services and telecommunications industries to help ensure the integrity of their enterprise and to provide adherence with industry regulations, operational transparency requirements and risk identification and

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mitigation. All of Mantas’ financial services products are based on its Behavior Detection Platform™ that encompasses proprietary analytical techniques to provide applications for anti-money laundering, trading and brokerage compliance and fraud management. The current Mantas 4.0 platform can analyze billions of accounts and transactions, all in the context of one another, in order to identify suspicious activities for further review. In telecommunications, Mantas’ products provide real-time fraud detection as well as best value routing and revenue assurance for major carriers globally.

     During the fourth quarter of 2003, SOTAS, a majority-owned subsidiary, was merged into Mantas, joining complementary technologies, target markets, development capabilities and ultimately customer value propositions. Mantas recognizes revenue from software licenses, post-contract customer support and related consulting services under contracts ranging from one to five years. Mantas identifies competition from general consulting firms and software development companies, companies focusing on compliance solutions for financial services and telecommunications companies, as well as internal development.

     As of December 31, 2004, we owned 87.6% voting interest in Mantas.

Year Ended December 31, 2004 Versus 2003

Revenue. Total revenue increased $2.6 million, or 11.2%, year-over-year in 2004 due to a 25% increase in revenue from financial services industry clients, partially offset by a 34% decline in revenue from telecommunications industry clients. Revenues reflect fees from perpetual license sales, implementation services and product maintenance agreements. Total product revenue in 2004 decreased by 29% due to a reduction in license sales to the telecommunications industry; financial services product revenue was unchanged. Total service revenue in 2004 increased by 35%, growing in both the financial services and telecommunications industries. Growth in both industries reflects an increase in implementation and maintenance revenues.

     Most product implementations to date have been performed by Mantas. To facilitate future growth, Mantas has formed distribution and alliance agreements with global systems integrators to enable its clients to purchase implementation services directly from these partner firms.

     Three clients accounted individually for greater than 10% (and collectively 68%) of 2004 revenue. These same three clients, plus two others, accounted individually for greater than 10% (and collectively 69%) of 2003 revenue. Revenue concentration among a small number of clients is expected to continue in 2005. Revenue from foreign clients accounted for 37% of 2004 revenue, up from 17% of revenue in 2003. Total contractual backlog (revenue not yet recognized from signed contracts) was $40 million as of December 31, 2004, up from $28.2 million at the end of 2003.

     Industry trends affecting Mantas’ business include increased regulatory compliance requirements and concern for terrorist acts world-wide requiring banks, insurers, brokerage firms and other financial services businesses, as well as telecommunications providers, to implement rigorous screening systems to detect and prevent money laundering and other illegal activities. Utilizing internal resources to create and maintain solutions for these challenges is often difficult for businesses already under budgetary constraints particularly as the market continues to grow in sophistication and demand. Mantas believes that continuing market consolidation in the financial services and telecommunication software industry has intensified competition among software providers, causing increased pricing pressure but also an increase in competitive gap between market leaders (such as Mantas) and other participants. These trends are expected to lead to continued sales opportunities for Mantas in 2005.

Cost of Sales. Cost of sales decreased $1.5 million, or 11.6%, in 2004 as compared to 2003. Product gross margin increased from 91% to 97% of revenue due to a decrease in the cost of third party licenses and other materials from outside vendors delivered to clients as part of Mantas implementations. Service gross margin, which includes maintenance, increased to 42% from 15% 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.

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Selling, General and Administrative. Selling, general and administrative costs decreased $5.2 million, or 18.6%, in 2004 as compared to 2003. Mantas attributes the decrease primarily to the amount of capitalized software development associated with the completion of Mantas 4.0 ($4.3 million in 2004 as compared to $1.2 million in 2003). Qualifying internal costs associated with coding and testing were capitalized in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” due to the extended period of time between the establishment of technological feasibility and general release to customers. Also contributing to the decline were reductions in average headcount and associated travel in three areas: telecom industry sales where investment was reduced to better align with projected returns; financial services sales and business development where a shift to a geography based management structure led to redundant management positions; and general corporate marketing and communications. These expense reductions were offset by an increase of $0.4 million to establish a direct sales presence in Singapore to service the Asia Pacific region.

Amortization. Amortization associated with acquired technology decreased $0.2 million in 2004 as compared to 2003. Mantas attributes the decrease to a $0.8 million reduction in expense for technology acquired at Mantas’ formation in May 2001, partially offset by an increase for amortization expense for software costs related to Mantas 4.0 following its general release in September 2004. Amortization for 2005 is expected to increase due to a full year of amortization for Mantas 4.0 as compared to four months of amortization in 2004.

Interest, Net. Interest expense remained constant in 2004 as compared to 2003. Interest expense consists primarily of interest expense from borrowings under Mantas’ credit facility.

Net Loss before Income Taxes. Net loss before income taxes decreased $5.6 million, or 32.2%, for the year ended December 31, 2004 as compared to the prior year. The improved results are due to cost savings and cost reduction initiatives described above, partially offset by a reduction in the amount of losses allocated to minority interest. 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.

Year Ended December 31, 2003 Versus 2002

Revenue. Revenue increased $2.1 million, or 9.7%, for the year ended December 31, 2003 as compared to the prior year. Mantas’ revenue is included in our consolidated operating results subsequent to our acquiring a controlling interest in April 2002. This increase is partially offset by a decrease in revenue at SOTAS due to softness in the telecommunications sector.

Cost of Sales. Cost of sales increased $6.4 million, or 94.7%, in 2003 as compared to 2002. The increase is primarily attributable to consolidating Mantas’ results in April 2002.

Selling, General and Administrative. Selling, general and administrative expenses increased $3.7 million, or 15.4%, in 2003 as compared to 2002. The increase is primarily attributable to consolidating Mantas’ results in April 2002, partially offset by a decrease in selling, general and administration at SOTAS.

Amortization. Amortization increased $0.9 million, or 44.6%, as compared to 2002. Mantas attributes this increase to amortization related to acquired technology.

Interest, Net. Interest expense decreased $0.2 million in 2003 as compared to 2002. Mantas attributes this decrease to a decrease in interest expense at SOTAS.

Net Loss Before Income Taxes. Net loss before income taxes increased $7.1 million, or 68.5%, due to the transactions described above and Mantas’ results being included in our consolidated operating results subsequent to our acquiring a controlling interest in April 2002.

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Pacific Title

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	25,609		$	31,528		$	21,877
Operating expenses
Cost of sales		19,253			20,500			17,768
Selling, general and administrative		5,130			5,354			5,753
Total operating expenses		24,383			25,854			23,521
Operating income (loss)		1,226			5,674			(1,644	)
Other income, net		81			—			241
Interest, net		(40	)		(60	)		(153	)
Minority interest		(110	)		(763	)		262
Net income (loss) before income taxes	$	1,157		$	4,851		$	(1,294	)

     Pacific Title’s revenue is primarily derived from providing post-production services to the motion picture and television industry. Revenue 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. 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, 2004, we owned a 93.2% voting interest in Pacific Title.

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 $1.2 million, or 6.1%, 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 decreased $0.2 million, or 4.2%, in 2004 as compared to 2003. Pacific Title attributes the decline to reduced management bonuses in 2004 partially offset by increased legal fees for pending litigation and amortization expense related to deferred stock units.

Interest, Net. Interest, net includes interest expense related to borrowings under Pacific Title’s bank obligations and capitalized leases. Interest expense remained constant in 2004 as compared to 2003.

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.

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Year Ended December 31, 2003 Versus 2002

Revenue. Revenue increased $9.7 million, or 44.1%, for the year ended December 31, 2003 as compared to the prior year. A total of $2.7 million of the increase is related to sales of large format projectors, which they no longer sell. The remaining increase is primarily attributable to increased capacity for film title and special effects services and increased demand for its services.

Cost of Sales. Cost of sales increased $2.7 million, or 15.4%, in 2003 as compared to 2002. Pacific Title attributes the increase primarily to a $1.7 million increase in costs of sales attributable to its large format film projectors’, which they no longer sell. Pacific Title attributes the remaining increase to an increase in costs related to post production services.

Selling, General and Administrative. Selling, general and administrative costs decreased $0.4 million, or 6.9%, in 2003 as compared to 2002. Pacific Title attributes the decline to a decrease in direct costs in 2003 as compared to 2002.

Interest, Net. Interest expense decreased $0.1 million in 2003 as compared to 2002. Pacific Title attributes the decline to decreased interest expense on capitalized lease obligations.

Net Income (Loss) before Income Taxes. Net income before income taxes was $4.9 million for the year ended December 31, 2003 as compared to net loss before income taxes of $1.3 million for the year ended December 31, 2002. The change is due to increase operating income as described above.

Other Companies

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	2,162		$	12,697		$	37,079
Total operating expenses		3,809			16,605			56,744
Operating loss		(1,647	)		(3,908	)		(19,665	)
Other income (loss), net		40,939			48,618			(5,835	)
Interest, net		(29	)		(205	)		(949	)
Minority interest		584			826			2,681
Equity loss		(13,960	)		(17,023	)		(46,960	)
Net income (loss) before income taxes	$	25,887		$	28,308		$	(70,728	)

     Revenue for the Other Companies segment is 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 revenue in 2004 is Laureate Pharma subsequent to consolidating their results in December 2004. In 2005, we will record 100% of operations of Laureate Pharma for a full year. The Other Companies segment also included the management fees generated by the management companies of certain private equity funds through August 2003 and December 2002 when they were sold. In 2003 and 2002, this segment also included the operating results of Agari Mediaware and Protura Wireless, which were shut down in July 2003.

Year Ended December 31, 2004 Versus 2003

Revenue. Revenue declined $10.5 million, or 83.0%, for the year ended December 31, 2004 as compared to the prior year. Approximately $9.4 million of the decline relates to Tangram, which was sold in February 2004. Also contributing to the decline is the sale of our interest in a management company of a private equity fund in August 2003, which contributed $2.0 million of the decline . Partially offsetting the decline is $0.9 million of revenue from Laureate Pharma, which was acquired in December 2004.

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Operating Loss. Operating loss declined $2.3 million, or 57.9%, for the year ended December 31, 2004 as compared to the prior year period. A total of $2.1 million and $0.5 million of the decline relates to operations at Agari Mediaware and Protura Wireless which were shut down in July 2003.

Year Ended December 31, 2003 Versus 2002

Revenue. Revenue declined $24.4 million, or 65.8%, for the year ended December 31, 2003 as compared to the prior year period. The decline is primarily attributable to the sale of our interest in a management company of two private equity funds in August 2003 and December 2002, which contributed $21.9 million of the decline. A total of $1.4 million of the decline is due to Aptas, which was sold in 2002 and Protura, which was shut down in July 2003. The remaining decline is primarily attributable to a decline in revenue at Tangram.

Operating Loss. Operating loss declined $15.8 million, or 80.1%, for the year ended December 31, 2003 as compared to the prior year period. A total of $3.7 million of the decline is related to Aptas, which was sold in 2002 and Protura, which was shut down in July 2003. A total of $6.6 million of the decline relates to impairment charges related to Aptas, Protura and Agari in 2002. A total of $4.2 million of the decline relates to operations at Agari, which was shut down in July 2003.

Other Income (Loss), Net

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Gain on sale of companies and funds, net	$	44,486		$	50,808		$	13,886
Gain (loss) on trading securities		(396	)		301			(14,572	)
Gain on Tellabs and related forward sale contract, net		—			—			1,509
Impairment charges		(3,197	)		(2,494	)		(6,658	)
Other		46			3			—
	$	40,939		$	48,618		$	(5,835	)

     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 on sales 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 on sale of companies and funds was $70.1 million in 2003.

     Gain on sale of companies and funds for the year ended December 31, 2002 was $13.9 million. During 2002, we sold or liquidated our interests in certain companies and funds including Palm, Allied, Puralube, Aptas, iMedium and the Greenhill Fund for aggregate net cash proceeds of $31.2 million. Also included in gain on sale of companies is $9.0 million related to the release of escrowed proceeds from the sale of a private company in 2000.

     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 and 2002 primarily reflect 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.

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     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 companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. We recognize our share of losses to the extent we have cost basis in the equity investee, or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our companies accounted for under the equity method are based on estimates and on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities are made final.

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Share of our equity method other companies’ results of operations	$	(3,484	)	$	(663	)	$	(5,864	)
Share of private equity funds’ results of operations		(6,759	)		(9,591	)		(21,090	)
Impairment charges		(3,717	)		(6,769	)		(20,006	)
	$	(13,960	)	$	(17,023	)	$	(46,960	)

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 investments 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 companies’ results of operations in 2004 as compared to 2003. This increase in equity loss is primarily attributable to a $2.4 million change related to companies whose carrying value was reduced to zero during 2004 and the remaining change is related to companies in which we no longer have an ownership interest.

Year Ended December 31, 2003 Versus 2002

     The decrease in equity loss in 2003 as compared to 2002 is primarily due to a $13.2 million decrease in impairment charges, which is attributable to a $5.2 million decline in impairment charges on our investments in private equity funds and an $8.0 million decline for companies in which we no longer have an ownership interest. Also contributing to the decline in equity loss is a $5.2 million decline in our share of equity method companies’ results. Of this decline, $2.1 million is related to companies in which we no longer have an ownership interest, $2.6 million related to companies whose carrying value was reduced to zero and $0.5 million is related to companies in which we continue to have an equity interest. These declines were partially offset by the inclusion in 2003 of $3.3 million related to the recognition of our share of Sanchez’s loss. Sanchez’s 2003 results included a $9.5 million impairment charge related to an acquisition Sanchez completed in 2002. The remaining decrease in equity loss is due to a decline in our share of private equity funds, which is primarily attributable to a reduction in realized losses recorded by the funds as well as the sale of a private equity fund in 2003 which accounts for $5.6 million of the decline.

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Corporate Operations

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
General and administrative costs, net	$	(16,768	)	$	(18,999	)	$	(20,448	)
Stock-based compensation		(2,273	)		(2,432	)		(3,421	)
Depreciation		(203	)		(260	)		(1,024	)
Interest income		2,409			2,090			6,104
Interest expense		(8,939	)		(11,418	)		(16,895	)
Impairment — related party		(3,400	)		(659	)		(11,434	)
Other		(2,826	)		64			11
	$	(32,000	)	$	(31,614	)	$	(47,107	)

General and Administrative Costs, Net.

     Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs. The 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. The decrease of $1.4 million for the year ended December 31, 2003 as compared to the prior year period is primarily attributable to reduced employee-related costs and the reduction in the use of outside consulting firms partially offset by increased insurance costs and severance costs.

Stock Based Compensation. Stock based compensation consists primarily of expense related to grants of restricted stock and deferred stock units to our employees. 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 and 2002 periods.

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 $0.3 million in 2004 as compared to 2003 primarily due to increased invested cash balances, partially offset by interest earned on a note receivable in 2003 related to the sale of the corporate campus in October 2003 as well as the collection of an installment sale related to a company sold in 1997. Both the note and installment sale were paid in 2004. Interest income declined $4.0 million in 2003 compared to 2002. Included in interest income during 2002 is interest recorded on a note receivable from a related party. In January 2003, the note went into default and we will not record interest income on the note until the carrying value is paid in full. Also contributing to the decline in 2003 was less interest income earned on increased invested cash balances in 2002 primarily attributable to lower interest rates.

Interest Expense. Interest expense is primarily comprised of interest associated with our $200 million, 5% subordinated convertible notes due 2006 and the $150 million 2.625% convertible senior debentures with a stated maturity of 2024. 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. Interest expense declined $5.5 million in 2003 as compared to 2002. The decline is primarily due to the elimination of accretion of the obligation and amortization of the cost of the two forward sale contracts on our Tellabs holdings which were settled in March and August of 2002. Also included in interest expense is interest on the mortgage for our corporate headquarters, which was sold in October 2002.

Impairment — related party. In May 2001, we entered into a loan agreement with Mr. Musser, our former CEO. In the fourth quarter of 2004, first quarter of 2003 and fourth quarter of 2002, we impaired the loan by $3.4 million, $0.7 million and $11.4 million, respectively, to the estimated value of the collateral that we held at each date. The carrying value of the loan at December 31, 2004 is $1.1 million.

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Other – 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, 2004 was $24 thousand, net of a increase in the valuation allowance of $10.0 million. The tax benefit relates to our share of a state tax benefit recorded by a subsidiary, partially offset by foreign income taxes generated by a subsidiary in jurisdictions where the company has no offsetting tax attributes. We have recorded a valuation allowance to reduce our net deferred tax asset to an amount that is more likely than not to be realized in future years.

Liquidity And Capital Resources

  Parent Company

     We fund our operations with proceeds from sales of and distributions from companies, funds and trading securities. Other sources of liquidity which have been utilized by us in prior periods include sales of available-for-sale securities, sales of our equity and issuance of debt. Our ability to generate liquidity from sales of 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 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. 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.

     As of December 31, 2004, at the parent company level, we had $128.3 million of cash and cash equivalents, $0.6 million of restricted cash and $33.6 million of marketable securities for a total of $162.5 million. In addition to the amounts above, we have $16.8 million in escrow associated with our interest payments due on the 2024 Debentures. In addition, our consolidated subsidiaries had cash and cash equivalents of $18.6 million.

     Proceeds from sales of and distributions from companies and funds were $39 million in 2004, $39 million in 2003 and $25 million in 2002. Proceeds from sales of available-for-sale and trading securities were $15 million in 2004, $39 million in 2003 and $13 million in 2002.

     In September 2004, we increased our revolving credit facility that provides for borrowings, issuances of letters of credit and guarantees from $25 million to $55 million. The amended agreement provides the Company with a $45 million revolving line and a $10 million letter of credit facility. Borrowing availability under the facility is reduced by the face amount of outstanding letters of credit and guarantees and by revolving credit facilities our subsidiaries have at the same bank. This credit facility matures in May 2005 and bears interest at the prime rate (5.25% at December 31, 2004) for outstanding borrowings. The facility requires cash collateral equal to one times any outstanding amounts under the facility. We have granted the bank a right to a security interest in accounts held by us at the bank equal to any amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our companies.

     As of December 31, 2004, we provided guarantees related to four of our subsidiaries’ credit facilities that allowed for total borrowings of up to $38.0 million. In addition, a consolidated subsidiary maintained a $2.0 million revolving credit facility at the same bank that provided our credit facility. We also provided a letter of credit to the landlord of CompuCom’s Dallas headquarters lease, which will expire on March 19, 2019, in an amount up to $6.3 million. Availability under our revolving credit facility at December 31, 2004 is as follows (in millions):

	Revolving Credit			Letters of Credit			Total
Size of facility	$	45.0		$	10.0		$	55.0
Outstanding Guarantees		(38.0	) (a)		—			(38.0	)
Subsidiary facility at same bank		(2.0	)		—			(2.0	)
Outstanding Letter of Credit		—			(6.3	)		(6.3	)
Amount Available at 12/31/04	$	5.0		$	3.7		$	8.7

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     (a) Of the total guarantees of $38.0 million, $16.6 million is outstanding under these facilities at December 31, 2004 and included as debt on the Consolidated Balance Sheet.

     In addition to the guarantees above, we have other guarantees associated with various forms of debt including lines of credit, term loans, equipment leases and mortgages, as well as operating leases totaling $11 million at December 31, 2004. Additionally, we have committed capital of approximately $21 million, all of which are commitments made in prior years to various private equity funds, to be funded over the next several years, including approximately $7 million, which is expected to be funded in the next twelve months. We do not intend to commit new investments in additional private equity funds and may seek to reduce our current ownership interests in, and our existing commitments to the funds in which we hold interests.

     In March 2005, consolidated companies amended their credit facilities to increase aggregate borrowings $4.5 million (for an aggregate total of $44.5 million in credit facilities). We also reduced our aggregate guarantees under these facilities by $4.0 million. After these amendments, we have $9.0 million available under the revolving line.

     The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to acquire technology-related companies, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in companies we may receive proceeds from such sales which could increase our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

     In May 2001, we entered into a loan agreement with Mr. Musser, our former CEO. In the fourth quarter of 2004, first quarter of 2003 and fourth quarter of 2002, we impaired the loan by $3.4 million, $0.7 million and $11.4 million, respectively, to the estimated value of the collateral that we held at each respective date. The carrying value of the loan at December 31, 2004 is $1.4 million. During 2004, we received $7.2 million in cash payments against the loan balance, primarily from proceeds received related to the Sanchez merger and the sale of Mr. Musser’s CompuCom holdings. Since 2001, we have received a total of $13.4 million in cash paydowns on the loan.

     We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions we received as a general partner to the fund for further distribution to the fund’s limited partners (the “clawback”). Assuming the funds in which we are a general partner are liquidated or dissolved on December 31, 2004 and, assuming for these purposes the only distributions from the funds are equal to the carrying value of the funds on the December 31, 2004 financial statements, the maximum clawback we would be required to return for our general partner interest is $7 million. Management estimates its liability to be approximately $4 million, which is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

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

     Interest on the 2024 Debentures is payable semi-annually. At the note holders’ option, the notes are convertible into our common stock before the close of business on March 14, 2024 subject to certain conditions. The conversion rate of the notes at December 31, 2004 was $7.2174 of principal amount per share. The closing price of our common stock on December 31, 2004 was $2.12. The note holders may require repurchase of the notes on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective amount plus accrued and unpaid interest. The note holders may also require repurchase of the notes upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, we may redeem all or some of the 2024 Debentures commencing March 20, 2009. We have escrowed $16.7 million for interest payments through March 15, 2009 on the 2024 Debentures.

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     For reasons we have discussed, we believe our cash and cash equivalents at December 31, 2004 and other internal sources of cash flow are expected to be sufficient to fund our cash requirements for the next twelve months, including commitments to our existing companies and funds, our current operating plan to acquire interests in new companies and our general corporate requirements.

  Consolidated Subsidiaries

     Alliance, ChromaVision and Mantas incurred losses in 2004 and may need additional capital to fund their operations. If we decide not to provide sufficient capital resources to allow them to reach a positive cash flow position, and they are unable to raise capital from outside resources, they may need to scale back their operations. If these companies meet their business plans for 2005 and the related milestones established by us, we believe they will have sufficient cash or availability under established lines of credit to fund their operations for at least the next twelve months.

     Consolidated subsidiaries have outstanding facilities that provide for borrowings of up to $40 million. A revolving credit facility of $3 million, which would have matured in February 2005, $5 million, which would have matured in March 2005 and a $3 million revolving line, which would have matured in November 2005 have all been renewed through January 2006. A $10 million revolving credit facility matures in February 2006 A consolidated subsidiary with a revolving credit facility for $2 million that expired in September 2004, has been renewed through January 2006.

     As of December 31, 2004, outstanding borrowings under these facilities were $16.6 million.

  Analysis of Parent Company Cash Flows

     Cash flow activity for the Parent Company was as follows:

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Net cash (used in) provided by operating activities of continuing operations	$	(24,463	)	$	(31,658	)	$	31,349
Net cash provided by (used in) investing activities of continuing operations		86,070			40,595			(74,405	)
Net cash (used in) provided by financing activities of continuing operations		(54,863	)		326			(3,288	)
	$	6,744		$	9,263		$	(46,344	)

  Cash (Used In) Provided by Operating Activities

     2004 vs. 2003. Cash used in operating activities decreased $7.2 million in 2004 as compared to 2003. The decrease is due to a decline in general and administrative costs and interest expenses in 2004 when compared to 2003.

     2003 vs. 2002. Cash used in operating activities was $31.7 million in 2003 as compared to cash provided by operating activities in 2002 of $31.3 million. The change of $63.0 million is primarily attributable to collection of an income tax receivable in 2002 of $62.6 million with no corresponding collection in 2003.

  Cash (Used In) Provided by Investing Activities

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

     2004 vs. 2003. Cash provided by investing activities increased $45.5 million in 2004 as compared to 2003. The increase is mainly attributable to $125.9 million of net cash proceeds related to the sale of CompuCom in October

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2004. Partially offsetting this increase is a decrease of $24.2 million of proceeds from sales of available-for-sale and trading securities, a $31.5 million net increase in short-term investments, primarily comprised of certificates of deposit, U.S. Treasury Securities and mortgage and asset-backed securities. Also included is a $16.7 million increase in purchases of held-to-maturity securities, which represents the escrowed proceeds to fund interest payments on the 2024 Debentures through 2009. Additionally, acquisition of ownership interests increased $12.4 million in 2004 as compared to 2003. During 2004, Safeguard acquired Laureate Pharma for $24.5 million of cash, invested $10.0 million in Mantas, invested $12.5 million in ChromaVision and used $1.8 million of cash to purchase shares of Pacific Title from minority interest shareholders.

     2003 vs. 2002. Cash provided by investing activities was $40.6 million in 2003 versus cash used in investing activities in 2002 of $74.4 million. The change of $115.0 million is due to a decrease of $72.9 million in acquisitions and ownership interests in companies, funds and subsidiaries, primarily attributable to the purchase of Alliance in 2002 for $55 million. Additionally, proceeds from sales of assets increased $39.9 million as we continued to focus on exiting non-strategic assets.

  Cash (Used In) Provided by Financing Activities

     2004 vs. 2003. Cash used in financing activities increased $55.2 million in 2004 as compared to 2003. Included in financing activities in 2004 is $145.1 million of net proceeds received related to the 2024 Debentures issued in February 2004 offset by $201.4 million which was used to redeem the remaining 2006 Notes.

     2003 vs. 2002. Cash provided by financing activities was $0.3 million in 2003 versus cash used of $3.3 million in 2002. The 2002 period includes the pay down of long-term debt of $3.3 million as a result of the sale of our corporate campus in 2002.

  Consolidated Working Capital From Continuing Operations

     Consolidated working capital from continuing operations increased to $170 million at December 31, 2004 compared to $131 million at December 31, 2003. The increase is primarily attributable to proceeds from sales of and distributions from companies and funds.

  Analysis of Consolidated Company Cash Flows

     Cash flow activity from continuing operations was as follows:

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Net cash (used in) provided by operating activities of continuing operations	$	(48,061	)	$	(47,509	)	$	15,359
Net cash provided by (used in) investing activities of continuing operations		93,309			57,498			(40,826	)
Net cash used in financing activities of continuing operations		(35,089	)		(14	)		(22,738	)
	$	10,159		$	9,975		$	(48,205	)

  Cash (Used In) Provided by Operating Activities

     2004 vs. 2003. Net cash used in operating activities decreased $0.6 million in 2004 as compared to 2003. The decrease is primarily attributable to working capital changes.

     2003 vs. 2002. Cash used in operating activities was $47.5 million in 2003 versus cash provided by operating activities of $15.4 million in 2002. The change is primarily due to the collection of an income tax receivable of $63.5 million in 2002 with no corresponding collection in 2003.

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  Cash (Used In) Provided by Investing Activities

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

     2004 vs. 2003. Net cash provided by investing activities increased $35.8 million in 2004 as compared to 2003. The increase is primarily attributable to $125.9 of net cash proceeds related to the sale of CompuCom in October 2004. Partially offsetting this increase is a decrease of $24.2 million of proceeds from sales of available-for-sale and trading securities and a $16.7 million increase in purchases of held-to-maturity securities, which represents the escrowed proceeds to fund interest payment on the 2024 Debentures through 2009. Acquisition of ownership interests increased $15.9 million in 2004 as compared to 2003. During 2004, Safeguard acquired Laureate Pharma for $24.5 million of cash and used $1.8 million of cash to purchase shares of Pacific Title from some of its’ shareholders.

     2003 vs. 2002. Cash provided by investing activities increased $98.3 million in 2003 as compared to 2002. The increase is primarily attributable to a $39.9 million increase in proceeds from sales of assets, including the sales of non-strategic assets including Kanbay, Internet Capital Group, DocuCorp, Verticalnet and Pac-West. Also contributing to the change was a $60.3 million decrease in acquisitions and ownership interest in companies, funds and subsidiaries, primarily attributable to the purchase of Alliance in 2002 for $55 million.

  Cash Used In Provided by Financing Activities

     2004 vs. 2003. Net cash used in financing activities increased $35.1 million in 2004 as compared to 2003. Included in financing activities in 2004 is $145.1 million of net proceeds received related to the 2024 Debentures issued in February 2004 offset by $201.4 million which was used to redeem the remaining 2006 Notes. Also contributing to the increase is $13.7 million increase in the issuance of subsidiary common stock to third parties, primarily by ChromaVision.

     2003 vs. 2002. Cash used in financing activities decreased $22.7 million in 2003 as compared to 2002. The change is due to paydowns of long-term debt of $18.3 million in 2002 versus $2.3 million in 2003, primarily related to the paydown of mortgage debt as a result of the sale of our corporate campus in 2002.

Contractual Cash Obligations and Other Commercial Commitments

     The following table summarizes our contractual obligations and other commercial commitments as of December 31, 2004, by period due or expiration of the commitment.

	Payments Due by Period
					2006 and		2008 and		Due after
	Total		2005		2007		2009		2009
	(In millions)
Contractual Cash Obligations
Long-term debt (a)	$	23.6	$	4.1	$	17.5	$	2.0	$	—
Capital leases		3.1		1.2		1.8		0.1		—
Convertible senior debentures(b)		150.0		—		—		—		150.0
Operating leases		20.1		5.0		6.8		6.1		2.2
Funding commitments(c)		20.8		7.2		7.9		4.3		1.4
Potential clawback liabilities(d)		4.1		—		—		—		4.1
Other long-term obligations(e)		4.3		0.5		1.1		1.2		1.5
Total Contractual Cash Obligations	$	226.0	$	18.0	$	35.1	$	13.7	$	159.2

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	Amount of Commitment Expiration by Period
					2006 and		2008 and		Due after
	Total		2005		2007		2009		2009
					(in millions)
					(unaudited)
Other Commitments
Letters of credit(f)	$	8.0	$	—	$	1.2	$	0.5	$	6.3

(a)	We have various forms of debt including lines of credit, term loans, equipment leases and mortgages. Of our total outstanding guarantees of $49 million, $18 million of outstanding debt associated with the guarantees is included on the Consolidated Balance Sheets at December 31, 2004. The remaining $31 million is not reflected on the Consolidated Balance Sheets or in the above table.
(b)	In February 2004, we completed the issuance of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024.
(c)	These amounts include funding commitments to private equity funds ($21 million). The amounts have been included in the respective years based on estimated timing of capital calls provided to us by the funds’ management.
(d)	Under certain circumstances, we may be required to return a portion or all the distributions we received as a general partner to the fund for a further distribution to the fund’s limited partners (the “clawback”). Assuming the funds in which we are a general partner are liquidated or dissolved on December 31, 2004 and the only value provided by the funds is the carrying values represented on the December 31, 2004 financial statements, the maximum clawback we would be required to return for our general partner interests is $7 million. Management estimates its liability to be approximately $4 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.
(e)	Reflects the amount payable to our former Chairman and CEO under a consulting contract.
(f)	Letters of credit include a $6.3 million letter of credit provided to the landlord of CompuCom’s Dallas headquarters lease in connection with the sale of CompuCom; $1.2 million letter of credit issued by a subsidiary supporting a subsidiary guarantee; and $0.5 million letter of credit issued by a subsidiary supporting its office lease.

     We have retention agreements with certain executive officers at December 31, 2004. The maximum aggregate exposure under the agreements is $8.5 million at December 31, 2004. This amount is not included in the above table.

     As of December 31, 2004, Safeguard and its subsidiaries consolidated for tax purposes had federal net operating loss carryforwards and federal capital loss carryforwards of approximately $170 million and $187 million, respectively. The net operating loss carryforwards expire in various amounts from 2005 to 2023. The capital loss carryforwards expire in various amounts from 2006 to 2008. Limitations on utilization of both the net operating loss carryforward and capital loss carryforward may apply.

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

  Recent Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), which replaced FIN 46. FIN 46R defines the provisions under which a Variable Interest Entity should be consolidated. FIN 46R is effective for all entities that are subject to

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the provisions of FIN 46R no later than the end of the first reporting period that ended after March 15, 2004. The Company accounts for, under the equity method, certain private equity funds that account for their investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” The effective date for FIN 46 has been delayed for these funds until the AICPA finalizes its proposed Statement of Position on clarifying the scope of the Audit Guide and accounting by the parent companies and equity method investors for investments in investment companies. If it is ultimately determined that FIN 46 applies to private equity funds, then the amount of equity income or loss the Company records on private equity funds accounted for under the equity method may change significantly.

     In February 2004, the FASB issued Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This EITF was issued to determine the meaning of other-than-temporary impairment and its application to investments in debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF 03-1 also applies to investments in equity securities that are both outside SFAS 115’s scope and are not accounted for by the equity method, which are defined as “cost method investments.” The impairment measurement and recognition guidance is delayed until the final issuance of FSP EITF 03-01-a. The disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company does not believe that the adoption of the impairment measurement and recognition provisions of EITF 03-1 will have a material impact on the Company’s financial statements.

     In September 2004, the FASB Task Force reached a consensus on EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” The Task Force ruled that all instruments that have embedded conversion features that are contingent on market conditions indexed to an issuer’s share price should be included in diluted earnings per share computations (if dilutive) regardless of whether the market conditions have been met. The effective date of the consensus has not been determined and will coincide with the effective date of the proposed Statement that revises SFAS No. 128 (“Earnings Per Share”). The Company has outstanding convertible debt as discussed in Note 9, which could be considered dilutive in periods in which the Company reports net income.

     In December 2004, the FSAB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.123R”). SFAS No. 123R will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123R requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123R is effective beginning as of the first interim or annual reporting period beginning after June 15, 2005. This new standard may be adopted in one of two ways – the modified prospective transition method or the modified retrospective transition method. The Company is in the process of determining the impact of the requirements of SFAS No. 123R, which will have a material impact on its consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of Accounting Principles Board (APB) Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our second quarter of fiscal 2006. We do not believe adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows.

Factors That May Affect Results

     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.

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Risks Related to Our Business

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

     If our 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 companies include:

•   many of our companies have a history of operating losses or a limited operating history and may never be profitable;

•   intensifying competition affecting the products and services our 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 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 companies.

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

The identity of our 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 companies. We also regularly evaluate alternate 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 companies in which we strategically focus, liquidate our interests in any of our companies or otherwise change the nature of our interests in our companies. Therefore, the identity of our companies and the nature of our interests in them could vary significantly from period to period.

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

•   At June 30, 2004, we consolidated the results of operations of the following companies: CompuCom Systems, Inc., Alliance Consulting Group Associates, Inc., Pacific Title and Arts Studio, Inc., Mantas, Inc. and ChromaVision Medical Systems, Inc.

•   In October 2004, CompuCom completed a merger transaction which resulted in the divestiture of our interest in CompuCom. As a result, commencing as of and for the period ending September 30, 2004, we accounted for CompuCom as a discontinued operation and all prior periods were reclassified to conform to this presentation.

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•   In December 2004, we completed the purchase of assets from Laureate Pharma, L.P., and we have consolidated the results of operations of the acquired business from the date of the transaction.

Our companies currently do not provide us with any cash flow from their operations so we rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations.

     We need capital to invest in new companies, to make additional investments in, or advances to, our existing companies and private equity funds, and to finance our corporate overhead. We also need cash to service and repay our outstanding debt. As a result, we have substantial cash requirements. Our companies currently do not provide us with any cash flow from their operations. To the extent our 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 investments 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 companies.

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

     The aggregate market value of our interests in our publicly traded companies (ChromaVision Medical Systems, Inc. (NASDAQ:CVSN)(soon-to-be called Clarient, Inc. – symbol “CLRT”) and eMerge Interactive, Inc. (NASDAQ:EMRG)) was approximately $77.2 million as of December 31, 2004. Fluctuations in the market price of the common stock of our publicly traded companies are likely to affect the price of our common stock. The market price of our public companies’ common stock has been highly volatile and subject to fluctuations unrelated or disproportionate to operating performance.

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

     We face intense competition from companies with business strategies similar to our own and from other capital providers as we acquire and develop interests in 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 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 on our investments. In addition, our strategy of actively operating our companies generally requires us to acquire majority or controlling interests in companies. This may place us at a competitive disadvantage to some of our competitors because they may have more flexibility than we do in structuring acquisitions.

We may be unable to obtain maximum value for our holdings in companies or liquidate our interests in companies on a timely basis.

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

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     The absolute size of our holdings in our companies may also affect our ability to sell our interest in companies on a timely basis. Registration and other requirements under applicable securities laws, as well as our need to comply with the Investment Company Act, may adversely affect our ability to dispose of our interest in companies 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 companies participate decline.

     Our strategy involves creating value for our shareholders by helping our companies grow and, if appropriate, accessing the public and private capital markets. Therefore, our success is dependent on the value of our 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 companies to decline. If valuations in the market sectors in which our companies participate decline, our companies’ access to the public and private capital markets on terms acceptable to them may be limited.

Our 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 company interests.

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

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

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

     Our inability to adequately control our 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 companies may not collaborate with each other or 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 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 an operating company that conducts its business operations principally through majority-owned subsidiaries and are not engaged primarily in the business of investing, reinvesting or trading in securities. We are also in compliance with the 40% Test. Consequently, we do not believe that we are an investment company under the Investment Company Act.

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     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 managing, operating and promoting collaboration by and among our companies. 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 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 company. Our ownership levels may also be affected if our companies are acquired by third parties or if our 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 companies.

Several lawsuits have been brought or threatened against us and our companies and the outcomes of these lawsuits are uncertain.

     We and Warren V. Musser, our former Chairman, were named as defendants in a putative class action filed on June 26, 2001 in U.S. 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 our 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 us 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 our companies, the impact of competition on prospects for one or more of our companies and our lack of a superior business plan. On October 23, 2001, the Court entered an order consolidating the two cases and, on April 5, 2002, plaintiffs filed a consolidated and amended class action complaint for violation of the federal securities laws. 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 in the consolidated action, which motion was denied by the Court on February 18, 2004. On July 12, 2004, a third putative class action complaint captioned Mandell v. Safeguard Scientifics, Inc., et al. was filed against 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.

     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, plaintiffs filed an amended class action complaint

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under the caption of one of the three actions (the “Amended Complaint”) that names us, CompuCom and its directors as defendants. The Amended Complaint alleges that CompuCom, its directors, and we breached fiduciary duties in connection with the merger agreement relating to the acquisition of CompuCom by an affiliate of Platinum Equity, LLC and aided and abetted one another in the course of committing the alleged breach. Among other things, the Amended Complaint alleges that the defendants failed to obtain the best transaction reasonably available and 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. The Amended Complaint seeks (i) an injunction against the proposed transaction, (ii) an order invalidating the proposed transaction in the event it is consummated, (iii) an order directing CompuCom’s directors to obtain a transaction that is in the best interests of all of its stockholders and to disclose all material information to stockholders in connection with any transaction, and (iv) the imposition of a constructive trust, in favor of plaintiffs, upon any benefits improperly received by defendants. On July 27, 2004, 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. 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, plaintiffs filed a Second Amended Complaint alleging substantially similar claims. On November 5, 2004, defendants filed motions to dismiss the Second Amended Complaint.

     Finally, we, as well as our 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 companies.

Risks Related to Our Companies

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

     Many of our companies have a history of operating losses or limited operating history, have significant historical losses and may never be profitable. Many of these companies 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 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 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 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 companies. This may place our companies at a disadvantage in responding to the offerings of their competitors, technological changes or changes in client requirements. Also, our 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 companies may compete against companies within our network of companies.

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

     If our 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 companies will achieve or maintain market penetration or commercial success, or that the businesses of our companies will be successful.

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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 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 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 companies may not be able to respond to the rapid technology changes in an economically efficient manner, and our companies may become or remain unprofitable.

Many of our companies may grow rapidly and may be unable to manage their growth.

     We expect some of our companies to grow rapidly. Rapid growth often places considerable operational, managerial and financial strain on a business. To successfully manage rapid growth, our 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 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 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 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 companies with sufficient capital resources to enable them to reach a cash flow positive position. If our companies need to, but are not able to raise capital from other outside sources, then they may need to cease or scale back operations.

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

     Our companies assert various forms of intellectual property protection. Intellectual property may constitute an important part of our 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 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 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 companies’ technology, or third parties may develop similar technology independently.

     Some of our 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 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 companies’ proprietary rights, with or without merit, could subject our companies to costly litigation and the diversion of their technical and management personnel from other business concerns. If our companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our companies will increase and their profits, if any, will decrease.

     Third parties may assert infringement or other intellectual property claims against our companies based on their patents or other intellectual property claims. Even though we believe our 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 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 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 companies could face legal liabilities from claims made against their operations, products or work.

     The manufacture and sale of certain of our companies’ products entails an inherent risk of product liability. Certain of our companies maintain product liability insurance. Although none of our 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 companies’ revenues and income. In addition, many of the engagements of our companies involve projects that are critical to the operation of their clients’ businesses. If our 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 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 companies or may not be enforceable. Also as consultants, some of our 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 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 companies are subject to the impact of economic downturns.

     The results of operations of our 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 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 companies.

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

     Our companies are dependent upon their ability to attract and retain senior management and key personnel, including trained technical and marketing personnel. Our companies will also need to continue to hire additional personnel as they expand. Some of our companies have employees represented by labor unions. Although these 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 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 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 companies. If Medicare or private payors change the rates at which our companies or their customers are reimbursed by insurance providers for their products, such changes could adversely impact our 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 companies may be negatively impacted.

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

     Some of our 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 7A. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities (except the Tellabs transactions, which were completed in August 2002). Based on closing market prices at December 31, 2004, the fair market value of our holdings in public securities was approximately $77.2 million. A 20% decrease in equity prices would result in an approximate $15.4 million decrease in the fair value of our publicly traded securities. At December 31, 2004, the value of the collateral securing the Musser loan included $0.6 million of publicly traded securities. A 20% decrease in the fair value of these securities would result in a charge of approximately $0.1 million.

     In February 2004, we completed the issuance of $150 million of fixed rate notes with a stated maturity of March 2024. Interest payments of approximately $2.0 million each are due March and September of each year starting in September 2004. The holders of the 2024 Debentures may require repurchase of the notes on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective principal amounts plus accrued and unpaid interest. On October 8, 2004, we utilized approximately $16.7 million of the proceeds from the CompuCom sale to escrow interest payments due through March 15, 2009.

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										After			Fair Market
Liabilities	2005			2006			2007			2007			Value at 12/31/04
Convertible Senior Debentures due by year (in millions)	$	—		$	—		$	—		$	150.0		$	115.1
Fixed Interest Rate		2.625	%		2.625	%		2.625	%		2.625	%		2.625	%
Interest Expense (in millions)	$	3.9		$	3.9		$	3.9		$	63.8			N/A

     At December 31, 2004, our outstanding debt totaled $26.7 million, which consisted of fixed rate debt of $10.1 million and variable-rate debt of $16.6 million. Based on our 2004 average outstanding borrowings under our variable-rate debt, a one-percentage point increase in interest rates would negatively impact our annual pre-tax earnings and cash flows by approximately $0.1 million.

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

Item 8. Financial Statements and Supplementary Data

     The following Consolidated Financial Statements, and the related Notes thereto, of Safeguard Scientifics, Inc. and the Report of Independent Auditors as filed as a part of this Form 10-K.

	Page
Management’s Report on Internal Control over Financial Reporting	65
Report of Independent Registered Public Accounting Firm	66
Report of Independent Registered Public Accounting Firm	68
Consolidated Balance Sheets as of December 31, 2004 and 2003	69
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002	70
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002	71
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002	72
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002	73
Notes to Consolidated Financial Statements	74

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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

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

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

     Management evaluated our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2004, our internal control over financial reporting was effective.

     The Company acquired Laureate Pharma, Inc. and Alliance acquired Mensamind, Inc. during 2004, and management excluded from its assessment of the effectiveness of internal control over financial reporting of the Company as of December 31, 2004, the internal control over financial reporting of Laureate Pharma, Inc. and Mensamind, Inc. associated with total assets of $37.4 million and total revenues of $1.0 million included in the consolidated financial statements of the Company and subsidiaries as of and for the year ended December 31, 2004.

     Our independent registered public accounting firm, KPMG LLP, have audited management’s assessment of our internal control over financial reporting. Their opinion on management’s assessment and their opinions on the effectiveness of our internal control over financial reporting and on our financial statements appears on the following page.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing on page 65 of the financial statements, that Safeguard Scientifics, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of Safeguard Scientifics, Inc. is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Safeguard Scientifics, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also, in our opinion, Safeguard Scientifics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by COSO.

Safeguard Scientifics, Inc. acquired Laureate Pharma, Inc. and Alliance acquired Mensamind, Inc. during 2004, and management excluded from its assessment of the effectiveness of internal control over financial reporting of Safeguard Scientifics, Inc. as of December 31, 2004, the internal control over financial reporting of Laureate Pharma, Inc. and Mensamind, Inc. associated with total assets of $37.4 million and total revenues of $1.0 million included in the consolidated financial statements of Safeguard Scientifics, Inc. and subsidiaries as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of Safeguard Scientifics, Inc. also excluded an evaluation of the internal control over financial reporting of Laureate Pharma, Inc. and Mensamind, Inc.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 14, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 14, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc. (the “Company”) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 1 to the Consolidated Financial Statements, the Company adopted SFAS No. 142, “Goodwill and Intangible Assets,” on January 1, 2002.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of internal control over financial reporting of Safeguard Scientifics, Inc. as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 14, 2005

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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2004			2003
	(In thousands except per
	share data)
ASSETS
Current Assets
Cash and cash equivalents	$	146,874		$	136,715
Restricted cash		1,119			1,069
Marketable securities		33,555			7,081
Restricted marketable securities		3,771			—
Accounts receivable, less allowances ($1,078 - 2004; $1,016 - 2003)		37,677			33,363
Prepaid expenses and other current assets		8,974			7,278
Current assets of discontinued operations		—			333,150
Total current assets		231,970			518,656
Property and equipment, net		45,135			14,873
Ownership interests in and advances to companies		35,311			53,119
Long-term marketable securities		11,964			—
Long-term restricted marketable securities		13,045			—
Intangible assets, net		10,855			10,017
Goodwill		93,049			90,763
Note receivable — related party		1,384			11,946
Other		11,099			7,884
Non-current assets of discontinued operations		—			129,228
Total Assets	$	453,812		$	836,486
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	15,456		$	11,530
Accounts payable		6,370			3,836
Accrued compensation and benefits		12,480			14,470
Accrued expenses		20,909			14,850
Deferred revenue		7,267			9,607
Current liabilities of discontinued operations		—			186,166
Total current liabilities		62,482			240,459
Long-term debt		11,210			2,537
Other long-term liabilities		11,785			13,152
Convertible subordinated notes		—			200,000
Convertible senior debentures		150,000			—
Non-current liabilities of discontinued operations		—			129,610
Deferred taxes		880			—
Minority interest		11,652			14,557
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $0.10 par value; 1,000 shares authorized		—			—
Common stock, $0.10 par value; 500,000 shares authorized; 119,893 and 119,450 shares issued and outstanding in 2004 and 2003		11,989			11,945
Additional paid-in capital		750,564			737,560
Accumulated deficit		(565,018	)		(510,198	)
Accumulated other comprehensive income (loss)		11,786			(39	)
Treasury stock, at cost (53 shares-2003)		—			(191	)
Unamortized deferred compensation		(3,518	)		(2,906	)
Total shareholders’ equity		205,803			236,171
Total Liabilities and Shareholders’ Equity	$	453,812		$	836,486

See Notes to Consolidated Financial Statements.

69

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2004			2003			2002
	(In thousands except per share data)
Revenue
Product sales	$	8,397		$	17,822		$	20,241
Service sales		148,312			149,616			94,235
Total revenue		156,709			167,438			114,476
Operating Expenses
Cost of sales — product		2,728			6,879			4,375
Cost of sales — service		102,271			93,278			44,848
Selling, general and administrative		103,771			110,812			118,894
Amortization of intangibles		5,129			9,499			7,660
Impairment		—			15,968			6,575
Total operating expenses		213,899			236,436			182,352
Operating loss		(57,190	)		(68,998	)		(67,876	)
Other income (loss), net		38,804			48,930			(5,149	)
Impairment — related party		(3,400	)		(659	)		(11,434	)
Interest income		2,628			2,197			6,313
Interest expense		(9,761	)		(12,173	)		(21,661	)
Equity loss		(14,534	)		(17,179	)		(51,004	)
Minority interest		8,428			6,754			10,172
Net loss from continuing operations before income taxes and change in accounting principle		(35,025	)		(41,128	)		(140,639	)
Income tax benefit (expense)		24			(209	)		(46	)
Net loss from continuing operations before change in accounting principle		(35,001	)		(41,337	)		(140,685	)
Discontinued operations, net of income taxes		(19,819	)		8,006			12,017
Cumulative effect of change in accounting principle		—			—			(21,815	)
Net Loss	$	(54,820	)	$	(33,331	)	$	(150,483	)
Basic Income (Loss) Per Share:
Loss from continuing operations	$	(0.29	)	$	(0.35	)	$	(1.19	)
Net income (loss) from discontinued operations		(0.17	)		0.07			0.09
Cumulative effect of change in accounting principle		—			—			(0.18	)
Net Loss Per Share	$	(0.46	)	$	(0.28	)	$	(1.28	)
Diluted Income (Loss) Per Share:
Loss from continuing operations	$	(0.29	)	$	(0.35	)	$	(1.20	)
Net income (loss) from discontinued operations		(0.17	)		0.05			0.08
Cumulative effect of change in accounting principle		—			—			(0.18	)
Net Loss Per Share	$	(0.46	)	$	(0.30	)	$	(1.30	)
Shares Used in Computing — Basic and Diluted Income (Loss) Per Share		119,965			118,486			117,736

See Notes to Consolidated Financial Statements.

70

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Net Loss from Continuing Operations	$	(35,001	)	$	(41,337	)	$	(140,685	)
Other Comprehensive Income (Loss), Before Taxes:
Foreign currency translation adjustments		(139	)		(36	)		—
Unrealized holding gains (losses) in available-for-sale securities		11,964			12,364			(964	)
Reclassification adjustments		—			(16,248	)		1,817
Related Tax (Expense) Benefit:
Unrealized holding losses in available-for-sale securities		—			130			337
Reclassification adjustments		—			1,229			(636	)
Other Comprehensive Income (Loss) from Continuing Operations		11,825			(2,561	)		554
Comprehensive Loss from Continuing Operations		(23,176	)		(43,898	)		(140,131	)
Income (loss) from discontinued operations		(19,819	)		8,006			12,017
Cumulative effect of change in accounting principle		—			—			(21,815	)
Comprehensive Loss	$	(42,995	)	$	(35,892	)	$	(149,929	)

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

											Accumulated
											Other
					Additional						Comprehensive									Unamortized
	Common Stock				Paid-In			Accumulated			Income			Treasury Stock						Deferred
	Shares		Amount		Capital			Deficit			(Loss)			Shares			Amount			Compensation			Total
	(In thousands)
Balance — December 31, 2001		118,154	$	11,815	$	744,005		$	(326,384	)	$	1,968			381		$	(11,528	)	$	(1,080	)	$	418,796
Net loss		—		—		—			(150,483	)		—			—			—			—			(150,483	)
Issuance of restricted stock, net		1,296		130		(5,723	)		—			—			(348	)		11,399			(5,806	)		—
Amortization of deferred compensation		—		—		1,592			—			—			—			—			1,828			3,420
Other comprehensive income		—		—		—			—			554			—			—			—			554
Balance — December 31, 2002		119,450		11,945		739,874			(476,867	)		2,522			33			(129	)		(5,058	)		272,287
Net loss		—		—		—			(33,331	)		—			—			—			—			(33,331	)
Stock options exercised, net		—		—		(325	)		—			—			(200	)		651			—			326
Acceleration of vesting of stock options		—		—		29			—			—			—			—			—			29
Restricted stock forfeitures, net		—		—		—			—			—			220			(713	)		713			—
Amortization of deferred compensation		—		—		108			—			—			—			—			2,295			2,403
Impact of subsidiary equity transactions		—		—		(2,126	)		—			—			—			—			(856	)		(2,982	)
Other comprehensive loss		—		—		—			—			(2,561	)		—			—			—			(2,561	)
Balance — December 31, 2003		119,450		11,945		737,560			(510,198	)		(39	)		53			(191	)		(2,906	)		236,171
Net loss		—		—		—			(54,820	)		—			—			—			—			(54,820	)
Stock options exercised, net		369		37		1,104			—			—			(73	)		251			—			1,392
Acceleration of vesting of stock options		—		—		130			—			—			—			—			(130	)		130
Amortization of deferred compensation		—		—		—			—			—			—			—			2,729			2,729
Impact of subsidiary equity transactions		—		—		8,661			—			—			—			—			(389	)		8,272
Issuance of restricted stock, net		74		7		3,109			—			—			20			(60	)		(2,952	)		104
Other comprehensive income		—		—		—			—			11,825			—			—			—			11,825
Balance — December 31, 2004		119,893	$	11,989	$	750,564		$	(565,018	)	$	11,786			—		$	—		$	(3,518	)	$	205,803

See Notes to Consolidated Financial Statements.

72

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Cash Flows from Operating Activities of Continuing Operations
Net loss	$	(54,820	)	$	(33,331	)	$	(150,483	)
Adjustments to reconcile to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations		19,819			(8,006	)		(12,017	)
Cumulative effect of change in accounting principle		—			—			21,815
Depreciation and amortization		13,173			17,298			14,650
Deferred income taxes		62			(130	)		—
Equity loss		14,534			17,179			51,004
Other (income) loss, net		(38,804	)		(48,930	)		5,149
Impairment		—			15,968			6,575
Impairment — related party		3,400			659			11,434
Non-cash compensation charges		4,272			2,690			3,420
Minority interest		(8,438	)		(8,207	)		(10,178	)
Changes in assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable, net		(3,254	)		(2,068	)		9,146
Income tax receivable		—			—			63,473
Accounts payable, accrued expenses, deferred revenue and other		1,995			(631	)		1,371
Net cash provided by (used in) operating activities of continuing operations		(48,061	)		(47,509	)		15,359
Cash Flows from Investing Activities of Continuing Operations
Proceeds from sales of available-for-sale and trading securities		14,784			38,981			13,273
Proceeds from sales of and distributions from companies and funds		39,085			38,955			24,738
Proceeds from sale of CompuCom, net		125,853			—			—
Advances to companies		(1,015	)		(139	)		(4,397	)
Repayment of advances to companies		400			753			—
Acquisitions of ownership interests in companies, funds and subsidiaries, net of cash acquired		(34,797	)		(18,931	)		(79,254	)
Acquisitions by subsidiaries, net of cash acquired		(57	)		—			—
Advances to related party		—			—			(618	)
Repayments of advances to related party		7,162			1,940			1,556
Increase in restricted cash and short-term investments		(37,660	)		(16,263	)		(33,626	)
Decrease in restricted cash and short-term investments		11,643			21,783			28,039
Purchase of restricted securities		(16,715	)		—			—
Proceeds from sale of building		—			—			17,672
Capital expenditures		(10,956	)		(7,115	)		(6,335	)
Capitalized software costs		(4,300	)		(2,094	)		(2,242	)
Other, net		(118	)		(372	)		368
Net cash provided by (used in) investing activities of continuing operations		93,309			57,498			(40,826	)
Cash Flows from Financing Activities of Continuing Operations
Proceeds from convertible senior debentures		150,000			—			—
Payments of offering costs on convertible senior debentures		(4,887	)		—			—
Repurchase of convertible subordinated notes		(200,000	)		—			—
Payments of costs to repurchase convertible subordinated notes		(1,368	)		—			—
Borrowings on revolving credit facilities		72,749			91,094			8,562
Repayments on revolving credit facilities		(66,103	)		(90,949	)		(13,713	)
Borrowings on term debt		2,796			3,518			919
Repayments on term debt		(2,299	)		(2,281	)		(18,347	)
Payment on contract termination		—			(1,623	)		—
Decrease (increase) in restricted cash		44			(550	)		—
Issuance of Company common stock, net		1,392			326			—
Issuance of subsidiary common stock, net		14,176			482			755
Offering costs on issuance of subsidiary common stock		(1,589	)		(31	)		(914	)
Net cash used in financing activities of continuing operations		(35,089	)		(14	)		(22,738	)
Net Increase (Decrease) in Cash and Cash Equivalents		10,159			9,975			(48,205	)
Cash and Cash Equivalents at beginning of period		136,715			126,740			174,945
Cash and Cash Equivalents at end of period	$	146,874		$	136,715		$	126,740

See Notes to Consolidated Financial Statements.

73

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

  Description of the Company

     Safeguard Scientifics, Inc. (Safeguard or the Company) is focused on owning and operating businesses engaged in a number of diverse business activities. The Company focuses primarily on companies in the Time-To-Volume stage of development. Time-To-Volume companies generally are generating revenues from commercially viable products or services but are facing new challenges as they scale their businesses to meet market opportunities. The Company seeks to create long-term shareholder value by helping companies primarily in the information technology and life sciences industries develop through superior operations and management. Safeguard’s value creation strategy is designed to drive superior growth at our companies by providing leadership and counsel, capital support and financial expertise, strategic guidance and operating discipline, access to best practices and industry knowledge.

     The Company offers a range of operational and management services to each of our companies through a team of dedicated professionals. The Company engages in an ongoing planning and assessment process through our involvement and engagement in the development of our companies, and our executives provide mentoring, advice and guidance to develop the management of Safeguard’s companies. The Company focuses our resources on the operations of Safeguard’s consolidated, majority-owned companies in order to assist them in increasing market penetration, growing revenue, improving cash flow and creating long-term value growth.

  Basis of Presentation

     The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which it directly or indirectly owns more than 50% of the outstanding voting securities.

     The Company’s Consolidated Statements of Operations, Comprehensive Loss and Cash Flows also include the following subsidiaries:

Year Ended
December 31, 2004	December 31, 2003	December 31, 2002
Alliance Consulting Group Associates ChromaVision Medical Systems     (soon to be known as “Clarient”) Laureate Pharma     (since December 2004) Mantas Pacific Title and Arts Studio	Agari Mediaware     (through June 2003) Alliance Consulting Group Associates ChromaVision Medical Systems Mantas Pacific Title and Arts Studio Protura Wireless (through June 2003) SOTAS (merged with Mantas –     October 2003) Tangram Enterprise Solutions	Agari Mediaware Alliance Consulting Group Associates     (since December 2002) aligne (merged with Alliance     December 2002) Aptas (through March 2002) ChromaVision Medical Systems     (since June 2002) Lever8 (merged with Alliance     December 2002) Mantas (since April 2002) Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions

74

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

December 31, 2004	December 31, 2003
Alliance Consulting Group Associates	Alliance Consulting Group Associates
ChromaVision Medical Systems	ChromaVision Medical Systems
Laureate Pharma	Mantas
Mantas	Pacific Title and Arts Studio
Pacific Title and Arts Studio	Tangram Enterprise Solutions

     Alliance operates on a 52 or 53-week fiscal year, ending on the Saturday closest to December 31. Alliance’s last three fiscal years have ended on January 1, 2005, December 27, 2003 and December 28, 2002. Fiscal year 2004 was a period of 53 weeks, while fiscal years 2003 and 2002 were periods of 52 weeks. The Company and all other subsidiaries operate on a calendar year.

     During 2004, 2003 and 2002, certain consolidated companies were either disposed of or ceased operations, resulting in deconsolidation during the year.

     CompuCom Systems, Inc., previously a majority-owned subsidiary, is accounted for as a discontinued operation (see Note 2). Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of this business have been segregated from those of continuing operations for all periods presented.

     Tangram was consolidated through February 20, 2004 at which time it was sold to Opsware, Inc. in a stock and debt for stock exchange. The Company recorded an $8.5 million gain on the transaction, which is included in Other Income (Loss), Net on the Consolidated Statements of Operations for the year ended December 31, 2004.

  Principles of Accounting for Ownership Interests in Companies

     The Company’s ownership interests in its companies are accounted for under three methods: consolidation, equity and cost. The applicable accounting method is generally determined based on the Company’s voting interest in the entity.

     Consolidation Method. The companies in which the Company directly or indirectly owns more than 50% of the outstanding voting securities are accounted for under the consolidation method of accounting. Under this method, these company’s financial statements are included within the Company’s Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Participation of other shareholders in the net assets and in the income or losses of these consolidated companies is reflected in Minority Interest in the Consolidated Balance Sheets and Statements of Operations. Minority Interest adjusts the Company’s consolidated operating results to reflect only the Company’s share of the earnings or losses of the consolidated company. However, if there is no minority interest balance remaining on the Consolidated Balance Sheets related to the respective company, the Company records 100% of the consolidated company’s losses. The results of operations and cash flows of a consolidated company are included through the latest interim period in which the Company owned a 50% or greater voting interest. Upon dilution of control below 50%, the accounting method is adjusted to either the equity or cost method of accounting.

     Equity Method. The companies whose results are not consolidated, but over whom the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to the company depends on an evaluation of several factors including, among others, representation on the company’s Board of Directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. The Company also accounts for

75

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

its interests in some private equity funds under the equity method of accounting, based on its respective general and limited partner interests. Under the equity method of accounting, the company’s financial statements are not reflected within the Company’s Financial Statements; however, the Company’s share of the income or loss of the company is reflected in Equity Loss in the Consolidated Statements of Operations. The carrying value of equity method companies is included in Ownership Interests and Advances to Companies on the Consolidated Balance Sheets.

     When the Company’s investment in an equity method company is reduced to zero, no further losses are recorded in the Company’s Consolidated Statements of Operations unless the Company has outstanding guarantee obligations or has committed additional funding to the equity method company. When the equity method company subsequently reports income, the Company will not record its share of such income until it equals the amount of the Company’s share of losses not previously recognized.

     Cost Method. Companies not consolidated or accounted for under the equity method are accounted for under the cost method of accounting. Under the cost method, the Company’s share of the income or losses of such entities is not included in the Company’s Consolidated Statements of Operations.

     In addition to the Company’s investments in voting and non-voting equity and debt securities, it also periodically makes advances to its companies in the form of promissory notes which are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting By Creditors for Impairment of a Loan.”

     Impairment. On a continuous basis, but no less frequently than at the end of each quarterly period, the Company evaluates the carrying value of its 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. The business plan objectives and milestones the Company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. Management then determines whether there has been an other than temporary decline in the carrying value of its ownership interest in the company. Impairment is measured by the amount by which the carrying amount of the assets exceeds their fair values.

     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. 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.

     Impairment charges related to consolidated companies are included in Impairment on the Consolidated Statements of Operations. Impairment charges associated with equity method companies are included in Equity Loss in the Consolidated Statements of Operations. Impairment charges related to cost method companies are included in Other Income (Loss), Net in the Consolidated Statements of Operations.

     The new cost basis of a company is not written-up if circumstances suggest the value of the company has subsequently recovered.

  Accounting Estimates

     The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. These estimates include evaluation of the Company’s investments in its companies, investments in marketable securities, asset impairment, revenue recognition, income taxes and commitments and contingencies.

76

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

     It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests in and advances to companies, goodwill and intangible assets and the estimated useful life of amortizable intangible assets could change in the near term and that the effect of such changes on the financial statements could be material. At December 31, 2004, the Company believes the recorded amount of carrying value of the Company’s ownership interests in and advances to companies, goodwill and intangible assets is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future, or that a significant loss will not be recorded in the future upon the sale of a company.

  Reclassifications

     Certain prior year amounts have been reclassified to conform to the current year presentation including the reclassification of CompuCom, previously a majority owned subsidiary, as discontinued operations as a result of the sale of the Company’s interest in October 2004. The impact of these changes did not affect the Company’s net loss.

  Cash and Cash Equivalents, Short-Term Marketable Securities and Restricted Cash

     The Company considers all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits that are readily convertible into cash. The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Short-term marketable securities consist of held-to-maturity securities consisting of certificates of deposits and commercial paper at December 31, 2004 and certificates of deposit at December 31, 2003. Restricted cash is primarily invested in money market instruments.

  Restricted Marketable Securities

     Restricted marketable securities include held-to-maturity securities, as it is the Company’s ability and intent to hold these securities to maturity. The securities are U.S. Treasury securities with various maturity dates. Pursuant to terms of the 2024 Debentures, as a result of the sale of CompuCom, the Company pledged the securities to the escrow agent for interest payments through March 15, 2009 on the 2024 Debentures resulting as restricted on the balance sheet (See Note 4).

  Long-Term Marketable Securities

     The Company records its ownership interest in cost method equity securities that have readily determinable fair value as available-for-sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders’ equity. Unrealized losses are charged against net loss when a decline in the fair value is determined to be other than temporary. Trading securities are carried at fair value, based on quoted market prices, with the unrealized gain or loss included in Other Income (Loss), Net, in the Consolidated Statements of Operations. The Company records its ownership interest in debt securities at amortized cost because it has the ability and intent to hold these securities until maturity.

77

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

  Derivative Financial Instruments

     The Company has used derivative instruments to manage its exposure to fluctuations in certain investments in publicly held securities. These derivatives were settled in 2002. Derivative financial instruments were recognized at fair value in the statement of financial position, and the corresponding gains or losses were reported either in the Statements of Operations or as a component of Comprehensive Loss, depending on the type of hedging relationship that existed. If the derivative was determined to be a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives were offset against the change in the fair value of the hedged assets, liabilities or firm commitments through the Statement of Operations or recognized in Other Comprehensive Loss until the hedge item was recognized in the Statements of Operations. The ineffective portion of a derivative’s change in fair value was immediately recognized in the Statements of Operations.

  Financial Instruments

     The Company’s financial instruments, principally cash and cash equivalents, restricted cash, marketable securities, restricted marketable securities, accounts receivable, notes receivable, accounts payable, accrued expenses and deferred revenue are carried at cost which approximates fair value due to the short-term maturity of these instruments. The Company’s long-term debt is carried at cost which approximates fair value as the debt bears interest at rates approximating current market rates. At December 31, 2004, the market value of the Company’s convertible senior debentures was approximately $115 million based on quoted market prices.

  Property and Equipment

     Property and equipment are stated at cost. Equipment under capital leases are stated at the present value of minimum lease payments. Provision for depreciation and amortization is based on the lesser of the estimated useful lives of the assets or the remaining lease term (buildings and leasehold improvements, 5 to 15 years; machinery and equipment, 1 to 13 years) and is computed using the straight-line method.

  Intangible Assets, net

     SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives continue to be amortized over their respective estimated useful lives to their estimated residual value.

     Purchased in-process research and development (“IPR&D”) represents the value assigned in a purchase business combination to research and development projects of the acquired business that had commenced but had not yet been completed at the date of acquisition and which have no alternative future use. In accordance with SFAS No. 2, “Accounting for Research and Development Costs,” as clarified by FASB Interpretation No. 4, amounts assigned to IPR&D meeting the above criteria must be charged to expense as part of the allocation of the purchase price of the business combination.

  Goodwill

     SFAS No. 142 requires that goodwill be tested for impairment at least annually.

  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets, including property and equipment and amortizable intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to

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forecasted undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

  Recoverability of Note Receivable — Related Party

     The Company evaluates the recoverability of its Note Receivable — Related Party in accordance with SFAS No. 114. Under SFAS No. 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis, the Company assesses the recoverability of the loan by reviewing the fair value of the liquid collateral supporting the loan and estimating future cash flows discounted at the loan’s effective rate as well as determining whether there has been any significant, adverse, other than temporary, changes in the estimated fair value of the collateral that does not have readily available fair values. Impairment charges are included in Impairment — Related Party on the Consolidated Statements of Operations. The Company does not accrue interest when a note is considered impaired. All cash receipts from impaired notes are applied to reduce the principal amount of such note until the principal has been fully recovered, and is recognized as interest income thereafter.

  Deferred Revenue

     Deferred revenue represents cash collections on contracts in advance of performance of services or delivery of products and is recognized as revenue when the related services are performed or products are delivered.

  Revenue Recognition

     During 2004, 2003 and 2002, our revenue from continuing operations was primarily attributable to Alliance, ChromaVision, Mantas and Pacific Title.

     Alliance generates revenue from consulting services. Revenue is generally recognized when persuasive evidence of an arrangement exists, services are performed, the service fee is fixed and determinable and collectability is probable. Revenue is generally recognized upon the performance of services. Certain services are performed under fixed-price service contracts related to discrete projects. Revenue from these contracts are recognized 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.

     ChromaVision generates revenue from Diagnostic Services, instrument sales and fee-per-use charges. ChromaVision recognizes revenue for Diagnostic Services at the time of completion of services at amounts equal to those amounts expected for collection 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 ChromaVision’s collection experience with other third party payors.

     ChromaVision places most of its ACIS^® units with users on a “fee-per-use” basis. ChromaVision recognizes revenue based on the greater of actual usage fees or the minimum monthly rental fee. Under this pricing model, ChromaVision 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, ChromaVision 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, ChromaVision 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

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maintenance contract, typically twelve months. Revenue on system sales is recognized upon acceptance by the customer, often subsequent to a testing and evaluation period.

     Mantas recognizes revenue from software licenses, post contract customer support (PCS) and related consulting services. 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, specified upgrades, PCS, and/or other services, Mantas allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence. Revenue from maintenance agreements is recognized ratably over the term of the maintenance period, generally from one to five years. 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 transactions that include significant production, development or customization, revenue is recognized using the percentage of completion method. Mantas measures progress toward completion by a reference to total costs incurred compared to total costs expected to be incurred in completing the development effort. Mantas’ revenue calculated using the percentage 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 until Mantas has evidence that the acceptance provisions have been met. 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.

     Pacific Title’s revenue is primarily derived from film title and special effects service contracts to the motion picture and television industry. 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 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.

  Stock-Based Compensation

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

     In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” – an amendment to SFAS 123.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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     The Company elected to continue to account for stock-based compensation in accordance with APB Opinion No. 25. Had compensation cost been recognized consistent with SFAS No. 148, the Company’s consolidated net loss from continuing operations and net loss from discontinued operations and loss per share from continuing operations and loss per share from discontinued operations would have been as follows:

		Twelve Months Ended December 31,
		2004			2003			2002
		(in thousands, except per share data)
Consolidated net loss from continuing operations	As reported	$	(35,001	)	$	(41,337	)	$	(140,685	)
Add: Stock based compensation expense included in net loss	As reported		4,272			2,690			3.420
Deduct: Total stock based employee compensation expense from continuing operations determined under fair value based method for all awards, net of related tax effects			(9,371	)		(9,707	)		(8,727	)
Consolidated net loss from continuing operations	Pro forma		(40,100	)		(48,354	)		(145,992	)
Income (loss) from discontinued operations	As reported		(19,819	)		8,006			12,017
Cumulative change in accounting principle	As reported		—			—			(21,815	)
Deduct: Total stock based employee compensation expense from discontinued operations determined under fair value based method for all awards, net of related tax effects			(277	)		(1,053	)		(1,217	)
	Pro forma	$	(60,196	)	$	(41,401	)	$	(157,007	)
Basic Income (Loss) Per Share:
Loss from continuing operations	As reported	$	(0.29	)	$	(0.35	)	$	(1.19	)
Income (loss) from discontinued operations	As reported		(0.17	)		0.07			0.09
Cumulative change in accounting principle	As reported		—			—			(0.18	)
		$	(0.46	)	$	(0.28	)	$	(1.28	)
Loss from continuing operations	Pro forma	$	(0.33	)	$	(0.41	)	$	(1.24	)
Income (loss) from discontinued operations	Pro forma		(0.17	)		0.06			0.09
Cumulative change in accounting principle	Pro forma		—			—			(0.18	)
		$	(0.50	)	$	(0.35	)	$	(1.33	)
Diluted Income (Loss) Per Share:
Loss from continuing operations	As reported	$	(0.29	)	$	(0.35	)	$	(1.20	)
Income (loss) from discontinued operations	As reported		(0.17	)		0.05			0.08
Cumulative change in accounting principle	As reported		—			—			(0.18	)
		$	(0.46	)	$	(0.30	)	$	(1.30	)
Loss from continuing operations	Pro forma	$	(0.33	)	$	(0.41	)	$	(1.24	)
Income (loss) from discontinued operations	Pro forma		(0.17	)		0.06			0.09
Cumulative change in accounting principle	Pro forma		—			—			(0.18	)
		$	(0.50	)	$	(0.35	)	$	(1.33	)
Per share weighted average fair value of stock options issued on date of grant		$	1.45		$	1.96		$	1.56

     The following ranges of assumptions were used by the Company, its subsidiaries and its companies accounted for under the equity method to determine the fair value of stock options granted during the years ended December 31, 2004, 2003 and 2002 using the Black-Scholes option-pricing model for public companies and subsidiaries and the minimum value method for private equity method companies:

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	Year Ended December 31,
	2004	2003	2002
Company
Dividend yield	0%	0%	0%
Expected volatility	85% to 95%	95%	90% to 95%
Average expected option life	5 years	5 years	5 years
Risk-free interest rate	3.5% to 3.9%	2.5% to 3.3%	2.6% to 5.0%

	Year Ended December 31,
	2004	2003	2002
Subsidiaries and Equity Method Companies
Dividend yield	0%	0%	0%
Expected volatility	70% to 109%	0% to 287%	0% to 212%
Average expected option life	4 to 5 years	3 to 8 years	4 to 10 years
Risk-free interest rate	2.5% to 3.9%	1.8% to 4.5%	1.8% to 5.7%

     Detailed information regarding the Company’s stock-based compensation plans may be found in Note 13.

  Defined Contribution Plans

     Defined contribution plans are contributory and cover eligible employees of the Company and certain subsidiaries. The plan allows eligible employees, as defined in the plan, to contribute to the plan up to 75% of their pretax compensation, subject to the maximum contributions allowed by the Internal Revenue Code. The Company determines the amount, if any, of the employer paid matching contribution at the end of each calendar year. Additionally, the Company may make annual discretionary contributions under the plan based on a participant’s eligible compensation. Certain subsidiaries also generally match from 30% to 50% of the first 4% to 6% of employee contributions to these plans. Amounts expensed relating to all plans were $0.6 million in 2004, $0.8 million in 2003 and $1.3 million in 2002.

  Income Taxes

     Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”, under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management provides valuation allowances against the net deferred tax asset for amounts which are not considered more likely than not to be realized.

  Net Loss Per Share

     Net loss per share (EPS) is computed on net loss using the weighted average number of common shares outstanding during each year. Diluted EPS includes common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and is adjusted, if applicable, for the effect on net loss of such transactions. Diluted EPS calculations adjust net loss for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s public subsidiaries or equity companies.

  Comprehensive Income (Loss)

     Comprehensive income (loss) is the change in equity of a business enterprise during a period from non-owner sources. Excluding net income (loss), the Company’s sources of other comprehensive income (loss) is from net

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unrealized appreciation (depreciation) on its available-for-sale securities and foreign currency translation adjustments. Reclassification adjustments result from the recognition in net loss of unrealized gains or losses that were included in comprehensive income (loss) in prior periods.

  Segment Information

     The Company reports segment data based on the management approach which designates the internal reporting which is used by management for making operating decisions and assessing performance as the source of the Company’s reportable operating segments.

  New Accounting Pronouncements

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), which replaced FIN 46. FIN 46R defines the provisions under which a Variable Interest Entity should be consolidated. FIN 46R is effective for all entities that are subject to the provisions of FIN 46R no later than the end of the first reporting period that ended after March 15, 2004. The Company accounts for, under the equity method, certain private equity funds that account for their investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” The effective date for FIN 46R has been delayed for these funds until the AICPA finalizes its proposed Statement of Position on clarifying the scope of the Audit Guide and accounting by the parent companies and equity method investors for investments in investment companies. If it is ultimately determined that FIN 46R applies to private equity funds, then the amount of equity income or loss the Company records on private equity funds accounted for under the equity method may change significantly.

     In February 2004, the FASB issued Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This EITF was issued to determine the meaning of other-than-temporary impairment and its application to investments in debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF 03-1 also applies to investments in equity securities that are both outside SFAS 115’s scope and are not accounted for by the equity method, which are defined as “cost method investments.” The impairment measurement and recognition guidance is delayed until the final issuance of FSP EITF 03-01-a. The disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company does not believe that the adoption of the impairment measurement and recognition provisions of EITF 03-1 will have a material impact on the Company’s financial statements.

     In September 2004, the FASB Task Force reached a consensus on EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” The Task Force ruled that all instruments that have embedded conversion features that are contingent on market conditions indexed to an issuer’s share price should be included in diluted earnings per share computations (if dilutive) regardless of whether the market conditions have been met. The effective date of the consensus has not been determined and will coincide with the effective date of the proposed Statement that revises SFAS No. 128, “Earnings Per Share.” The Company has outstanding convertible debt as discussed in Note 10, which could be considered dilutive in periods in which the Company reports net income.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.123R”). SFAS No. 123R will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption

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of SFAS No. 123R requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123R, is effective beginning as of the first interim or annual reporting period beginning after June 15, 2005. This new standard may be adopted in one of two ways – the modified prospective transition method or the modified retrospective transition method. The Company is in the process of determining the impact of the requirements of SFAS No. 123R, which will have a material impact on its consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our second quarter of fiscal 2006. We do not believe adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows.

2. Discontinued Operations

     On October 1, 2004, the Company completed the sale of its interest in CompuCom, consisting of 24.5 million shares of common stock and 1.5 million shares of preferred stock. The Company received approximately $128 million in gross cash proceeds for its common and preferred shares. The Company recorded a gain on the sale of approximately $1.8 million in the fourth quarter of 2004. The Company also received $2 million in cash proceeds from a portion of the shares of CompuCom held as collateral against Mr. Musser’s note receivable.

     In connection with the sale:

•   The Company has provided to the landlord of CompuCom’s Dallas headquarters lease, a letter of credit, which will expire on March 19, 2019, in an amount to $6.3 million. CompuCom agreed to reimburse the Company for all fees and expenses incurred, which may not exceed 1.5% of the aggregate principal amount of the Safeguard letter of credit per annum, in order to obtain and maintain this letter of credit.

•   On October 8, 2004, the Company utilized approximately $16.7 million of the proceeds to escrow interest payments due through March 15, 2009, on the Company’s 2.625% convertible senior debentures with a stated maturity of 2024 pursuant to the terms of the 2024 debentures. These escrowed amounts are shown as Restricted Marketable Securities on the Consolidated Balance Sheets.

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Results of the discontinued operation are as follows:

	Period Ended
	October 1,			Year Ended December 31,
	2004			2003			2002
	(in thousands)			(in thousands)
Revenue	$	936,238		$	1,455,120		$	1,571,078
Operating expenses		(927,276	)		(1,433,351	)		(1,540,012	)
Impairment		(42,719	)		—			—
Other		(1,329	)		(281	)		(477	)
Income (loss) before income taxes and minority interest		(35,086	)		21,488			30,589
Income tax (expense) benefit		3,024			(5,191	)		(7,372	)
Income (loss) before minority interest		(32,062	)		16,297			23,217
Minority interest		10,445			(8,291	)		(11,625	)
Net income (loss) from operations		(21,617	)		8,006			11,592
Cumulative effect of change in accounting principle		—			—			425
Gain on disposal		1,798			—			—
Discontinued operations, net of income taxes	$	(19,819	)	$	8,006		$	12,017

     In connection with this transaction, in the second quarter of 2004, a possible impairment of the carrying value of goodwill was indicated as the Company’s estimated net proceeds from the transaction were less than the Company’s carrying value of CompuCom. Accordingly, the Company completed the two-step testing requirements of SFAS No. 142. In the first step, the Company compared the fair value of the CompuCom reporting unit to its carrying value. Fair value was determined based on the Company’s estimated net proceeds from the transaction. This calculation resulted in an indication of impairment in the CompuCom reporting unit. The fair value of the CompuCom reporting unit was then allocated to the assets and liabilities of the CompuCom reporting unit. This fair value was then deducted from the fair value of the CompuCom reporting unit to determine the implied fair value of goodwill. The carrying value of the goodwill exceeded its implied fair value by $23.3 million.

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

     After recording the Company’s share of CompuCom’s impairment charge, the Company’s carrying value of its goodwill still exceeded its implied fair value by $9.3 million and the Company recorded an additional impairment charge of $9.3 million in the second quarter of 2004. The total impairment above of $42.7 million is comprised of $33.4 million recorded by CompuCom in their operating results and $9.3 million recorded by the Company in the second quarter of 2004.

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     The assets and liabilities of discontinued operations were as follows:

	December 31,
	2003
	(in thousands)
Cash	$	81,145
Accounts receivable, less allowances		212,141
Inventory		35,612
Other current assets		4,252
Total current assets		333,150
Property and equipment, net		19,134
Goodwill		104,889
Other assets		5,205
Total non-current assets		129,228
Total Assets	$	462,378
Accounts payable		105,007
Accrued expenses		76,237
Deferred revenue		4,922
Total current liabilities		186,166
Minority interest		127,602
Deferred taxes on income		2,008
Total non-current liabilities		129,610
Carrying value of CompuCom	$	146,602

3. Business Combinations

  Acquisitions by the Company – 2004

     In December 2004, the Company acquired substantially all of the assets comprising the business of Laureate Pharma L.P. The purchase price for the assets consisted of approximately $29.5 million in cash and the assumption of certain specified liabilities of Laureate Pharma. The Company used $24.5 million of available cash and borrowings made by Laureate Pharma under a $5 million term loan to finance the purchase price. The Company incurred approximately $1.2 million in transaction costs. Concurrent with the closing of this transaction, the Company funded $1 million of working capital to Laureate Pharma. Laureate Pharma is a life sciences company dedicated to providing services to facilitate biopharmaceutical product development and manufacturing.

     In 2004, the Company acquired additional shares of Pacific Title from minority interest shareholders for a total of $1.8 million. As a result of these purchases of additional shares, the Company increased its ownership in Pacific Title from 84% to 93%. Pacific Title is a provider of a broad range of post-production digital and photo-chemical services to the Hollywood motion picture film and television industry. In accordance with the Company’s strategy to hold controlling interests, the Company will from time to time acquire shares held by less than controlling shareholders.

     In the third and fourth quarters of 2004, the Company acquired additional shares of Mantas for a total of $10 million. As a result of these purchases of additional shares, the Company increased its ownership in Mantas to 88%. Mantas is a software company which provides analytic applications for the global financial services and telecommunications markets. The Company provided funding for product development and working capital needs.

     In February 2004, the Company acquired additional shares of ChromaVision Medical Systems for $5 million. In March 2004, ChromaVision entered into a securities purchase agreement with a limited number of accredited investors pursuant to which ChromaVision agreed to issue shares of common stock and warrants to purchase an additional shares of common stock for an aggregate purchase price of $21 million. Of the total placement of $21 million, the Company funded $7.5 million to ChromaVision. The Company’s ownership in ChromaVision decreased from 59.9% to 56.5% at December 31, 2004. ChromaVision provides a range of cancer diagnostic and consultation

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services, including technical lab services and hardware, software and web enabled cellular image analysis. The Company participated in a private placement by ChromaVision to support the Diagnostic Services business line implementation as well as maintaining the Company’s controlling interest.

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

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

     The following table summarizes the estimated fair values of assets acquired and liabilities assumed.

	Laureate			ChromaVision		Mantas		Pacific Title
	(In thousands)
Working Capital	$	2,589		$	7,709	$	10,000	$	1,378
Property and equipment		26,722			72		—		450
Deferred Taxes		(1,220	)		—		—		—
Intangible assets		2,601			—		—		—
Goodwill		—			4,664		—		—
Acquired In-Process Research and Development		—			89		—		—
Total Purchase Price	$	30,692		$	12,534	$	10,000	$	1,828

     The intangible asset consists of the Laureate Pharma trade name, which has an indefinite life and is not amortized. Property and equipment will be depreciated over their weighted average useful lives (2 years to 15 years). The acquired in-process research and development costs were charged to earnings.

  Acquisitions by the Company — 2003

     In September 2003, the Company acquired additional shares of SOTAS from minority shareholders for $1.4 million. The Company also funded $5 million to satisfy SOTAS’ outstanding balance on their line of credit. The Company then converted a total of $2.2 million of debt into common stock of SOTAS. As a result of these transactions, the Company increased its ownership in SOTAS by 24.6% to 99.8%.

     In September 2003, the Company acquired additional shares of Mantas from a minority shareholder and provided funding to Mantas for a total of $0.8 million.

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

     In February 2003, the Company acquired additional shares of ChromaVision Medical Systems for $5 million.

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

87

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquisitions by Subsidiaries

     In October 2004, Alliance Consulting acquired 100% of the issued and outstanding stock of Mensamind, Inc. for approximately $2.1 million, of which $0.9 million is payable in cash and the remaining $1.2 million in issuance of Alliance Consulting stock options, and transaction costs. Both the payment of cash and issuance of options occurred in January 2005. Mensamind provides offshore IT consulting services. This acquisition will enable Alliance to provide offshore capabilities to its existing and new clients. The following summarizes the estimated fair values of assets acquired and liabilities assumed.

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

	(in thousands)
Working Capital	$	(848	)
Property and equipment		232
Intangible assets		1,500
Goodwill		1,327
Total Purchase Price	$	2,211

  Pro Forma Financial Information

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

	Year Ended December 31,
	2004			2003
	(In thousands except per
	share data)
Total revenues	$	165,984		$	174,884
Net loss from continuing operations	$	(42,129	)	$	(60.614	)
Diluted loss per share	$	(0.35	)	$	(0.51	)

4.   Marketable Securities

     Marketable securities include the following:

	Current				Non Current
	2004		2003		2004		2003
	(in thousands)				(in thousands)
Held-to-maturity:
Certificates of deposit	$	17,471	$	7,081	$	—	$	—
U.S. Treasury securities		15,342		—		—		—
Mortgage and asset-backed securities		742		—		—		—
		33,555		7,081		—		—
Restricted U.S. Treasury securities		3,771		—		13,045		—
		37,326		7,081		13,045		—
Available-for-sale:
Equity securities		—		—		11,964		—
	$	37,326	$	7,081	$	25,009	$	—

88

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     As of December 31, 2004, the contractual maturities of securities are as follows:

	Years to Maturity
	(in thousands)
	Less Than		One to		Five to Ten		Greater Than		No Single
	One Year		Five Years		Years		Ten Years		Maturity Date		Total
Held-to-maturity	$	37,326	$	13,045	$	—	$	—	$	—	$	50,371
Available-for-sale		—		—		—		—		11,964		11,964
	$	37,326	$	13,045	$	—	$	—	$	11,964	$	62,335

     As of December 31, 2004, the Company’s investment in available-for-sale securities had a cost value of zero and unrealized gains of $12.0 million, which are reflected in Other Comprehensive Income (Loss) on the Consolidated Balance Sheet.

5. Property and Equipment

     Property and equipment consisted of the following:

	As of December 31,
	2004			2003
	(In thousands)
Building and improvements	$	16,838		$	4,024
Machinery and equipment		64,606			44,439
		81,444			48,463
Accumulated depreciation and amortization		(36,309	)		(33,590	)
	$	45,135		$	14,873

6. Ownership Interests in and Advances to Companies

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

	As of December 31,
	2004		2003
	(In thousands)
Equity Method
Public Companies	$	—	$	9,354
Non-Public Companies		—		934
Private Equity Funds		24,040		27,279
		24,040		37,567
Cost Method
Non-Public Companies		9,152		12,618
Private Equity Funds		2,119		2,934
	$	35,311	$	53,119

     During 2004, eMerge was reclassified to the cost method of accounting because the Company’s ownership level decreased as did the Company’s ability to exercise significant influence over eMerge. The Company now accounts for its investment in eMerge as an available-for-sale security under SFAS No. 115, as eMerge’s common stock is publicly traded. (see Note 4).

     At December 31, 2003, the Company’s carrying value in its companies accounted for under the equity method exceeded its share of the underlying equity in the net assets of such companies by $1 million, which is included in Ownership Interests In and Advances to Companies on the Consolidated Balance Sheets.

89

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     During management’s ongoing review of the recoverability of recorded carrying values for investments versus fair value, it was determined that the carrying value of certain investments were not fully recoverable. In 2004, 2003 and 2002, the Company recorded impairment charges totaling $3.7 million, $6.8 million and $20.0 million, respectively, for companies and funds accounted for under the equity method. Impairment charges related to cost method companies were $3.2 million, $2.5 million and $6.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The amount of each impairment charge was determined by comparing the carrying value of the company to its estimated fair value. Impairment charges associated with equity method companies are included in Equity Loss in the Consolidated Statements of Operations. Impairment charges related to cost method companies are included in Other Income (Loss), Net in the Consolidated Statements of Operations.

     The following unaudited summarized financial information for our companies and funds accounted for under the equity method at December 31, 2004 and 2003 and for the three years ended December 31, 2004, 2003 and 2002, has been compiled from the unaudited financial statements of our respective companies and reflects certain historical adjustments. Revenue and net loss of the companies and funds are excluded for periods prior to the year of their acquisition and subsequent to their disposition.

	As of December 31,
	2004		2003
	(In thousands)
Balance Sheets
Current assets	$	41,001	$	85,241
Non-current assets		525,242		556,970
Total Assets	$	566,243	$	642,211
Current liabilities	$	18,924	$	40,058
Non-current liabilities		29,371		45,289
Shareholders’ equity		517,948		556,864
Total Liabilities and Shareholders’ Equity	$	566,243	$	642,211

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Results of Operations
Revenue:
Public companies	$	—		$	96,404		$	166,624
Non-public companies		8,513			3,464			86,657
	$	8,513		$	99,868		$	253,281
Net Loss	$	(63,503	)	$	(90,272	)	$	(190,834	)

7. Goodwill and Other Intangible Assets

     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company completes an annual impairment review of goodwill annually, or more frequently if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In 2003, the Company determined that Alliance Consulting Group, including aligne and Lever8 Solutions (which were merged into Alliance shortly after the Alliance acquisition), was a “reporting unit” under SFAS No. 142. The Company engaged a third party valuation firm to assist it in determining the fair value of this reporting unit. 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 the reporting unit was then compared to the carrying value, indicating that an impairment may exist.

90

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     The fair value of the reporting unit was then allocated to the assets and liabilities of the reporting unit. This fair value was then deducted from the fair value of the reporting unit to determine the implied fair value of goodwill. Because the carrying value of the goodwill exceeded its implied fair value, the Company reported a $16.0 million impairment charge in the fourth quarter of 2003. This impairment charge is included in Impairment on the Consolidated Statements of Operations.

     Under the transition provisions of SFAS No. 142, the Company was required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. The Company completed the required testing during the second quarter of 2002. As a result, the Company reported a $21.8 million goodwill impairment loss related to aligne and Lever8 (prior to the Alliance merger), arising from the initial application of SFAS No.142, which required the carrying amount of goodwill be compared to the fair value. The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies. This loss was recognized in the Consolidated Statements of Operations as a Cumulative Effect of a Change in Accounting Principle during the year ended December 31, 2002.

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

								Other
	Alliance		ChromaVision		Mantas			Companies			Total
Balance at December 31, 2003	$	53,307	$	13,891	$	22,150		$	1,415		$	90,763
Additions		1,327		4,664		—			—			5,991
Purchase price adjustments (1)		—		—		(2,290	)		—			(2,290	)
Deconsolidation		—		—		—			(1,415	)		(1,415	)
Balance at December 31, 2004	$	54,634	$	18,555	$	19,860		$	—		$	93,049

(1)   The above purchase price adjustments represent activity to complete the final purchase price allocation.

     As discussed in Note 3, certain purchase price adjustments are not final.

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

	December 31, 2004
		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net
	(In thousands)
Customer-related	7 years	$	3,633	$	1,062	$	2,571
Technology-related	4 - 10 years		11,422		7,143		4,279
Process-related	3 years		1,500		83		1,417
			16,555		8,288		8,267
Trade Names	Indefinite		2,588		—		2,588
Total		$	19,143	$	8,288	$	10,855

	December 31, 2004
		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net
	(In thousands)
Customer-related	7 years	$	3,633	$	543	$	3,090
Technology-related	4 - 10 years		11,547		4,620		6,927
Total		$	15,180	$	5,163	$	10,017

91

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     Amortization expense related to intangible assets was $3.5 million, $3.2 million and $3.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. The following table provides estimated future amortization expense related to intangible assets (assuming there is not a writedown associated with these intangible assets causing an acceleration of expense):

	Total
	(In thousands)
2005	$	3,700
2006		2,114
2007		1,056
2008		639
2009 and thereafter		758
	$	8,267

8.   Financial Instruments

     In 1999, the Company entered into two forward sale contracts related to 3.4 million shares of its holdings in Tellabs common stock. The forward sale contracts were considered derivative financial instruments that had been designated as fair value hedging instruments under SFAS No. 133.

     The net gain recognized during the year ended December 31, 2002 was $1.5 million. This amount reflects a $23.3 million gain on the change in the fair value of the hedging contract, reduced by a $21.8 million loss on the change in fair value of the Tellabs holdings. These gains (losses) are reflected in Other Income (Loss), Net in the Consolidated Statement of Operations. The forward sale contracts were settled in 2002.

9. Long-term Debt and Credit Arrangements

     Consolidated long-term debt consists of the following:

	As of December 31,
	2004			2003
	(In thousands)
Credit line borrowings	$	16,613		$	4,665
Term loans		3,672			4,882
Capital lease obligations		3,094			982
Mortgage obligations		3,287			3,538
		26,666			14,067
Less current maturities		(15,456	)		(11,530	)
Total long-term debt, less current portion	$	11,210		$	2,537

     In September 2004, the Company increased its revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees from $25 million to $55 million. The amended agreement provides the Company with a $45 million revolving line and a $10 million letter of credit facility. 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 controlled companies. This credit facility matures in May 2005 and bears interest at the prime rate (5.25% at December 31, 2004) 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. Prior to May 5, 2004, the facility required cash collateral at the bank equal to two times any amounts outstanding under the facility. In conjunction with the issuance of the Convertible Senior Debentures in March 2004, the Company amended its revolving credit facility to grant the bank a right to security interest in accounts held by the Company at the bank equal to any amounts outstanding under the facility.

92

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     As of December 31, 2004, the Company had outstanding guarantees related to four companies’ credit facilities, which allowed for total borrowings of up to $38 million ($16.6 million was outstanding as of December 31, 2004). In addition, a consolidated subsidiary maintained a $2 million revolving credit facility at the same bank that provided our credit facility. In connection with the sale of CompuCom, we provided to the landlord of CompuCom’s Dallas headquarters lease, a letter of credit, which will expire on March 19, 2019, in an amount to $6.3 million. CompuCom agreed to reimburse us for all fees and expenses incurred, which may not exceed 1.5% of the aggregate principal amount of the Safeguard letter of credit per annum, in order to obtain and maintain this letter of credit. As of December 31, 2004, there was $5.0 million available to the Company under the revolving line and $3.7 million available to the Company under the Company’s letter of credit facility.

     Five consolidated companies maintain separate revolving credit facilities which provide for aggregate borrowings of $40 million, of which $38 million is guaranteed by the Company under its credit facility. As of December 31, 2004, outstanding borrowings under these facilities were $16.6 million. Borrowings are secured by substantially all of the assets of the respective subsidiaries. These obligations bear interest at variable rates ranging between the prime rate minus 0.5% and the prime rate plus 1.25%. These facilities contain financial and non financial covenants. At December 31, 2004, two subsidiaries did not comply with certain financial covenants which subsequently received waivers by the lender. A $2 million facility expired in September 2004 and has been renewed through January 2006. One of the revolving credit facilities totaling $20 million matures in February 2006, the $10 million facility, consisting of a $3 million revolving line of credit that matures in January 2006, a $5 million term loan that matures in December 2009 and a $2 million equipment loan that matures in December 2008, the $5 million facility matures in March 2005 and has been renewed through January 2006, the $3 million facility matures in February 2005 and has been renewed through January 2006.

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

     Debt as of December 31, 2004 bears interest at fixed rates ranging between 4.0% and 22.0% and variable rates indexed to the prime rate plus 1.5%. Debt as of December 31, 2003 bore interest at fixed rates between 8.0% and 20.3% and variable rates indexed to the prime rate plus 1.0% to 1.5%.

	Total
	(In thousands)
2005	$	5,337
2006		14,705
2007		4,591
2008		1,019
2009 and thereafter		1,014
Total debt	$	26,666

     In March 2005, consolidated companies amended their credit facilities to increase aggregate borrowings $4.5 million (for an aggregate of $44.5 million in credit facilities). The Company also reduced its aggregate guarantees under these facilities by $4.0 million. After these amendments, the Company had $9.0 million available under the revolving line.

     Alliance’s credit facility, which matures in February 2006 and of which $10.1 million is outstanding at December 31, 2004, is classified as a current liability at December 31, 2004 as a result of a lockbox arrangement with the bank that was entered into as part of the March 2005 amendment.

10. Convertible Subordinated Notes and Convertible Senior Debentures

     In June 1999, the Company issued $200 million of 5% convertible subordinated notes due June 15, 2006 (2006 Notes). Interest was payable semi-annually. The 2006 Notes were convertible into the Company’s common stock. As of December 31, 2004, the Company has repurchased or redeemed all of the 2006 Notes for an aggregate cost of $201.4 million, including transaction costs. The Company also recorded $1.8 million of expense for the year ended

93

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

December 31, 2004 related to the acceleration of deferred debt costs associated with the 2006 Notes, which is included in Other Income, Net on the Consolidated Statements of Operations.

     In February 2004, the Company completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024. Interest on the 2024 Debentures is payable semi-annually. At the debenture holders’ option, the debentures are convertible into our common stock through March 14, 2024, subject to certain conditions. The conversion rate of the debentures at December 31, 2004 was $7.2174 of principal amount per share. The closing price of the Company’s common stock at December 31, 2004 was $2.12.The Debenture holders may require repurchase of the debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective face amount plus accrued and unpaid interest. The Debenture holders may also require repurchase of the debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, we may redeem all or some of the debentures commencing March 20, 2009.

     As required by the terms of the 2024 Debentures, after completing the sale of CompuCom, the Company escrowed $16.7 million on October 8, 2004 for interest payments through March 15, 2009 on the 2024 Debentures (see Notes 2 and 4).

11. Accrued Expenses

     Accrued expenses consisted of the following:

	As of December 31,
	2004		2003
	(In thousands)
Accrued professional fees	$	4,200	$	2,031
Other		16,709		12,819
	$	20,909	$	14,850

12. Shareholders’ Equity

  Preferred Stock

     Shares of preferred stock, par value $0.10 per share, are voting and are issuable in one or more series with rights and preferences as to dividends, redemption, liquidation, sinking funds, and conversion determined by the Board of Directors. At December 31, 2004 and 2003, there were one million shares authorized and none outstanding.

  Shareholders’ Rights Plan

     In February 2000, the Company adopted a shareholders’ rights plan. Under the plan, each shareholder of record on March 24, 2000 received the right to purchase 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock at the rate of one right for each share of the Company’s common stock then held of record. Each 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock is designed to be equivalent in voting and dividend rights to one share of the Company’s common stock. The rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer that would result in such a person or group owning 15% or more of the Company’s common stock. If the rights do become exercisable, the Company’s shareholders, other than the shareholders that caused the rights to become exercisable, will be able to exercise each right at an exercise price of $300 and receive shares of the Company’s common stock having a market value equal to approximately twice the exercise price. As an alternative to paying the exercise price in cash, if the directors of the Company so determine, shareholders may elect to exercise their rights and, without the payment of any exercise price, receive half the number of shares of common stock that would have been received had the exercise price been paid in cash.

94

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Stock-Based Compensation

The Company has three equity compensation plans: the 2001 Associates Equity Compensation Plan with 5.4 million shares reserved for issuance; the 1999 Equity Compensation Plan, with 9.0 million shares reserved for issuance; and the 2004 Equity Compensation Plan (adopted by the Board of Directors and approved by the Company’s shareholders in 2004), with 6.0 million shares reserved for issuance. Employees and consultants are eligible for grants of stock options, restricted stock awards, stock appreciation rights, stock units, performance units and other stock-based awards under each of these plans; directors and executive officers are eligible for grants only under the 1999 and 2004 Equity Compensation Plans. Generally, outstanding options vest over four years after the date of grant and expire eight years after the date of grant. To the extent allowable, all grants are incentive stock options. All options granted under the plans to date have been at prices which have been equal to the fair market value at the date of grant. At December 31, 2004, the Company reserved 16.8 million shares of common stock for possible future issuance under its equity compensation plans. Several subsidiaries also maintain equity compensation plans for their employees and directors.

     In 2002, the Company made an offer to its employees to exchange stock options held by these employees for restricted shares of the Company’s stock. Under the exchange program, each employee with an outstanding stock option with an exercise price in excess of $15.00 per share was offered the opportunity to exchange the options for shares of restricted stock. In order to participate in the exchange, a participant had to exchange all eligible options held. The shares of restricted stock were issued on January 22, 2002, and vested on the later of July 22, 2002, or the date on which the unvested eligible option exchanged for the restricted shares would have vested. At December 31, 2004, all of the restricted shares issued under the exchange program had vested. As a result of the exchange, the Company issued 537,878 shares of restricted stock in January 2002 in return for 2,038,071 stock options that were canceled.

     Approximately $2.0 million of non-cash deferred compensation associated with this restricted stock is being expensed as the restricted stock vests, and will be reduced to the extent that a participant forfeits his or her shares of restricted stock received in the exchange prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

     Option activity is summarized below:

				Weighted
				Average
	Shares			Exercise Price
	(In thousands)
Outstanding at December 31, 2001		12,472		$	15.80
Options granted		3,000			2.15
Options canceled – option exchange program		(2,038	)		36.94
Other options canceled/forfeited		(2,030	)		15.43
Outstanding at December 31, 2002		11,404			8.50
Options granted		1,078			2.67
Options exercised		(200	)		1.63
Options canceled/forfeited		(1,963	)		8.10
Outstanding at December 31, 2003		10,319			8.10
Options granted		2,719			2.09
Options exercised		(442	)		3.15
Options canceled/forfeited		(3,380	)		14.69
Outstanding at December 31, 2004		9,216		$	4.15
Shares available for future grant		7,592

95

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     The following summarizes information about the Company’s stock options outstanding at December 31, 2004:

Options Outstanding								Options Exercisable
					Weighted Average	Weighted				Weighted
			Number		Remaining	Average				Average
Range of			Outstanding		Contractual Life	Exercise		Exercisable		Exercise
Exercise Prices			(In thousands)		(In years)	Price		(In thousands)		Price
1.25	–	1.99		1,624	6.2	$	1.48		671	$	1.39
1.99	–	2.62		3,705	6.9		2.14		931		2.14
2.62	–	3.56		1,403	5.9		3.48		851		3.47
3.56	–	5.53		1,801	4.0		5.17		1,746		5.18
5.53	–	8.83		242	2.4		8.04		239		8.05
8.83	–	14.84		219	1.0		10.89		219		10.89
14.84	–	50.98		222	3.2		42.40		222		42.40
1.25	–	50.98		9,216	5.7	$	4.15		4,879	$	5.87

     Total compensation expense for restricted stock issuances was approximately $0.5 million, $1.8 million and $3.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Unamortized compensation expense related to restricted stock issuances at December 31, 2004 is $0.4 million.

     The Company issued 0.9 million of deferred stock units to senior executives in December 2002 and 0.6 million in January 2004. The value of these deferred stock units was $1.6 million and $3.0 million, respectively, based on the fair value of the stock as of the date of the grant. Deferred stock units are payable in stock on a one-for-one basis. Payments in respect of the deferred stock units are distributable not earlier than one year after the vesting. The deferred stock units granted in December 2002 and 0.3 million of the units granted in January 2004 vest 25% after one year, then in 36 equal monthly installments thereafter. The remaining 0.3 million of deferred stock units granted in January 2004 vest after five years, or earlier depending on the achievement of certain performance criteria, including the sale of CompuCom. Total compensation expense for deferred stock units was $2.2 million and $0.6 million for the year ended December 31, 2004 and 2003, respectively. Unamortized compensation expense related to deferred stock units at December 31, 2004 is $1.8 million.

     Stock-based compensation expense related to stock awards by subsidiaries was $1.5 million and $0.3 million for the years ended December 31, 2004 and 2003, respectively. Total unamortized deferred compensation related to stock awards by subsidiaries was $1.3 million at December 31, 2004.

     Certain employees of our subsidiaries have the right to require the respective subsidiary to purchase shares of common stock of the subsidiary received by the employee pursuant to the exercise of options. The employee must hold the shares for at least six months prior to exercising this right. The required purchase price is 75% — 100% of the fair market value at the time the right is exercised, and in some cases is subject to a floor of $1.58. During 2004, three employees exercised 561,251 options of a subsidiary, all of which may be required to be purchased by the subsidiary during 2005 under the liquidity plan at the greater of the then fair value or $1.58 per share.

14. Other Income (Loss)

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Gain on sale of companies and funds, net	$	44,486		$	50,808		$	14,316
Gain (loss) on trading securities		(396	)		301			(14,572	)
Unrealized gain on Tellabs and related forward sale contracts, net		—			—			1,509
Impairment charges		(3,197	)		(2,494	)		(6,658	)
Other		(2,089	)		315			256
	$	38,804		$	48,930		$	(5,149	)

96

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     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 shares of Fidelity National Financial in the second quarter of 2004 and $8.5 million related to our sale of Tangram for shares of Opsware in the first quarter of 2004 Also included in gain on sale of companies and funds in 2004 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 on sales of companies and funds was $37.5 million for the year ended December 31, 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 sale of Internet Capital Group, and $17.3 million related to the sale of Kanbay. Also included is a $3.0 million gain related to proceeds received in 2003 for a company sold in 1997 and a $0.9 million gain related to the sale of a portion of an interest in a company. Total net cash proceeds for gains on sale of companies and funds was $70.1 million for the year ended December 31, 2003.

     During 2002, the Company sold or liquidated interests in certain companies and funds including Palm, Allied, Puralube, Aptas, iMedium and the Greenhill Fund for aggregate net cash proceeds of $36.3 million. Also included in gain on sale of companies is $9.0 million related to the release of escrowed proceeds from the sale of a private company in 2000.

     Gain (loss) on trading securities in 2004 primarily reflect the adjustment to fair value of our holdings in Opsware and subsequent loss on sale of Opsware stock of $0.1 million. Total net cash proceeds related to our sales of Opsware and FNF common stock for the year ended December 31, 2004 was $14.8 million. Gain (loss) on trading securities in 2003 and 2002 primarily reflects the adjustment to fair value of our holdings in Verticalnet, which were classified as trading securities and were sold in 2003 for $1.1 million in net cash proceeds.

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

15. Income Taxes

     The provision (benefit) for income taxes is as follows:

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Current
State	$	(182	)	$	339		$	46
Foreign		96			—			—
Deferred, primarily state		62			(130	)		—
	$	(24	)	$	209		$	46

     Total income tax benefit differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to income from continuing operations before income taxes and before the cumulative effect of a change in accounting principle in 2002 as a result of the following:

97

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Year Ended December 31,
	2004			2003			2002
Statutory tax benefit		(35.0	)%		(35.0	)%		(35.0	)%
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit		0.3			0.8			—
Non-deductible amortization		2.7			—			—
Valuation allowance		31.0			32.8			34.7
Other adjustments		1.0			1.9			0.3
		0.0	%		0.5	%		0.0	%

     The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	As of December 31,
	2004			2003
	(In thousands)
Deferred tax asset (liability):
Subsidiary/investee carrying values	$	46,168		$	57,192
Tax loss and credit carryforwards		193,062			198,738
Accrued expenses		5,436			1,667
Intangible assets		1,129			3,945
Other		3,644			2,331
		249,439			263,873
Valuation allowance		(250,319	)		(263,718	)
Net deferred tax asset (liability)	$	(880	)	$	155

     The net deferred tax liability of $0.9 million at December 31, 2004 is reflected in Deferred Taxes of $0.9 million on the Consolidated Balance Sheets. The net deferred tax asset of $0.2 million at December 31, 2003 is included in Other Assets on the Consolidated Balance Sheets.

     The Company has not recognized gross deferred tax assets for the difference between the book and tax basis of our holdings in the stock of certain consolidated subsidiaries where we do not believe we will dispose of the asset in the foreseeable future. As a result of the shut down in July 2003 of two consolidated subsidiaries, and the expected sale of another subsidiary in the foreseeable future, the Company recorded the gross deferred tax assets in 2003 for the difference between the book and tax basis of these companies.

     As of December 31, 2004, the Company had federal net operating loss carryforwards and federal capital loss carryforwards of approximately $170 million and $187 million, respectively. These carryforwards expire as follows:

	Total
	(In thousands)
2005	$	73
2006		20,561
2007		88,128
2008		87,536
2009 and thereafter		160,688
	$	356,986

     Limitations on utilization of both the net operating loss carryforward and capital loss carryforward may apply.

     The Company’s subsidiaries that are not consolidated for tax purposes have additional federal net loss carryforwards of $157 million, which expire in various amounts from 2005 to 2023. Limitations on utilization of both the net operating loss carryforward and capital loss carryforward may apply. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits.

98

     In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has recognized that it is more likely than not that certain future tax benefits may not be realized as a result of current and future income. Accordingly, the valuation allowance has been increased in the current year to reflect lower than anticipated net deferred tax asset utilization. In the event of a decrease in the valuation allowance in future years, a portion of the decrease will reduce the Company’s recorded goodwill. This is due to deferred tax assets acquired as part of the purchase of a subsidiary which currently requires a valuation allowance.

16. Net Loss Per Share

     The calculations of net loss per share were:

	Year Ended December 31,
	2004			2003			2002
	(In thousands except per share data)
Basic:
Net loss from continuing operations before change in accounting principle	$	(35,001	)	$	(41,337	)	$	(140,685	)
Net income (loss) from discontinued operations		(19,819	)		8,006			12,017
Cumulative effect of change in accounting principle		—			—			(21,815	)
Net Loss	$	(54,820	)	$	(33,331	)	$	(150,483	)
Average common shares outstanding		119,965			118,486			117,736
Loss from continuing operations before change in accounting principle	$	(0.29	)	$	(0.35	)	$	(1.19	)
Net income (loss) from discontinued operations		(0.17	)		0.07			0.09
Cumulative effect of change in accounting principle		—			—			(0.18	)
Net loss per share	$	(0.46	)	$	(0.28	)	$	(1.28	)
Diluted:
Net loss from continuing operations before change in accounting principle	$	(35,001	)	$	(41,337	)	$	(140,685	)
Net income (loss) from discontinued operations		(19,819	)		8,006			12,017
Cumulative effect change in accounting principle		—			—			(21,815	)
		(54,820	)		(33,331	)		(150,483	)
Effect of public holdings		—			(2,264	)		(2,993	)
Adjusted net loss from discontinued operations	$	(54,820	)	$	(35,595	)	$	(153,476	)
Average common shares outstanding		119,965			118,486			117,736
Loss per share from continuing operations before change in accounting principle	$	(0.29	)	$	(0.35	)	$	(1.20	)
Net income (loss) from discontinued operations		(0.17	)		0.05			0.08
Cumulative effect of change in accounting principle		—			—			(0.18	)
Diluted loss per share	$	(0.46	)	$	(0.30	)	$	(1.30	)

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

     The following potential shares of common stock and their effects on income were excluded from the diluted net loss per share calculation because their effect would be anti-dilutive:

99

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•   At December 31, 2004, 2003 and 2002, options to purchase 9.2 million, 10.3 million and 11.4 million shares of common stock at prices ranging from $1.25 to $50.98, $1.25 to $50.98 and $1.75 to $89.72 per share, respectively, were excluded from the 2004, 2003 and 2002 calculations, respectively.

•   At December 31, 2004, 2003 and 2002, restricted stock units convertible into 1.6 million, 1.3 million and 2.4 million shares of stock were excluded from the calculations.

•   At December 31, 2004, 2003 and 2002, a total of 3.4 million, 8.3 million and 8.3 million shares related to the Company’s 2006 Notes (See Note 10) representing the weighted average effect of assumed conversion of the 2006 Notes were excluded from the calculation.

•   At December 31, 2004, a total of 20.8 million shares related to the Company’s 2024 Debentures (See Note 10) representing the weighted average effect of assumed conversion of the 2024 Debentures were excluded from the calculation.

17. Related Party Transactions

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

     The loan bears interest at the default annual rate of 9% and became payable on a limited basis on January 1, 2003. The Company sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted the Company security interests in securities and real estate as collateral. Based on the information available to us, the Company also concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006. In the fourth quarter of 2002, the first quarter of 2003 and the fourth quarter of 2004, the Company impaired the loan by $11.4 million, $0.7 million and $3.4 million respectively, to the estimated value of the collateral that the Company held at that date. The Company’s carrying value of the loan at December 31, 2004 is $1.4 million. The Company will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis.

     In the normal course of business, the Company’s directors, officers and employees hold board positions of companies in which the Company has a direct or indirect ownership interest.

     The Company’s Chairman is the President and CEO of TL Ventures. The Company has invested or committed a total of $67 million in the seven TL Ventures and EnerTech Capital funds. The Company owns less than 7% of the partnership interests of each of these funds.

100

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

18. Commitments and Contingencies

  Safeguard Scientifics Securities Litigation

     On June 26, 2001, the Company 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 the Company’s stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

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

     These two cases were consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state a claim upon which relief may be granted. On October 24, 2002, the Court denied the defendants’ motions to dismiss, holding that, based on the allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at that juncture. On December 20, 2002, plaintiffs filed with the Court a motion for class certification. On August 27, 2003, the Court denied plaintiffs’ motion for class certification. On September 12, 2003, plaintiffs filed with the United States Court of Appeals for the Third Circuit a petition for permission to appeal the order denying class certification. On November 5, 2003, the Third Circuit denied plaintiffs’ petition and declined to hear the appeal. On November 18, 2003, plaintiffs’ counsel moved to intervene in the consolidated action new plaintiffs and proposed class representatives, which motion was denied by the Court on February 18, 2004. On July 12, 2004, a third putative class action complaint captioned Mandell v. Safeguard Scientifics, Inc., et al. was filed against 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.

101

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

  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, plaintiffs filed an amended class action complaint under the caption of one of the three actions ( the “Amended Complaint”) that names us, CompuCom and its directors as defendants. The Amended Complaint alleges that CompuCom, its directors, and we breached fiduciary duties in connection with the merger agreement relating to the acquisition of CompuCom by an affiliate of Platinum Equity, LLC and aided and abetted one another in the course of committing the alleged breach. Among other things, the Amended Complaint alleges that the defendants failed to obtain the best transaction reasonably available and 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. The Amended Complaint seeks (i) an injunction against the proposed transaction, (ii) an order invalidating the proposed transaction in the event it is consummated, (iii) an order directing CompuCom’s directors to obtain a transaction that is in the best interests of all of its stockholders and to disclose all material information to stockholders in connection with any transaction, and (iv) the imposition of a constructive trust, in favor of plaintiffs, upon any benefits improperly received by defendants. On July 27, 2004, 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. 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, plaintiffs filed a Second Amended Complaint alleging substantially similar claims. On November 5, 2004, defendants filed motions to dismiss the Second Amended Complaint.

     The outcome of this litigation is uncertain, and while we believe that we and CompuCom 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.

Other

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

     The Company and its subsidiaries conduct a portion of their operations in leased facilities and lease machinery and equipment under leases expiring at various dates to 2011. Total rental expenses under operating leases was $3.7 million, $6.1 million and $5.3 million in 2004, 2003 and 2002, respectively. Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2004, are (in millions): $6.2 — 2005 $4.3 — 2006, $4.2 — 2007, $4.1 — 2008; $3.3 — 2009 and $2.2 thereafter.

102

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     In connection with its ownership interests in certain affiliates, the Company has guarantees of $49 million at December 31, 2004, of which $45 million relates to guarantees of the Company’s consolidated companies (and $38 million of which is guaranteed under the Company’s revolving credit facility (See Note 9)).

			Debt Included on
	Amount		Consolidated Balance Sheet
	(in millions)		(in millions)
Consolidated Companies Guarantees under the Company’s facility	$	38.0	$	16.6
Other Consolidated Company Guarantees		7.3		1.4
Non-consolidated Company Guarantees		3.7		—
Total	$	49.0	$	18.0

     Additionally, we have committed capital of approximately $21 million related to commitments made in prior years to various private equity funds, to be funded over the next several years, including approximately $7 million, which is expected to be funded during the next twelve months.

     Under certain circumstances, the Company may be required to return a portion or all the distributions it received as a general partner to the certain private equity funds (the “clawback”). Assuming the funds in which we are a general partner are liquidated or dissolved on December 31, 2004 and assuming for these purposes the only distributions from the funds are equal to the carrying value of the funds on the December 31, 2004 financial statements, the maximum clawback we would be required to return for our general partner interest is approximately $7 million. Management estimates its liability to be approximately $4 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

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

     In October 2001, the Company entered into an agreement with Mr. Musser, its former Chairman and Chief Executive Officer, to provide for annual payments of $650,000 per year and certain health care and other benefits for life. The related current liability of $0.5 million is included in Accrued Expenses and the long-term portion of $3.8 million is included in Other Long-Term Liabilities on the Consolidated Balance Sheets at December 31, 2004.

     The Company has retention agreements with certain executive officers. The maximum aggregate cash exposure under the agreements is $8.5 million at December 31, 2004.

19. Parent Company Financial Information

     Parent company financial information is provided to present the financial position and results of operations of the Company as if the consolidated companies (see Note 1) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies.

     As discussed in Note 2, CompuCom’s net assets have been classified as held for sale and their results of operations and cash flows are presented as a discontinued operation for all prior periods.

103

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

  Parent Company Balance Sheets

	As of December 31,
	2004		2003
	(In thousands)
Assets
Cash and cash equivalents	$	128,262	$	121,518
Restricted cash		561		1,019
Marketable securities		33,555		7,081
Restricted marketable securities		3,771		—
Other current assets		2,506		838
Asset held-for-sale		—		146,602
Total current assets		168,655		277,058
Ownership interests in and advances to companies		179,870		165,852
Long-term marketable securities		11,964		—
Long-term restricted marketable securities		13,045		—
Note receivable — related party		1,384		11,946
Other		5,701		3,418
Total Assets	$	380,619	$	458,274
Liabilities and Shareholders’ Equity
Current liabilities		14,497		11,103
Long-term liabilities		10,319		11,000
Convertible subordinated notes		—		200,000
Convertible senior debentures		150,000		—
Shareholders’ equity		205,803		236,171
Total Liabilities and Shareholders’ Equity	$	380,619	$	458,274

104

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

  Parent Company Statements of Operations

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Revenue	$	92		$	386		$	169
Operating expenses
General and administrative		19,385			22,515			25,696
Impairment		—			—			6,575
Total operating expenses		19,385			22,515			32,271
Operating loss		(19,293	)		(22,129	)		(32,102	)
Other income (loss), net		38,659			49,530			(4,484	)
Impairment — related party		(3,400	)		(659	)		(11,434	)
Interest income		2,409			2,090			6,104
Interest expense		(8,647	)		(10,835	)		(17,127	)
Equity loss		(44,729	)		(59,334	)		(81,642	)
Net loss from continuing operations before change in accounting principle		(35,001	)		(41,337	)		(140,685	)
Equity income (loss) attributable to discontinued operations		(19,819	)		8,006			12,017
Cumulative effect of change in accounting principle		—			—			(21,815	)
Net Loss	$	(54,820	)	$	(33,331	)	$	(150,483	)

105

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

  Parent Company Statements of Cash Flows

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Cash Flows from Operating Activities of Continuing Operations
Net loss	$	(54,820	)	$	(33,331	)	$	(150,483	)
Adjustments to reconcile to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations		19,819			(8,006	)		(12,017	)
Depreciation		203			260			1,024
Equity loss		44,729			59,334			81,642
Non-cash compensation charges		2,153			2,345			3,406
Other income (loss), net		(38,659	)		(49,530	)		4,484
Impairment		—			—			6,575
Impairment — related party		3,400			659			11,434
Cumulative effect of change in accounting principle		—			—			21,815
Changes in assets and liabilities, net of effect of acquisitions and dispositions:
Other current assets		(320	)		(2,532	)		2,415
Income tax receivable		—			—			62,647
Other current liabilities		(968	)		(857	)		(1,593	)
Net cash provided by (used in) operating activities of continuing operations		(24,463	)		(31,658	)		31,349
Cash Flows from Investing Activities of Continuing Operations
Proceeds from sales of available-for-sale and trading securities		14,784			38,981			13,273
Proceeds from sales of and distributions from companies		39,085			38,955			24,738
Proceeds from sale of discontinued operations		125,853			—			—
Advances to companies		(615	)		(139	)		(5,697	)
Repayment of advances to companies		—			1,403			—
Acquisitions of ownership interests in companies and subsidiaries, net of cash acquired		(58,263	)		(45,831	)		(118,703	)
Advances to related party		—			—			(618	)
Repayment of advances to related party		7,162			1,940			1,556
Increase in restricted cash and short-term investments		(42,160	)		(16,263	)		(33,626	)
Decrease in restricted cash and short-term investments		16,143			21,783			28,039
Purchases of held-to-maturity securities		(16,715	)		—			—
Proceeds from sale of building		—			—			17,672
Capital expenditures		(272	)		(242	)		(1,407	)
Other, net		1,068			8			368
Net cash provided by (used in) investing activities of continuing operations		86,070			40,595			(74,405	)
Cash Flows from Financing Activities of Continuing Operations
Proceeds from convertible senior debentures		150,000			—			—
Payment of offering costs on convertible senior debentures		(4,887	)		—			—
Repurchase of convertible subordinated notes		(200,000	)		—			—
Payment of costs to repurchase convertible subordinated notes		(1,368	)		—			—
Repayments on term debt		—			—			(3,288	)
Issuance of Company common stock, net		1,392			326			—
Net cash provided by (used in) financing activities of continuing operations		(54,863	)		326			(3,288	)
Net Increase (Decrease) in Cash and Cash Equivalents		6,744			9,263			(46,344	)
Cash and Cash Equivalents at beginning of period		121,518			112,255			158,599
Cash and Cash Equivalents at end of period	$	128,262		$	121,518		$	112,255

106

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

20. Supplemental Non-cash Financing and Investing Activities

     During the years ended December 31, 2004, 2003 and 2002, the Company converted $1.2 million, $5.7 million and $0.8 million, respectively, of advances to companies into ownership interests in companies.

     Interest paid in 2004, 2003 and 2002 was $9.3 million, $12.2 million and $12.2 million, respectively, of which $7.6 million in 2004 and $10 million in 2003 and 2002 was related to the Company’s convertible subordinated notes and senior debentures.

     Cash paid for taxes in the years ended December 31, 2004, 2003 and 2002 was $0.2 million, $0.6 million and $0.2 million, respectively.

     In conjunction with the sale of its headquarters facility in 2002, the Company received a $2 million note, which was paid in full in 2003.

     During the year ended December 31, 2004, the Company sold its interest in Sanchez for $32.1 million in cash and 226,435 shares of Fidelity National Financial (“FNF”) common stock valued at $8.3 million on the date of the merger. The FNF shares were sold during 2004 for net cash proceeds of $8.3 million. Also during 2004, the Company sold its interest in Tangram Enterprise Solutions for shares of Opsware, Inc. valued at $6.9 million. The Opsware shares were sold during 2004 for $6.5 million in net cash proceeds.

21. Operating Segments

     The Company previously reported the following operating segments: i) CompuCom, ii) Strategic Companies, and iii) Non-Strategic Companies. As a result of the sale of the Company’s interest in CompuCom, which accounted for approximately 90% of consolidated revenues in the last three years, the Company re-evaluated its operating segments in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

     The Company now presents four of its consolidated companies as separate segments – Alliance, ChromaVision, Mantas and Pacific Title. The results of operations of the Company’s other companies, in which the Company has less than a majority interest, as well as the Company’s ownership in Laureate Pharma and funds, will be reported in the “Other Companies” segment.

     All prior periods have been reclassified to reflect the expanded segments presentation.

     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 includes certain corporate expenses, which are not identifiable to the operations of the Company’s operating business segments. Other Items primarily consists of general and administrative expenses related to 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 the Company’s consolidated operating data by reportable segments. Each segment includes the results of the consolidated companies and records the Company’s share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of the companies and the mark to market of trading securities. All significant intersegment activity has been eliminated in consolidation. Accordingly, segment results reported by the Company exclude the effect of transactions between the Company and its subsidiaries and among the Company’s subsidiaries.

107

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     Segment assets included in Other Items include primarily cash and cash equivalents of $128.8 million and $122.6 million at December 31, 2004 and 2003, respectively.

     Revenue is attributed to geographic areas based on where the services are performed or the customer’s shipped to location. A majority of the Company’s revenue is generated in the United States.

     As of December 31, 2004 and 2003, the Company’s assets were primarily located in the United States.

     The following represents the segment data from continuing operations:

	For the Year Ended December 31, 2004
	(in thousands)
																					Total
										Pacific		Other			Total			Other			Continuing
	Alliance			ChromaVision			Mantas			Title		Companies			Segments			Items			Operations
Revenues	$	93,148		$	9,769		$	25,929		$	25,609	$	2,162		$	156,617		$	92		$	156,709
Operating income (loss)	$	(5,039	)	$	(20,974	)	$	(11,512	)	$	1,226	$	(1,647	)	$	(37,946	)	$	(19,244	)	$	(57,190	)
Net income (loss)	$	(5,336	)	$	(12,829	)	$	(11,904	)	$	1,157	$	25,887		$	(3,025	)	$	(31,976	)	$	(35,001	)
Segment Assets
December 31, 2004	$	85,183		$	40,857		$	37,504		$	16,603	$	68,643		$	248,790		$	205,022		$	453,812
December 31, 2003	$	78,851		$	28,271		$	41,280		$	15,845	$	61,010		$	225,257		$	148,851		$	374,108

	For the Year Ended December 31, 2003
	(in thousands)
																					Total
										Pacific		Other			Total			Other			Continuing
	Alliance			ChromaVision			Mantas			Title		Companies			Segments			Items			Operations
Revenues	$	87,648		$	11,928		$	23,321		$	31,528	$	12,697		$	167,122		$	316		$	167,438
Operating income (loss)	$	(18,344	)	$	(9,670	)	$	(21,059	)	$	5,674	$	(3,908	)	$	(47,307	)	$	(21,691	)	$	(68,998	)
Net income (loss)	$	(18,559	)	$	(6,568	)	$	(17,546	)	$	4,851	$	28,308		$	(9,514	)	$	(31,823	)	$	(41,337	)

	For the Year Ended December 31, 2002
	(in thousands)
																						Total
										Pacific			Other			Total			Other			Continuing
	Alliance			ChromaVision			Mantas			Title			Companies			Segments			Items			Operations
Revenues	$	28,564		$	5,626		$	21,261		$	21,877		$	37,079		$	114,407		$	69		$	114,476
Operating loss	$	(3,028	)	$	(6,636	)	$	(12,010	)	$	(1,644	)	$	(19,665	)	$	(42,983	)	$	(24,893	)	$	(67,876	)
Net loss	$	(3,037	)	$	(8,058	)	$	(10,415	)	$	(1,294	)	$	(70,728	)	$	(93,532	)	$	(47,153	)	$	(140,685	)

Other Items

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Corporate operations	$	(32,000	)	$	(31,614	)	$	(47,107	)
Income tax benefit (expense)		24			(209	)		(46	)
	$	(31,976	)	$	(31,823	)	$	(47,153	)

108

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

22. Selected Quarterly Financial Information (Unaudited)

	Three Months Ended
	March 31			June 30			September 30			December 31
	(In thousands except per share data)
2004
Revenue	$	39,008		$	39,878		$	34,963		$	42,860
Cost of sales		24,780			24,836			25,252			30,131
Selling, general and administrative		26,115			28,719			24,987			23,950
Amortization of intangibles		1,565			1,127			1,089			1,348
Total operating expenses		52,460			54,682			51,328			55,429
Operating loss		(13,452	)		(14,804	)		(16,365	)		(12,569	)
Other income (loss), net		10,479			29,998			(921	)		(752	)
Impairment — related party		—			—			—			(3,400	)
Interest income		452			522			582			1,072
Interest expense		(3,178	)		(2,500	)		(2,208	)		(1,875	)
Equity loss		(2,374	)		(3,927	)		(2,772	)		(5,461	)
Minority interest		2,371			971			2,543			2,543
Net income (loss) from continuing operations before income taxes		(5,702	)		10,260			(19,141	)		(20,442	)
Income tax (expense) benefit		(40	)		(89	)		72			81
Net income (loss) from continuing operations		(5,742	)		10,171			(19,069	)		(20,361	)
Income (loss) from discontinued operations		1,108			(22,632	)		(54	)		1,759
	$	(4,634	)	$	(12,461	)	$	(19,123	)	$	(18,602	)
Basic net income (loss) per share (a)
Income (loss) from continuing operations	$	(0.05	)	$	0.08		$	(0.16	)	$	(0.17	)
Income (loss) from discontinued operations		0.01			(0.18	)		—			0.02
	$	(0.04	)	$	(0.10	)	$	(0.16	)	$	(0.15	)
Diluted net income (loss) per share (a)
Income (loss) from continuing operations	$	(0.05	)	$	0.08		$	(0.16	)	$	(0.17	)
Income (loss) from discontinued operations		0.01			(0.18	)		—			0.02
	$	(0.04	)	$	(0.10	)	$	(0.16	)	$	(0.15	)
2003
Revenue	$	40,402		$	41,484		$	43,081		$	42,471
Cost of sales		24,561			26,155			24,374			25,067
Selling, general and administrative		31,074			28,855			25,495			25,388
Amortization of intangibles		1,645			1,942			1,801			4,111
Impairment		—			—			—			15,968
Total operating expenses		57,280			56,952			51,670			70,534
Operating loss		(16,878	)		(15,468	)		(8,589	)		(28,063	)
Other income, net		4,191			12,881			31,205			653
Impairment — related party		(659	)		—			—			—
Interest income		714			519			605			359
Interest expense		(3,041	)		(3,057	)		(3,082	)		(2,993	)
Equity loss		(4,024	)		(2,135	)		(3,613	)		(7,407	)
Minority interest		2,104			2,198			604			1,848
Net income (loss) from continuing operations before income taxes		(17,593	)		(5,062	)		17,130			(35,603	)
Income tax (expense) benefit		(5	)		(117	)		(163	)		76
Net income (loss) from continuing operations		(17,598	)		(5,179	)		16,967			(35,527	)
Income from discontinued operations		2,059			2,029			1,275			2,643
	$	(15,539	)	$	(3,150	)	$	18,242		$	(32,884	)
Basic net income (loss) per share (a)
Income (loss) from continuing operations	$	(0.15	)	$	(0.04	)	$	0.14		$	(0.30	)
Income from discontinued operations		0.02			0.01			0.01			0.02
	$	(0.13	)	$	(0.03	)	$	0.15		$	(0.28	)
Diluted net income (loss) per share (a)
Income (loss) from continuing operations	$	(0.15	)	$	(0.04	)	$	0.14		$	(0.30	)
Income from discontinued operations		0.01			0.01			0.01			0.02
	$	(0.14	)	$	(0.03	)	$	0.15		$	(0.28	)

109

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(a)   Per share amounts for the quarters have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period. Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive, and because of the adjustments to net income (loss) for the dilutive effect of public holdings common stock equivalents and convertible securities.

23. Trade Accounts Receivable

     The following table summarizes the activity in the allowance for doubtful accounts:

	(In thousands)
Balance, December 31, 2001	$	1,136
Charged to costs and expenses		682
Charge-offs		(1,061	)
Other		590
Balance, December 31, 2002		1,347
Charged to costs and expenses		779
Charge-offs		(1,043	)
Other		(67	)
Balance, December 31, 2003		1,016
Charged to costs and expenses		643
Charge-offs		(309	)
Other		(272	)
Balance, December 31, 2004	$	1,078

24. Separate Financial Information of Subsidiaries not Consolidated

     The following is summarized financial information for PA Early Stage Partners II, L.P. (PAESP II or the Fund), a private equity fund which the Company accounts for under the equity method of accounting. The Company’s current strategy does not include making new commitments in private equity funds. Additionally, the Company may seek to reduce its current ownership interests in and its existing commitments to funds in which it holds interests. The Company has, in the past, sold its interests in certain funds in privately negotiated sales as opportunities arose and believes that it may be able to sell its fund interests in the future.

     PAESP II is a private venture capital fund formed on February 23, 2000 as a limited partnership with $101.5 million in aggregate capital commitments of which the Company has committed to invest $25 million. As of December 31, 2004, the Company has invested a total of $21.0 million, which constitutes 24.6% of the invested capital to date.

     PAESP II is the second of three private venture capital partnerships managed by PA Early Stage Partners, the fund’s manager. All three funds have had a similar focus and investment strategy. The first fund formed by PA Early Stage was started in 1997. PA Early Stage Partners formed a third private venture capital partnership in February, 2003 with aggregate capital commitments of $83 million dollars. PAESP II typically invests in preferred stock and convertible debt securities issued by privately held early stage information technology and life sciences companies having substantial operations in Pennsylvania. In assessing private companies in which to invest, the fund manager screened hundreds of business plans, met with management teams of many prospective portfolio companies, conducted detailed analyses of those companies’ market opportunities, technology assets, and financial projections, and performed other risk/return analyses in making their investment decisions. Through December 31, 2004, the Fund has called $85.3 million of capital from its investors and has made 36 portfolio investments. The Fund does not anticipate making any new investments.

110

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     The Fund hopes to generate returns for its investors by liquidating its investments as a result of mergers, acquisitions, buyouts, public offerings or other value-creation events affecting the companies. The expected holding period for a successful early stage investment is between five and seven years, reflecting the time it takes for a typical early stage technology or life sciences company to execute on its business plan. It is not unusual for early-stage venture capital funds such as PAESP II to incur substantial losses in the early years of the fund since early stage companies often fail during the first few years of their existence. Gains are often not realized until later in a fund’s life when successful portfolio investments have had ample time to create substantial shareholder value and achieve a profitable liquidity event. The Fund is five years old and has not realized any gains to date and has experienced realized losses in connection with the write off of non-performing companies. Liquidation of the Fund’s investments is subject to market factors and individual portfolio companies’ performance which are substantially outside of the control of the Fund. On a quarterly basis, the Company evaluates the Fund’s performance as compared to the Fund’s investment strategies and the Company’s business objectives and, if necessary, records an impairment charge.

     The Fund values its venture capital investments at fair value as determined in good faith by the general partner of the Fund. No public market exists for the Fund’s investments. Therefore, the Fund must determine the fair value of its investments by taking into consideration the cost of the securities, prices of recent significant placements of securities of the same issuer, subsequent developments concerning the companies to which the securities relate, and such other factors as the general partner may deem relevant. Because of the inherent uncertainty of such valuations, these estimated values may differ significantly from the values that would have been used had a ready market for these investments existed, and the differences could be material. The Fund reflects adjustments to valuations of investments in its financial statements as unrealized gains or losses, and records realizations or write-offs of investments as realized gains or losses. The Fund has applied its fair value methodology and key assumptions for determining valuations of portfolio investments consistently across all reporting periods.

     The following summarized financial information of the Fund is based upon the Fund’s financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America that require the Fund’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

111

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

PA Early Stage Partners, II, L.P.

	As of December 31,
	2004		2003
	(In thousands)
	(unaudited)
Balance Sheets
Assets
Cash and temporary investments	$	1,081	$	976
Venture capital investments, at fair value:
Information Technology		14,346		14,601
Life Sciences		5,458		5,981
Other		1,289		1,194
	$	22,174	$	22,752
Liabilities’ and Partners’ Capital
Accounts payable and accrued expenses	$	5	$	—
Total partners’ capital		22,169		22,752
	$	22,174	$	22,752

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
	(unaudited)
Statements of Operations
Revenue	$	14		$	21		$	112
Expenses		(2,110	)		(2,113	)		(2,116	)
Net operating loss		(2,096	)		(2,092	)		(2,004	)
Realized loss on investments		(4,552	)		(4,298	)		(3,723	)
Net unrealized gain (loss) on investments		2,722			(8,128	)		429
Net loss on investments		(1,830	)		(12,426	)		(3,294	)
Net decrease in partners’ capital resulting from operations	$	(3,926	)	$	(14,518	)	$	(5,298	)

	Year Ended December 31,
	2004			2003			2002
	(In thousands)
	(unaudited)
Statements of Changes in Partners’ Capital
Balance — Beginning of Year	$	22,752		$	33,718		$	34,252
Partners contributions		4,567			3,552			5,075
Net decrease in partners’ capital resulting from operations		(2,096	)		(2,092	)		(2,004	)
Net decrease in partners’ capital resulting from investments		(1,830	)		(12,426	)		(3,294	)
Distribution to partners		(1,224	)		—			(311	)
Balance — End of Year	$	22,169		$	22,752		$	33,718

112

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

None.

Item 9A. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures

     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

     (b) Management’s Report on Internal Control Over Financial Reporting

     Our management’s report on internal control over financial reporting is set forth in Item 8 of this annual report on Form 10-K and is incorporated by reference herein.

     (c) Change in Internal Control over Financial Reporting

     No change in our internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None

113

PART III

Item 10. Directors and Executive Officers of the Registrant

     Incorporated by reference to the portions of the Definitive Proxy Statement entitled “Election of Directors,” “Corporate Governance Principles and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information about our executive officers is included as an Annex to Part I above.

Item 11. Executive Compensation

     Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Stock Ownership of Directors and Officers.”

  Securities Authorized for Issuance Under Equity Compensation Plans

     Our equity compensation plans provide a broad-based program designed to attract and retain talent while creating alignment with the long-term interests of our shareholders. Employees at all levels participate in our equity compensation plans. In addition, members of our Board of Directors (“Board”) receive stock options for their service on our Board.

     Our Board is authorized to administer our equity compensation plans, adopt, amend and repeal the administrative rules relating to the plans, and interpret the provisions of the plans. Our Board has delegated to the Compensation Committee of the Board (the “Compensation Committee”) authority to administer our equity compensation plans.

     Our Compensation Committee has the authority to select the recipients of grants under our equity compensation plans and determine the terms and conditions of the grants, including but not limited to (i) the number of shares of common stock covered by such grants, (ii) the type of grant, (iii) the dates upon which such grants vest (which is typically 25% on the first anniversary of the grant date and in 36 equal monthly installments thereafter), (iv) the exercise price of options (which is equal to the fair market value of the shares on the grant date) or the consideration to be paid in connection with restricted stock, stock units or other stock-based grants (which may be no consideration), and (iv) the term of the grant.

     The 2001 Plan provides for the grant of nonqualified stock options, stock appreciation rights, restricted stock, performance units, and other stock-based awards to employees, consultants or advisors of Safeguard and its subsidiaries, provided that no grants can be made under this plan to executive officers and directors of Safeguard. Under the NYSE rules that were in effect at the time this plan was adopted in 2001, shareholder approval of the plan was not required. This plan is administered by the Compensation Committee which, as described above, has the authority to issue equity grants under the 2001 Plan and to establish the terms and conditions of such grants. Except for the persons eligible to participate in the 2001 Plan and the inability to grant incentive stock options under the 2001 Plan, the terms of the 2001 plan are substantially the same as the other equity compensation plans approved by our shareholders (which have been described in previous filings).

     A total of 5,400,000 shares of our common stock are authorized for issuance under the 2001 Plan. At December 31, 2004, 3,422,908 shares were subject to outstanding options, 504,338 shares were available for future issuance, and 1,472,754 shares had been issued under the 2001 Plan. If any option granted under the 2001 Plan expires or is terminated, surrendered, canceled or forfeited, or if any shares of restricted stock, performance units or other stock-based grants are forfeited, the unused shares of common stock covered by such grants will again be available for grant under the 2001 Plan.

     Our Board is authorized to make appropriate adjustments in connection with the 2001 Plan to reflect any stock split, stock dividend, recapitalization, liquidation, spin-off or other similar event. The 2001 Plan also contains

114

provisions addressing the consequences of any Reorganization Event or Change in Control (as such terms are defined in the 2001 Plan). If a Reorganization or Change of Control Event occurs, unless the Compensation Committee determines otherwise, all outstanding options and stock appreciation rights (SARs) that are not exercised will be assumed by, or replaced with comparable options or rights by, the surviving corporation (or a parent of the surviving corporation), and other outstanding grants will be converted to similar grants of the surviving corporation or a parent of the surviving corporation). Notwithstanding that provision, the Compensation Committee has the authority to take one or both of the following actions: (i) require that grantees surrender their outstanding options and SARs in exchange for a payment by Safeguard in cash or company stock, as determined by the Compensation Committee, in an amount equal to the amount by which the then fair market value of the shares of stock subject to the unexercised options and SARs exceeds the exercise price of the options or the base amount of the SARs, as applicable, or (ii) after giving grantees an opportunity to exercise their outstanding options and SARs or otherwise realize the value of all of their other grants, terminate any or all unexercised options, SARs and grants at such time as the Compensation Committee deems appropriate.

     The following table provides information as of December 31, 2004 about the securities authorized for issuance under our equity compensation plans.

Equity Compensation Plan Information

					Number of securities
					remaining available for
	Number of securities to		Weighted-average		future issuance under
	be issued upon exercise		exercise price of		equity compensation plans
	of outstanding options,		outstanding options,		(excluding securities
Plan Category	warrants and rights (a)		warrants and rights (1)		reflected in column (a))
Equity compensation plans approved by security holders (2)		7,244,079	$	5.0738		7,087,753
Equity compensation plans not approved by security holders (3)		3,422,908	$	2.5901		504,338
Total		10,666,987	$	4.1514		7,592,091

(1)	The weighted average exercise price calculation excludes the 1,450,541 shares underlying outstanding deferred stock units included in column (a) that were issued for no consideration.
(2)	Represents awards granted under the 1990 Stock Option Plan and the 1999 Equity Compensation Plan and shares available for issuance under the 1999 Equity Compensation Plan and the 2004 Equity Compensation Plan. Includes 1,450,541 shares underlying deferred stock units outstanding at December 31, 2004. Deferred stock units are issued for no consideration and are payable in stock, on a one-for-one basis. Payments in respect of the deferred stock units are generally distributable following termination of employment or service, death, permanent disability or retirement. The value of the 1,450,541 deferred stock units was approximately $4.5 million based on the fair value of the stock on the various grant dates. The deferred stock units generally vest over a period of one to four years, with the exception of deferred stock units issued to directors in lieu of compensation, which are vested at issuance.
(3)	Represents awards granted and shares available for issuance under the 2001 Plan.

Item 13. Certain Relationships and Related Transactions

     Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Relationships and Transactions with Management and Others.”

Item 14. Principal Accounting Fees and Services

     Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Independent Public Accountant — Audit Fees.”

115

PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a)     Consolidated Financial Statements and Schedules

     Incorporated by reference to Item 8 of this Report on Form 10-K.

     (b)     Exhibits

     The exhibits required to be filed as part of this Report are listed in the exhibit index below.

Exhibits

     The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Report. For exhibits that previously have been filed, the Registrant incorporates those exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of the previous filing and the location of the exhibit in the previous filing which is being incorporated by reference herein. Documents which are incorporated by reference to filings by parties other than the Registrant are identified in footnotes to this table.

		Incorporated Filing Reference
			Original
Exhibit		Form Type &	Exhibit
Number	Description	Filing Date	Number
2.1	Agreement and Plan of Merger, dated as of May 27, 2004, among CompuCom Systems, Inc., CHR Holding Corporation and CHR Merger Corporation	Form 8-K 5/28/04		99.2
3.1	Amended and Restated Articles of Incorporation of Safeguard	Form 10-K 3/15/04		3.1
3.2	By-laws of Safeguard, as amended	Form 10-Q 5/15/01		3.1
4.1	Rights Agreement dated as of March 1, 2000 between Safeguard Scientifics, Inc. and ChaseMellon Shareholder Services LLC, as Rights Agent	Form 8-K 2/29/00		4
4.2	Designation of Series A Junior Participating Preferred Shares	Form 10-K 3/22/00		4.11
4.3.1	Indenture, dated as of February 18, 2004 between Safeguard Scientifics, Inc. and Wachovia Bank, National Association, as trustee, including the form of 2.625% Convertible Senior Debentures due 2024	Form 10-K 3/15/04		4.10
4.3.2	Purchase Agreement dated February 18, 2004 of Safeguard Scientifics, Inc. to issue and sell to Wachovia Capital Markets, 2.625% Convertible Senior Debentures Due 2024	Form 10-K 3/15/04		4.11
4.3.3	Registration Rights Agreement dated as of February 18, 2004 between Safeguard Scientifics, Inc. and Wachovia Capital Markets, LLC	Form 10-K 3/15/04		4.12
10.1 *	1990 Stock Option Plan, as amended	Form 10-K 3/31/97		4.3
10.2.1 *	Safeguard Scientifics, Inc. 1999 Equity Compensation Plan, as amended	Form 10-K 4/2/01		4.3
10.2.2 *	Amendment No. 1 to the Safeguard Scientifics, Inc. 1999 Equity Compensation Plan	Form 10-Q 8/6/04		10.2

116

		Incorporated Filing Reference
			Original
Exhibit		Form Type &	Exhibit
Number	Description	Filing Date	Number
10.3.1	Safeguard Scientifics, Inc. 2001 Associates Equity Compensation Plan	Form S-8 11/14/01		4.1
10.3.2	Amendment No. 1 to the Safeguard Scientifics, Inc. 2001 Associates Equity Compensation Plan	Form 10-K 3/21/03		4.4.1
10.3.3	Amendment No. 2 to the Safeguard Scientifics, Inc. 2001 Associates Equity Compensation Plan	Form 10-Q 8/6/04		10.3
10.4 *	Safeguard Scientifics, Inc. 2004 Equity Compensation Plan	Form 10-Q 8/6/04		10.1
10.5 *	Form of directors’ stock option grant certificate under the 1999 and 2004 Equity Compensation Plans	Form 10-Q 11/9/04		10.3
10.6 *	Form of officers’ stock option grant certificate under the 1999 and 2004 Equity Compensation Plans	Form 10-Q 11/9/04		10.4
10.7 *	Safeguard Scientifics, Inc. Group Stock Unit Award Program—form of grant document under the 1999 and 2004 Equity Compensation Plans	Form 10-Q 11/9/04		10.5
10.8 *	Safeguard Scientifics, Inc. Group Stock Unit Program for Directors—form of grant document under the 1999 and 2004 Equity Compensation Plans	Form 10-Q 11/9/04		10.6
10.9 *	Form of Restricted Stock Grant Agreement under the 1999, 2001 and 2004 Equity Compensation Plans	Form 10-Q 11/9/04		10.7
10.10 *	Safeguard Scientifics, Inc. Long Term Incentive Plan, as amended and restated effective June 15, 1994	Form 10-K 3/30/95		10.6
10.11 *	Safeguard Scientifics, Inc. Executive Deferred Compensation Plan	Form 10-K 3/15/04		4.13
10.12.1 *	Letter Agreement dated October 12, 2001, between Safeguard Scientifics, Inc. and Anthony L. Craig	Form 10-K 4/1/02		10.20
10.12.2 *	Letter Agreement, dated January 1, 2003, between Safeguard Scientifics, Inc. and Anthony L. Craig	Form 10-K 3/21/03		10.17
10.13 *	Employment Agreement dated August 17, 2004 between Safeguard Scientifics, Inc. and Michael F. Cola	Form 10-Q 11/9/04		10.1
10.14 *	Employment Agreement dated August 17, 2004 between Safeguard Scientifics, Inc. and Christopher J. Davis	Form 10-Q 11/9/04		10.2
10.15 *	Employment Letter, effective November 17, 2004, and Letter Agreement, dated November 17, 2004, by and between Safeguard Scientifics, Inc. and Steven J. Feder	Form 8-K 11/19/04		99.1
10.16 *	Letter Agreement dated February 25, 2005 by and between Safeguard Scientifics, Inc. and John A. Loftus	Form 8-K 2/25/05		99.1
10.17.1	Amended and Restated Demand Note dated May 18, 2001 given by Warren V. Musser for advances by Bonfield Insurance, Ltd.	Form 10-Q 8/14/01		10.4
10.17.2	Agreement to Restructure by and among Warren V. Musser and Hillary Grinker Musser and Safeguard Scientifics, Inc. and Bonfield Insurance, Ltd., dated as of April 16, 2001	Form 10-Q 8/14/01		10.5
10.17.3	Amendment to Agreement to Restructure by and among Warren V. Musser and Hillary Grinker Musser and Safeguard Scientifics, Inc. and Bonfield Insurance, Ltd., dated May 18, 2001	Form 10-Q 8/14/01		10.6
10.17.4	Employment Agreement dated as of October 15, 2001 between Safeguard Scientifics, Inc. and Warren V. Musser	Form 10-K 4/1/02		10.14

117

		Incorporated Filing Reference
				Original
Exhibit		Form Type &		Exhibit
Number	Description	Filing Date		Number
10.18.1	Loan Agreement dated May 10, 2002 by and among Comerica Bank — California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.	Form 10-Q 8/14/02			10.1
10.18.2	First Amendment dated May 9, 2003 to Loan Agreement dated May 10, 2002, by and among Comerica Bank — California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.	Form 10-Q 5/13/03			10.1
10.18.3	Second Amendment dated February 12, 2004 to Loan Agreement dated May 10, 2002 by and among Comerica Bank — California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.	Form 10-K 3/15/04			10.19
10.18.4	Third Amendment dated May 5, 2004 to Loan Agreement dated May 10, 2002 by and among Comerica Bank — California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.	Form 10-Q 5/10/04			10.29
10.18.5	Fourth Amendment dated September 30, 2004 to Loan Agreement dated May 10, 2002 by and among Comerica Bank, successor by merger to Comerica Bank — California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.	Form 8-K 10/5/04			10.1
10.18.6 †	Guaranty dated May 10, 2002 by Safeguard Scientifics, Inc. to Comerica Bank, successor by merger to Comerica Bank—California		—		—
10.18.7	Affirmation and Amendment of Guaranty dated September 30, 2004, by Safeguard Scientifics, Inc. to Comerica Bank, successor by merger to Comerica Bank—California	Form 8-K 10/5/04			10.2
10.19.1 †	Loan Agreement dated September 25, 2003, by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.		—		—
10.19.2 †	First Amendment dated December 12, 2003 to Loan Agreement dated September 25, 2003 by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.		—		—
10.19.3 †	Second Amendment dated May 27, 2004 to Loan Agreement dated September 25, 2003 by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.		—		—
10.19.4 †	Third Amendment dated August 9, 2004 to Loan Agreement dated September 25, 2003 by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.		—		—
10.19.5	Fourth Amendment dated September 30, 2004 to Loan Agreement dated September 25, 2003 by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.	Form 8-K 10/5/04			10.3
10.19.6	Guaranty dated September 30, 2004 by Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. (on behalf of Alliance Consulting)	Form 8-K 10/5/04			10.4
10.19.7	Affirmation of Guaranty dated September 30, 2004 by Safeguard Scientifics, Inc.	Form 8-K 10/5/04			10.5
10.19.8 †	Fifth Amendment dated March 11, 2005 to Loan Agreement dated September 25, 2003 by and among Comerica Bank, Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc.		—		—

118

		Incorporated Filing Reference
				Original
Exhibit		Form Type &		Exhibit
Number	Description	Filing Date		Number
10.20.1	Loan Agreement dated March 11, 2005, by and between Comerica Bank—California and ChromaVision Medical Systems, Inc.		(1)		(1)
10.20.2	First Amendment dated October 21, 2003 to Loan and Security Agreement dated February 13, 2003 between ChromaVision Medical Systems, Inc. and Comerica Bank		(2)		(2)
10.20.3	Second Amendment dated January 22, 2004 to Loan and Security Agreement dated February 13, 2003 between ChromaVision Medical Systems, Inc. and Comerica Bank		(3)		(3)
10.20.4	Third Amendment dated as of January 31, 2005 to Loan Agreement dated February 13, 2003 by and between Comerica Bank and ChromaVision Medical Systems, Inc.	Form 8-K 2/3/05			99.2
10.20.5	Fourth Amendment dated as of March 11, 2005 to Loan Agreement dated February 13, 2003 by and between Comerica Bank and ChromaVision Medical Systems, Inc.		(4)		(4)
10.20.6	Amended and Restated Unconditional Guaranty dated March 11, 2005 to Comerica Bank provided by Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. (on behalf of ChromaVision)		(5)		(5)
10.20.7	Reimbursement and Indemnity Agreement dated as of March 11, 2005 by ChromaVision Medical Systems, Inc. in favor of Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc.		(6)		(6)
10.21.1	Loan and Security Agreement dated as of December 1, 2004 by and between Comerica Bank and Laureate Pharma, Inc.	Form 8-K 12/7/04			99.1
10.21.2	Guaranty dated December 1, 2004 to Comerica Bank provided by Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. (on behalf of Laureate Pharma)	Form 8-K 12/7/04			99.2
10.21.3	First Amendment dated as of January 31, 2005 to Loan and Security Agreement dated as of December 1, 2004 by and between Comerica Bank and Laureate Pharma, Inc.	Form 8-K 2/3/05			99.3
10.22.1 †	Amended and Restated Loan and Security Agreement dated as of December 15, 2002, by and between Comerica Bank—California and Mantas, Inc.		—		—
10.22.2 †	First Amendment dated as of March 19, 2004, to Amended and Restated Loan and Security Agreement dated as of December 15, 2002 by and between Comerica Bank, successor by merger to Comerica Bank—California, and Mantas, Inc.		—		—
10.22.3 †	Second Amendment dated as of March 31, 2004, to Amended and Restated Loan and Security Agreement dated as of December 15, 2002 by and between Comerica Bank, successor by merger to Comerica Bank—California, and Mantas, Inc.		—		—
10.22.4 †	Unconditional Guaranty dated March 31, 2004 to Comerica Bank provided by Safeguard Delaware, Inc. (on behalf of Mantas)		—		—
10.22.5	Third Amendment dated as of January 28, 2005, to Amended and Restated Loan and Security Agreement dated as of December 15, 2002 by and between Comerica Bank, successor by merger to Comerica Bank—California, and Mantas, Inc.	Form 8-K 2/3/05			99.1

119

		Incorporated Filing Reference
				Original
Exhibit		Form Type &		Exhibit
Number	Description	Filing Date		Number
10.22.6†	Fourth Amendment dated March 14, 2005, to Amended and Restated Loan and Security Agreement dated as of December 15, 2002 by and between Comerica Bank, successor by merger to Comerica Bank—California, and Mantas, Inc.		—		—
10.23	Amended and Restated Loan and Security Agreement dated as of January 31, 2005, by and between Comerica Bank and Pacific Title & Arts Studio, Inc.	Form 8-K 2/3/05			99.4
10.24.1	Asset Purchase Agreement dated as of October 20, 2004, by and among Safeguard Scientifics, Inc., Biopharma Acquisition Company, Inc. (now known as Laureate Pharma, Inc.), Laureate Pharma, L.P. and Purdue Pharma, L.P.	Form 8-K 10/25/04			10.1
10.24.2	Form of Agreement of Lease by and between Norwell Land Company and Biopharma Acquisition Company, Inc. (now known as Laureate Pharma, Inc.)	Form 8-K 10/25/04			10.2
10.24.3	Form of Termination and Option Agreement by and between Norwell Land Company and Biopharma Acquisition Company, Inc. (now known as Laureate Pharma, Inc.)	Form 8-K 10/25/04			10.3
10.25	Letter of Credit issued to W.P. Carey	Form 8-K 10/5/04			10.1
14 †	Code of Conduct		—		—
21 †	List of Subsidiaries		—		—
23.1 †	Consent of Independent Registered Public Accounting Firm — KPMG LLP		—		—
31.1 †	Certification of Anthony L. Craig pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934		—		—
31.2 †	Certification of Christopher J. Davis pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934		—		—
32.1 †	Certification of Anthony L. Craig pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		—		—
32.2 †	Certification of Christopher J. Davis pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		—		—

†	Filed herewith
*	These exhibits relate to management contracts or compensatory plans, contracts or arrangements in which directors and/or executive officers of the Registrant may participate.
(1)	Incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-K filed March 31, 2003 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)
(2)	Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed on November 14, 2003 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)

120

(3)	Incorporated by reference to Exhibit 10.6 of the Annual Report on Form 10-K filed March 14, 2005 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)
(4)	Incorporated by reference to Exhibit 10.8 of the Annual Report on Form 10-K filed March 14, 2005 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)
(5)	Incorporated by reference to Exhibit 10.9 of the Annual Report on Form 10-K filed March 14, 2005 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)
(6)	Incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-K filed March 14, 2005 by ChromaVision Medical Systems, Inc. (SEC File No. 000-22677)

121

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Safeguard Scientifics, Inc.
By:	ANTHONY L. CRAIG
	Anthony L. Craig
	President and Chief Executive Officer

Dated: March 14, 2005

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
Anthony L. Craig	President and Chief Executive Officer and Director (Principal Executive Officer)	Dated: March 14, 2005
Anthony L. Craig
Christopher J. Davis	Executive Vice President and Chief Administrative and Financial Officer (Principal Financial and Accounting Officer)	Dated: March 14, 2005
Christopher J. Davis
Julie A. Dobson	Director	Dated: March 14, 2005
Julie A. Dobson
Robert E. Keith, JR.	Chairman of the Board of Directors	Dated: March 14, 2005
Robert E. Keith, Jr.
Andrew E. Lietz	Director	Dated: March 14, 2005
Andrew E. Lietz
George Mackenzie	Director	Dated: March 14, 2005
George MacKenzie
Jack L. Messman	Director	Dated: March 14, 2005
Jack L. Messman
John W. Poduska, SR.	Director	Dated: March 14, 2005
John W. Poduska Sr.
Robert Ripp	Director	Dated: March 14, 2005
Robert Ripp
John J. Roberts	Director	Dated: March 14, 2005
John J. Roberts

122

EX-10.18.6

EXHIBIT 10.18.6

UNCONDITIONAL GUARANTY

     For and in consideration of the loan to SAFEGUARD DELAWARE, INC. and SAFEGUARD SCIENTIFICS (DELAWARE), INC. (collectively, the “Borrower”), which loan is made pursuant to a Loan Agreement among Borrower and Comerica Bank-California (“Bank”), as amended from time to time (the “Agreement”), and acknowledging that Bank would not enter into the Agreement without the benefit of this Guaranty, the undersigned SAFEGUARD SCIENTIFICS, INC. (“Guarantor”) hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Borrower owes to Bank and performance by Borrower of the Agreement and any other agreements between Borrower and Bank, as amended from time to time (collectively referred to as the “Agreements”), in strict accordance with their respective terms. The liability of Guarantor hereunder shall not exceed a principal amount of $25,000,000 plus interest and the fees and expenses incurred by Bank in enforcing the Loan Documents.

     1.  If Borrower does not pay any amount or perform its obligations in strict accordance with the Agreements, Guarantor shall immediately pay all amounts due thereunder (including, without limitation, all principal, interest and fees) and otherwise to proceed to complete the same and satisfy all of Borrower’s obligations under the Agreements.

     2.  If there is more than one guarantor, the obligations hereunder are joint and several, and whether or not there is more than one Guarantor, the obligations hereunder are independent of the obligations of Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or whether Borrower be joined in any such action or actions. Guarantor waives the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof, to the extent permitted by law. Guarantor’s liability under this Guaranty is not conditioned or contingent upon the genuineness, validity, regularity or enforceability of the Agreements.

     3.  Guarantor authorizes Bank, without notice or demand and without affecting its liability hereunder, from time to time to (a) renew, extend, or otherwise change the terms of the Agreements or any part thereof; (b) take and hold security for the payment of this Guaranty or the Agreements, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sa le thereof as Bank in its sole discretion may determine.

     4.  Guarantor waives any right to require Bank to (a) proceed against Borrower or any other person; (b) proceed against or exhaust any security held from Borrower or any other person; or (c) pursue any other remedy in Bank’s power whatsoever. Bank may, at its election, exercise or decline or fail to exercise any right or remedy it may have against Borrower or any security held by Bank, including without limitation the right to foreclose upon any such security by judicial or nonjudicial sale, without affecting or impairing in any way the liability of Guarantor hereunder. Guarantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower (other than payment of the Borrower’s obligations). Guarantor waives any setoff, defense or counterclaim that Borrower may have against Bank. Guarantor waives any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower. Until all of the amounts that Borrower owes to Bank have been paid in full, Guarantor shall have no right of subrogation or reimbursement for claims arising out of or in connection with this Guaranty, contribution or other rights against Borrower, and Guarantor waives any right to enforce any remedy that Bank now has or may hereafter have against Borrower. Guarantor waives all rights to participate in any security now or hereafter held by Bank. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness. Guarantor assumes the responsibility for being and keeping itself informed of the financial condition of Borrower and of all other circumstances bearing upon the risk of nonpayment of any indebtedness or nonperformance of any obligation of Borrower, warrants to Bank that it will keep so informed, and agrees that absent a request for particular information by Guarantor, Bank shall not have any duty to advise Guarantor of information known to Bank regarding such condition or any such circumstances. Guarantor waives

1

the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433.

     5.  If Borrower becomes insolvent or is adjudicated bankrupt or files a petition for reorganization, arrangement, composition or similar relief under any present or future provision of the United States Bankruptcy Code, or if such a petition is filed against Borrower, and in any such proceeding some or all of any indebtedness or obligations under the Agreements are terminated or rejected or any obligation of Borrower is modified or abrogated, or if Borrower’s obligations are otherwise avoided for any reason, Guarantor agrees that Guarantor’s liability hereunder shall not thereby be affected or modified and such liability shall continue in full force and effect as if no such action or proceeding had occurred. This Guaranty shall continue to be effective or be reinstated, as the case may be, if any payment must be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other guarantor, or otherwise, as though such payment had not been made.

     6.  Any indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to any indebtedness of Borrower to Bank; and, until all of Borrower’s obligations are satisfied, such indebtedness of Borrower to Guarantor shall be collected, enforced and received by Guarantor as trustee for Bank and be paid over to Bank on account of the indebtedness of Borrower to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty.

     7.  Guarantor agrees to pay reasonable attorneys’ fee s and all other costs and expenses which may be incurred by Bank or any Lender in the enforcement of this Guaranty. No terms or provisions of this Guaranty may be changed, waived, revoked or amended without Bank’s prior written consent. Should any provision of this Guaranty be determined by a court of competent jurisdiction to be unenforceable, all of the other provisions shall remain effective. This Guaranty, together with any agreements (including without limitation any security agreements or any pledge agreements) executed in connection with this Guaranty, embodies the entire agreement among the parties hereto with respect to the matters set forth herein, and supersedes all prior agreements among the parties with respect to the matters set forth herein. No course of prior dealing among the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty. Bank may assign this Guaranty without in any way affecting Guarantor’s liability under it. This Guaranty shall inure to the benefit of Bank and its successors and assigns. This Guaranty is in addition to the guaranties of any other guarantors and any and all other guaranties of Borrower’s indebtedness or liabilities to Bank.

     8.  Guarantor represents and warrants to Bank that (i) Guarantor has taken all necessary and appropriate action to authorize the execution, delivery and performance of this Guaranty, (ii) execution, delivery and performance of this Guaranty do not conflict with or result in a breach of or constitute a default under Guarantor’s organizational documents or agreements to which it is party or by which it is bound, and (iii) this Guaranty constitutes a valid and binding obligation, enforceable against Guarantor in accordance with its terms.

     9.  Guarantor covenants and agrees that Guarantor shall do all of the following:

          9.1  Guarantor shall maintain its existence, remain in good standing in its state of organization, and continue to qualify in each jurisdiction in which the failure to so qualify could have a material adverse effect on the financial condition, operations or business of Guarantor. Guarantor shall maintain in force all licenses, approvals and agreements, the loss of which is reasonably likely to have a material adverse effect on its financial condition, operations or business.

          9.2  Guarantor shall comply with all statutes, laws, ordinances, directives, orders, and government rules and regulations to which it is subject if non-compliance with such laws would reasonably be expected to adversely affect the financial condition, operations or business of Guarantor.

          9.3  At any time and from time to time Guarantor shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Guaranty.

          9.4  Guarantor shall not transfer, assign, encumber or otherwise dispose of any shares of

2

capital stock or other equity interest Guarantor may now have or hereafter acquire in Borrower.

     10.  Effectiveness; Binding Effect: Governing Law. This Guaranty shall become effective when it shall have been executed by Guarantor and thereafter shall be binding upon and inure to the benefit of Bank and its successors and assigns. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.

     11.  Waiver of Jury Trial. GUARANTOR AND BANK HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Guarantor and Bank each acknowledge that this waiver is a material inducement to enter into a business relations hip, that each has already relied on the waiver in entering into this Agreement, and that each will continue to rely on the waiver in their related future dealings. Guarantor and Bank further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

     12.  Consent to Jurisdiction; Venue; Bank for Service of Process. All judicial proceedings brought against the Guarantor or the Lenders with respect to this Guaranty and the Loan Documents may be brought in any state or federal court of competent jurisdiction in the County of Santa Clara in the State of California, and by execution and delivery of this Guaranty, Guarantor accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Guaranty. Guarantor and Bank irrevocably waive any right they may have to assert the doctrine of forum non conveniens or to object to venue to the extent any proceeding is brought in accordance with this Section. Guarantor and Bank designate and appoint each Responsible Officer, from time to time, and such other Persons as may hereafter be selected by Guarantor and Bank irrevocably agreeing in writing to so serve as their agent to receive on their behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by Guarantor and Bank to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to Guarantor and Bank at the address provided in the applicable signature page hereto, except that unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of process. If any agent is appointed by Guarantor and such agent refuse to accept service, Guarantor and Bank hereby agree that service upon it by mail shall constitute sufficient notice. Nothing herein shall affect the right to serve process in any other manner permitted by law.

     IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of May 10, 2002.

SAFEGUARD SCIENTIFICS, INC.
By:	/s/ Christopher J. Davis
	Title: Managing Director/CFO

3

EX-10.19.1

EXHIBIT 10.19.1

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
AND
ALLIANCE HOLDINGS, INC.

LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT is entered into as of September 25, 2003 by and among COMERICA BANK (“Bank”) and ALLIANCE CONSULTING GROUP ASSOCIATES, INC. and ALLIANCE HOLDINGS, INC., (individually, a “Borrower” and collectively, the “Borrowers”).

RECITALS

     Borrowers desire to obtain credit from time to time from Bank and Bank desires to extend credit to Borrowers. This Agreement sets forth the terms on which Bank will advance credit to Borrowers, and Borrowers will repay the amounts owing to Bank.

AGREEMENT

     The parties agree as follows:

     1. DEFINITIONS AND CONSTRUCTION.

          1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions:

               “Accounts” means all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to a Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by a Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

               “Advance” or “Advances” means a cash advance or cash advances under the Revolving Facility.

               “Affiliate” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and partners.

               “Bank Expenses” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.

               “Borrower’s Books” means all of a Borrower’s books and records including: ledgers; records concerning Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

               “Borrowing Base” means an amount equal to eighty five percent (85%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower.

               “Business Day” means any day that is not a Saturday, Sunday, or other day on which banks in the State of California or the Commonwealth of Pennsylvania are authorized or required to close.

               “Change in Control” shall mean a transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of a Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the Board of Directors of a Borrower, who did not have such power before such transaction; provided that a transaction with any Affiliate of a Borrower shall not constitute a “Change of Control.”

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               “Closing Date” means the date of this Agreement.

               “Code” means the California Uniform Commercial Code.

               “Collateral” means the property described on Exhibit A attached hereto.

               “Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards, or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

               “Copyrights” means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

               “Credit Extension” means each Advance, amounts extended to Borrower from Bank pursuant to Bank’s sale to Borrower of foreign currency, or any other extension of credit by Bank for the benefit of Borrower hereunder.

               “Current Assets” means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries as at such date.

               “Current Liabilities” means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendible at the option of Borrower or any Subsidiary to a date more than one year from the date of determination.

               “Daily Balance” means the amount of the Obligations owed at the end of a given day.

               “Eligible Accounts” means those Accounts that arise in the ordinary course of a Borrower’s business that comply with all of such Borrower’s representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank’s reasonable judgment and upon notification thereof to a Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

               (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date, or, in the case of Accounts for which an invoice has not been sent, within forty five (45) days after the date on which an obligation owing to a Borrower arises with respect to such Account;

               (b) Accounts with respect to an account debtor, thirty-five percent (35%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date, provided, however, that Eligible

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Accounts shall include Accounts that are otherwise Eligible Accounts with respect to Borrower’s customers listed on Appendix I attached hereto, as approved by Bank in Bank’s discretion from time to time, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;

               (c) Accounts with respect to which the account debtor is an officer, employee, or agent of a Borrower;

               (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional;

               (e) Accounts with respect to which the account debtor is an Affiliate of a Borrower provided, however, that Eligible Accounts shall include Accounts with respect to which the account debtor is an Affiliate of a Borrower in an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) at any time and only to the extent such Accounts are otherwise Eligible Accounts;

               (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts;

               (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States, except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. § 3727);

               (h) Accounts with respect to which a Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to a Borrower or for deposits or other property of the account debtor held by a Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to a Borrower;

               (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrowers exceed thirty percent (30%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

               (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and

               (k) Accounts the collection of which Bank reasonably determines to be doubtful.

               “Eligible Foreign Accounts” means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) that Bank approves on a case-by-case basis; including, without limitation, Accounts with IBM Canada Ltd. and any of its Affiliates.

               “Equipment” means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.

               “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

               “Event of Default” has the meaning assigned in Article 8.

               “Exchange Contract” has the meaning set forth in Section 2.1(b).

               “Foreign Exchange Reserve” has the meaning set forth in Section 2.1(b).

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               “GAAP” means generally accepted accounting principles as in effect from time to time.

               “Guarantor” means Safeguard Scientifics, Inc.

               “Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

               “Insolvency Proceeding” means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

               “Intellectual Property Collateral” means all of a Borrower’s right, title, and interest in and to the following:

               (a) Copyrights, Trademarks and Patents;

               (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held;

               (c) Any and all design rights which may be available to a Borrower now or hereafter existing, created, acquired or held;

               (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above;

               (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;

               (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and

               (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing;

               provided however, that any of the foregoing developed by a Borrower to be used exclusively by a Borrower’s customer shall not constitute “Intellectual Property Collateral”.

               “Inventory” means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower’s Books relating to any of the foregoing.

               “Investment” means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

               “IRC” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

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               “Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

               “Loan Documents” means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into in connection with this Agreement, all as amended or extended from time to time.

               “Material Adverse Effect” means a material adverse effect on (i) the business operations condition (financial or otherwise) or prospects of a Borrower and its Subsidiaries taken as a whole (ii) the ability of a Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents (iii) the value or priority of Bank’s security interests in the Collateral or (iv) the prospect of repayment of any portion of the Obligations.

               “Negotiable Collateral” means all of Borrower’s present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower’s Books relating to any of the foregoing.

               “Obligations” means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise.

               “Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations in part of the same.

               “Periodic Payments” means all installments or similar recurring payments that a Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between a Borrower and Bank.

               “Permitted Indebtedness” means:

               (h) Indebtedness of a Borrower in favor of Bank arising under this Agreement or any other Loan Document;

               (i) Indebtedness existing on the Closing Date and disclosed in the Schedule;

               (j) Indebtedness secured by a lien described in clause (c) of the defined term “Permitted Liens,” provided (i) such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness and (ii) such Indebtedness does not exceed $250,000 in the aggregate at any given time; and

               (k) Subordinated Debt.

               “Permitted Investment” means:

               (a) Investments existing on the Closing Date disclosed in the Schedule; and

               (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, and (iv) Bank’s money market accounts.

               “Permitted Liens” means the following:

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               (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents;

               (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank’s security interests;

               (c) Liens (i) upon or in any equipment which was not financed by Bank acquired or held by a Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and

               (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase.

               “Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

               “Prime Rate” means the variable rate of interest, per annum, most recently announced by Bank, as its “prime rate,” whether or not such announced rate is the lowest rate available from Bank.

               “Responsible Officer” means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower.

               “Revolving Facility” means the facility under which Borrowers may request Bank to issue Advances, as specified in Section 2.1(a) hereof.

               “Revolving Line” means a credit extension of up to Ten Million Dollars ($10,000,000).

               “Revolving Maturity Date” means the day before the first anniversary of the Closing Date.

               “Schedule” means the schedule of exceptions attached hereto and approved by Bank, if any.

               “Subordinated Debt” means any debt incurred by a Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank).

               “Subsidiary” means any corporation, company or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock or other units of ownership which by the terms thereof has the ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by a Borrower, either directly or through an Affiliate.

               “Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of a Borrower connected with and symbolized by such trademarks.

          1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms “financial statements” shall include the notes and schedules thereto.

     2. LOAN AND TERMS OF PAYMENT.

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          2.1 Credit Extensions.

               Borrowers promise to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to each Borrower and/or Borrowers hereunder. Borrowers shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

               (a) Revolving Advances.

                    (i) Subject to and upon the terms and conditions of this Agreement, Borrowers may request Advances in an aggregate outstanding amount not to exceed the lesser of the Revolving Line or the Borrowing Base, minus, in each case, the Foreign Exchange Reserve. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(a) shall be immediately due and payable. Borrowers may prepay any Advances without penalty or premium.

                    (ii) Whenever Borrowers desire an Advance, a Borrower will notify Bank by facsimile transmission or telephone no later than 3:30 p.m. Eastern time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank’s discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(a) to a Borrower’s deposit account.

               (b) Foreign Exchange Contracts.

                    (i) Subject to the terms of this Agreement, Borrowers may enter into foreign exchange contracts (the “Exchange Contracts”) not to exceed an aggregate amount of One Million Dollars ($1,000,000) (the “Contract Limit”), pursuant to which Bank shall sell to or purchase from a Borrower foreign currency on a spot or future basis. No Borrower shall request any Exchange Contracts at any time it is out of compliance with any of the provisions of this Agreement. All Exchange Contracts must provide for delivery of settlement on or before the Revolving Maturity Date. The amount available under the Revolving Line at any time shall be reduced by the following amounts (the “Foreign Exchange Reserve”) on any given day (the “Determination Date”): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two (2) Business Days after the Determination Date, ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two (2) Business Days after the Determination Date, one hundred percent (100%) of the gross amount of the Exchange Contracts.

                    (ii) Bank may, in its discretion, terminate the Exchange Contracts at any time (a) that the Obligations have been accelerated and remain unpaid or (b) that there is not sufficient availability under the Revolving Line and a Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without limitation of any applicable indemnities, Borrowers agree to reimburse Bank for any and all fees, costs and expenses relating thereto or arising in connection therewith.

                    (iii) In the case of Borrowers’ purchase of foreign currency, a Borrower in advance shall instruct Bank upon settlement either to treat the settlement amount as an advance under the Revolving Line, or to debit Borrower’s account for the amount settled.

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                    (iv) Borrowers shall execute all standard form applications and agreements of Bank in connection with the Exchange Contracts and, without limiting any of the terms of such applications and agreements, Borrowers will pay all standard fees and charges of Bank in connection with the Exchange Contracts.

                    (v) Without limiting any of the other terms of this Agreement or any such standard form applications and agreements of Bank, Borrowers agree to indemnify Bank and hold it harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, reasonable attorneys’ fees of counsel mutually acceptable to Bank and Borrowers), of every nature and description which it may sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby.

          2.2 If, at any time or for any reason, the amount of Obligations owed by Borrowers to Bank pursuant to Sections 2.1(a) and 2.1(b) of this Agreement is greater than the lesser of (i) the Revolving Line or (ii) the Borrowing Base, Borrowers shall immediately pay to Bank, in cash, the amount of such excess.

          2.3 Interest Rates, Payments, and Calculations.

               (a) Interest Rates. Except as set forth in Section 2.3(b), each Advance which shall be a Prime Rate Option Advance or a LIBOR Option Advance as elected by Borrowers pursuant to the terms set forth in the LIBOR Addendum to Loan and Security Agreement executed in connection herewith (provided, however, that Borrowers may not request, and at no time shall there be, greater than five (5) LIBOR Option Advances outstanding at any time), shall bear interest on the outstanding Daily Balance thereof at the applicable rate set forth in such LIBOR Addendum to Loan and Security Agreement.

               (b) Default Rate. If any payment is not made within ten (10) days after the date such payment is due, Borrowers shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default.

               (c) Payments. Interest hereunder shall be due and payable on the first calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of a Borrower’s deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment.

               (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.

          2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrowers specify. After the acceleration of the Obligations and so long as the Obligations remain unpaid, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 3:30 p.m. Eastern time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

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          2.5 Fees. Borrowers shall pay to Bank the following:

               (a) Facility Fee. On the Closing Date, a Facility Fee equal to $25,000, which shall be nonrefundable;

               (b) Commitment Fee. A Commitment Fee equal to one eighth of one percent (0.125%) per annum of the average unused portion of the Revolving Line. Such fee shall be payable in quarterly installments on the last day of each fiscal quarter or, in the case of the quarter in which the Revolving Maturity Date falls, on the Revolving Maturity Date. Each quarterly installment shall be calculated on the average unused portion of the Revolving Line during such fiscal quarter; and

               (c) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys’ fees of up to $7,500, exclusive of out-of-pocket expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys’ fees and expenses, as and when they are incurred by Bank.

          2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law):

               (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrowers or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof);

               (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or

               (c) imposes upon Bank any other condition with respect to its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrowers thereof. Borrowers agree to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank’s calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error.

          2.7 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

     3. CONDITIONS OF LOANS.

          3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

               (a) this Agreement;

               (b) a certificate of the Secretary of each Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

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               (c) financing statements (Form UCC-1);

               (d) two intellectual property security agreements, duly executed by Borrowers;

               (e) an agreement to provide insurance;

               (f) an unconditional guaranty, duly executed by Guarantor;

               (g) a subordination agreement, duly executed by Guarantor;

               (h) LIBOR Addendum to Loan and Security Agreement, duly executed by Borrowers;

               (i) two securities account control agreements for each Borrower;

               (j) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof;

               (k) a payoff letter from PNC Bank;

               (l) current financial statements of Borrowers for the most recent fiscal quarter; and

               (m) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

          3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

               (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and

               (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2.

          3.3 Condition Precedent to Initial Advance. The obligation of Bank to make any Advances under the Revolving Line 45 days or more after the Closing Date is subject to the condition precedent that Borrowers shall have used commercially reasonable efforts in assisting Bank to complete an audit of the Collateral, the results of which are satisfactory to Bank.

     4. CREATION OF SECURITY INTEREST.

          4.1 Grant of Security Interest. Each Borrower hereby grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof.

          4.2 Delivery of Additional Documentation Required. Each Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue the perfection of

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Bank’s security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrowers from time to time may deposit with Bank specific time deposit accounts to secure specific Obligations. Borrowers authorize Bank to hold such balances in pledge and to decline to honor any drafts thereon or any request by a Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the Obligations are outstanding.

          4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower’s usual business hours, but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrower’s Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify a Borrower’s financial condition or the amount, condition of, or any other matter relating to, the Collateral.

     5. REPRESENTATIONS AND WARRANTIES.

          Each Borrower represents and warrants as follows:

          5.1 Due Organization and Qualification. Each of Borrower and each Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified.

          5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower’s Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Except as disclosed in the Schedule, Borrower is not in default under any material agreement to which it is a party or by which it is bound.

          5.3 No Prior Encumbrances. Borrower has good and marketable title to its property, free and clear of Liens, except for Permitted Liens.

          5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The property and services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or to the account debtor’s agent for immediate and unconditional acceptance by the account debtor. Neither Borrower has received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account.

          5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made.

          5.6 Intellectual Property Collateral. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Except as set forth in the Schedule, Borrower’s rights as a licensee of intellectual property do not give rise to more than five percent (5%) of its gross revenue in any given month, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service. Except as set forth in the Schedule, Borrower is not a party to, or bound by, any agreement that restricts the grant by Borrower of a security interest in Borrower’s rights under such agreement.

          5.7 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. Except as disclosed in the Schedule, all Borrower’s Inventory and Equipment is located only at the location set forth in Section 10 hereof and Borrower has paid for and owns all Equipment financed by Bank hereunder.

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          5.8 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower’s interest or Bank’s security interest in the Collateral.

          5.9 No Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that Bank has received from Borrower fairly present in all material respects Borrower’s financial condition as of the date thereof and Borrower’s consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

          5.10 Solvency, Payment of Debts. Except as disclosed in the Schedule, Borrower is solvent and able to pay its debts (including trade debts) as they mature.

          5.11 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA, and no event has occurred resulting from Borrower’s failure to comply with ERISA that could result in Borrower’s incurring any material liability. Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect.

          5.12 Environmental Condition. Except as disclosed in the Schedule, none of Borrower’s or any Subsidiary’s properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower’s knowledge, none of Borrower’s properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment.

          5.13 Taxes. Except as disclosed in the Schedule, Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein.

          5.14 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.

          5.15 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower’s business as currently conducted, the failure to obtain which could have a Material Adverse Effect.

          5.16 Accounts. None of Borrower’s nor any Subsidiary’s property is maintained or invested with a Person other than Bank.

          5.17 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading.

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     6. AFFIRMATIVE COVENANTS.

          Each Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, each Borrower shall do all of the following:

          6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries’ corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which it is required under applicable law. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect.

          6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect.

          6.3 Financial Statements, Reports, Certificates. Each Borrower shall deliver the following to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated balance sheet, income, and cash flow statement covering Borrower’s consolidated operations during such period, prepared in accordance with GAAP, consistently applied, in a form acceptable to Bank and certified by a Responsible Officer; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower’s fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within sixty (60) days after the last day of each fiscal year, a financial forecast for the current fiscal year in form and substance satisfactory to Bank; (d) copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and, if applicable, all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time; and (f) within thirty (30) days of the last day of each fiscal quarter, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower’s intellectual property, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in Exhibits A, B, and C of the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement.

     Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable.

     Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto.

     Bank shall have a right from time to time hereafter to audit Borrower’s Accounts and appraise Collateral at Borrower’s expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing and the fees for such audits shall be reasonable and customary for a transaction of this type.

          6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than $100,000.

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          6.5 Taxes. Except as disclosed in the Schedule, Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

          6.6 Insurance.

               (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower’s business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower’s business, ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower’s.

               (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender’s loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof, and all liability insurance policies shall show the Bank as an additional insured and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank’s request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations.

          6.7 Accounts. Borrower shall maintain and shall cause each of its Subsidiaries to maintain its primary depository, operating, and investment accounts with Bank and/or its Affiliates.

          6.8 Current Ratio. Borrower shall maintain at all times, measured as of the last day of each calendar month, a ratio of Current Assets to Current Liabilities plus, to the extent not already included therein, all Indebtedness (including without limitation any Contingent Obligations) owing from Borrower to Bank, less deferred revenue, of at least 1.25 to 1.00.

          6.9 Intellectual Property Rights.

               (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registerable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights.

               (b) Borrower shall promptly give Bank written notice of any applications or registrations of intellectual property rights filed with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any. Borrower shall (i) give Bank not less than 30 days prior written notice of the filing of any applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed, and (ii) prior to the filing of any such applications or registrations, shall execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower, and upon the request of Bank, shall file such documents simultaneously with the filing of any such applications or registrations. Upon filing any such applications or registrations with the United States Copyright Office, Borrower shall promptly provide Bank with (i) a copy of such applications or registrations, without the exhibits, if any, thereto, (ii) evidence of the filing of any documents requested by Bank to be filed for Bank

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to maintain the perfection and priority of its security interest in such intellectual property rights, and (iii) the date of such filing.

               (c) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the priority of Bank’s security interest in the Intellectual Property Collateral. Borrower shall (i) protect, defend and maintain the validity and enforceability of the trade secrets, Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld.

               (d) Bank may audit Borrower’s Intellectual Property Collateral to confirm compliance with this Section, provided such audit may not occur more often than twice per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower’s sole expense, any actions that Borrower is required under this Section to take but which Borrower fails to take, after 15 days’ notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section.

          6.10 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

     7. NEGATIVE COVENANTS.

          Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, no Borrower will do any of the following:

          7.1 Dispositions. Except as disclosed in the Schedule, convey, sell, lease, transfer or otherwise dispose of (collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out or obsolete Equipment.

          7.2 Change in Business; Change in Control or Executive Office. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto); or cease to conduct business in the manner conducted by Borrower as of the Closing Date; or suffer or permit a Change in Control; or without thirty (30) days prior written notification to Bank, relocate its chief executive office or state of incorporation or change its legal name; or without Bank’s prior written consent, change the date on which its fiscal year ends.

          7.3 Mergers or Acquisitions. Merge or consolidate; or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than any Affiliate of a Borrower; or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (other than any Affiliate of a Borrower).

          7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness.

          7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. Agree with any Person other than Bank not to grant a security interest in, or otherwise encumber, any of its property, or permit any Subsidiary to do so.

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          7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, or permit any of its Subsidiaries to do so, except that Borrower may repurchase the stock of former employees pursuant to stock repurchase agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase.

          7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments; or maintain or invest any of its property with a Person other than Bank or permit any of its Subsidiaries to do so unless such Person has entered into an account control agreement with Bank in form and substance satisfactory to Bank; or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower.

          7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

          7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent.

          7.10 Inventory and Equipment. Store the Inventory or the Equipment with a bailee, warehouseman, or other third party unless the third party has been notified of Bank’s security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank’s benefit or (b) is in pledge possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Store or maintain any Equipment or Inventory at a location other than the location set forth in Section 10 of this Agreement.

          7.11 Compliance. Become an “investment company” or be controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank’s Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing.

          7.12 Negative Pledge Agreements. Permit the inclusion in any contract to which it or a Subsidiary becomes a party of any provisions that could restrict or invalidate the creation of a security interest in any of Borrower’s or such Subsidiary’s property.

     8. EVENTS OF DEFAULT.

          Any one or more of the following events shall constitute an “Event of Default” by Borrowers under this Agreement:

          8.1 Payment Default. If Borrowers fail to pay any of the Obligations within three (3) days of when due;

          8.2 Covenant Default. If a Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between a Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement; and a Borrower has failed to cure such default within ten (10) days after a Borrower receives notice thereof or any officer of a Borrower becomes aware thereof; provided, however, that if the

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default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrowers be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrowers shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made;

          8.3 Material Adverse Effect. If there occurs any circumstance or circumstances that could have a Material Adverse Effect;

          8.4 Attachment. If any portion of a Borrower’s assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if a Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of a Borrower’s assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of a Borrower’s assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after a Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrowers (provided that no Credit Extensions will be required to be made during such cure period);

          8.5 Insolvency. If a Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is commenced against a Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

          8.6 Other Agreements. If there is a default or other failure to perform in any agreement to which a Borrower is a party or by which it is bound resulting in a right by a third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of $100,000); or which could have a Material Adverse Effect;

          8.7 Subordinated Debt. If a Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank;

          8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least $100,000 shall be rendered against a Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment);

          8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document; or

          8.10 Guaranty. If any guaranty of all or a portion of the Obligations (a “Guaranty”) ceases for any reason to be in full force and effect, or any guarantor fails to perform any obligation under any Guaranty or a security agreement securing any Guaranty (collectively, the “Guaranty Documents”), or any event of default occurs under any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document, or if any of the circumstances described in Sections 8.3 through 8.9 occur with respect to any guarantor or any guarantor dies or becomes subject to any criminal prosecution, or any circumstances arise causing Bank, in good faith, to become insecure as to the satisfaction of any of any guarantor’s obligations under the Guaranty Documents.

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     9. BANK’S RIGHTS AND REMEDIES.

          9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by each Borrower:

               (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank);

               (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;

               (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;

               (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank’s determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower’s owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank’s rights or remedies provided herein, at law, in equity, or otherwise;

               (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;

               (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section 9.1, Borrower’s rights under all licenses and all franchise agreements shall inure to Bank’s benefit;

               (g) Dispose of the Collateral by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower’s premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate;

               (h) Bank may credit bid and purchase at any public sale; and

               (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers.

          9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, each Borrower hereby irrevocably appoints Bank (and any of Bank’s designated officers, or employees) as such Borrower’s true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank’s security interest in the Accounts; (b) endorse Borrower’s name on any checks or other forms of payment or security that may come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower’s policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to file,

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in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral; and (h) to transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred, including without limitation to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower’s approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest. The appointment of Bank as each Borrower’s attorney in fact, and each and every one of Bank’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank’s obligation to provide Credit Extensions hereunder is terminated.

          9.3 Accounts Collection. At any time during the occurrence and continuation of an Event of Default, Bank may notify any Person owing funds to a Borrower of Bank’s security interest in such funds and verify the amount of such Account. Each Borrower shall collect all amounts owing to such Borrower for Bank, receive in trust all payments as Bank’s trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.

          9.4 Bank Expenses. If a Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrowers: (a) make payment of the same or any part thereof; (b) set up such reserves under a loan facility in Section 2.1 as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.

          9.5 Bank’s Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrowers.

          9.6 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on a Borrower’s part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given.

          9.7 Demand; Protest. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which a Borrower may in any way be liable.

     10. NOTICES.

          Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrowers or to Bank, as the case may be, at its addresses set forth below:

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If to any Borrower:	Alliance Consulting Group Associates, Inc. and Alliance Holdings, Inc. One Commerce Square 2005 Market St., Suite 3200 Philadelphia, PA 19103 Attn: Stephanie Cohen FAX: (215) 564-4913
with a copy to:	Safeguard Scientifics, Inc Attn: CFO 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087
If to Bank:	Comerica Bank 9920 S. La Cienega Blvd., Suite 1401 Inglewood, CA 90301 Attn: Manager FAX: (310) 338-6110
with a copy to:	Comerica Bank 11921 Freedom Drive Suite 920 Reston, VA 20190 FAX: (703) 467-9308

     The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

     11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

          This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

     12. GENERAL PROVISIONS.

          12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank’s prior written consent, which consent may be granted or withheld in Bank’s sole discretion. Bank shall have the right without the consent of or notice to Borrowers to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits hereunder.

          12.2 Indemnification. Each Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in

20

any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and a Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

          12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.

          12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

          12.5 Amendments in Writing, Integration. Neither this Agreement nor the Loan Documents can be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the Loan Documents, if any, are merged into this Agreement and the Loan Documents.

          12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

          12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions to Borrowers. The obligations of each Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

     13. CO-BORROWER PROVISIONS.

          13.1 Primary Obligation. This Agreement is a primary and original obligation of each Borrower and shall remain in effect notwithstanding future changes in conditions, including any change of law or any invalidity or irregularity in the creation or acquisition of any Obligations or in the execution or delivery of any agreement between Bank and any Borrower. Each Borrower shall be liable for existing and future Obligations as fully as if all of all Credit Extensions were advanced to such Borrower. Bank may rely on any certificate or representation made by any Borrower as made on behalf of, and binding on, all Borrowers, including without limitation Advance Request Forms, Borrowing Base Certificates and Compliance Certificates.

          13.2 Enforcement of Rights. Borrowers are jointly and severally liable for the Obligations and Bank may proceed against one or more of the Borrowers to enforce the Obligations without waiving its right to proceed against any of the other Borrowers.

          13.3 Borrowers as Agents. Each Borrower appoints the other Borrower as its agent with all necessary power and authority to give and receive notices, certificates or demands for and on behalf of both Borrowers, to act as disbursing agent for receipt of any Advances on behalf of each Borrower and to apply to Bank on behalf of each Borrower for Advances, any waivers and any consents. This authorization cannot be revoked, and Bank need not inquire as to each Borrower’s authority to act for or on behalf of Borrower.

          13.4 Subrogation and Similar Rights. Notwithstanding any other provision of this Agreement or any other Loan Document, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating the Borrower to the rights of Bank under the Loan Documents) to seek contribution, indemnification, or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 13.4 shall be null and void. If any payment is

21

made to a Borrower in contravention of this Section 13.4, such Borrower shall hold such payment in trust for Bank and such payment shall be promptly delivered to Bank for application to the Obligations, whether matured or unmatured.

          13.5 Waivers of Notice. Except as otherwise provided in this Agreement, each Borrower waives notice of acceptance hereof; notice of the existence, creation or acquisition of any of the Obligations; notice of an Event of Default; notice of the amount of the Obligations outstanding at any time; notice of intent to accelerate; notice of acceleration; notice of any adverse change in the financial condition of any other Borrower or of any other fact that might increase the Borrower’s risk; presentment for payment; demand; protest and notice thereof as to any instrument; default; and all other notices and demands to which the Borrower would otherwise be entitled. Each Borrower waives any defense arising from any defense of any other Borrower, or by reason of the cessation from any cause whatsoever of the liability of any other Borrower. Bank’s failure at any time to require strict performance by any Borrower of any provision of the Loan Documents shall not waive, alter or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage or other security instrument, or exercising any rights available thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of any Borrower. Each Borrower also waives any defense arising from any act or omission of Bank that changes the scope of the Borrower’s risks hereunder.

          13.6 Subrogation Defenses. Each Borrower hereby waives any defense based on impairment or destruction of its subrogation or other rights against any other Borrower and waives all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as those statutory provisions are now in effect and hereafter amended, and under any other similar statutes now and hereafter in effect.

          13.7 Right to Settle, Release.

               (a) The liability of Borrowers hereunder shall not be diminished by (i) any agreement, understanding or representation that any of the Obligations is or was to be guaranteed by another Person or secured by other property, or (ii) any release or unenforceability, whether partial or total, of rights, if any, which Bank may now or hereafter have against any other Person, including another Borrower, or property with respect to any of the Obligations.

               (b) Without affecting the liability of any Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Obligations with respect to a Borrower, (ii) grant other indulgences to a Borrower in respect of the Obligations, (iii) modify in any manner any documents relating to the Obligations with respect to a Borrower, (iv) release, surrender or exchange any deposits or other property securing the Obligations, whether pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any guarantor, endorser or other Person who is now or may hereafter be liable with respect to any of the Obligations.

          13.8 Subordination. All indebtedness of a Borrower now or hereafter arising held by another Borrower is subordinated to the Obligations and the Borrower holding the indebtedness shall take all actions reasonably requested by Lender to effect, to enforce and to give notice of such subordination.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
By:	/s/ Stephanie Cohen
Title:	Chief Financial Officer
ALLIANCE HOLDINGS, INC.
By:	/s/ Stephanie Cohen
Title:	Authorized Corporate Signer
COMERICA BANK
By:	/s/ Carl Kopfinger
Title:	First Vice President

23

DEBTOR: ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC.

SECURED PARTY: COMERICA BANK

EXHIBIT A

COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT

     All personal property of Borrower (herein referred to as “Borrower” or “Debtor”) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

          (a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;

          (b) all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the forgoing, or any parts thereof or any underlying or component elements of any of the forgoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;

          (c) all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;

          (d) all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and

          (e) any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.

24

EXHIBIT B

TECHNOLOGY & LIFE SCIENCES DIVISION
LOAN ANALYSIS
LOAN ADVANCE/PAYDOWN REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:30 P.M. Eastern Time
DEADLINE FOR WIRE TRANSFERS IS 3:30 P.M. Eastern Time

TO: Loan Analysis	DATE:	TIME:
FAX #: (650) 846-6840

FROM:	ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. Borrower’s Name	TELEPHONE REQUEST (For Bank Use Only):
		The following person is authorized to request the loan payment transfer/loan advance on the designated account and is known to me.
FROM:
	Authorized Signer’s Name
FROM:
	Authorized Signature (Borrower)		Authorized Request & Phone #
PHONE #:
			Received by (Bank) & Phone #
FROM ACCOUNT#:
(please include Note number, if applicable)
TO ACCOUNT #:			Authorized Signature (Bank)
(please include Note number, if applicable)

REQUESTED TRANSACTION TYPE	REQUESTED DOLLAR AMOUNT	For Bank Use Only
PRINCIPAL INCREASE* (ADVANCE)	$	Date Rec’d:
PRINCIPAL PAYMENT (ONLY)	$	Time:
		Comp. Status:	YES                    NO
OTHER INSTRUCTIONS:		Status Date:
		Time:
		Approval:

All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for and advance confirmed by this Borrowing Certificate, including without limitation the representation that Borrower has paid for and owns the equipment financed by the Bank; provided, however, that those representations and warranties the date expressly referring to another date shall be true, correct and complete in all material respects as of such date.

  *IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE) YES                    NO

If YES, the Outgoing Wire Transfer Instructions must be completed below.

OUTGOING WIRE TRANSFER INSTRUCTIONS		Fed Reference Number	Bank Transfer Number
The items marked with an asterisk (*) are required to be completed.
*Beneficiary Name
*Beneficiary Account Number
*Beneficiary Address
Currency Type	US DOLLARS ONLY
*ABA Routing Number (9 Digits)
*Receiving Institution Name
*Receiving Institution Address
*Wire Account	$

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EXHIBIT C

BORROWING BASE CERTIFICATE

Borrower: ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. Lender: Comerica Bank

Commitment Amount: $10,000,000

ACCOUNTS RECEIVABLE
	1.	Accounts Receivable Book Value as of		$
	2.	Additions (please explain on reverse)		$
	3.	TOTAL ACCOUNTS RECEIVABLE		$
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
	4.	Amounts over 90 days due	$
	5.	Balance of 35% over 90 day accounts	$
		Balance of 50% over 90 day accounts (for account debtors listed on Appendix 1)	$
	6.	Concentration Limits
	7.	Foreign Accounts	$
	8.	Governmental Accounts	$
	9.	Contra Accounts	$
	10.	Demo Accounts	$
	11.	Intercompany/Employee Accounts	$
	12.	Other (please explain on reverse)	$
	13.	TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS		$
	14.	Eligible Accounts (#3 minus #13)		$
	15.	LOAN VALUE OF ACCOUNTS (85% of #14)		$
BALANCES
	16.	Maximum Loan Amount		$
	17.	Total Funds Available [Lesser of #16 or #15]		$
	18.	Present balance owing on Line of Credit		$
	19.	Outstanding under Sublimits (Foreign Exchange Contracts)		$
	20.	RESERVE POSITION (#17 minus #18 and #19)		$

The undersigned each represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica Bank.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.		ALLIANCE HOLDINGS, INC.
By:		By:
	Authorized Signer		Authorized Signer

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EXHIBIT D

COMPLIANCE CERTIFICATE

TO:	COMERICA BANK
FROM:	ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC.

     The undersigned authorized officer of ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending                      with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required	Complies
Monthly financial statements Annual (CPA Audited) 10K and 10Q A/R & A/P Agings, Borrowing Base Cert. A/R Audit IP Report Financial Forecast	Monthly within 30 days FYE within 90 days (as applicable) Monthly within 20 days Initial and Semi-Annual Quarterly within 30 days FYE within 60 days	Yes Yes Yes Yes Yes Yes Yes	No No No No No No No

Financial Covenant	Required	Actual	Complies
Measured on a Monthly Basis:
Minimum Current Ratio	1.25:1.00*	:1.00	Yes	No

* Borrower shall maintain at all times, measured as of the last day of each calendar month, a ratio of Current Assets to Current Liabilities plus, to the extent not already included therein, all Indebtedness (including without limitation any Contingent Obligations) owing from Borrower to Bank, less deferred revenue, of at least 1.25 to 1.00.

Comments Regarding Exceptions:   See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by: 

AUTHORIZED SIGNER

Date: 

Verified: 

AUTHORIZED SIGNER

Date: 

Compliance Status
  Yes                    No

27

SCHEDULE OF EXCEPTIONS

Permitted Indebtedness (Section 1.1)

See Schedule Attached

Permitted Investments (Section 1.1)

None

Permitted Liens (Section 1.1)

Inbound Licenses (Section 5.6)

N/A

Prior Names (Section 5.7)

See Schedule Attached

Litigation (Section 5.8)

N/A

LIBOR
Addendum To Loan and Security Agreement

     This Addendum to Loan and Security Agreement (this “Addendum”) is entered into on September 25, 2003, by and between Comerica Bank (“Bank”) and Alliance Consulting Group Associates, Inc. & Alliance Holdings, Inc. (collectively, “Borrower”). This Addendum supplements the terms of the Loan and Security Agreement of even date herewith.

14. Definitions. Unless otherwise defined herein, all initially capitalized terms in this Addendum shall be as defined in the Loan Agreement.

     14.1 Advance. As used herein, “Advance” means a borrowing requested by Borrower and made by Bank under the Loan Agreement, including a LIBOR Option Advance and/or a Prime Rate Option Advance.

     14.2 Business Day. As used herein, “Business Day” means any day except a Saturday, Sunday or any other day designated as a holiday under Federal, Pennsylvania or California statute or regulation.

     14.3 LIBOR. As used herein, “LIBOR” means the rate per annum (rounded upward if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula:

LIBOR =	Base LIBOR
	100% — LIBOR Reserve Percentage
(1)	“Base LIBOR” means the rate per annum determined by Bank at which deposits for the relevant LIBOR Period would be offered to Bank in the approximate amount of the relevant LIBOR Option Advance in the inter-bank LIBOR market selected by Bank, upon request of Bank at 1:00 p.m. Eastern Time, on the day that is the first day of such LIBOR Period.
(2)	“LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable LIBOR Period.

     14.4 LIBOR Business Day. As used herein, “LIBOR Business Day” means a Business Day on which dealings in Dollar deposits may be carried out in the interbank LIBOR market.

     14.5 LIBOR Period. As used herein, “LIBOR Period” means, with respect to a LIBOR Option Advance:

(1)

initially, the period commencing on, as the case may be, the date the Advance is made or the date on which the Advance is converted to a LIBOR Option Advance, and continuing for, in every case, a thirty (30), sixty (60) or ninety (90) day period thereafter so long as the LIBOR Option is quoted for such period in the applicable interbank LIBOR market, as such period is selected by Borrower in the notice of Advance as provided in the Loan Agreement or in the notice of conversion as provided in this Addendum; and

(2)

thereafter, each period commencing on the last day of the next preceding LIBOR Period applicable to such LIBOR Option Advance and continuing for, in every case, a thirty (30), sixty (60) or ninety (90) day period thereafter so long as the LIBOR Option is quoted for such period in the applicable interbank LIBOR market, as such period is selected by Borrower in the notice of continuation as provided in this Addendum.

     14.6 Loan Agreement. As used herein, “Loan Agreement” means the Loan and Security Agreement by and between Bank and Borrower of even date herewith.

     14.7 Regulation D. As used herein, “Regulation D” means Regulation D of the Board of Governors of the Federal Reserve System as amended or supplemented from time to time.

     14.8 Regulatory Development. As used herein, “Regulatory Development” means any or all of the following: (i) any change in any law, regulation or interpretation thereof by any public authority (whether or not having the force of law); (ii) the application of any existing law, regulation or the interpretation thereof by any public authority (whether or not having the force of law); and (iii) compliance by Bank with any request or directive (whether or not having the force of law) of any public authority.

15. Interest Rate Options. Subject to Section 2.3(b) of the Loan Agreement, Borrower shall have the following options regarding the interest rate to be paid by Borrower on the Advance under the Loan Agreement:

     15.1 A rate equal to the Prime Rate as referenced in the Loan Agreement and quoted from time to time by Bank as such rate may change from time to time (the “Prime Rate Option”); or

     15.2 A rate equal to two and one half of one percent (2.50%) above Bank’s LIBOR, (the “LIBOR Option”), which LIBOR Option shall be in effect during the relevant LIBOR Period.

16. LIBOR Option Advance. The minimum LIBOR Option Advance will not be less than One Million Dollars ($1,000,000) for any LIBOR Option Advance.

17. Payment of Interest on LIBOR Option Advances. Interest on each LIBOR Option Advance shall be payable pursuant to the terms of the Loan Agreement, which provides, in part, that interest shall be payable on the first day of each month. Interest on such LIBOR Option Advance shall be computed on the basis of a 360-day year and shall be assessed for the actual number of days elapsed from the first day of the LIBOR Period applicable thereto but not including the last day thereof. Interest on each Prime Rate Option Advance shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.

18. Bank’s Records Re: LIBOR Option Advances. With respect to each LIBOR Option Advance, Bank is hereby authorized to note the date, principal amount, interest rate and LIBOR Period applicable thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to the Loan Agreement, which notations shall be prima facie evidence of the accuracy of the information noted.

19. Selection/Conversion of Interest Rate Options. At the time any Advance is requested under the Loan Agreement and/or Borrower wishes to select the LIBOR Option for all or a portion of the outstanding principal balance of the Loan Agreement, and at the end of each LIBOR Period, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower; (b) the principal amount subject thereto; and (c) if the LIBOR Option is selected, the length of the applicable LIBOR Period. Any such notice may be given by telephone so long as, with respect to each LIBOR Option selected by Borrower, (i) Bank receives written confirmation from Borrower not later than three (3) LIBOR Business Days after such telephone notice is given; and (ii) such notice is given to Bank prior to 1:00 p.m., Eastern Time, on the first day of the LIBOR Period. For each LIBOR Option requested hereunder, Bank will quote the applicable fixed LIBOR Rate to Borrower at approximately 1:00 p.m., Eastern Time, on the first day of the LIBOR Period. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination of the rate by Bank; provided, however, that if Borrower fails to accept any such quotation given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR Option to be selected on such day. If no specific designation of interest is made at the time any Advance is requested under the Loan Agreement or at the end of any LIBOR Period, Borrower shall be deemed to have selected the Prime Rate Option for such Advance or the principal amount to which such LIBOR Period applied. At any time the LIBOR Option is in effect, Borrower may, at the end of the applicable LIBOR Period, convert to the Prime Rate Option. At any time the Prime Rate Option is in effect, Borrower may convert to the LIBOR Option, and shall designate a LIBOR Period.

     Prepayment. In the event that the LIBOR Option is the applicable interest rate for all or any part of the outstanding principal balance of the Loan Agreement, and any payment or prepayment of any such outstanding principal balance of the Loan Agreement shall occur on any day other than the last day of the applicable LIBOR Period (whether voluntarily, by acceleration, required payment, or otherwise), or if Borrower elects the LIBOR Option as the applicable interest rate for all or any part of the outstanding principal balance of the Loan Agreement in accordance with the terms and conditions hereof, and, subsequent to such election, but prior to the commencement of the applicable LIBOR Period,

Borrower revokes such election for any reason whatsoever, or if the applicable interest rate in respect of any outstanding principal balance of the Loan Agreement hereunder shall be changed, for any reason whatsoever, from the LIBOR Option to the Prime Rate Option prior to the last day of the applicable LIBOR Period, or if Borrower shall fail to make any payment of principal or interest hereunder at any time that the LIBOR Option is the applicable interest rate hereunder in respect of such outstanding principal balance of the Loan Agreement, Borrower shall reimburse Bank, on demand, for any resulting loss, cost or expense incurred by Bank as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties. Such amount payable by Borrower to Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant LIBOR Period, at the applicable rate of interest for such outstanding principal balance of the Loan Agreement, as provided under this Loan Agreement, over (b) the amount of interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank LIBOR market. Calculation of any amounts payable to Bank under this paragraph shall be made as though Bank shall have actually funded or committed to fund the relevant outstanding principal balance of the Loan Agreement hereunder through the purchase of an underlying deposit in an amount equal to the amount of such outstanding principal balance of the Loan Agreement and having a maturity comparable to the relevant LIBOR Period; provided, however, that Bank may fund the outstanding principal balance of the Loan Agreement hereunder in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Upon the written request of Borrower, Bank shall deliver to Borrower a certificate setting forth the basis for determining such losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. Any prepayment hereunder shall also be accompanied by the payment of all accrued and unpaid interest on the amount so prepaid. Any outstanding principal balance of the Loan Agreement which is bearing interest at such time at the Prime Rate Option may be prepaid without penalty or premium. Partial prepayments hereunder shall be applied to the installments hereunder in the inverse order of their maturities.

     BY INITIALING BELOW, BORROWER ACKNOWLEDGE(S) AND AGREE(S) THAT: (A) THERE IS NO RIGHT TO PREPAY ANY LIBOR OPTION ADVANCE, IN WHOLE OR IN PART, WITHOUT PAYING THE PREPAYMENT AMOUNT, EXCEPT AS OTHERWISE REQUIRED UNDER APPLICABLE LAW; (B) BORROWER SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT AMOUNT IF BANK EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF ANY LIBOR OPTION ADVANCE AS PART OR ALL OF THE OBLIGATIONS OWING UNDER THE LOAN AGREEMENT, INCLUDING WITHOUT LIMITATION, ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) BORROWER WAIVES ANY RIGHTS UNDER SECTION 2954.10 OF THE CALIFORNIA CIVIL CODE, OR ANY SUCCESSOR STATUTE; AND (D) BANK HAS MADE EACH LIBOR OPTION ADVANCE PURSUANT TO THE LOAN AGREEMENT IN RELIANCE ON THESE AGREEMENTS.

20. Hold Harmless and Indemnification. Any LIBOR Option Advances shall, at Bank’s option, convert to Prime Rate Option Advances in the event that an Event of Default shall exist. Borrower shall pay to Bank, upon demand by Bank any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Option Advances to Prime Rate Option Advances pursuant to the preceding sentence. Borrower shall pay to Bank, upon the request of Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any reasonable loss, costs or expense incurred by it as a result of any failure by Borrower to borrow a LIBOR Option Rate Advance on the date for such borrowing specified in the relevant notice of borrowing hereunder. Borrower agrees to indemnify Bank and to hold Bank harmless from, and to reimburse Bank on demand for, all losses and expenses which Bank sustains or incurs as a result of (i) any payment of a LIBOR Option Advance prior to the last day of the applicable LIBOR Period for any reason, including, without limitation, termination of the Loan Agreement, whether pursuant to this Addendum or the occurrence of an Event of Default; (ii) any termination of a LIBOR Period prior to the date it would otherwise end in accordance with this Addendum; or (iii) any failure by Borrower, for any reason, to borrow any portion of a LIBOR Option Advance.

21. Funding Losses. The indemnification and hold harmless provisions set forth in this Addendum shall include, without limitation, all losses and expenses arising from interest and fees that Bank pays to lenders of funds it obtains in order to fund the loans to Borrower on the basis of the LIBOR Option(s) and all losses incurred in liquidating or re-deploying deposits from which such funds were obtained and loss of profit for the period after termination. A written

statement by Bank to Borrower of such losses and expenses shall be conclusive and binding, absent manifest error, for all purposes. This obligation shall survive the termination of this Addendum and the payment of the Loan Agreement.

22. Regulatory Developments Or Other Circumstances Relating To Illegality or Impracticality of LIBOR. If any Regulatory Development or other circumstances relating to the interbank Euro-dollar markets shall, at any time, in Bank’s reasonable determination , make it unlawful or impractical for Bank to fund or maintain, during any LIBOR Period, to determine or charge interest rates based upon LIBOR, Bank shall give notice of such circumstances to Borrower and:

(a)   In the case of a LIBOR Period in progress, Borrower shall, if requested by Bank, promptly pay any interest which had accrued prior to such request and the date of such request shall be deemed to be the last day of the term of the LIBOR Period; and

(b)   No LIBOR Period may be designated thereafter until Bank determines that such would be practical.

23. Additional Costs. Borrower shall pay to Bank from time to time, upon Bank’s request, such amounts as Bank determines are needed to compensate Bank for any costs it incurred which are attributable to Bank having made or maintained a LIBOR Option Advance or to Bank’s obligation to make a LIBOR Option Advance, or any reduction in any amount receivable by Bank hereunder with respect to any LIBOR Option or such obligation (such increases in costs and reductions in amounts receivable being herein called “Additional Costs”), resulting from any Regulatory Developments, which (i) change the basis of taxation of any amounts payable to Bank hereunder with respect to taxation of any amounts payable to Bank hereunder with respect to any LIBOR Option Advance (other than taxes imposed on the overall net income of Bank for any LIBOR Option Advance by the jurisdiction where Bank is headquartered or the jurisdiction where Bank extends the LIBOR Option Advance; (ii) impose or modify any reserve, special deposit, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Bank (including any LIBOR Option Advance or any deposits referred to in the definition of LIBOR); or (iii) impose any other condition affecting this Addendum (or any of such extension of credit or liabilities). Bank shall notify Borrower of any event occurring after the date hereof which entitles Bank to compensation pursuant to this paragraph as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determinations by Bank for purposes of this paragraph, shall be conclusive, provided that such determinations are made on a reasonable basis.

24. Legal Effect. Except as specifically modified hereby, all of the terms and conditions of the Loan Agreement remain in full force and effect.

     IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date first set forth above.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
By:	/s/ Stephanie Cohen
Title:	Chief Financial Officer
ALLIANCE HOLDINGS, INC.
By:	/s/ Stephanie Cohen
Title:	Authorized Corporate Signer
COMERICA BANK
By:	/s/ Carl Kopfinger
Title:	First Vice President

EX-10.19.2

EXHIBIT 10.19.2

FIRST AMENDMENT
TO
LOAN AND SECURITY AGREEMENT

This First Amendment to Loan and Security Agreement (the “Amendment”) is entered into as of December 12, 2003, by and between COMERICA BANK (“Bank”) and ALLIANCE CONSULTING GROUP ASSOCIATES, INC. and ALLIANCE HOLDINGS, INC. (individually, a “Borrower” and collectively, the “Borrowers”).

RECITALS

     Borrowers and Bank are parties to that certain Loan and Security Agreement dated as of September 25, 2003 (as amended from time to time, together with any related agreements, the “Agreement”). Hereinafter, all indebtedness owing by Borrowers to Bank shall be referred to as the “Indebtedness.” The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

AGREEMENT

I.   Incorporation by Reference. The Recitals and the documents referred to therein are incorporated herein by this reference. Except as otherwise noted, the terms not defined herein shall have the meaning set forth in the Agreement.

II.   Amendment to the Agreement. Subject to the satisfaction of the conditions precedent as set forth in Article IV hereof, the Agreement is hereby amended as set forth below.

A.   A new definition of “ACH Sublimit” is hereby alphabetically added to Section 1.1 of the Agreement to read as follows:

““ACH Sublimit” means a sublimit for Automated Clearing House transactions under the Revolving Line not to exceed $75,000.”

B.   A new subsection (e) is hereby added to the definition of “Indebtedness” in Section 1.1 of the Agreement to read as follows:

“and (e) all obligations arising under the Foreign Exchange Reserve and the ACH Sublimit.”

C.   The first sentence of subsection 2.1(a)(i) of the Agreement is hereby amended and restated in its entirety to read as follows:

“Subject to and upon the terms and conditions of this Agreement, Borrowers may request Advances in an aggregate outstanding amount not to exceed the lesser of the Revolving Line or the Borrowing Base, minus, in each case, the Foreign Exchange Reserve and the ACH Sublimit.”

D.   A new subsection (c) is hereby added to Section 2.1 of the Agreement to read as follows:

“(c) ACH Sublimit. Subject to the terms and conditions of this Agreement, Borrower may request ACH origination services by delivering to Bank a duly executed ACH application on Bank’s standard form; provided, however, that the total amount of the ACH processing reserves shall not exceed, and availability under the Revolving Line shall be reduced by, the ACH

Sublimit. In addition, Bank may, in its sole discretion, charge as Advances any amounts that become due or owing to Bank in connection with the ACH services. If Borrower has not secured to Bank’s satisfaction its obligations with respect to any ACH origination services by the Revolving Maturity Date, then, effective as of such date, the balance in any deposit accounts held by Bank and the certificates of deposit issued by Bank in Borrower’s name (and any interest paid thereon or proceeds thereof, including any amounts payable upon the maturity or liquidation of such certificates), shall automatically secure such obligations to the extent of the then outstanding ACH origination services. Borrower authorizes Bank to hold such balances in pledge and to decline to honor any drafts thereon or any requests by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the ACH origination services continue.”

III.   Legal Effect.

A.   The Agreement is hereby amended wherever necessary to reflect the changes described above.

B.   Borrower agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness.

C.   Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Agreement. Except as expressly modified pursuant to this Amendment, the terms of the Agreement remain unchanged, and in full force and effect. Bank’s agreement to modifications to the existing Indebtedness pursuant to this Amendment in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Amendment shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties, all makers and endorsers of Agreement, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Amendment. The terms of this paragraph apply not only to this Amendment, but also to all subsequent loan modification requests.

D.   This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

E.   This is an integrated Amendment and supersedes all prior negotiations and agreements regarding the subject matter hereof. All modifications hereto must be in writing and signed by the parties.

IV.   Conditions Precedent. Except as specifically set forth in this Amendment, all of the terms and conditions of the Agreement remain in full force and effect. The effectiveness of this Agreement is conditioned upon receipt by Bank of this Amendment, and any other documents which Bank may require to carry out the terms hereof, including but not limited to the following:

A.   This Amendment, duly executed by Borrower;

B.   A legal fee from the Borrower in the amount of $250; and

C.   Such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.		COMERICA BANK
By:	/s/ Stephanie Cohen	By:	/s/ Brian Anderson
Title:	CFO	Title:	FLO
ALLIANCE HOLDINGS, INC.
By:	/s/ Stephanie Cohen
Title:	Authorized Corporate Signer

EX-10.19.3

EXHIBIT 10.19.3

SECOND AMENDMENT
TO
LOAN DOCUMENTS

     This Second Amendment to Loan Documents is entered into as of May 27, 2004 (the “Amendment”), by and between COMERICA BANK (“Bank”), ALLIANCE CONSULTING GROUP ASSOCIATES, INC. (“Consulting”) and ALLIANCE HOLDINGS, INC., (“Holdings”; Alliance and Holdings are referred to herein individually as a “Borrower” and collectively, the “Borrowers”).

RECITALS

     Borrowers and Bank are parties to that certain Loan and Security Agreement dated as of September 25, 2003, as amended, including without limitation by that certain First Amendment to Loan and Security Agreement dated as of December 12, 2003 (collectively, the “Agreement”) and that certain LIBOR Addendum to Loan and Security Agreement dated as of September 25, 2003 (the “LIBOR Addendum”). The parties desire to amend the Agreement and the LIBOR Addendum in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. The following defined terms in Section 1.1 of the Agreement are hereby amended to read as follows:

          “Credit Extension” means each Advance, extension of ACH services, Letter of Credit, or any other extension of credit by Bank for the benefit of a Borrower hereunder.

          “ACH Sublimit” means a sublimit for Automated Clearing House transactions under the Revolving Line not to exceed $150,000.

     2. The first sentence of Section 2.1(a) of the Agreement is hereby amended to read as follows: “Subject to and upon the terms and conditions of this Agreement, Borrowers may request Advances in an aggregate outstanding amount not to exceed the lesser of the Revolving Line or the Borrowing Base, minus, in each case, the ACH Sublimit and the aggregate face amount of all outstanding Letters of Credit.”

     3. Section 2.1(b) of the Agreement is hereby amended to read as follows:

          (b) [Intentionally Omitted.]

     4. A new Section 2.1(d) is hereby added to the Agreement to read as follows:

          (c) Letters of Credit.

               (i) Subject to the terms and conditions of this Agreement, at any time prior to the Revolving Maturity Date, Bank agrees to issue or cause to be issued letters of credit for the account of a Borrower (each, a “Letter of Credit” and collectively, the “Letters of Credit”) in an aggregate outstanding face amount not to exceed the lesser of the Revolving Line or the Borrowing Base minus, in each case, the aggregate amount of the outstanding Advances and the ACH Sublimit, provided that the aggregate face amount of all outstanding Letters of Credit shall not exceed $400,000. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s form of standard application and letter of credit agreement (the “Application”), which Borrowers hereby agree to execute, including Bank’s standard fee equal to 1.5% per annum of the face amount of each Letter of Credit. On any drawn but unreimbursed Letter of Credit, the unreimbursed amount

1

shall be deemed an Advance under Section 2.1(a). Prior to the Revolving Maturity Date, Borrowers shall secure in cash all obligations under any outstanding Letters of Credit on terms acceptable to Bank.

               (ii) The obligation of Borrowers to reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, the Application, and such Letters of Credit, under all circumstances whatsoever. Borrowers shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys’ fees, arising out of or in connection with any Letters of Credit, except for expenses caused by Bank’s gross negligence or willful misconduct.

     5. Section 2.2 of the Agreement is hereby amended to read as follows:

     2.2 Overadvances. If the aggregate amount of the outstanding Advances plus the aggregate face amount of all outstanding Letters of Credit plus the ACH Sublimit exceeds the lesser of the Revolving Line or the Borrowing Base at any time, Borrower shall immediately pay to Bank, in cash, the amount of such excess.

     6. A new Section 14 is hereby added to the Agreement to read as follows:

     14. REFERENCE PROVISION.

     If and only if the jury trial waiver set forth in Section 11 of this Agreement is invalidated for any reason by a court of law, statute or otherwise, the reference provisions set forth below shall be substituted in place of the jury trial waiver. So long as the jury trial waiver remains valid, the reference provisions set forth in this Section shall be inapplicable.

     (a) Each controversy, dispute or claim (each, a “Claim”) between the parties arising out of or relating to this Agreement, any security agreement executed by a Borrower in favor of Bank, any note executed by a Borrower in favor of Bank or any other document, instrument or agreement executed by a Borrower with or in favor of Bank (collectively in this Section, the “Loan Documents”), other than (i) all matters in connection with nonjudicial foreclosure of security interests in real or personal property; or (ii) the appointment of a receiver or the exercise of other provisional remedies (any of which may be initiated pursuant to applicable law) that are not settled in writing within fifteen (15) days after the date on which a party subject to the Loan Documents gives written notice to all other parties that a Claim exists (the “Claim Date”) shall be resolved by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor sections (“CCP”), which shall constitute the exclusive remedy for the resolution of any Claim concerning the Loan Documents, including whether such Claim is subject to the reference proceeding. Except as set forth in this section, the parties waive the right to initiate legal proceedings against each other concerning each such Claim. Venue for these proceedings shall be in the Superior Court in the County where the real property, if any, is located or in a County where venue is otherwise appropriate under state law (the “Court”). By mutual agreement, the parties shall select a retired Judge of the Court to serve as referee, and if they cannot so agree within fifteen (15) days after the Claim Date, the Presiding Judge of the Court (or his or her representative) shall promptly select the referee. A request for appointment of a referee may be heard on an ex parte or expedited basis. The referee shall be appointed to sit as a temporary judge, with all the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP §170.6. Upon being selected, the referee shall (a) be requested to set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection and (b) if practicable, try any and all issues of law or fact and report a statement of decision upon them within ninety (90) days of the date of selection. The

2

referee will have power to expand or limit the amount of discovery a party may employ. Any decision rendered by the referee will be final, binding and conclusive, and judgment shall be entered pursuant to CCP §644 in any court in the State of California having jurisdiction. The parties shall complete all discovery no later than fifteen (15) days before the first trial date established by the referee. The referee may extend such period in the event of a party’s refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to “priority” in conducting discovery. Either party may take depositions upon seven (7) days written notice, and shall respond to requests for production or inspection of documents within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate.

     (b) Except as expressly set forth herein, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. Except for trial, all proceedings and hearings conducted before the referee shall be conducted without a court reporter unless a party requests a court reporter. The party making such a request shall have the obligation to arrange for and pay for the court reporter. Subject to the referee’s power to award costs to the prevailing party, the parties shall equally bear the costs of the court reporter at the trial and the referee’s expenses

     (c) The referee shall determine all issues in accordance with existing California case and statutory law. California rules of evidence applicable to proceedings at law will apply to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that shall be binding upon the parties. At the close of the reference proceeding, the referee shall issue a single judgment at disposing of all the claims of the parties that are the subject of the reference. The parties reserve the right (i) to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee and (ii) to obtain findings of fact, conclusions of laws, a written statement of decision, and (iii) to move for a new trial or a different judgment, which new trial, if granted, shall be a reference proceeding under this provision.

     (d) If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration conducted by a retired judge of the Court, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth in this Section shall apply to any such arbitration proceeding.

     7. Exhibit C to the Agreement is hereby amended to read as Exhibit C attached hereto.

     8. Section 2(a) of the LIBOR Addendum is hereby amended in its entirety to read as follows:

          (a) A rate equal to (i) the Prime Rate as referenced in the Loan Agreement and quoted from time to time by Bank as such rate may change from time to time minus (ii) one half of one percent (0.50%) (the “Prime Rate Option”); or

     9. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement and the LIBOR Addendum. The Agreement and the LIBOR Addendum, as amended hereby, shall be and remain in full force and effect in accordance with their respective terms and hereby are ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the

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Agreement and the LIBOR Addendum, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement.

     10. Each Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

     11. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

     12. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

               (a) this Amendment, duly executed by Borrowers;

               (b) an Affirmation of Subordination;

               (c) an amount equal to all Bank Expenses incurred through the date of this Amendment; and

               (d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

ALLIANCE HOLDINGS, INC.
By:	/s/ Stephanie Cohen
Title:	Authorized Corporate Signer
ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
By:	/s/ Stephanie Cohen
Title:	CFO and Assistant Secretary
COMERICA BANK
By:	/s/ Bradley Steele
Title:	First Vice President

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EXHIBIT C

BORROWING BASE CERTIFICATE

Borrower: ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. Lender: Comerica Bank

Commitment Amount: $10,000,000

ACCOUNTS RECEIVABLE
	1.	Accounts Receivable Book Value as of		$
	2.	Additions (please explain on reverse)		$
	3.	TOTAL ACCOUNTS RECEIVABLE		$
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
	4.	Amounts over 90 days due	$
	5.	Balance of 35% over 90 day accounts	$
		Balance of 50% over 90 day accounts (for account debtors listed on Appendix 1)	$
	6.	Concentration Limits
	7.	Foreign Accounts	$
	8.	Governmental Accounts	$
	9.	Contra Accounts	$
	10.	Demo Accounts	$
	11.	Intercompany/Employee Accounts	$
	12.	Other (please explain on reverse)	$
	13.	TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS		$
	14.	Eligible Accounts (#3 minus #13)		$
	15.	LOAN VALUE OF ACCOUNTS (85% of #14)		$
BALANCES
	16.	Maximum Loan Amount		$
	17.	Total Funds Available [Lesser of #16 or #15]		$
	18.	Present balance owing on Line of Credit		$
	19.	Outstanding under Sublimits		$
	20.	RESERVE POSITION (#17 minus #18 and #19)		$

The undersigned each represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica Bank.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.		ALLIANCE HOLDINGS, INC.
By:		By:
	Authorized Signer		Authorized Signer

5

EX-10.19.4

EXHIBIT 10.19.4

THIRD AMENDMENT
TO
LOAN DOCUMENTS

     This Third Amendment to Loan Documents is entered into as of August 9, 2004 (the “Amendment”), by and between COMERICA BANK (“Bank”), ALLIANCE CONSULTING GROUP ASSOCIATES, INC. (“Consulting”) and ALLIANCE HOLDINGS, INC., (“Holdings”; Alliance and Holdings are referred to herein individually as a “Borrower” and collectively, the “Borrowers”).

RECITALS

     Borrowers and Bank are parties to that certain Loan and Security Agreement dated as of September 25, 2003, as amended, including without limitation by that certain First Amendment to Loan and Security Agreement dated as of December 12, 2003 and that Second Amendment to Loan and Security Agreement dated as of May 27, 2004 (collectively, the “Agreement”) and that certain LIBOR Addendum to Loan and Security Agreement dated as of September 25, 2003 (the “LIBOR Addendum”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. The following defined term in Section 1.1 of the Agreement is hereby amended to read as follows:

“Revolving Maturity Date” means November 24, 2004.

     2. The reference in Section 2.1(c)(i) to “$400,000” is amended to read “$1,400,000”.

     3. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remains in full force and effect in accordance with its terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement.

     4. Each Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

     5. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

     6. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

               (a) this Amendment, duly executed by Borrowers;

               (b) an amount equal to all Bank Expenses incurred through the date of this Amendment; and

               (c) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

ALLIANCE HOLDINGS, INC.
By:	/s/ Stephanie Cohen
Title:	Authorized Corporate Signer
ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
By:	/s/ Stephanie Cohen
Title:	CFO and Assistant Secretary
COMERICA BANK
By:	/s/ Beth Kinsey
Title:	Senior Vice President

EX-10.19.8

Exhibit 10.19.8

FIFTH AMENDMENT
TO
LOAN DOCUMENTS

     This Fifth Amendment to Loan Documents is entered into as of March 11, 2005 (the “Amendment”), by and among COMERICA BANK (“Bank”), ALLIANCE CONSULTING GROUP ASSOCIATES, INC. (“Consulting”) and ALLIANCE HOLDINGS, INC., (“Holdings”; Consulting and Holdings are referred to herein individually as a “Borrower” and collectively, the “Borrowers”).

RECITALS

     Borrowers and Bank are parties to that certain Loan and Security Agreement dated as of September 25, 2003, as amended, including without limitation by that certain First Amendment to Loan and Security Agreement dated as of December 12, 2003, that certain Second Amendment to Loan and Security Agreement dated as of May 27, 2004, that certain Third Amendment to Loan Documents dated as of August 9, 2004, and that certain Fourth Amendment to Loan Documents dated as of September 30, 2004 (collectively, the “Agreement”) and that certain LIBOR Addendum to Loan and Security Agreement dated as of September 25, 2003 (the “LIBOR Addendum”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. The following defined terms in Section 1.1 of the Agreement are hereby added or amended to read as follows:

               “Borrowing Base” means an amount equal to $15,000,000 plus eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrowers.

               “Eligible Accounts” means those net billed trade Accounts that arise in the ordinary course of a Borrower’s business that comply with all of such Borrower’s representations and warranties to Bank set forth in Section 5.4 (it being recognized that pre-billed Accounts do not comply with such representations); provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank’s reasonable judgment and upon notification thereof to Borrowers in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

               (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date;

               (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;

               (c) Accounts with respect to which the account debtor is an officer, employee, or agent of a Borrower;

               (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional;

               (e) Accounts with respect to which the account debtor is an Affiliate of a Borrower;

1

               (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts;

               (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States, except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727);

               (h) Accounts with respect to which a Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to such Borrower or for deposits or other property of the account debtor held by such Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to such Borrower, provided that, unless otherwise agreed to by Bank in writing, instead of deducting unapplied cash and customer deposits from Eligible Accounts, a reserve of $943,000 for unapplied cash and $1,199,000 for customer deposits shall permanently be deducted from Eligible Accounts (which reserve may be changed by Bank based on the results of a Collateral audit);

               (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrowers exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

               (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business;

               (k) Credit balances over ninety (90) days from invoice date; and

               (l) Accounts the collection of which Bank reasonably determines to be doubtful.

               “Eligible Foreign Accounts” means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit or credit insurance in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) that Bank approves on a case-by-case basis.

     2. Section 2.3(a) of the Agreement is hereby amended in its entirety to read as follows:

                    (i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to the Prime Rate.

     3. A new Section 2.8 is hereby added to the Agreement to read as follows:

          2.8. Lockbox.

               (a) Effective as of April 11, 2005 and at all times thereafter, Borrowers shall maintain an account at Bank (the “Lock Box Account”) into which all funds received by a Borrower from any source shall immediately be deposited. Borrowers shall direct all customers to mail or deliver all checks or other forms of payment for amounts owing to a Borrower to a post office box designated by Bank, over which Bank shall have exclusive and unrestricted access. Bank shall collect the mail delivered to such post office box, open such mail, and endorse and credit all items to the Lock Box Account. Borrowers shall direct all customers or other persons owing money to a Borrower who make payments by electronic transfer of funds to wire such

2

funds directly to the Lock Box Account. Borrowers shall hold in trust for Bank all amounts that a Borrower receives despite the directions to make payments to the post office box or Lock Box Account, and immediately deliver such payments to Bank in their original form as received from the customer, with proper endorsements for deposit into the Lock Box Account. Each Borrower irrevocably authorizes Bank to transfer to the Lock Box Account any funds that have been deposited into any other accounts or that Bank has received by wire transfer, check, cash, or otherwise. No Borrower shall establish or maintain any accounts with any Person other than Bank except for accounts opened in the ordinary course of business from which all funds are transferred on a daily basis to the Lock Box Account. Bank shall have all right, title and interest in all of the items from time to time in the Lock Box Account and their proceeds. Neither Borrowers nor any person claiming through a Borrower shall have any right or control over the use of, or any right to withdraw any amount from, the Lock Box Account, which shall be under the sole control of Bank.

               (b) Bank may apply amounts held in the Lock Box Account to the outstanding balance of the Obligations on a daily basis. Borrowers shall open an operating account or operating accounts at Bank (collectively, the “Operating Account”), and any remaining balance in the Lock Box Account shall be transferred by Bank to the Operating Account. Bank may from time to time in its discretion make Advances to Borrowers to cover checks or other items or charges which a Borrower has drawn or made against such Operating Account or to cause payment of principal, interest, fees, or other charges due and payable by Borrowers under the Loan Documents. Each Borrower hereby irrevocably requests and authorizes Bank to make such Advances from time to time by means of appropriate entries of credits to the Operating Account sufficient to cover any such checks, items, and other charges then presented. Borrowers acknowledge and agree that the making of such Advances pursuant to this Section shall, in each case, be subject in all respects to the provisions of this Agreement, including without limitation the applicable conditions precedent to each Advance contained in this Agreement as if each of such Advances were covered by a Payment/ Advance Form signed or otherwise approved by Borrowers. Borrowers absolutely and unconditionally understand and agree that each Advance so made pursuant to this Section by entry of credits to the Operating Account or otherwise shall, for all purposes of this Agreement and the other Loan Documents, be treated as and deemed to be an Advance made directly to a Borrower.

               (c) Notwithstanding anything to the contrary contained in this Agreement, “Revolving Line” shall mean a credit extension of up to $15,000,000 until such time as Borrower has set up a Lockbox in accordance with this Section.

     4. The second paragraph of Section 6.3 of the Agreement is hereby amended in its entirety to read as follows:

               Within twenty (20) days after the last day of each month and with each request for a Credit Extension which brings the aggregate outstanding balance of all Credit Extensions to an amount in excess of $15,000,000, Borrowers shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable, provided that such reporting shall be delivered on a weekly basis at any time that the aggregate balance of all outstanding Credit Extensions is in excess of $15,000,000.

     5. Section 6.8 of the Agreement is hereby amended in its entirety to read as follows:

          6.8 Current Ratio. Borrowers shall maintain at all times a ratio of Current Assets to Current Liabilities plus, to the extent not already included therein, all Indebtedness (including without limitation any Contingent Obligations) owing from Borrowers to Bank, less deferred revenue, of at least 1.00 to 1.00.

     6. New Sections 6.11, 6.12, 6.13, and 6.14 are hereby added to the Agreement to read as follows:

3

          6.11 Consultant Utilization. Borrowers’ Consultant Utilization (salaried and hourly) shall be equal to or greater than 85% at all times. As used herein, “Consultant Utilization” means (a) all hours billed by Borrower to a client for consulting work divided by (b) all hours billed to Borrower by an hourly consultant or worked by Borrower’s salaried employees which perform consulting services.

          6.12 EBITDA. Beginning May 31, 2005 and as of the last day of each month thereafter, Borrowers’ monthly EBITDA shall be at least $50,000 for one of the two months immediately preceding each date of measurement.

          6.13 Net Profit. Borrowers’ net profit for the month ending October 31, 2005 shall be at least One Dollar ($1.00). Borrowers’ net profit for the two months ending November 30, 2005 shall be at least One Dollar ($1.00). As of the month ending December 31, 2005, and as of the last day of each month thereafter, Borrowers’ net profit for the three months immediately preceding each date of measurement shall be at least One Dollar ($1.00).

          6.14 Net Loss. As of March 31, 2005 and as of the last day of each month thereafter, Borrowers’ trailing three month net loss plus taxes shall not be greater than ($750,000).

          Borrowers shall only be required to comply with Sections 6.8, 6.11, 6.12, 6.13 and 6.14 (the “Financial Covenants”) when the aggregate balance of the outstanding Credit Extensions is in excess of $15,000,000. It shall be a condition precedent to Borrowers’ request of any Credit Extension which would bring the aggregate balance of the outstanding Credit Extensions in excess of $15,000,000 that Borrowers be in compliance with the Financial Covenants on the date of such request and on a pro forma basis for the month ended immediately prior to such request. Borrowers shall have the ability to cure any failure to comply with a Financial Covenant by immediately repaying such Credit Extensions as are necessary to bring the aggregate balance of the outstanding Credit Extensions to an amount which is $15,000,000 or less, provided that, notwithstanding anything to the contrary in this Agreement, unless otherwise agreed to by Bank in writing, thereafter, “Revolving Line” shall mean a credit extension of up to Fifteen Million Dollars ($15,000,000).

          The calculation of all Financial Covenants shall exclude the impact of noncash stock compensation expenses.

     7. Exhibit C to the Agreement is hereby amended and replaced in its entirety by Exhibit C attached hereto.

     8. Exhibit D to the Agreement is hereby amended and replaced in its entirety by Exhibit D attached hereto.

     9. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remains in full force and effect in accordance with its terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement.

     10. Except as set forth in the Schedule of Exceptions originally provided by Borrowers to Bank in connection with the Agreement and the updated Schedule of Exceptions provided by Borrowers to Bank in connection with this Amendment, each Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

4

     11. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

     12. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

               (a) this Amendment, duly executed by Borrowers;

               (b) Affirmation of Subordination;

               (c) two Amendment and Affirmation of Guaranties;

               (d) an amount equal to all Bank Expenses incurred through the date of this Amendment; and

               (e) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

5

     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the first date above written.

ALLIANCE HOLDINGS, INC.
By:	/s/ James Dandy
Title:	Authorized Signer
ALLIANCE CONSULTING GROUP ASSOCIATES, INC.
By:	/s/ James Dandy
Title:	Vice President, Finance
COMERICA BANK
By:	/s/ Elizabeth Kinsey
Title:	SVP

6

EXHIBIT C

BORROWING BASE CERTIFICATE

Borrower: ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. Lender: Comerica Bank

Commitment Amount: $20,000,000

ACCOUNTS RECEIVABLE
	1.	Accounts Receivable Book Value as of		$
	2.	Additions (please explain on reverse)		$
	3.	TOTAL ACCOUNTS RECEIVABLE		$
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
	4.	Amounts over 90 days due	$
	5.	Balance of 25% over 90 day accounts	$
	6.	Concentration Limits	$
	7.	Foreign Accounts	$
	8.	Governmental Accounts	($2,142,000)
	9.	Reserves for unapplied cash and customer deposits	$
	10.	Unbilled Accounts	$
	11.	Intercompany/Employee Accounts	$
	12.	Other (please explain on reverse)	$
	13.	TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS		$
	14.	Eligible Accounts (#3 minus #13)		$
	15.	LOAN VALUE OF ACCOUNTS (80% of #14)		$
BALANCES
	16.	Maximum Loan Amount		$20,000,000
	17.	Total Funds Available [Lesser of #16 or #15 plus $15,000,000]		$
	18.	Present balance owing on Line of Credit		$
	19.	Outstanding under Sublimits		$
	20.	RESERVE POSITION (#17 minus #18 and #19)		$

The undersigned each represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica Bank.

ALLIANCE CONSULTING GROUP ASSOCIATES, INC.		ALLIANCE HOLDINGS, INC.
By:		By:
	Authorized Signer		Authorized Signer

7

EXHIBIT D

COMPLIANCE CERTIFICATE

TO:	COMERICA BANK
FROM:	ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC.

     The undersigned authorized officer of ALLIANCE CONSULTING GROUP ASSOCIATES, INC. & ALLIANCE HOLDINGS, INC. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement among Borrowers and Bank (the “Agreement”), (i) each Borrower is in complete compliance for the period ending                      with all required covenants except as noted below and (ii) all representations and warranties of such Borrower stated in the Agreement are true and correct as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required	Complies
Monthly financial statements Annual (CPA Audited) 10K and 10Q A/R & A/P Agings, Borrowing Base Cert. A/R Audit IP Report Financial Forecast	Monthly within 30 days FYE within 90 days (as applicable) Monthly within 20 days* Initial and Semi-Annual Quarterly within 30 days FYE within 60 days	Yes Yes Yes Yes Yes Yes Yes	No No No No No No No

* Within twenty (20) days after the last day of each month and with each request for a Credit Extension which brings the aggregate outstanding balance of all Credit Extensions in excess of $15,000,000, Borrowers shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable, provided that such reporting shall be delivered on a weekly basis at any time that the aggregate amount of all outstanding Credit Extensions exceeds $15,000,000.

Financial Covenant	Required	Actual	Applicable	Complies
Minimum Current Ratio**	1.00:1.00	:1.00	N/A	Yes	No
Minimum Consultant Utilization**	85%***	%	N/A	Yes	No
EBITDA for trailing 2 mo. (beg. 5/05)**	$50,000 for 1 of 2 months of measurement	$	N/A	Yes	No
Minimum Net Profit	*	$	N/A	Yes	No
Maximum trailing 3 mo. Net Loss (beg. 3/05)**	($750,000)	$	N/A	Yes	No

*Borrowers’ net profit for the month ending October 31, 2005 shall be at least One Dollar ($1.00). Borrowers’ net profit for the two months ending November 30, 2005 shall be at least One Dollar ($1.00). As of the month ending December 31, 2005, and as of the last day of each month thereafter, Borrowers’ net profit for the three months immediately preceding each date of measurement shall be at least One Dollar ($1.00).
**Borrowers shall only be required to comply when the aggregate balance of the outstanding Credit Extensions is in excess of $15,000,000.
***Please attach a report showing calculation of consultant utilization percentage.

Comments Regarding Exceptions:   See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by: 

AUTHORIZED SIGNER

Date: 

Verified: 

AUTHORIZED SIGNER

Date: 

Compliance Status
  Yes                    No

8

EX-10.22.1

EXHIBIT 10.22.1

MANTAS, INC.
 
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “Agreement”) is entered into as of December 15, 2002, by and between COMERICA BANK-CALIFORNIA (“Bank”) and MANTAS, INC. (“Borrower”).

RECITALS

     A. Bank and Borrower have entered into that certain Loan and Security Agreement, dated as of November 16, 2001, as amended by that certain First Amendment to Loan and Security Agreement, dated August 12, 2002 (‘Original Loan Agreement”).

     B. Borrower has asked Bank to amend and restate the Original Loan Agreement as provided herein, and Bank has agreed to such amendment and restatement, provided Borrower enters into this Agreement.

AGREEMENT

The parties agree as follows:

     1. DEFINITIONS AND CONSTRUCTION.

          1.1 Definitions. As used in this Agreement, the following terms shall have the definitions set forth on Exhibit A.

          1.2 Accounting Terms. All accounting terms not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and schedules.

     2. LOAN AND TERMS OF PAYMENT.

          2.1 Credit Extensions.

               (a) Borrower promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

               (b) Revolving Advances.

                    (i) Subject to, and upon the terms and conditions of, this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed (A) the lesser of (I) the Committed Revolving Line or (II) the greater of the Borrowing Base or $1,000,000, minus (B) the aggregate face amount of all outstanding Letters of Credit. Amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b), together with all accrued and unpaid interest thereon, shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium.

                    (ii) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit C hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer, or a designee of a Responsible Officer, or without instructions if, in Bank’s discretion, such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(b) to Borrower’s deposit account.

Page 1

               (c) Equipment Advances.

                    (i) Subject to, and upon the terms and conditions of this Agreement, at any time from the date hereof through the Revolving Maturity Date, Bank agrees to make advances (each, an “Equipment Advance” and, collectively, the “Equipment Advances”) to Borrower in an aggregate outstanding amount not to exceed Five Hundred Thousand Dollars ($500,000). Each Equipment Advance shall not exceed one hundred percent (100%) of the invoice amount of equipment, furniture and software (which Borrower shall, in any case, have purchased within ninety (90) days of the date of the corresponding Equipment Advance), excluding taxes, shipping, warranty charges, freight discounts and installation expenses. Equipment Advances for software will be limited to One Hundred Thousand Dollars ($100,000) in the aggregate (“Software Advances”). Equipment Advances for equipment and furniture are hereinafter referred to as “Standard Equipment Advances”. Notwithstanding the foregoing, on the date of the closing hereof, Borrower may obtain Equipment Advances in an aggregate amount not to exceed One Hundred Fifty Thousand Dollars ($150,000) for equipment, furniture or software purchased on or after January 1, 2002 (“Look-Back Advances”). Each Look-Back Advance shall not exceed seventy-five percent (75%) of the invoice amount of equipment, furniture and software, excluding taxes, shipping, warranty charges, freight discounts and installation expenses. Any Look-Back Advance for software shall be considered a Software Advance, and any other Look-Back Advance shall be considered a Standard Equipment Advance, provided that the provisions of Sections 2.1(c)(ii) and (iii) shall not apply to Look-Back Advances.

                    (ii) Interest shall accrue from the date of each Standard Equipment Advance at the rate specified in Section 2.3(a), and shall be payable monthly on the 14th day of each month through the Equipment Maturity Date. Any Standard Equipment Advances that are outstanding on March 14, 2003, shall be payable in thirty-three (33) equal monthly installments of principal, plus all accrued interest, beginning on April 14, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date. Any Standard Equipment Advances that are outstanding on June 14, 2003 (which were not outstanding on March 14, 2003), shall be payable in thirty (30) equal monthly installments of principal, plus all accrued interest, beginning on July 14, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date. Any Standard Equipment Advances that are outstanding on September 14, 2003 (which were not outstanding on June 14, 2003), shall be payable in twenty-seven (27) equal monthly installments of principal, plus all accrued interest, beginning on October 14, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date. Any Standard Equipment Advances that are outstanding on December 14, 2003 (which were not outstanding on September 14, 2003) shall be payable in twenty-four (24) equal monthly installments of principal, plus all accrued interest, beginning on January 14, 2004, and continuing on the same day of each month thereafter through the Equipment Maturity Date, at which time all amounts due under this Section 2.1(c)(ii), and any other amounts due under this Agreement, shall be immediately due and payable. Standard Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Standard Equipment Advances without penalty or premium.

                    (iii) Interest shall accrue from the date of each Software Advance at the rate specified in Section 2.3(a) hereof, and shall be payable monthly on the 14th day of each month through the Software Maturity Date. Any Software Advances that are outstanding on March 14, 2003, shall be payable in twenty-one (21) equal monthly installments of principal, plus all accrued interest, beginning on April 14, 2003, and continuing on the same day of each month thereafter through the Software Maturity Date. Any Software Advances that are outstanding on June 14, 2003 (which were not outstanding on March 14, 2003), shall be payable in eighteen (18) equal monthly installments of principal, plus all accrued interest, beginning on July 14, 2003, and continuing on the same day of each month thereafter through the Software Maturity Date. Any Software Advances that are outstanding on September 14, 2003 (which were not outstanding on June 14, 2003), shall be payable in fifteen (15) equal monthly installments of principal, plus all accrued interest, beginning on October 14, 2003, and continuing on the same day of each month thereafter through the Software Maturity Date. Any Software Advances that are outstanding on December 14, 2003 (which were not outstanding on September 14, 2003), shall be payable in twelve (12) equal monthly installments of principal, plus all accrued interest, beginning on January 14, 2004, and continuing on the same day of each month thereafter through the Software Maturity Date, at which time all amounts due under this Section 2.1(c)(iii) shall be immediately due and payable. Software Advances, once repaid, may not be reborrowed. Borrower may prepay any Software Advances without penalty or premium.

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                    (iv) Interest shall accrue from the date of each Look-Back Advance at the rate specified in Section 2.3(a) hereof, and shall be payable monthly on the 14th day of each month through the Look-Back Maturity Date. Any Look-Back Advances shall be payable in seventeen (17)] equal monthly installments of principal, plus all accrued interest, beginning on February 14, 2003, and continuing on the same day of each month thereafter through the Look-Back Maturity Date.

                    (v) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time three Business Days before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit C. The notice shall be signed by a Responsible Officer, or a designee thereof, and shall include a copy of the invoice for any Equipment to be financed.

               (d) Letters of Credit.

                    (i) Subject to the terms and conditions of this Agreement, Bank agrees to issue, or cause to be issued, letters of credit for the account of Borrower (each, a “Letter of Credit,” and collectively, the “Letters of Credit”) in an aggregate outstanding face amount not to exceed the amount of Advances available under Section 2.1(b)(i) at the time of any such issuance. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s form of standard application and letter of credit agreement. Any Letter of Credit outstanding upon termination of this Agreement for any reason shall become cash secured, in form and substance satisfactory to Bank, prior to the release of any collateral hereunder by Bank. On any drawn but unreimbursed Letter of Credit, the unreimbursed amount shall be deemed an Advance under Section 2.1(b).

                    (ii) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys’ fees, arising out of or in connection with any Letters of Credit, except for expenses caused by Bank’s gross negligence or willful misconduct.

          2.2 Overadvances. If, at any time, the aggregate amount of the outstanding Advances exceeds (a) the lesser of (i) the Committed Revolving Line or (ii) the greater of the Borrowing Base or $1,000,000, minus (b) the aggregate face amount of all outstanding Letters of Credit, Borrower shall immediately pay to Bank, in cash, the amount of such excess.

          2.3 Interest Rates, Payments, and Calculations.

               (a) Interest Rate.

                    (i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one percent (1.0%) above the Prime Rate.

                    (ii) Equipment Advances. Except as set forth in Section 2.3(b), (A) the Standard Equipment Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one and one-half percent (1.5%) above the Prime Rate, and (B) the Software Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to two percent (2.0%) above the Prime Rate.

               (b) Late Fee; Default Rate. If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default.

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               (c) Payments. Interest hereunder shall be due and payable on the 14th day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower’s deposit accounts or against the Committed Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.

               (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.

          2.4 Crediting Payments. Except when an Event of Default has occurred and is continuing, Bank shall credit a wire transfer of funds, check, or other item of payment to such deposit account or Obligation as Borrower specifies. When an Event of Default, has occurred and is continuing, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

          2.5 Fees.:

               (a) Facility Fees.

                    (i) A Facility Fee equal to Twelve Thousand Five Hundred Dollars ($12,500) was paid to Bank for the commitment made in Section 2.1(b) for the period covered by the Original Loan Agreement. Borrower shall pay to Bank a Facility Fee equal to Five Thousand Dollars ($5,000) for the commitment made in Section 2.1(b) for the amended period set forth herein, which shall be nonrefundable and the receipt of which the Bank acknowledges.

                    (ii) Borrower shall pay to Bank a Facility Fee equal to Two Thousand Dollars ($2,000) for the commitment made in Section 2.1(c), which shall be nonrefundable and the receipt of which the Bank acknowledges.

                    (iii) Borrower shall pay to Bank a Non-Use Fee equal to (A) one tenth of one percent (0.10%) on the unused portion of the Revolving Facility during the period from the date hereof through June 14, 2003 and payable on June 14, 2003, and (B) one tenth of one percent (0.10%) on the unused portion of the Revolving Facility during the period from June 15, 2003 through the Revolving Maturity Date and payable on the Revolving Maturity Date.

               (b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys’ fees and expenses, and, after the Closing Date, all Bank Expenses, including reasonable attorneys’ fees and expenses, as and when they become due. Such expenses shall specifically include fees incurred for any audit of the Collateral and/or the Accounts Receivable.

          2.6 Additional Costs. In case of any change after the date hereof to any law, regulation, treaty or official directive, or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof, or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law):

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               (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof);

               (b) imposes, modifies, or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or

               (c) imposes upon Bank any other condition with respect to its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank’s calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error.

          2.7 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

     3. CONDITIONS OF LOANS.

          3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

               (a) this Agreement;

               (b) an officer’s certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

               (c) financing statements (Form UCC-1);

               (d) warrants to purchase stock;

               (e) an intellectual property security agreement;

               (f) an agreement to provide insurance;

               (g) payment of the fees and Bank Expenses then due as specified in Section 2.5;

               (h) current financial statements in accordance with Section 6.2; and

               (i) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

          3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

               (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1;

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               (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). Except as disclosed in writing from Borrower to Bank, the making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2; and

               (c) in the case of any Advances under Section 2.1(b) in excess of $1,000,000, an audit of the Collateral, the results of which shall be satisfactory to the Bank.

     4. CREATION OF SECURITY INTEREST.

          4.1 Grant of Security Interest. Pursuant to the Original Loan Agreement, Borrower has granted and pledged, to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral, and Borrower hereby continues and confirms such grant and pledge, to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes, and will continue to constitute, a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Notwithstanding any termination, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

          4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank’s security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents.

          4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower’s usual business hours but no more than once every six months (unless an Event of Default has occurred and is continuing), to inspect Borrower’s Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower’s financial condition or the amount, condition of, or any other matter relating to, the Collateral.

     5. REPRESENTATIONS AND WARRANTIES.

     Borrower represents and warrants as follows:

          5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Effect.

          5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower’s Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, which default could have a Material Adverse Effect.

          5.3 Collateral. Borrower has good title to the Collateral, free and clear of Liens, except for Permitted Liens. The Eligible Accounts are bona fide existing obligations. The property giving rise to such Eligible Accounts has been delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. All

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Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made.

          5.4 Intellectual Property Collateral. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the registered Copyrights, Trademarks and Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Borrower’s rights as a licensee of intellectual property has not given rise to more than five percent (5%) of its gross revenue over the preceding twelve month period, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service to the extent attributable to Borrower’s rights as a licensee of intellectual property.

          5.5 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof or such other location as Borrower may notify Bank in accordance with the provisions of Section 7.2.

          5.6 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect, or a material adverse effect on Borrower’s interest or Bank’s security interest in the Collateral.

          5.7 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower’s consolidated financial condition as of the date thereof and Borrower’s consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

          5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement.

          5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower’s failure to comply with ERISA that is reasonably likely to result in Borrower’s incurring any liability that could have a Material Adverse Effect. Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could reasonably be expected to have a Material Adverse Effect.

          5.10 Environmental Condition. Except as disclosed in the Schedule, none of Borrower’s or any Subsidiary’s properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower’s knowledge, none of Borrower’s properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or

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omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment.

          5.11 Taxes. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP.

          5.12 Subsidiaries. Other than Mantas Ltd., Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.

          5.13 Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower’s business as currently conducted, except where the failure to do so could not cause a Material Adverse Effect.

          5.14 Inbound Licenses. Except as disclosed on the Schedule and except for commercially available off-the-shelf software licenses, Borrower is not a party to, nor is bound by, any license or similar agreement that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property.

          5.15 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading.

     6. AFFIRMATIVE COVENANTS.

     Borrower covenants that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:

          6.1 Good Standing and Government Compliance. Borrower shall maintain its and each of its Subsidiaries’ corporate existence in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which could have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank’s Lien on the Collateral.

          6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company-prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during such period, in a form acceptable to Bank and certified by a Responsible Officer; (b) beginning with the fiscal year ending December 31, 2002, as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower’s fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt, and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (e) such budgets, sales projections, operating plans or other financial information generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time; and (f) within thirty (30) days of the last day of each fiscal quarter, a report signed by

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Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower’s Intellectual Property Collateral, including, but not limited to, any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in Exhibits A, B, and C of the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement.

               (a) Within twenty (20) days after the last day of each month so long as any amounts remain outstanding under Section 2.1(b), Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer, in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable for so long as any amounts remain outstanding under the Committed Revolving Line.

               (b) Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank, with the monthly financial statements, a Compliance Certificate signed by a Responsible Officer, in substantially the form of Exhibit E hereto.

               (c) Bank shall have a right from time to time hereafter to audit Borrower’s Accounts and appraise Collateral at Borrower’s expense, provided that such audits will be conducted no more often than every six (6) months, unless an Event of Default has occurred and is continuing.

               (d) Within five (5) days after the last day of each quarter, Borrower shall deliver to Bank copies of all New Contracts.

          6.3 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Closing Date. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims involving more than One Hundred Thousand Dollars ($100,000).

          6.4 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

          6.5 Insurance.

               (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower’s business is conducted on the date hereof. Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar to Borrower’s.

               (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All policies of property insurance shall contain a lender’s loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee, and all liability insurance policies shall show Bank as an additional insured and specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank’s request, Borrower shall deliver to

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Bank certified copies of the policies of insurance and evidence of all premium payments. All proceeds payable under any such policy shall, at Bank’s option, be payable to Bank to be applied on account of the Obligations.

          6.6 Primary Depository. Borrower shall maintain its primary depository and operating accounts with Bank.

          6.7 Financial Covenants. Borrower shall maintain, as of the last day of each calendar month, unless stated otherwise:

               (a) Liquidity Ratio. (i) Except as provided in (ii), a ratio of unrestricted cash and equivalents plus fifty percent (50%) of net billed accounts receivable to all Indebtedness to Bank and the face amount of all outstanding letters of credit of at least 1.75 to 1.00. (ii) After June 30, 2003 and if there is no violation of the covenant set forth in Section 6.7(b), a ratio of unrestricted cash and equivalents plus fifty percent (50%) of net billed accounts receivable to all Indebtedness to Bank and the face amount of all outstanding letters of credit of at least 1.60 to 1.00.

               (b) Minimum New Contracts. During each quarter, the Borrower shall enter into New Contracts having an aggregate contractual value of not less than the following: (i) for the calendar quarter ended March 31, 2003 — $4,000,000, (ii) for the calendar quarter ended June 30, 2003 — $5,500,000; (iii) for the calendar quarter ended September 30, 2003 — $6,000,000; and (iv) for the calendar quarter ended December 31, 2003 — $6,500,000. The minimum New Contracts for subsequent years during the term hereof shall be set by the Bank on an annual basis prior to the beginning of each calendar year.

          6.8 Registration of Intellectual Property Rights.

               (a) Borrower shall apply for registration of, or cause applications for registration to be filed for, on an expedited basis (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable: (i) those intellectual property rights listed on Exhibits A, and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement, within thirty (30) days of the date of this Agreement, (ii) those intellectual property rights listed on Exhibit B to the Intellectual Property Security Agreement within ninety (90) days of the date of this Agreement, (iii) all registrable intellectual property rights which, in Borrower’s reasonable business judgment, are, or have a reasonable possibility of becoming, material to Borrower’s business or are otherwise of significant commercial value and which Borrower has developed as of the date of this Agreement but heretofore failed to register, within thirty (30) days of the date of this Agreement, except that in the case of Patents, the Borrower shall have ninety (90) days from the date of this Agreement to file applications for said Patents, and (iv) those additional intellectual property rights which, in Borrower’s reasonable business judgment, are, or have a reasonable possibility of becoming, material to Borrower’s business or are otherwise of significant commercial value and which are developed or acquired by Borrower from time to time in connection with any product, promptly following development or acquisition, but in any event prior to the sale or licensing of such product to any third party, and prior to Borrower’s use of such product (including without limitation major revisions or additions which significantly improve the functionality of the intellectual property rights listed on such Exhibits A, B and C). Borrower shall give Bank notice of all such applications or registrations. Notwithstanding the foregoing, the aforesaid obligation to file a patent with respect to any patentable Intellectual Property shall not apply if Borrower determines, in the exercise of its best commercial judgment (after consultation with patent counsel, if appropriate), that it is in the Borrower’s best commercial interest to protect such Intellectual Property as a trade secret rather than filing a patent with respect to such Intellectual Property, provided that, in such case, Borrower shall use its best efforts to protect such Intellectual Property as a trade secret.

               (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank’s security interest in the Intellectual Property Collateral.

               (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights which are, or have a reasonable possibility of becoming, material to Borrower’s business or are otherwise of significant commercial value , (ii) use reasonable commercial efforts to detect

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infringements of the Trademarks, Patents and Copyrights which are, or have a reasonable possibility of becoming, material to Borrower’s business or are otherwise of significant commercial value and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld.

               (d) Bank may audit Borrower’s Intellectual Property Collateral to confirm compliance with this Section, provided such audit may not occur more often than once every six (6) months, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower’s sole expense, any actions that Borrower is required under this Section to take but which Borrower fails to take, after fifteen (15) days’ notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section.

          6.9 Consent of Inbound Licensors. Prior to entering into or becoming bound by any license or similar agreement (excluding commercially available off-the-shelf commercial software licenses), Borrower shall: (i) provide written notice to Bank of the material terms of such license or agreement with a description of its likely impact on Borrower’s business or financial condition; and (ii) use best efforts to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for Borrower’s interest in such licenses or contract rights to be deemed Collateral and for Bank to have a security interest in it that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future.

          6.10 Further Assurances. At any time, and from time to time, Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

     7. NEGATIVE COVENANTS.

     Borrower covenants and agrees that, so long as any credit hereunder shall be available, and until payment in full of the outstanding Obligations, or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following:

          7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Permitted Transfers.

          7.2 Change in Business; Change in Control; Change of Name, Executive Office, or Jurisdiction of Incorporation. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower. Borrower will not have a Change in Control and will not, without thirty (30) days prior written notification to Bank, change its name, relocate its chief executive office or change the jurisdiction of its incorporation.

          7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person.

          7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness.

          7.5 Encumbrances. Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of Borrower’s property.

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          7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock (except for nominal purchases of less than $1,000 in any twelve month period), or permit any of its Subsidiaries to do so, except that Borrower may repurchase the stock of former employees pursuant to stock repurchase agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase; provided, however, that, at any time after May 24, 2006, Borrower may, if it is required to do so pursuant to the terms of its Certificate of Incorporation and if it is not in default under this Agreement, redeem stock from Safeguard 2001 Capital, L.P., SRA Ventures, LLC or the National Association of Securities Dealers, Inc., if the Borrower receives an equity infusion or Permitted Indebtedness in an amount greater than or equal to the aggregate redemption price of such stock.

          7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments.

          7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

          7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent.

          7.10 Inventory and Equipment. Store the Inventory or the Equipment with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the location set forth in Section 10 and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank’s security interest.

          7.11 Compliance. Become or be controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could reasonably be expected to have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank’s Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing.

          7.12 Negative Pledge Agreements. Permit the inclusion in any contract to which it becomes a party of any provisions that could restrict or invalidate the creation of a security interest in Borrower’s rights and interests in any Collateral.

     8. EVENTS OF DEFAULT.

     Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

          8.1 Payment Default. If Borrower fails to pay, when due, any principal payment or fails to pay, within three (3) days of when due, any other of the Obligations;

          8.2 Covenant Default. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform or observe any other material term, provision, condition, covenant or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under

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such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period);

          8.3 Material Adverse Change. If there occurs a material adverse change in Borrower’s business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank’s security interests in the Collateral;

          8.4 Attachment. If any material portion of Borrower’s assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower’s assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower’s assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period);

          8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

          8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect;

          8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank;

          8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of the judgment); or

          8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document.

     9. BANK’S RIGHTS AND REMEDIES.

          9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:

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               (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5, all Obligations shall become immediately due and payable without any action by Bank);

               (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;

               (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;

               (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank’s determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower’s owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank’s rights or remedies provided herein, at law, in equity, or otherwise;

               (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;

               (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section 9.1, Borrower’s rights under all licenses and all franchise agreements shall inure to Bank’s benefit;

               (g) Dispose of the Collateral by way of one or more contracts or transactions, for cash or on terms, in such manner (including without limitation by public or private sale) and at such places (including Borrower’s premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate;

               (h) Bank may credit bid and purchase at any public sale; and

               (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.

          9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank’s designated officers, or employees) as Borrower’s true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank’s security interest in the Accounts; (b) endorse Borrower’s name on any checks or other forms of payment or security that may come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower’s policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower’s approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights,

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Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; (h) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (i) to transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower’s attorney in fact, and each and every one of Bank’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank’s obligation to provide advances hereunder is terminated.

          9.3 Accounts Collection. Upon and during the continuance of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank’s security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank’s trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.

          9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.

          9.5 Bank’s Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.

          9.6 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower’s part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given.

          9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable.

     10. NOTICES.

     Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:

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If to Borrower:	Mantas, Inc. 4300 Fair Lakes Court Fairfax, Virginia 22033 Attn: Dan Ilisevich, Chief Financial Officer FAX: (703) 502-7761
If to Bank:	Comerica Bank-California 9920 S. La Cienega Blvd., Suite 1401 Inglewood, CA 90301 Attn: Manager FAX: (310) 338-6110
with a copy to:	Comerica Bank-California 11921 Freedom Drive, Suite 920 Reston, Virginia 20190 Attn: Brad Steele FAX: (703) 467-9308

     The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

     12. GENERAL PROVISIONS.

          12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank’s prior written consent, which consent may be granted or withheld in Bank’s sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits hereunder.

          12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

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          12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.

          12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

          12.5 Amendments in Writing, Integration. All amendments to or terminations of this Agreement must be in writing. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents.

          12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

          12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

          12.8 Waivers. Bank agrees to waive any and all of its rights and remedies that it may have against Borrower as a result of any breach of Section 6.7(b) of the Original Loan Agreement, provided, however, that nothing herein contained shall in any way be deemed a waiver or release of all or any part of Bank’s security interest in the Collateral. Such waiver does not apply to any other event of default or other failure by Borrower to perform in accordance with the Loan Documents, the Original Loan Agreement or this Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

MANTAS, INC.
By:	/s/ Daniel R. Ilisivech
Title:	Chief Financial Officer
COMERICA BANK-CALIFORNIA
By:	/s/ Bradley Steele
Title:	First Vice President

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EXHIBIT A

DEFINITIONS

“Accounts” means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

“Advance” or “Advances” means a cash advance or cash advances under the Revolving Facility.

“Affiliate” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and partners.

“Bank Expenses” means all: reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.

“Borrower’s Books” means all of Borrower’s books and records including: ledgers; records concerning Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

“Borrowing Base” means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower.

“Business Day” means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.

“Change in Control” shall mean a transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction.

“Claim Date” shall mean the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists.

“Closing Date” means the date of this Agreement.

“Code” means the California Uniform Commercial Code.

“Collateral” means the property described on Exhibit B attached hereto and all Negotiable Collateral and Intellectual Property Collateral to the extent not described on Exhibit B, except to the extent any such property (i) is nonassignable by its terms without the consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation, Section 9406(d) of the Code), or (ii) the granting of a security interest therein is contrary to applicable law, provided that upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral..

“Committed Revolving Line” means a credit extension of up to Four Million Dollars ($4,000,000).

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“Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

“Copyrights” means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

“Credit Extension” means each Advance or any other extension of credit by Bank for the benefit of Borrower hereunder.

“Current Liabilities” means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendible at the option of Borrower or any Subsidiary to a date more than one year from the date of determination.

“Eligible Accounts” means those Accounts that arise in the ordinary course of Borrower’s business that comply with all of Borrower’s representations and warranties to Bank set forth in Section 5.3; provided, that Bank may change the standards of eligibility by giving Borrower thirty (30) days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

(a)	Accounts that the account debtor has failed to pay within ninety (90) days of invoice date;
(b)	Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;
(c)	Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower;
(d)	Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional;
(e)	Accounts with respect to which the account debtor is an Affiliate of Borrower;
(f)	Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts;
(g)	Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States;

Page 2

(h)	Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower;
(i)	Except as otherwise provided in (j), Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;
(j)	Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose credit rating is at least Baa3/BBB- from either Standard & Poor’s Corporation or Moody’s Investors Service and whose total obligations to Borrower exceed fifty percent (50%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;
(k)	Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(l)	Accounts the collection of which Bank reasonably determines after inquiry and consultation with Borrower to be doubtful.

“Eligible Foreign Accounts” means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) that Bank approves on a case-by-case basis.

“Equipment” means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts, attachments and software in which Borrower has any interest.

“Equipment Advance” has the meaning set forth in Section 2.1(c).

“Equipment Maturity Date” means December 14, 2005.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

“Event of Default” has the meaning assigned in Article 8.

“GAAP” means generally accepted accounting principles as in effect from time to time.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

“Insolvency Proceeding” means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

“Intellectual Property Collateral” means all of Borrower’s right, title, and interest in and to the following:

(a)	Copyrights, Trademarks and Patents;
(b)	Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held;

Page 3

(c)	Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held;
(d)	Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above;
(e)	All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;
(f)	All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and
(g)	All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

“Inventory” means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower’s Books relating to any of the foregoing.

“Investment” means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement or the Original Loan Agreement, all as amended or extended from time to time.

“Look-Back Advance” has the meaning set forth in Section 2.1(c)(i).

“Look-Back Maturity Date” means June 14, 2004.

“Material Adverse Effect” means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents.

“Negotiable Collateral” means all of Borrower’s present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower’s Books relating to any of the foregoing.

“New Contracts” means a binding contract with a new or an existing customer of Borrower pursuant to which such customer agrees to purchase for an agreed-upon price a specified amount of goods or services from Borrower that such customer had not previously purchased from Borrower. A renewal or extension of an existing contract shall not be considered a New Contract.

“Obligations” means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency

Page 4

Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise.

“Original Loan Agreement” has the meaning set forth in the Recitals.

“Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Periodic Payments” means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument or agreement now or hereafter in existence between Borrower and Bank.

“Permitted Indebtedness” means:

(a)	Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document;
(b)	Indebtedness existing on the Closing Date and disclosed in the Schedule;
(c)	Indebtedness not to exceed Five Hundred Thousand Dollars ($500,000) in the aggregate secured by a lien described in clause (c) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness;
(d)	Subordinated Debt; and
(e)	Indebtedness to trade creditors incurred in the ordinary course of business.

“Permitted Investment” means:

(a)	Investments existing on the Closing Date disclosed in the Schedule;
(b)	(i) Marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing no more than one year from the date of investment therein issued by Bank, and (iv) Bank’s money market accounts;
(c)	Repurchases of stock from former employees or directors of Borrower under the terms of applicable repurchase agreements in an aggregate amount not to exceed One Hundred Thousand ($100,000) in the aggregate in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases;
(d)	Investments accepted in connection with Permitted Transfers;
(e)	Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate in any fiscal year;
(f)	Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plan agreements approved by Borrower’s Board of Directors;
(g)	Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of Borrower’s business;

Page 5

(h)	Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (h) shall not apply to Investments of Borrower in any Subsidiary; and
(i)	Joint ventures or strategic alliances in the ordinary course of Borrower’s business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do not exceed One Hundred Thousand Dollars ($100,000) in the aggregate in any fiscal year.

“Permitted Liens” means the following:

(a)	Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents;
(b)	Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which Borrower maintains adequate reserves, provided the same have no priority over any of Bank’s security interests;
(c)	Liens not to exceed Five Hundred Thousand Dollars ($500,000) in the aggregate (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment; and
(d)	Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase.

“Permitted Transfer” means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of:

(a)	Inventory in the ordinary course of business;
(b)	non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or
(c)	surplus, worn-out or obsolete Equipment.

“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

“Prime Rate” means the variable rate of interest, per annum, most recently announced by Bank, as its “prime rate,” whether or not such announced rate is the lowest rate available from Bank.

“Responsible Officer” means each of the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer and the Treasurer of Borrower.

“Revolving Facility” means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1(b) hereof.

“Revolving Maturity Date” means the day before the first anniversary of the Closing Date.

“Schedule” means the schedule of exceptions attached hereto, if any.

Page 6

“Software Advance” has the meaning set forth in Section 2.1(c)(i).

“Software Maturity Date” means December 14, 2004.

“Software Products” means software, computer source codes and other computer programs.

“Standard Equipment Advances” has the meaning set forth in Section 2.1(c)(i).

“Subordinated Debt” means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).

“Subsidiary” means any corporation or partnership in which (i) any general partnership interest or (ii) more than fifty percent (50%) of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.

“Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

Page 7

DEBTOR	MANTAS, INC.
SECURED PARTY:	COMERICA BANK-CALIFORNIA

EXHIBIT B

COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT

All personal property of Borrower (herein referred to as “Borrower” or “Debtor”) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

(a)	all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;
(b)	all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the forgoing, or any parts thereof or any underlying or component elements of any of the forgoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;
(c)	all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;
(d)	all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and
(e)	any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.
(f)	All of Debtor’s present and future rights, title and interest in, to and under Debtor’s securities account number maintained with                                                              and all investment property, including without limitation all securities and securities entitlements, financial assets, instruments or other property contained in such securities account, and all other investment property, financial assets, instruments or other property at any time held or maintained in the securities account, together with all investment property, financial assets, instruments or other property at any time substituted therefor or for any part thereof, and all interest, dividends, increases, profits, new investment property, financial assets, instruments or other property and or other increments, distributions or rights of any kind received on account of any of the foregoing, and all other income received in connection therewith and all products or proceeds thereof (whether cash or non-cash proceeds).

Notice — pursuant to an agreement between debtor and secured party, debtor has agreed not to further encumber the collateral described herein.

In the event that any entity is granted a security interest in debtor’s account, contrary to the above, the above secured party asserts a claim to the account and all property and assets substituted therefor, or for any part thereof, and any proceeds (cash and con-cash) thereof received by such entity.

8

EXHIBIT C

LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM

DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.

TO:          Emerging Growth Division	DATE:
FAX #: (650) 846-6840	TIME:

FROM:  MANTAS, INC.

CLIENT NAME (BORROWER)

REQUESTED BY: 

AUTHORIZED SIGNER’S NAME

AUTHORIZED SIGNATURE: 

PHONE NUMBER: 

FROM ACCOUNT # TO ACCOUNT #

REQUESTED TRANSACTION TYPE	REQUEST DOLLAR AMOUNT
	$
PRINCIPAL INCREASE (ADVANCE)	$
PRINCIPAL PAYMENT (ONLY)	$
INTEREST PAYMENT (ONLY)	$
PRINCIPAL AND INTEREST (PAYMENT)	$

OTHER INSTRUCTIONS: 

All representations and warranties of Borrower stated in the Amended and Restated Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for an Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

BANK USE ONLY
TELEPHONE REQUEST:

The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me.

Authorized Requester	Phone #
Received By (Bank)	Phone #

Authorized Signature (Bank)

9

EXHIBIT D

BORROWING BASE CERTIFICATE

Borrower: MANTAS, INC.	Lender: Comerica Bank-California
Commitment Amount: $4,000,000

ACCOUNTS RECEIVABLE
1.	Accounts Receivable Book Value as of ___		$
2.	Additions (please explain on reverse)		$
3.	TOTAL ACCOUNTS RECEIVABLE		$
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4.	Amounts over 90 days due	$
5.	Balance of 25% over 90 day accounts	$
6.	Concentration Limits
7.	Foreign Accounts	$
8.	Governmental Accounts	$
9.	Contra Accounts	$
10.	Demo Accounts	$
11.	Intercompany/Employee Accounts	$
12.	Other (please explain on reverse)	$
13.	TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS		$
14.	Eligible Accounts (#3 minus #13)		$
15.	LOAN VALUE OF ACCOUNTS (80% of #14)		$
BALANCES
16.	Maximum Loan Amount		$
17.	Total Funds Available [Lesser of #16 or #15]		$
18.	Present balance owing on Line of Credit		$
19.	Outstanding under Sublimits (Letters of Credit)		$
20.	RESERVE POSITION (#17 minus #18 and #19)		$

The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Amended and Restated Loan and Security Agreement between the undersigned and Comerica Bank-California.

MANTAS, INC.
By:
	Authorized Signer

10

EXHIBIT E
COMPLIANCE CERTIFICATE

TO:	COMERICA BANK-CALIFORNIA
FROM:	MANTAS, INC.

The undersigned authorized officer of MANTAS, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending ___with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required		Complies
Monthly financial statements	Monthly within 30 days		Yes	No
Annual (CPA Audited)	FYE within 120 days		Yes	No
10K and 10Q	(as applicable)		Yes	No
A/R & A/P Agings, Borrowing Base Cert.	Monthly within 20 days		Yes	No
A/R Audit	Initial and Semi-annual		Yes	No
IP Report	Quarterly within 30 days		Yes	No
New Contracts	Quarterly within 5 days		Yes	No
Financial Covenant	Required	Actual	Complies
Minimum Liquidity Ratio
Through 6/30/03 and thereafter if applicable	1.75:1.00	_____:1.00	Yes	No
After 6/30/03 if applicable	1.60: 1.00	_____:1.00	Yes	No
New Contracts
For Quarter ended 3/31/03	$4,000,000	$—	Yes	No
For Quarter ended 6/30/03	$5,500,000	$—	Yes	No
For Quarter ended 9/30/03	$6,000,000	$—	Yes	No
For Quarter ended 12/31/03	$6,500,000	$—	Yes	No

Comments Regarding Exceptions:   See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by: 

AUTHORIZED SIGNER

Date: 

Verified: 

AUTHORIZED SIGNER

Date: 

Compliance Status
  Yes                    No

11

SCHEDULE OF EXCEPTIONS

Permitted Indebtedness (Exhibit A)

Permitted Investments (Exhibit A)

Permitted Liens (Exhibit A)

Prior Names (Section 5.5)

Litigation (Section 5.6)

Secured Party: COMERICA BANK-CALIFORNIA
Debtor: MANTAS, INC.

EXHIBIT A

COLLATERAL DESCRIPTION ATTACHMENT
TO UCC FINANCING STATEMENTS

All personal property of Borrower (herein referred to as “Borrower” or “Debtor”) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

(a)	all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;
(b)	all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the forgoing, or any parts thereof or any underlying or component elements of any of the forgoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;
(c)	all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;
(d)	all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and

(e)

any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.

(f)

All of Debtor’s present and future rights, title and interest in, to and under Debtor’s securities account number maintained with                                                                                  and all investment property, including without limitation all securities and securities entitlements, financial assets, instruments or other property contained in such securities account, and all other investment property, financial assets, instruments or other property at any time held or maintained in the securities account, together with all investment property, financial assets, instruments or other property at any time substituted therefor or for any part thereof, and all interest, dividends, increases, profits, new investment property, financial assets, instruments or other property and or other increments, distributions or rights of any kind received on account of any of the foregoing, and all other income received in connection therewith and all products or proceeds thereof (whether cash or non-cash proceeds).

Notice — pursuant to an agreement between debtor and secured party, debtor has agreed not to further encumber the collateral described herein.

In the event that any entity is granted a security interest in debtor’s account, contrary to the above, the above secured party asserts a claim to the account and all property and assets substituted therefor, or for any part thereof, and any proceeds (cash and con-cash) thereof received by such entity.

EX-10.22.2

EXHIBIT 10.22.2

FIRST AMENDMENT
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

     This First Amendment to Amended and Restated Loan and Security Agreement is entered into as of March 19, 2004 (the “Amendment”), by and between COMERICA BANK, successor by merger to Comerica Bank — California (“Bank”) and MANTAS, INC. (“Borrower”).

RECITALS

     Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of December 15, 2002, as amended (the “Agreement”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. The reference to “through the Revolving Maturity Date” in Section 2.1(c)(i) of the Agreement is hereby amended to read “through December 14, 2003”.

     2. The reference to “, and any other amounts due under this Agreement,” in Section 2.1(c)(ii) of the Agreement is hereby deleted in its entirety.

     3. A new Section 2.1(e) is hereby added to the Agreement to read as follows:

          (c) Facility B Equipment Advances.

          (i) Subject to, and upon the terms and conditions of this Agreement, at any time from the date hereof through March 19, 2005, Bank agrees to make advances (each, a “Facility B Equipment Advance” and, collectively, the “Facility B Equipment Advances”) to Borrower in an aggregate amount not to exceed Two Million Dollars ($2,000,000). Each Facility B Equipment Advance shall not exceed one hundred percent (100%) of the invoice amount of new equipment, furniture, software, and leasehold improvements (which Borrower shall, in any case, have purchased within one hundred twenty (120) days of the date of the corresponding Facility B Equipment Advance), excluding taxes, shipping, warranty charges, freight discounts and installation expenses. Facility B Equipment Advances for software and leasehold improvements will be limited to Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate (“Facility B Software Advances”). Facility B Equipment Advances for equipment and furniture are hereinafter referred to as “Standard Facility B Equipment Advances”.

          (ii) Interest shall accrue from the date of each Standard Facility B Equipment Advance at the rate specified in Section 2.3, and shall be payable monthly on the 19th day of each month through the Facility B Equipment Maturity Date. Any Standard Facility B Equipment Advances that are outstanding on June 19, 2004, shall be payable in thirty-three (33) equal monthly installments of principal, plus all accrued interest, beginning on July 19, 2004, and continuing on the same day of each month thereafter through the Facility B Equipment Maturity Date. Any Standard Facility B Equipment Advances that are outstanding on September 19, 2004 (which were not outstanding on June 19, 2004), shall be payable in thirty (30) equal monthly installments of principal, plus all accrued interest, beginning on October 19, 2004, and continuing on the same day of each month thereafter through the Facility B Equipment Maturity Date. Any Standard Facility B Equipment Advances that are outstanding on December 19, 2004 (which were not outstanding on September 19, 2004), shall be payable in twenty-seven (27) equal monthly installments of principal, plus all accrued interest, beginning on January 19, 2005, and continuing

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on the same day of each month thereafter through the Facility B Equipment Maturity Date. Any Standard Facility B Equipment Advances that are outstanding on March 19, 2005 (which were not outstanding on December 19, 2004) shall be payable in twenty-four (24) equal monthly installments of principal, plus all accrued interest, beginning on April 19, 2005, and continuing on the same day of each month thereafter through the Facility B Equipment Maturity Date, at which time all amounts owing under this Section 2.1(e), and any other amounts owing under this Agreement, shall be immediately due and payable. Standard Facility B Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Standard Facility B Equipment Advances without penalty or premium.

          (iii) Interest shall accrue from the date of each Facility B Software Advance at the rate specified in Section 2.3 hereof, and shall be payable monthly on the 19^th day of each month through the Facility B Software Maturity Date. Any Facility B Software Advances that are outstanding on June 19, 2004, shall be payable in twenty-one (21) equal monthly installments of principal, plus all accrued interest, beginning on July 19, 2004, and continuing on the same day of each month thereafter through the Facility B Software Maturity Date. Any Facility B Software Advances that are outstanding on September 19, 2004 (which were not outstanding on June 19, 2004), shall be payable in eighteen (18) equal monthly installments of principal, plus all accrued interest, beginning on October 19, 2004, and continuing on the same day of each month thereafter through the Facility B Software Maturity Date. Any Facility B Software Advances that are outstanding on December 19, 2004 (which were not outstanding on September 19, 2004), shall be payable in fifteen (15) equal monthly installments of principal, plus all accrued interest, beginning on January 19, 2005, and continuing on the same day of each month thereafter through the Facility B Software Maturity Date. Any Facility B Software Advances that are outstanding on March 19, 2005 (which were not outstanding on December 19, 2004), shall be payable in twelve (12) equal monthly installments of principal, plus all accrued interest, beginning on April 19, 2005, and continuing on the same day of each month thereafter through the Facility B Software Maturity Date, at which time all amounts due under this Section 2.1(e)(iii) shall be immediately due and payable. Facility B Software Advances, once repaid, may not be reborrowed. Borrower may prepay any Facility B Software Advances without penalty or premium.

          (v) When Borrower desires to obtain a Facility B Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:30 p.m. Eastern time three Business Days before the day on which the Facility B Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit C. The notice shall be signed by a Responsible Officer, or a designee thereof, and shall include a copy of the invoice for any equipment, software, furniture, or leasehold improvements to be financed.

     4. A new Section 2.3(a)(iii) is hereby added to the Agreement to read as follows:

          (iii) Facility B Equipment Advances. Except as set forth in Section 2.3(b), (A) the Standard Facility B Equipment Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one percent (1.0%) above the Prime Rate, and (B) the Facility B Software Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to two percent (2.0%) above the Prime Rate.

     5. Section 2.5(a)(iii) of the Agreement is hereby amended in its entirety to read as follows:

          (iii) Borrower shall pay to Bank a Non-Use Fee equal to one tenth of one percent (0.10%) per annum of the average unused portion of the availability under the Committed Revolving Line. Such fee shall be payable in semi-annual installments on September 19, 2004 and on the Revolving Maturity Date. Each installment shall be calculated on the average unused portion of the Revolving Line during the preceding six months.

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     6. Section 6.7 of the Agreement is hereby amended in its entirety to read as follows:

          6.7 Financial Covenants.

          (a) Quick Ratio. Borrower shall maintain at all times a ratio of Quick Assets to Current Liabilities plus, to the extent not already included therein, all Indebtedness (including without limitation any Contingent Obligations) owing from Borrower to Bank, less deferred revenue, of at least 1.25 to 1.00. The portion of Borrower’s Quick Assets made up of unrestricted cash shall not be less than Two Million Dollars ($2,000,000) at any time.

          (b) Minimum New Contracts. During each quarter, the Borrower shall enter into New Contracts having an aggregate contractual value of not less than the following: (i) for the calendar quarter ending March 31, 2004 — $5,000,000, (ii) for the calendar quarter ending June 30, 2004 — $9,000,000; (iii) for the calendar quarter ending September 30, 2004 — $6,000,000; and (iv) for the calendar quarter ending December 31, 2004 — $14,000,000. The minimum New Contracts for subsequent years during the term hereof shall be set by the Bank on an annual basis prior to the beginning of each calendar year, based on Borrower’s plan, which plan shall be acceptable to Bank and shall be received by Bank on or before December 15 of each year.

     7. The following defined terms are hereby added to or amended in Exhibit A to the Agreement to read as follows:

          “Committed Revolving Line” means a credit extension of up to Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000).

          “Credit Extension” means each Advance, Equipment Advance, Letter of Credit, Facility B Equipment Advance, or any other extension of credit by Bank for the benefit of Borrower hereunder.

          “Eligible Accounts” means those Accounts that arise in the ordinary course of Borrower’s business that comply with all of Borrower’s representations and warranties to Bank set forth in Section 5.3; provided, that Bank may change the standards of eligibility by giving Borrower thirty (30) days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

          (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date;

          (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;

          (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower;

          (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional;

          (e) Accounts with respect to which the account debtor is an Affiliate of Borrower;

          (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts;

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          (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States;

          (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower (including without limitation invoices for down payments for deployment services and licenses), but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower;

          (i) Except as otherwise provided in (j), Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

          (j) Accounts with respect to a domestic account debtor, including Subsidiaries and Affiliates, whose credit rating is at least Baa1/BBB+ from either Standard & Poor’s Corporation or Moody’s Investors Service and whose total obligations to Borrower exceed thirty five percent (35%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

          (k) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business;

          (l) Credit balances over 90 days from invoice date; and

          (m) Accounts the collection of which Bank reasonably determines after inquiry and consultation with Borrower to be doubtful.

          “Eligible Foreign Accounts” means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit or credit insurance in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, (ii) Accounts on which the account debtor is Barclays, ABN Amro, or Banco Bilbao, or (iii) that Bank approves on a case-by-case basis.

          “Facility B Equipment Advance” has the meaning set forth in Section 2.1(e).

          “Facility B Equipment Maturity Date” means March 19, 2007.

          “Facility B Software Maturity Date” means March 19, 2006.

          “Net Trade Accounts Receivables” means bona-fide, billed accounts receivable net of allowances for bad debt.

          “New Contracts” means a binding contract with a new or an existing customer of Borrower pursuant to which such customer agrees to purchase for an agreed-upon price software, maintenance, and/or services from Borrower that such customer had not previously purchased from Borrower, with respect to which an executed contract has been delivered to Bank. A renewal or extension of an existing contract shall not be considered a New Contract.

          “Quick Assets” means, at any date as of which the amount thereof shall be determined, the unrestricted cash and cash-equivalents plus Net Trade Accounts Receivable of Borrower determined in accordance with GAAP for private companies.

          “Revolving Maturity Date” means March 18, 2005.

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     8. Exhibit E to the Agreement is hereby amended in its entirety to read as Exhibit E attached hereto.

     9. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement, except to the extent such security interest are being released pursuant to Section 17 above.

     10. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

     11. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

     12. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

          (a) this Amendment, duly executed by Borrower;

          (b) Corporate Resolutions to Borrow;

          (c) disbursement instructions, an agreement to provide insurance, and auto-debit authorizations;

          (d) a nonrefundable amendment fee equal to $7,500 plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and

          (e) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

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     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

MANTAS, INC.
By:	/s/ Daniel R. Ilisivech
Title:	Chief Financial Officer
Name:	Daniel R. Ilisivech
COMERICA BANK
By:	/s/ Bradley Steele
Title:	First Vice President
Name:	Bradley Steele

6

EXHIBIT E
COMPLIANCE CERTIFICATE

TO:	COMERICA BANK
FROM:	MANTAS, INC.

The undersigned authorized officer of MANTAS, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending ___with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required		Complies
Monthly financial statements	Monthly within 30 days		Yes	No
Annual (CPA Audited)	FYE within 120 days		Yes	No
10K and 10Q	(as applicable)		Yes	No
A/R & A/P Agings, Borrowing Base Cert.	Monthly within 20 days		Yes	No
A/R Audit	Initial and Semi-annual		Yes	No
IP Report	Quarterly within 30 days		Yes	No
New Contracts	Quarterly within 5 days		Yes	No
Financial Covenant	Required	Actual	Complies
Minimum Quick Ratio	1.25:1.00*	____:1.00	Yes	No
New Contracts
For Quarter ending 3/31/04	$5,000,000	$—	Yes	No
For Quarter ending 6/30/04	$9,000,000	$—	Yes	No
For Quarter ending 9/30/04	$6,000,000	$—	Yes	No
For Quarter ending 12/31/04	$14,000,000	$—	Yes	No
*including at least $2MM unrestricted cash

Comments Regarding Exceptions:   See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by: 

AUTHORIZED SIGNER

Date: 

Verified: 

AUTHORIZED SIGNER

Date: 

Compliance Status
  Yes                    No

7

EX-10.22.3

EXHIBIT 10.22.3

SECOND AMENDMENT
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

     This Second Amendment to Amended and Restated Loan and Security Agreement is entered into as of March 31, 2004 (the “Amendment”), by and between COMERICA BANK, successor by merger to Comerica Bank — California (“Bank”) and MANTAS, INC. (“Borrower”).

RECITALS

     Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of December 15, 2002, as amended, including without limitation by that certain First Amendment to Amended and Restated Loan and Security Agreement dated as of March 19, 2004 (collectively, the “Agreement”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. All outstanding Equipment Advances and Facility B Equipment Advances are hereby converted to Advances and shall be treated as Advances made under the Committed Revolving Line for all purposes hereafter. Notwithstanding anything to the contrary in the Agreement, Borrower may not request nor receive any further Equipment Advances or Facility B Equipment Advances.

     2. The first sentence of Section 2.1(b)(i) of the Agreement is hereby amended to read as follows: “Subject to, and upon the terms and conditions of, this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the Committed Revolving Line minus the aggregate face amount of all outstanding Letters of Credit.”

     3. Sections 2.1 (c) and (e) of the Agreement are hereby amended in their entirety to read as follows:

                    (c) [Intentionally Omitted.]

                    (e) [Intentionally Omitted.]

     4. The first sentence of Section 2.1(d) of the Agreement is hereby amended to read as follows: “Subject to the terms and conditions of this Agreement, Bank agrees to issue, or cause to be issued, letters of credit for the account of Borrower (each, a “Letter of Credit,” and collectively, the “Letters of Credit”) in an aggregate outstanding face amount not to exceed the amount of Advances available under Section 2.1(b)(i) at the time of any such issuance, provided that the aggregate face amount of all outstanding Letters of Credit shall not exceed $500,000 at any time.”

     5. Section 2.2 of the Agreement is hereby amended in its entirety to read as follows:

          2.2 [Intentionally Omitted.]

     6. Section 2.3(a)(i) of the Agreement is hereby amended in its entirety to read as follows:

                    (i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one half percent (0.5%) above the Prime Rate.

     7. The second and fourth paragraphs of Section 6.2 of the Agreement, labeled (a) and (c), are hereby amended to read as follows:

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                    (a) [Intentionally Omitted.]

                    (c) [Intentionally Omitted.]

     8. Section 6.7 of the Agreement is hereby amended in its entirety to read as follows:

               6.7 [Intentionally Omitted.]

     9. New Section 13 is hereby added to the Agreement to read as follows:

          13. REFERENCE PROVISION.

          If and only if the jury trial waiver set forth in Section 11 of this Agreement is invalidated for any reason by a court of law, statute or otherwise, the reference provisions set forth below shall be substituted in place of the jury trial waiver. So long as the jury trial waiver remains valid, the reference provisions set forth in this Section shall be inapplicable.

          (a) Each controversy, dispute or claim (each, a “Claim”) between the parties arising out of or relating to this Agreement, any security agreement executed by Borrower in favor of Bank, any note executed by Borrower in favor of Bank or any other document, instrument or agreement executed by Borrower with or in favor of Bank (collectively in this Section, the “Loan Documents”), other than (i) all matters in connection with nonjudicial foreclosure of security interests in real or personal property; or (ii) the appointment of a receiver or the exercise of other provisional remedies (any of which may be initiated pursuant to applicable law) that are not settled in writing within fifteen (15) days after the date on which a party subject to the Loan Documents gives written notice to all other parties that a Claim exists (the “Claim Date”) shall be resolved by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor sections (“CCP”), which shall constitute the exclusive remedy for the resolution of any Claim concerning the Loan Documents, including whether such Claim is subject to the reference proceeding. Except as set forth in this section, the parties waive the right to initiate legal proceedings against each other concerning each such Claim. Venue for these proceedings shall be in the Superior Court in the County where the real property, if any, is located or in a County where venue is otherwise appropriate under state law (the “Court”). By mutual agreement, the parties shall select a retired Judge of the Court to serve as referee, and if they cannot so agree within fifteen (15) days after the Claim Date, the Presiding Judge of the Court (or his or her representative) shall promptly select the referee. A request for appointment of a referee may be heard on an ex parte or expedited basis. The referee shall be appointed to sit as a temporary judge, with all the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP §170.6. Upon being selected, the referee shall (a) be requested to set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection and (b) if practicable, try any and all issues of law or fact and report a statement of decision upon them within ninety (90) days of the date of selection. The referee will have power to expand or limit the amount of discovery a party may employ. Any decision rendered by the referee will be final, binding and conclusive, and judgment shall be entered pursuant to CCP §644 in any court in the State of California having jurisdiction. The parties shall complete all discovery no later than fifteen (15) days before the first trial date established by the referee. The referee may extend such period in the event of a party’s refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to “priority” in conducting discovery. Either party may take depositions upon seven (7) days written notice, and shall respond to requests for production or inspection of documents within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding

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upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate.

          (b) Except as expressly set forth herein, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. Except for trial, all proceedings and hearings conducted before the referee shall be conducted without a court reporter unless a party requests a court reporter. The party making such a request shall have the obligation to arrange for and pay for the court reporter. Subject to the referee’s power to award costs to the prevailing party, the parties shall equally bear the costs of the court reporter at the trial and the referee’s expenses

          (c) The referee shall determine all issues in accordance with existing California case and statutory law. California rules of evidence applicable to proceedings at law will apply to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that shall be binding upon the parties. At the close of the reference proceeding, the referee shall issue a single judgment disposing of all the claims of the parties that are the subject of the reference. The parties reserve the right (i) to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee and (ii) to obtain findings of fact, conclusions of laws, and a written statement of decision, and (iii) to move for a new trial or a different judgment, which new trial, if granted, shall be a reference proceeding under this provision.

          (d) If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration conducted by a retired judge of the Court, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth in this Section shall apply to any such arbitration proceeding.

     10. The following defined terms are hereby added to or amended in Exhibit A to the Agreement to read as follows:

          “Committed Revolving Line” means a credit extension of up to Five Million Dollars ($5,000,000).

          “Credit Extension” means each Advance, Letter of Credit, or any other extension of credit by Bank for the benefit of Borrower hereunder.

     11. Exhibit E to the Agreement is hereby amended in its entirety to read as Exhibit E attached hereto.

     12. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement, except to the extent such security interest are being released pursuant to Section 17 above.

     13. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

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     14. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

     15. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

          (a) this Amendment, duly executed by Borrower;

          (b) Corporate Resolutions to Borrow;

          (c) Unconditional Guaranty with Corporate Resolutions to Guaranty;

          (d) disbursement instructions, an agreement to provide insurance, and auto-debit authorizations;

          (e) a nonrefundable amendment fee equal to $2,000 plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and

          (f) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

MANTAS, INC.
By:	/s/ Daniel R. Ilisivech
Title:	Chief Financial Officer
Name:	Daniel R. Ilisivech
COMERICA BANK
By:	/s/ Bradley Steele
Title:	First Vice President
Name:	Bradley Steele

4

EXHIBIT E
COMPLIANCE CERTIFICATE

TO:	COMERICA BANK
FROM:	MANTAS, INC.

The undersigned authorized officer of MANTAS, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending ___with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required		Complies
Monthly financial statements	Monthly within 30 days		Yes	No
Annual (CPA Audited)	FYE within 120 days		Yes	No
10K and 10Q	(as applicable)		Yes	No
IP Report	Quarterly within 30 days		Yes	No
New Contracts	Quarterly within 5 days		Yes	No
Financial Covenant	Required	Actual	Complies
None.

Comments Regarding Exceptions:   See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by: 

AUTHORIZED SIGNER

Date: 

Verified: 

AUTHORIZED SIGNER

Date: 

Compliance Status
  Yes                    No

5

EX-10.22.4

EXHIBIT 10.22.4

UNCONDITIONAL GUARANTY

     For and in consideration of the loan by COMERICA BANK, successor by merger to COMERICA BANK-CALIFORNIA (“Bank”) to MANTAS, INC. (“Borrower”), which loan is made pursuant to an Amended and Restated Loan and Security Agreement dated as of December 15, 2002, as amended from time to time, including without limitation by that certain First Amendment to Amended and Restated Loan and Security Agreement dated as of March 19, 2004 and that certain Second Amendment to Amended and Restated Loan and Security Agreement (the “Second Amendment”) dated as of the date hereof (collectively, the “Agreement”), and acknowledging that Bank would not enter into the Second Amendment without the benefit of this Guaranty, the undersigned SAFEGUARD DELAWARE, INC. (“Guarantor”) hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Borrower owes to Bank and performance by Borrower of the Agreement, in strict accordance with its respective terms. All terms used without definition in this Guaranty shall have the meaning assigned to them in the Agreement. Guarantor’s maximum liability under this Guaranty shall not exceed a principal amount of $5,000,000 plus interest and fees accrued in connection with the enforcement of the Agreement or this Guaranty.

     1. If Borrower does not pay any amount or perform its obligations in strict accordance with the Agreement, Guarantor shall immediately pay all amounts due thereunder (including, without limitation, all principal, interest, and fees) and otherwise to proceed to complete the same and satisfy all of Borrower’s obligations under the Agreement.

     2. If there is more than one guarantor, the obligations hereunder are joint and several, and whether or not there is more than one guarantor, the obligations hereunder are independent of the obligations of Borrower and any other person or entity, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or whether Borrower be joined in any such action or actions. Guarantor waives the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof, to the extent permitted by law. Guarantor’s liability under this Guaranty is not conditioned or contingent upon the genuineness, validity, regularity or enforceability of the Agreement.

     3. Guarantor authorizes Bank, without notice or demand and without affecting its liability hereunder, from time to time to (a) renew, extend, or otherwise change the terms of the Agreement or any part thereof; (b) take and hold security for the payment of this Guaranty or the Agreement, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as Bank in its sole discretion may determine.

     4. Guarantor waives any right to require Bank to (a) proceed against Borrower , any guarantor or any other person; (b) proceed against or exhaust any security held from Borrower; or (c) pursue any other remedy in Bank’s power whatsoever. Bank may, at its election, exercise or decline or fail to exercise any right or remedy it may have against Borrower or any security held by Bank, including without limitation the right to foreclose upon any such security by judicial or nonjudicial sale, without affecting or impairing in any way the liability of Guarantor hereunder. Guarantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower. Guarantor waives any setoff, defense or counterclaim that Borrower may have against Bank. Guarantor waives any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower. Until all of the amounts that Borrower owes to Bank have been paid in full, Guarantor shall have no right of subrogation or reimbursement, contribution or other rights against Borrower, and Guarantor waives any right to enforce any remedy that Bank now has or may hereafter have against Borrower. Guarantor waives all rights to participate in any security now or hereafter held by Bank. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness. Guarantor assumes the responsibility for being and keeping itself informed of the financial condition of Borrower and of all other circumstances bearing upon the risk of nonpayment of any indebtedness or nonperformance of any obligation of Borrower, warrants to Bank that it will keep so informed, and agrees that absent a request for particular information by Guarantor, Bank shall not have any duty to advise Guarantor of information known to Bank regarding such

condition or any such circumstances. Guarantor waives the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433.

     5. Guarantor acknowledges that, to the extent Guarantor has or may have certain rights of subrogation or reimbursement against Borrower for claims arising out of this Guaranty, those rights may be impaired or destroyed if Bank elects to proceed against any real property security of Borrower by non-judicial foreclosure. That impairment or destruction could, under certain judicial cases and based on equitable principles of estoppel, give rise to a defense by Guarantor against its obligations under this Guaranty. Guarantor waives that defense and any others arising from Bank’s election to pursue non-judicial foreclosure. Without limiting the generality of the foregoing, Guarantor waives any and all benefits and defenses under California Code of Civil Procedure Sections 580a, 580b, 580d and 726, to the extent they are applicable.

     6. If Borrower becomes insolvent or is adjudicated bankrupt or files a petition for reorganization, arrangement, composition or similar relief under any present or future provision of the United States Bankruptcy Code, or if such a petition is filed against Borrower, and in any such proceeding some or all of any indebtedness or obligations under the Agreement are terminated or rejected or any obligation of Borrower is modified or abrogated, or if Borrower’s obligations are otherwise avoided for any reason, Guarantor agrees that Guarantor’s liability hereunder shall not thereby be affected or modified and such liability shall continue in full force and effect as if no such action or proceeding had occurred. This Guaranty shall continue to be effective or be reinstated, as the case may be, if any payment must be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other guarantor, or otherwise, as though such payment had not been made.

     7. Any indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to any indebtedness of Borrower to Bank; and such indebtedness of Borrower to Guarantor shall be collected, enforced and received by Guarantor as trustee for Bank and be paid over to Bank on account of the indebtedness of Borrower to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty.

     8. Upon Bank’s request, Guarantor agrees to complete and sign a financial statement on Bank’s form. Guarantor agrees to pay reasonable attorneys’ fees and all other costs and expenses which may be incurred by Bank in the enforcement of this Guaranty. No terms or provisions of this Guaranty may be changed, waived, revoked or amended without Bank’s prior written consent. Should any provision of this Guaranty be determined by a court of competent jurisdiction to be unenforceable, all of the other provisions shall remain effective. This Guaranty, together with any agreements (including without limitation any security agreements or any pledge agreements) executed in connection with this Guaranty, embodies the entire agreement among the parties hereto with respect to the matters set forth herein, and supersedes all prior agreements among the parties with respect to the matters set forth herein. No course of prior dealing among the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty. Bank may assign this Guaranty without in any way affecting Guarantor’s liability under it. This Guaranty shall inure to the benefit of Bank and its successors and assigns. This Guaranty is in addition to the guaranties of any other guarantors and any and all other guaranties of Borrower’s indebtedness or liabilities to Bank.

     9. Guarantor represents and warrants to Bank that (i) Guarantor has taken all necessary and appropriate action to authorize the execution, delivery and performance of this Guaranty, (ii) execution, delivery and performance of this Guaranty do not conflict with or result in a breach of or constitute a default under Guarantor’s Certificate of Incorporation or Bylaws or other organizational documents or agreements to which it is party or by which it is bound, and (iii) this Guaranty constitutes a valid and binding obligation, enforceable against Guarantor in accordance with its terms.

     10. Guarantor covenants and agrees that Guarantor shall do all of the following:

          10.1. Guarantor shall maintain its corporate existence, remain in good standing in the state of its incorporation, and continue to qualify in each jurisdiction in which the failure to so qualify could have a material adverse effect on the financial condition, operations or business of Guarantor. Guarantor shall maintain in force all licenses, approvals and agreements, the loss of which could have a material adverse effect on its financial condition, operations or business.

          10.2. Guarantor shall comply with all statutes, laws, ordinances, directives, orders, and government rules and regulations to which it is subject if non-compliance with such laws could adversely affect the financial condition, operations or business of Guarantor.

          10.3. At any time and from time to time Guarantor shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Guaranty.

     11. This Guaranty shall be governed by the laws of the State of California, without regard to conflicts of laws principles. GUARANTOR WAIVES ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. Guarantor submits to the exclusive jurisdiction of the state and federal courts located in Santa Clara County, California for purposes of this Guaranty and the Agreement

     12. Guarantor represents and warrants to Bank that (i) it is the General Partner of Safeguard 99 Capital L.P., Safeguard 2000 Capital L.P. and Safeguard 2001 Capital L.P., all of which own capital stock of Borrower and (ii) the financial statements of Guarantor and its Affiliates provided to Bank are true and correct in all material respects.

     13. By acceptance of this Guaranty, Bank agrees that it will not make Credit Extensions to Borrower under the Agreement in excess of a principal amount of $5,000,000. If Bank makes any Credit Extensions in excess of such amount, this Guaranty shall be valid only to the extent of Credit Extensions in a principal amount of $5,000,000 plus interest and fees.

     14. Reference Provision. If and only if the jury trial waiver set forth in Section 11 of this Agreement is invalidated for any reason by a court of law, statute or otherwise, the reference provisions set forth below shall be substituted in place of the jury trial waiver. So long as the jury trial waiver remains valid, the reference provisions set forth in this Section shall be inapplicable.

          14.1. Each controversy, dispute or claim (each, a “Claim”) between the parties arising out of or relating to this Agreement, any security agreement executed by Guarantor in favor of Bank, any note executed by Guarantor in favor of Bank or any other document, instrument or agreement executed by Guarantor with or in favor of Bank (collectively in this Section, the “Loan Documents”), other than (i) all matters in connection with nonjudicial foreclosure of security interests in real or personal property; or (ii) the appointment of a receiver or the exercise of other provisional remedies (any of which may be initiated pursuant to applicable law) that are not settled in writing within fifteen (15) days after the date on which a party subject to the Loan Documents gives written notice to all other parties that a Claim exists (the “Claim Date”) shall be resolved by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor sections (“CCP”), which shall constitute the exclusive remedy for the resolution of any Claim concerning the Loan Documents, including whether such Claim is subject to the reference proceeding. Except as set forth in this section, the parties waive the right to initiate legal proceedings against each other concerning each such Claim. Venue for these proceedings shall be in the Superior Court in the County where the real property, if any, is located or in a County where venue is otherwise appropriate under state law (the “Court”). By mutual agreement, the parties shall select a retired Judge of the Court to serve as referee, and if they cannot so agree within fifteen (15) days after the Claim Date, the Presiding Judge of the Court (or his or her representative) shall promptly select the referee. A request for appointment of a referee may be heard on an ex parte or expedited basis. The referee shall be appointed to sit as a temporary judge, with all the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP §170.6. Upon being selected, the referee shall (a) be requested to set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection and (b) if practicable, try any and all issues of law or fact and report a statement of decision upon them within ninety (90) days of the date of selection. The referee will have power to expand or limit the amount of discovery a party may employ. Any decision rendered by the referee will be final, binding and conclusive, and judgment shall be entered pursuant to CCP §644 in any court in the State of California having jurisdiction. The parties shall complete all discovery no later than fifteen (15) days before the first trial date established by the referee. The referee may extend such period in the event of a party’s refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such

discovery or unavailability of a witness due to absence or illness. No party shall be entitled to “priority” in conducting discovery. Either party may take depositions upon seven (7) days written notice, and shall respond to requests for production or inspection of documents within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate.

          14.2. Except as expressly set forth herein, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. Except for trial, all proceedings and hearings conducted before the referee shall be conducted without a court reporter unless a party requests a court reporter. The party making such a request shall have the obligation to arrange for and pay for the court reporter. Subject to the referee’s power to award costs to the prevailing party, the parties shall equally bear the costs of the court reporter at the trial and the referee’s expenses.

          14.3. The referee shall determine all issues in accordance with existing California case and statutory law. California rules of evidence applicable to proceedings at law will apply to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that shall be binding upon the parties. At the close of the reference proceeding, the referee shall issue a single judgment at disposing of all the claims of the parties that are the subject of the reference. The parties reserve the right (i) to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee and (ii) to obtain findings of fact, conclusions of laws, a written statement of decision, and (iii) to move for a new trial or a different judgment, which new trial, if granted, shall be a reference proceeding under this provision.

          14.4. If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration conducted by a retired judge of the Court, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth in this Section shall apply to any such arbitration proceeding.

     IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of March 31, 2004.

SAFEGUARD DELAWARE, INC.
By:	/s/ Christopher J. Davis
Title:	Vice President

EX-10.22.6

Exhibit 10.22.6

FOURTH AMENDMENT
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

     This Fourth Amendment to Amended and Restated Loan and Security Agreement is entered into as of March 14, 2005 (the “Amendment”), by and between COMERICA BANK, successor by merger to Comerica Bank — California (“Bank”) and MANTAS, INC. (“Borrower”).

RECITALS

     Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of December 15, 2002, as amended, including without limitation by that certain Loan Extension dated as of December 14, 2003, that certain First Amendment to Amended and Restated Loan and Security Agreement dated as of March 19, 2004, that certain Second Amendment to amended and Restated Loan and Security Agreement dated as of March 31, 2004 and that certain Third Amendment to Amended and Restated Loan and Security Agreement dated as of January 28, 2005 (collectively, the “Agreement”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

     NOW, THEREFORE, the parties agree as follows:

     1. The first sentence of Section 2.1(b)(i) of the Agreement is hereby amended to read as follows: “Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base minus, in each case, the aggregate face amount of all outstanding Letters of Credit.”

     2. Section 2.2 of the Agreement is hereby amended in its entirety to read as follows:

2.2 Overadvances. If, at any time, the aggregate amount of the outstanding Advances exceeds the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base minus, in each case, the aggregate face amount of all outstanding Letters of Credit, Borrower shall immediately pay to Bank, in cash, the amount of such excess.

     3. A new Section 2.8 is hereby added to the Agreement to read as follows:

2.8 Lockbox. As of June 14, 2005 and at all times thereafter, Borrower shall cause all remittances made by any account debtor for any Accounts to be made to a lock box (the “Lockbox”) maintained with Bank. Unless otherwise directed by Bank in writing, all invoices and other instructions submitted by Borrower to an account debtor relating to Account payments shall designate the Lockbox as the place to which such payments shall be made. Notwithstanding anything to the contrary contained in this Agreement, “Revolving Line” shall mean a credit extension of up to $3,500,000 until such time as Borrower has caused all remittances made by any account debtor for any Accounts to be made to the Lockbox.

     4. Section 5.3 of the Agreement is hereby amended in its entirety to read as follows:

5.3 Collateral and Bona Fide Eligible Accounts. Borrower has good title to the Collateral, free and clear of Liens, except for Permitted Liens. The Eligible Accounts are bona fide existing obligations. The property and services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or to the account debtor’s agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. All Inventory is in all material respects of

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good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made.

     5. The second and fourth paragraphs of Section 6.2 of the Agreement, labeled (a) and (c), are hereby amended to read as follows:

     (a) Within twenty (20) days after the last day of each month and with each request for a Credit Extension which brings the aggregate outstanding balance of all Credit Extensions in excess of $3,500,000, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable of Borrower and Sotas.

     (c) Bank shall have a right from time to time hereafter to audit Borrower’s Accounts and appraise Collateral at Borrower’s expense, provided that such audits will be conducted no more often than every six (6) months, unless an Event of Default has occurred and is continuing. The obligation of Bank to make each Credit Extension is subject to the condition that Bank shall have obtained results satisfactory to Bank of an audit and appraisal of Borrower’s Accounts and Collateral within the six (6) months prior to such Credit Extension. The obligation of Bank to make the next Credit Extension after March 14, 2005 which brings the aggregate balance of the outstanding Credit Extensions in excess of $3,500,000 is subject to the condition that Bank shall have obtained results satisfactory to Bank of such an audit.

     6. Section 6.6 of the Agreement is hereby amended in its entirety to read as follows:

     6.6 Primary Depository. On or before May 14, 2005, all Borrower’s accounts at Sun Trust shall be closed, and Borrower shall thereafter maintain all payroll, depository, and operating accounts with Bank.

     7. Section 6.7(a) of the Agreement is hereby amended in its entirety to read as follows:

     6.7 Financial Covenants.

     (a) Quick Ratio. Borrower shall maintain at all times, a ratio of Quick Assets to Current Liabilities plus, to the extent not already included therein, all Indebtedness (including without limitation any Contingent Obligations) owing from Borrower to Bank, less deferred revenue, of at least 1.40 to 1.00. The portion of Borrower’s Quick Assets made up of unrestricted cash shall not be less than Two Million Dollars ($2,000,000) at any time and shall be maintained with Bank. Borrower authorizes Bank to decline to honor any checks, drafts or other items of payment or directions to wire or otherwise transfer funds from Bank if, after giving effect to the payment of any such item or pursuant to such transfer request, Borrower would not be in compliance with this Section 6.7(a).

     8. Section 6.7(b) of the Agreement is hereby amended to read as follows:

     (b) [Intentionally Omitted.]

     9. Section 6.7(c) is hereby added to Section 6.7 of the Agreement to read as follows:

     (c) EBITDA. Borrower shall maintain at all times during which the aggregate amount of all outstanding Credit Extensions is greater than $3,500,000, an EBITDA for the periods set forth on Schedule 1 attached hereto and incorporated herein by reference, in an amount no less than the amount set forth below the corresponding period on Schedule 1. As used herein, “EBITDA” means Borrower’s net income plus interest, taxes, depreciation, amortization and non-cash stock compensation expenses.

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     10. A new paragraph is hereby added to the end of Section 6.7 to read as follows: “Borrower shall only be required to comply with Sections 6.7(a) and 6.7(c) (the “Financial Covenants”) when the aggregate balance of the outstanding Credit Extensions is in excess of $3,500,000. It shall be a condition precedent to Borrower’s request of any Credit Extension which would bring the aggregate balance of the outstanding Credit Extensions in excess of $3,500,000 that Borrower be in compliance with the Financial Covenants on the date of such request and on a pro forma basis for the month ended immediately prior to such request. Borrower shall have the ability to cure any failure to comply with a Financial Covenant by immediately repaying such Credit Extensions as are necessary to bring the aggregate balance of the outstanding Credit Extensions to an amount which is $3,500,000 or less provided that, notwithstanding anything to the contrary contained in this Agreement, unless otherwise agreed to by Bank in writing, thereafter, “Revolving Line” shall mean a credit extension of up to $3,500,000.”

     11. The following defined terms are hereby amended in Exhibit A to the Agreement to read as follows:

               “Borrowing Base” means an amount (the “Formula”) equal to (i) $3,500,000 plus (ii) eighty percent (80%) of Eligible Accounts plus an amount equal to the lesser of (i) sixty percent (60%) of Eligible Exception Accounts, or (ii) $2,000,000, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower, provided that Bank may modify the Formula from time to time based upon receipt of the results of an audit of Borrower’s or Sotas’ Accounts.

               “Committed Revolving Line” means a credit extension of up to Seven Million Dollars ($7,000,000).

               “Eligible Accounts” means those billed Accounts of Borrower or Sotas that arise in the ordinary course of Borrower’s and Sotas’ business, that are paid into the Lockbox, and that comply with all of Borrower’s representations and warranties to Bank set forth in Section 5.3; provided, that Bank may change the standards of eligibility by giving Borrower thirty (30) days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

               (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date;

               (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;

               (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower or Sotas;

               (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional;

               (e) Accounts with respect to which the account debtor is an Affiliate of Borrower or Sotas;

               (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts;

               (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727);

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               (h) Accounts with respect to which Borrower or Sotas is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower or Sotas (including without limitation invoices for down payments for deployment services and licenses), but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower or Sotas;

               (i) Accounts with respect to an account debtor (to which (j) does not apply), including Subsidiaries and Affiliates, whose total obligations to Borrower or Sotas exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

               (j) Accounts with respect to a domestic account debtor, including Subsidiaries and Affiliates, whose credit rating is at least Baa1/BBB+ from either Standard & Poor’s Corporation or Moody’s Investors Service and whose total obligations to Borrower or Sotas exceed thirty five percent (35%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

               (k) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business;

               (l) Credit balances over 90 days from invoice date; and

               (m) Accounts the collection of which Bank reasonably determines after inquiry and consultation with Borrower or Sotas to be doubtful.

               “Eligible Exception Accounts” means those Accounts, including certain foreign receivables with investment grade ratings which are not insured or supported by letters of credit, advanced billed account receivables and progress billed account receivables, that Bank determines in its sole discretion to lend against which would not otherwise be Eligible Accounts or Eligible Foreign Accounts.

               “Revolving Maturity Date” means January 31, 2006.

               “Sotas” means Sotas, Inc.

12. A new Section 13 is hereby added to the Agreement to read as follows:

13. REFERENCE PROVISION. The parties prefer that any dispute between them be resolved in litigation subject to a Jury Trial Waiver as set forth in Section 11 of this Agreement, but the availability of that process is in doubt because of the opinion of the California Court of Appeal in Grafton Partners LP v. Superior Court, 9 Cal.Rptr.3d 511. This Reference Provision will be applicable until the California Supreme Court completes its review of that case, and will continue to be applicable if either that court or a California Court of Appeal publishes a decision holding that a pre-dispute Jury Trial Waiver provision similar to that contained in the Loan Documents is invalid or unenforceable. Delay in requesting appointment of a referee pending review of any such decision, or participation in litigation pending review, will not be deemed a waiver of this Reference Provision.

13.1 Mechanics.

     (i) Other than (i) nonjudicial foreclosure of security interests in real or personal property, (ii) the appointment of a receiver or (iii) the exercise of other provisional remedies (any of which may be initiated pursuant to applicable law), any controversy, dispute or claim (each, a “Claim”) between the

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parties arising out of or relating to this Agreement or any other document, instrument or agreement between the Bank and the undersigned (collectively in this Section, the “Loan Documents”), will be resolved by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure (“CCP”), or their successor sections, which shall constitute the exclusive remedy for the resolution of any Claim, including whether the Claim is subject to the reference proceeding. Except as otherwise provided in the Loan Documents, venue for the reference proceeding will be in the Superior Court or Federal District Court in the County or District where venue is otherwise appropriate under applicable law (the “Court”).

     (ii) The referee shall be a retired Judge or Justice selected by mutual written agreement of the parties. If the parties do not agree, the referee shall be selected by the Presiding Judge of the Court (or his or her representative). A request for appointment of a referee may be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would result if ex parte relief is not granted. The referee shall be appointed to sit with all the powers provided by law. Each party shall have one peremptory challenge pursuant to CCP §170.6. Pending appointment of the referee, the Court has power to issue temporary or provisional remedies.

     (iii) The parties agree that time is of the essence in conducting the reference proceedings. Accordingly, the referee shall be requested to (a) set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection of the referee, (b) if practicable, try all issues of law or fact within ninety (90) days after the date of the conference and (c) report a statement of decision within twenty (20) days after the matter has been submitted for decision. Any decision rendered by the referee will be final, binding and conclusive, and judgment shall be entered pursuant to CCP §644.

     (iv) The referee will have power to expand or limit the amount and duration of discovery. The referee may set or extend discovery deadlines or cutoffs for good cause, including a party’s failure to provide requested discovery for any reason whatsoever. Unless otherwise ordered, no party shall be entitled to “priority” in conducting discovery, depositions may be taken by either party upon seven (7) days written notice, and all other discovery shall be responded to within fifteen (15) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding.

13.2 Procedures. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee, and the referee will be provided a courtesy copy of the transcript. The party making such a request shall have the obligation to arrange for and pay the court reporter. Subject to the referee’s power to award costs to the prevailing party, the parties will equally share the cost of the referee and the court reporter at trial.

13.3 Application of Law. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, provide all temporary or provisional remedies, enter equitable orders that will be binding on the parties and rule on any motion which would be authorized in a trial, including without limitation motions for summary judgment or summary adjudication . The referee shall issue a decision at the close of the reference proceeding which disposes of all claims of the parties that are the subject of the reference. The referee’s decision shall be entered by the Court as a judgment or an order in the same manner as if the action had been tried by the Court. The parties reserve the right to appeal from the final judgment or order or from any appealable decision or order entered by the referee. The parties reserve the right to findings of fact, conclusions of laws, a written statement of

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decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision.

13.4 Repeal. If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by reference procedure will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge or Justice, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery set forth above shall apply to any such arbitration proceeding.

13.5 THE PARTIES RECOGNIZE AND AGREE THAT ALL DISPUTES RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY, AND THAT THEY ARE IN EFFECT WAIVING THEIR RIGHT TO TRIAL BY JURY IN AGREEING TO THIS REFERENCE PROVISION. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY DISPUTE BETWEEN THEM WHICH ARISES OUT OF OR IS RELATED TO THIS AGREEMENT OR THE LOAN DOCUMENTS.

        13. Schedule 1 is hereby added to and incorporated by this reference into the Agreement to read as Schedule 1 attached hereto.

        14. Exhibit D to the Agreement is hereby amended in its entirety to read as Exhibit D attached hereto.

        15. Exhibit E to the Agreement is hereby amended in its entirety to read as Exhibit E attached hereto.

        16. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement, except to the extent such security interest are being released pursuant to Section 17 below.

        17. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

        18. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

        19. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

            (a) this Amendment, duly executed by Borrower;

            (b) Affirmation and Amendment to Guaranty (Safeguard);

            (c) Affirmation of Guaranty (Sotas);

            (d) disbursement instructions, agreement to provide insurance, and automatic debit authorization;

            (e) good standing certificates for Sotas issued by each of the Virginia Secretary of State, the Delaware Secretary of State and the Maryland Secretary of State on or before April 14, 2005;

6

            (f) a nonrefundable amendment fee equal to $3,000 plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and

            (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

MANTAS, INC.
By:	/s/ Daniel Ilisivech
Title:	CFO
Name:	Daniel Ilisivech
COMERICA BANK
By:	/s/ Joseph Crayton
Title:	Vice President
Name:	Joseph Crayton

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EXHIBIT D

BORROWING BASE CERTIFICATE

Borrower: MANTAS, INC.	Lender: Comerica Bank
Commitment Amount: $7,000,000

ACCOUNTS RECEIVABLE (MANTAS, INC.)
	1.	Accounts Receivable Book Value as of ___		$
	2.	Additions (please explain on reverse)		$
	3.	TOTAL ACCOUNTS RECEIVABLE (MANTAS, INC.)		$
ACCOUNTS RECEIVABLE (SOTAS, INC.)
	4.	Accounts Receivable Book Value as of ___		$
	5.	Additions (please explain on reverse)		$
	6.	TOTAL ACCOUNTS RECEIVABLE (SOTAS, INC.)		$
ACCOUNTS RECEIVABLE (MANTAS, INC. and SOTAS, INC.)
	7.	TOTAL ACCOUNTS RECEIVABLE (MANTAS, INC. and SOTAS, INC.) (#3 plus #6)		$
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
	8.	Amounts over 90 days due	$
	9.	Balance of 25% over 90 day accounts	$
	10.	Concentration Limits
	11.	Foreign Accounts	$
	12.	Governmental Accounts	$
	13.	Contra Accounts	$
	14.	Demo Accounts	$
	15.	Intercompany/Employee Accounts	$
	16.	Other (please explain on reverse)	$
	17.	TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS		$
	18.	Eligible Accounts (#7 minus #17)		$
	19.	Eligible Exception Accounts (no greater than $2,000,000)		$
	20.	LOAN VALUE OF ACCOUNTS (80% of #18 plus 60% of #19)		$
BALANCES
	21.	Maximum Loan Amount		$
	22.	Total Funds Available [Lesser of #21 or #20 plus $3,500,000]		$
	23.	Present balance owing on Line of Credit		$
	24.	Outstanding under Sublimits (Letters of Credit)		$
	25.	RESERVE POSITION (#22 minus #23 and #24)		$

The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Amended and Restated Loan and Security Agreement between the undersigned and Comerica Bank.

MANTAS, INC.
By:
	Authorized Signer

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EXHIBIT E
COMPLIANCE CERTIFICATE

TO: COMERICA BANK
FROM: MANTAS, INC.

The undersigned authorized officer of MANTAS, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending ________with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required	Complies
Monthly financial statements	Monthly within 30 days	Yes	No
Annual (CPA Audited)	FYE within 120 days	Yes	No
10K and 10Q	(as applicable)	Yes	No
A/R & A/P Agings, Borrowing Base Cert.	Monthly within 20 days w/Advances of $3,500,000 or greater	Yes	No
A/R Audit	Initial, prior to borrowing under formula portion of Borrowing Base and Semi-annual	Yes	No
IP Report	Quarterly within 30 days	Yes	No
Projections	11/30/05	Yes	No

Financial Covenants	Required			Actual		Applicable		Complies
(required when Advances exceed $3,500,000)
Minimum Quick Ratio		1.40:1.00	*		____:1.00		N/A	Yes	No
EBITDA		*	*	$	—		N/A	Yes	No

*Including at least $2,000,000 in unrestricted cash. The accounts receivable portion of the Minimum Quick Ratio shall be calculated based on reports prepared by Borrower, not Borrower’s auditors (grosses down A/R and deferred revenues).

**See Schedule 1

Comments Regarding Exceptions: See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

BANK USE ONLY

Received by:

AUTHORIZED SIGNER

Date:

Verified:

AUTHORIZED SIGNER

Date:

Compliance Status Yes No

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EX-14

EXHIBIT 14

SAFEGUARD SCIENTIFICS, INC.
CODE OF CONDUCT

I.   Background — Administration

The reputation and integrity of Safeguard Scientifics, Inc. is a valuable asset that is vital to our success. This Code of Conduct (“Code”) is applicable to Safeguard Scientifics, Inc. and each of its subsidiaries (exclusive of any publicly traded subsidiary that has adopted its own code of conduct in accordance with the regulations of the Securities and Exchange Commission (“SEC”) or the listing standards of any self-regulatory organization (“SRO”)). At the time this Code was adopted, the subsidiaries subject to this Code included the following entities: Alliance Consulting Group Associates, Inc., Mantas, Inc. and Pacific Title & Art Studio, Inc. Any entity that subsequently becomes a subsidiary of Safeguard Scientifics, Inc. shall automatically be subject to this Code unless it has adopted its own code of conduct in a form which is acceptable to Safeguard Scientifics, Inc. or is otherwise required by any relevant SEC regulations or SRO listing standards. Safeguard Scientifics, Inc. and its subsidiaries are collectively referred to in this Code as “Safeguard.”

Each Safeguard employee, including each of Safeguard’s officers, and each Safeguard director is responsible for conducting Safeguard’s business in a manner that demonstrates a commitment to the highest standards of integrity. This Code, which applies to all directors, officers and employees of Safeguard Scientifics, Inc. and its subsidiaries (collectively referred to as “Safeguard Personnel”), has been adopted to help Safeguard Personnel meet these standards. Specifically, the purpose of this Code is to:

•   encourage among Safeguard Personnel a culture of honesty, accountability and mutual respect;

•   provide guidance to help Safeguard Personnel recognize and deal with ethical issues; and

•   provide mechanisms for Safeguard Personnel to report alleged unethical conduct.

While this Code is designed to provide helpful guidelines, it is not intended to address every specific situation. Nevertheless, in every instance, we require that Safeguard Personnel act honestly, fairly and with a view towards “doing the right thing.” Therefore, dishonest or unethical conduct or conduct that is illegal will constitute a violation of this Code, regardless of whether such conduct is specifically referenced in this Code.

The Safeguard Scientifics, Inc. Board of Directors (“Safeguard Board”) is ultimately responsible for the implementation of the Code. The Safeguard Board has designated Deirdre Blackburn to be the compliance officer (the “Compliance Officer”) for the implementation and administration of the Code. Safeguard Personnel should feel free to direct questions concerning this Code to the Compliance Officer:

Safeguard Scientifics, Inc.
Attention: Compliance Officer
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
e-mail address: complianceofficer@safeguard.com

II.   Overview

It is the policy of Safeguard to: (a) comply with all applicable governmental laws, rules and regulations; (b) expect that all Safeguard Personnel at all times observe honest and ethical conduct in the performance of Safeguard’s related responsibilities, including the avoidance of conflicts of interest; (c) expect all Safeguard Personnel to treat others with dignity, including other employees, shareholders, customers and vendors; and (d) encourage and support internal disclosure of any violation of this Code for appropriate action.

The Code governs the business-related conduct of all Safeguard Personnel, including, but not limited to, the chief executive officer, chief financial officer and all other officers of Safeguard. The Code only applies to directors insofar as it relates to their roles as directors.

III.   Compliance With Law

A variety of laws apply to Safeguard and its operations. Safeguard Personnel are expected to comply with all such laws, as well as rules and regulations adopted under such laws. Examples of criminal violations under these laws include:

•   stealing, embezzling or misapplying corporate or bank funds;

•   using threats, physical force or other unauthorized means to collect money;

•   making false entries in the books and records of Safeguard, or engaging in any conduct that results in the making of such false entries;

•   making a payment for an expressed purpose on Safeguard’s behalf to an individual who intends to use it for a different purpose;

•   utilizing Safeguard’s funds or other assets or services to make a political contribution or expenditure; and

•   making payments, whether corporate or personal, of cash or other items of value that are intended to influence the judgment or actions of political candidates, government officials or businesses in connection with any of Safeguard’s activities.

Safeguard must and will report all suspected criminal violations to the appropriate authorities for possible prosecution and will investigate, address and report, as appropriate, non-criminal violations.

IV.   Conflicts of Interest

Safeguard Personnel are expected to make or participate in business decisions and actions in the course of their employment with Safeguard based on the best interests of Safeguard as a whole,

2

and not based on personal relationships or benefits. A conflict of interest, which can occur or appear to occur in a wide variety of situations, can compromise the business ethics of Safeguard Personnel. Generally speaking, a conflict of interest occurs when the personal interest of Safeguard Personnel or members of their immediate family interferes with, or has the potential to interfere with, the interests or business of Safeguard. For example, a conflict of interest may occur where an employee or a family member receives a gift, a unique advantage, or an improper personal benefit as a result of the employee’s position at Safeguard. A conflict of interest could make it difficult for such person to perform corporate duties objectively and effectively because they are involved in a competing interest. The following is a discussion of certain common areas that raise conflict of interest issues. However, a conflict of interest can occur in a variety of situations. You must be alert to recognize any situation that may raise conflict of interest issues and must disclose to the Compliance Officer any transaction or relationship that reasonably could be expected to give rise to actual or apparent conflicts of interest with Safeguard.

Outside Activities/Employment – Any outside activity must not significantly encroach on the time and attention Safeguard Personnel devote to their corporate duties and should not adversely affect the quality or quantity of their work. In addition, Safeguard Personnel may not make use of corporate equipment, facilities or supplies, or imply (without Safeguard’s approval) Safeguard’s sponsorship or support of any outside activity, and under no circumstances are Safeguard Personnel permitted to take for themselves or their family members business opportunities that are discovered or made available by virtue of their positions at Safeguard. Moreover, Safeguard Personnel may not perform services for or, except as noted in the following paragraph, have a financial interest in any entity that is or to such person’s knowledge may become, a vendor, customer or competitor of Safeguard. Safeguard Personnel are prohibited from taking part in any outside employment without Safeguard’s prior written approval.

Safeguard Personnel generally may have a passive investment in up to five percent of the total outstanding shares of an entity that is listed on a national or international exchange, or quoted on Nasdaq, the OTC Bulletin Board or a similar quotation service, provided that the investment is not so large financially either in absolute dollars or as a percentage of the person’s total net worth that it creates the appearance of a conflict of interest.

Directors of Safeguard may include persons of diversified business interests who may seek business relationships with Safeguard or who may be associated with, or have business or financial interests in, corporations or other business entities which, from time to time, have business dealings with Safeguard or which may compete with Safeguard. These relationships and interests are not prohibited. However, any Safeguard director who has such an actual or potential conflict of interest should promptly disclose the relevant facts to the Chairman of the Safeguard Board. The Chairman shall refer such matter to the full Safeguard Board or an appropriately authorized committee of the Safeguard Board for consideration and appropriate disposition.

Civic/Political Activities – Safeguard Personnel are encouraged to participate in civic, charitable or political activities so long as such participation does not encroach on the time and attention they are expected to devote to their company-related duties. Such activities are to be conducted

3

in a manner that does not involve Safeguard or its assets or facilities and does not create an appearance of Safeguard’s involvement or endorsement.

Inventions, Books and Publications – Safeguard Personnel must receive written permission from the Compliance Officer before developing, outside of Safeguard, any products, software or intellectual property that may be related to Safeguard’s current or potential business.

Proper Payments – Safeguard Personnel should pay for and receive only that which is proper. Safeguard Personnel should not make or promise payments to influence another’s acts or decisions, and Safeguard Personnel must not give gifts beyond those extended in normal business.

Gifts – Safeguard Personnel and members of their families must not give or receive valuable gifts (including gifts of equipment or money, discounts, or favored personal treatment) to or from any person associated with Safeguard’s vendors or customers. Acceptance of a gift in the nature of a memento, such as a conference gift or other inconsequential gift valued at less than one hundred dollars ($100), is permitted. Engaging in normal occasional business-related entertainment, such as meals or the use of sporting, theatrical or other public event tickets, is permissible with the understanding that it is expected Safeguard Personnel will exercise sound judgment in reliance on this exception so as to avoid any situation that may otherwise be subject to question.

Loans to Directors and Employees – Safeguard will not make loans or extend credit guarantees to or for the personal benefit of directors and executive officers except as permitted by law and the listing standards of any exchange or quotation system on which Safeguard common stock is listed. Loans or guarantees may be extended to other employees only with the prior written approval of the Chief Financial Officer of Safeguard Scientifics, Inc.

Insider Trading – Safeguard Personnel are prohibited from trading in securities while in possession of material inside information. Among other things, trading while in possession of material inside information can subject the person to criminal or civil penalties. Safeguard’s STATEMENT OF COMPANY POLICY—Securities Trading by Company Personnel is attached hereto as Exhibit A and incorporated by reference into this Code.

V.   Fair Dealing

Safeguard Personnel should deal fairly and in good faith with Safeguard’s other employees, customers, suppliers, regulators, business partners and others. Safeguard Personnel may not take unfair advantage of anyone through manipulation, misrepresentation, inappropriate threats, fraud, abuse of confidential information or other related conduct.

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VI.   Proper Use of Safeguard Assets

Safeguard assets, including facilities, materials, supplies, time, information, intellectual property, software, and other assets owned or leased by Safeguard, or that are otherwise in Safeguard’s possession, may be used only for legitimate business purposes. The personal use of Safeguard’s assets without Safeguard’s approval is prohibited.

VII.   Delegation of Authority

Safeguard Personnel, and particularly each of Safeguard’s officers and other managerial employees, must exercise due care to ensure that any delegation of authority is reasonable and appropriate in scope and includes appropriate and continuous monitoring.

VIII.   Handling Confidential Information

Safeguard Personnel should observe the confidentiality of information that they acquire by virtue of their affiliation with or employment by Safeguard, including information concerning customers, vendors, competitors and other employees, except where disclosure is approved by Safeguard or otherwise legally mandated. Of special sensitivity is financial information, which should under all circumstances be considered confidential except where its disclosure is approved by Safeguard, or after two full business days following its disclosure in a press release or a report filed with the SEC. In addition, Safeguard Personnel must safeguard proprietary information, which includes information that is not generally known to the public and has commercial value in Safeguard’s business. Proprietary information includes, among other things, software programs, source and object codes, trade secrets, ideas, techniques, inventions (whether patentable or not) and other information relating to designs, algorithms and research. It also includes information relating to marketing, pricing, customers, and terms of compensation for Safeguard Personnel. The obligation to preserve proprietary information continues even after employment ends.

IX.   Public Disclosures

Safeguard must ensure that all its filings and submissions with the SEC and other public communications provide full, fair, timely, accurate and understandable disclosure. Safeguard Personnel engaged in the preparation of these filings, submissions and communications (“Public Disclosure Personnel”) must endeavor to ensure that Safeguard’s filings, submissions, and communications meet these objectives. Depending on their duties and responsibilities, other employees may be called upon to provide information to assure that Safeguard’s reports are complete, fair and understandable. Safeguard Personnel are expected to take this responsibility very seriously. If requested by Public Disclosure Personnel to provide information for use in such filings, submissions or communications, Safeguard Personnel will provide, as promptly as practicable, accurate, understandable and complete information on a timely basis.

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X.   Special Ethics Guidelines for Executive, Financial and Legal Officers

In the performance of their duties, Safeguard’s Executive, Financial and Legal Officers, as designated by Safeguard Scientifics, Inc. from time to time, bear a special responsibility for promoting integrity throughout the organization, with responsibilities to Safeguard shareholders. The Executive, Financial and Legal Officers have a special role both to adhere to these principles themselves and also to ensure that a culture exists throughout Safeguard as a whole that ensures the fair and timely reporting of Safeguard financial results and condition, as well as other information required by SEC regulations.

Because of this special role, Safeguard’s Executive, Financial and Legal Officers are bound by the following Code of Ethics. Each Executive, Financial and Legal Officer will:

•   act with honesty and integrity, avoiding actual or apparent conflicts of interest with Safeguard (or any subsidiary or other affiliate thereof) in personal and professional relationships;

•   provide to Safeguard’s other employees, consultants and advisors who are engaged in filing reports and documents with the SEC (“SEC Reports”) or in disseminating other public communications such as press releases, information that is accurate, complete, relevant, timely and understandable;

•   endeavor to ensure full, fair, timely, accurate and understandable disclosure in SEC Reports;

•   comply with laws, rules and regulations of federal, state and local governments, and appropriate self-regulatory organizations;

•   act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgment to be subordinated;

•   respect the confidentiality of information acquired in the course of one’s work except when authorized or otherwise legally obligated to disclose;

•   refrain from using confidential information acquired in the course of employment for personal advantage;

•   proactively promote and be an example of ethical behavior as a responsible partner among peers in the work environment;

•   achieve responsible use of and control over all assets and resources employed or entrusted;

•   record or participate in the recording of entries in Safeguard’s books and records that are accurate to the best of his or her knowledge;

6

•   promptly report to the Compliance Officer and/or the Chair of the Audit Committee any conduct that he or she believes to be a violation of law or business ethics or of any provision of the Code of Ethics, including any transaction or relationship that reasonably could be expected to give rise to such a conflict.

Violations of this Code of Ethics for Executive, Financial and Legal Officers, including failures to report potential violations by others, will be viewed as a severe disciplinary matter that may result in personnel action, including termination of employment. If you believe that a violation of the Code of Ethics for Executive, Financial and Legal Officers has occurred, you must report the violation immediately. Violations should be reported in the manner set forth in Section XI below.

It is against Safeguard policy to retaliate against any employee for good faith reporting of violations of this Code of Ethics.

XI.   Report of Violations

Administration – General Policy Regarding Report of Violations – Safeguard Personnel who observe, learn of, or, in good faith, suspect a violation of the Code must immediately report the violation in accordance with the procedures outlined below. Safeguard Personnel who report violations or suspected violations in good faith will not be subject to retaliation of any kind. Reported violations will be investigated and addressed promptly and will be treated confidentially to the extent possible. A violation of the Code may result in disciplinary action, which may include termination of employment.

Complaint Procedure

•   Notification of Complaint

•

Safeguard Personnel who observe, learn of or, in good faith, suspect a violation of the Code must promptly report the violation or discuss issues and concerns of the type covered by this Code with his or her immediate manager, who in turn is responsible for informing the Compliance Officer of any violations or concerns raised. If an employee prefers not to report the matter to his or her own manager, the employee may instead report the matter directly to the Compliance Officer at the following address:

Safeguard Scientifics, Inc. Attention: Compliance Officer 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087-1945 e-mail: complianceofficer@safeguard.com

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•	Safeguard personnel who have concerns such as accounting discrepancies, fraud, accounting misrepresentations, auditing matters, accounting omissions, ethics violations or any other financially related concerns should report the matter directly to the Compliance Officer at the above address or to the Chair of the Audit Committee of the Safeguard Board at the following address:
	Safeguard Scientifics, Inc. Attention: Chair, Audit Committee c/o Corporate Secretary 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087-1945
•	Whenever practical, the complaint should be made in writing. It is unacceptable to submit a complaint knowing it is false.
•	Safeguard personnel who are not comfortable using the procedures and protocols outlined above can make an anonymous report via our third party provider, MySafeWorkplace. This anonymous and confidential reporting system is not affiliated with Safeguard and is accessible 24/7 through the Internet (www.MySafeWorkplace.com) or by calling the toll free number (800.461.9330).

•	Investigation
	Reports of violations will be investigated under the supervision of the Compliance Officer in consultation with the Safeguard Scientifics, Inc. Legal Department and/or external counsel, if applicable or desired. Safeguard Personnel are expected to cooperate in the investigation of reported violations.
•	Confidentiality
	Except as may be required by law or the requirements of the resulting investigation, the Compliance Officer and others conducting the investigation shall not disclose the identity of anyone who reports a suspected violation if anonymity is requested.
•	Protection Against Retaliation
	Retaliation in any form against an individual who reports an alleged violation of this Code, even if the report is mistaken, may itself be a violation of law and is a serious violation of this Code. Any alleged act of retaliation must be reported immediately. If determined to have in fact occurred, any act of retaliation will result in appropriate disciplinary action, which may include termination of employment. A copy of the Safeguard Scientifics, Inc. Whistleblower Protection Policy is attached hereto as Exhibit B and incorporated herein by reference.

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XII.   Waivers

Requests for a waiver of a provision of the Code must be submitted in writing to the Compliance Officer for appropriate review, and an executive officer of Safeguard Scientifics, Inc., the Safeguard Board or an appropriate Safeguard Board committee will decide the outcome. For conduct involving directors and executive officers, only the Safeguard Board or the Audit Committee of the Safeguard Board has the authority to waive a provision of the Code. The Audit Committee of the Safeguard Board must review and approve any “related party” transaction as defined in Item 404(a) of Regulation S-K, promulgated by the SEC, before it is consummated. In the event of an approved waiver involving the conduct of a director or executive officer, appropriate and prompt disclosure must be made to Safeguard’s shareholders as required by the SEC or other regulation or by applicable listing standards of the principal exchange or interdealer quotation system on which the Safeguard common stock is listed.

Statements in the Code to the effect that certain actions may be taken only with “Safeguard’s approval” will be interpreted to mean that appropriate executive officers of Safeguard Scientifics, Inc. or members of the Safeguard Board must give prior written approval before the proposed action may be undertaken.

XIII.   Compliance

Adherence to Code; Disciplinary Action – Safeguard Personnel have a responsibility to understand and follow this Code. In addition, all Safeguard Personnel are expected to perform their work with honesty and integrity in all areas not specifically addressed in this Code. A violation of this Code may result in appropriate disciplinary action, including the possible termination from employment with Safeguard.

Communications; Training; Annual Certification – Safeguard strongly encourages dialogue among employees and their managers to make everyone aware of situations that give rise to ethical questions and to articulate acceptable ways of handling those situations. Safeguard Personnel will receive periodic training on the contents and importance of the Code and related policies and the manner in which violations must be reported and waivers must be requested. All Safeguard Personnel must certify that they have read this Code and to the best of their knowledge are in compliance with all its provisions. In addition, each director, officer and other managerial employee of Safeguard, as may be designated by Safeguard from time to time, has an obligation to annually certify that he or she has read and reviewed this Code. Forms of these certifications are attached to this Code as Appendices I and II.

Responsibility of Senior Employees – All Safeguard officers and other managerial employees will be responsible for the enforcement of, and compliance with, this Code, including necessary distribution to assure Safeguard Personnel knowledge and compliance. Directors, officers and other managerial employees are expected to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. Managerial employees may be disciplined if they condone misconduct, do not report misconduct, do not take reasonable measures to detect misconduct, or do not demonstrate the appropriate leadership to insure compliance.

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XIV.   Related Policies

This Code should be read in conjunction with Safeguard’s other policy statements, including but not limited to the policies that are attached hereto and incorporated herein.

April 8, 2004

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EXHIBIT A
STATEMENT OF COMPANY POLICY
Securities Trading by Company Personnel

     If a director, officer or any employee has material non-public information relating to our Company, it is our policy that neither that person nor any related person may buy or sell securities of the Company or engage in any other action to take advantage of, or pass on to others, that information. This policy also applies to information obtained in the course of your employment relating to any other company.

     Transactions that may be desired for independent reasons (such as the need to raise money for an emergency expenditure) are no exception.

     Material Information. Material information is any information that a reasonable investor would consider important in a decision to buy, hold or sell stock. In short, any information which could reasonably affect the price of the stock.

     Examples. Common examples of information that will frequently be regarded as material are: current earnings or loss information; projections of future earnings or losses; news of a pending or proposed merger, acquisition or tender offer; news of a significant sale of assets or the disposition of a subsidiary; changes in dividend policies or the declaration of a stock split; news of a pending rights offering or other offering of additional securities; changes in management; significant new products or discoveries; impending bankruptcy or financial liquidity problems; and the gain or loss of a substantial customer or supplier. Either positive or negative information may be material.

     Twenty-Twenty Hindsight. Remember, if your securities transactions become the subject of scrutiny, they will be viewed after-the-fact with the benefit of hindsight. As a result, before engaging in any transaction you should carefully consider how regulators and securities plaintiffs lawyers might view your transaction in hindsight.

     Transactions by Family Members. The very same restrictions apply to your family members and others living in your household. Employees are expected to be responsible for the compliance of their immediate family and personal household.

     Tipping Information to Others. Whether the information is proprietary information about our Company or information that could have an impact on our stock price, employees must not pass the information on to others. The penalties apply whether or not you derive any benefit from another’s actions.

     When Information is Public. It is also improper for an officer, director or employee to enter a trade immediately after the Company has made a public announcement of material information, including earnings releases. Because the Company’s shareholders and the investing public should be afforded the time to receive the information, you should not engage in any transactions until two business days after the information has been released.

A-1

     Additional Prohibited Transactions. Because we believe it is improper and inappropriate for any Company personnel to engage in short-term or speculative transactions involving Company stock, it is the Company’s policy that directors, officers and employees should not engage in any of the following activities with respect to securities of the Company:

     1. Trading in securities on a short-term basis. Any Company stock purchased in the open market must be held for a minimum of six months. The SEC’s short-swing profit rule already prevents officers and directors from selling any Company stock within six months of a purchase. We are simply expanding this rule to all employees. However, the rule does not apply to stock option exercises, except to the extent required for officers and directors.

     2. Short sales.

     3. Buying or selling puts or calls.

     Officers and directors of the Company also should be particularly sensitive to the potential for Rule 16(b) Short-Swing Profit violations when purchasing Company stock on margin.

     Company Assistance. Any person who has questions about specific transactions or this Policy Statement may obtain guidance from the Legal Department. Remember, however, the ultimate responsibility for adhering to the Policy Statement and avoiding improper transactions rests with you. In this regard, it is imperative that you use your best judgment.

Implementation of Policy Statement.

     1. Violations. Violations of the foregoing Policy Statement or standards of conduct as set forth herein may subject an employee to disciplinary action and may be considered grounds for dismissal. Failure to comply with this Policy Statement may violate applicable laws and subject the employee and the Company to criminal or civil liability or both.

     2. Reports. Any employee who becomes aware of any conduct which might be a violation of this Policy Statement should immediately report the conduct to the Legal Department.

     3. Review and Acknowledgment. All new employees, upon commencing employment with the Company, will be required to review this Policy Statement and sign an Acknowledgment and Disclosure Statement. All employees will be required to review this Policy Statement and complete and return an Acknowledgment and Disclosure Statement annually. Failure to do so may subject an employee to disciplinary action and may be considered grounds for dismissal.

Last Revised: October 15, 2003

A-2

EXHIBIT B
Safeguard Scientifics, Inc.
Whistleblower Protection Policy

I.   Statement of Policy

Officers, directors, employees, contractors, subcontractors, and agents of Safeguard Scientifics, Inc. and its subsidiaries (collectively, the “Company”), are prohibited from taking any adverse or harmful action, threatening, harassing, discharging, demoting, suspending or otherwise discriminating against any employee of the Company for any lawful act done by the employee in:

•   providing information to, or otherwise assisting in an investigation, inquiry or otherwise conducted by a: (a) federal regulatory or law enforcement agency; (b) member or committee of Congress; (c) person with supervisory authority over the employee; or (d) person authorized by the Company to investigate, discover, or terminate misconduct, in each case when the information or investigation concerns conduct that the employee reasonably believes constitutes a violation of:

(i)	any rule or regulation of the U.S. Securities and Exchange Commission;
(ii)	any provision of federal, state or foreign law relating to fraud against Company shareholders; or
(iii)	any federal, state or foreign criminal law provision prohibiting mail fraud, bank fraud, or fraud by wire, radio, or television;
(iv)	the Company’s Code of Conduct;
(v)	the Statement of Company Policy, Securities Trading by Company Personnel; or
(vi)	similar policies as they may be amended from time to time; or

•   filing, testifying, or participating in any legal proceeding relating to an alleged violation of the laws described above; or

•   providing to a law enforcement officer any truthful information relating to the commission or possible commission of a federal, state or foreign offense.

II.   Compliance Procedure

The Company strongly encourages the prompt reporting of any violations of this Policy. Any employee who observes, learns of or, in good faith, suspects a violation of this Policy is strongly encouraged to promptly report the violation to his or her immediate manager, who in turn is responsible for informing the Compliance Officer of any violations or concerns raised. If an employee prefers not to report the matter to his or her own manager, the employee may instead report the matter directly to the Compliance Officer at the following address:

B-1

Safeguard Scientifics, Inc.
Attention: Compliance Officer
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
e-mail: complianceofficer@safeguard.com

An employee also may report any violation of this Policy to any independent director of the Company. The independent directors at the time this policy was adopted include: Julie A. Dobson, Andrew E. Lietz, George MacKenzie, Jack Messman, Russell E. Palmer, John W. Poduska, Sr., Robert Ripp and John J. Roberts. Correspondence addressed to the independent directors, as a group, any individual independent director, or any committee of the Board of Directors should be addressed as noted in, and will be handled in accordance with, the Company’s policy for communications with the Board which is posted on the corporate governance section of Safeguard’s website at http://www.safeguard.com.investors.

Whenever practical, any violation of this Policy should be made in writing.

Any employee who is not comfortable using the procedures and protocols outlined above can make an anonymous report via our third party provider, MySafeWorkplace. This anonymous and confidential reporting system is not affiliated with Safeguard and is accessible 24/7 through the Internet (www.MySafeWorkplace.com) or by calling the toll free number (800.461.9330).

Reports of violations or alleged violations of this Policy will be treated confidentially, to the extent possible, and investigated thoroughly. To the extent that a violation of this Policy is found, the Company will take appropriate remedial action, if possible.

The Company will not retaliate against an employee for bringing to the Company’s attention a good-faith report of a possible violation of this Policy.

III.   Consequences of Policy Violations

Any officer, director, employee, contractor, subcontractor, or agent of the Company who is found to have violated this Policy will be subject to disciplinary action, which may include termination of employment or association. Violations of this Policy by a contractor, subcontractor, or agent will be reported to the management of that entity for possible disciplinary action. Persons who engage in conduct that violates this Policy may also be subject to civil liability and criminal penalties.

IV.   Amendments to this Policy

The Board of Directors may amend this Policy from time to time as necessary or appropriate.

Adopted: April 8, 2004

B-2

APPENDIX I

CODE OF CONDUCT DISCLOSURE STATEMENT

As a director, officer or other employee of Safeguard Scientifics, Inc. or one of its subsidiaries (collectively with its subsidiaries, “Safeguard”), I have read and understand the Safeguard Scientifics, Inc. Code of Conduct, and I hereby reaffirm my agreement to comply with its terms. I hereby certify as follows:

1.	I have received a copy of the Code of Conduct.
2.	I have read, understand and agree to comply with the Code of Conduct.
3.	I am currently in compliance and, as applicable, members of my family are in compliance, with the terms of the Code of Conduct and all obligations imposed by it, except as disclosed below or on a separate page attached to this statement.
2.	I am not aware of any conduct on the part of any person associated with Safeguard that may constitute a violation of the Code of Conduct, except with respect to any matters that I may have disclosed to the President of Safeguard and/or as disclosed below or on a separate page attached to this statement.

I understand that all Disclosure Statements may be available to the President of Safeguard, its Board of Directors, and internal and external legal counsel. Such information shall otherwise be held in confidence except when, after consultation with Safeguard’s legal counsel and the President, Safeguard’s best interests would be served by disclosure.

Each person signing a Disclosure Statement is responsible for keeping his/her Disclosure Statement current. These statements will be kept in Safeguard’s Legal Department or in the Office of Human Resources of the respective subsidiaries.

Signature

Name

Date

APPENDIX II

ANNUAL SAFEGUARD DISCLOSURE STATEMENT

As a director, officer or other managerial employee of Safeguard Scientifics, Inc. or one of its subsidiaries (collectively with its subsidiaries, “Safeguard”), I have read and understand the Safeguard Scientifics, Inc. Code of Conduct, and I hereby reaffirm my agreement to comply with its terms. With respect to the last 12 months, I hereby certify as follows:

1.	I have complied and, as applicable, members of my family have complied, with the terms of the Code of Conduct and all obligations imposed by it, except as disclosed below or on a separate page attached to this statement.
2.	I am not aware of any conduct on the part of any person associated with Safeguard that may constitute a violation of the Code of Conduct, except with respect to any matters that I may have disclosed to the President of Safeguard and/or as disclosed below or on a separate page attached to this statement.

I understand that all Disclosure Statements may be available to the President of Safeguard, its Board of Directors, and internal and external legal counsel. Such information shall otherwise be held in confidence except when, after consultation with Safeguard’s legal counsel and President, Safeguard’s best interests would be served by disclosure.

Each person signing a Disclosure Statement is responsible for keeping his/her Disclosure Statement current. These statements will be kept in Safeguard’s Legal Department or in the Office of Human Resources of the respective subsidiaries.

Signature

Name

Date

EX-21

EXHIBIT 21

SUBSIDIARIES OF SAFEGUARD SCIENTIFICS, INC.

     Exclusive of immaterial subsidiaries and companies in which the Registrant holds a minority interest, as of March 10, 2005, the Registrant had the following subsidiaries:

NAME	PLACE OF INCORPORATION
Alliance Consulting Group Associates, Inc.	NEW JERSEY
Alliance Holdings, Inc.	DELAWARE
Alliance IT Consulting India Private Limited	INDIA
Bonfield Fund Management, L.P.	DELAWARE
Bonfield Insurance, Ltd.	BRITISH VIRGIN ISLANDS
Bonfield Partners Capital, L.P.	DELAWARE
ChromaServices, Inc.	DELAWARE
ChromaVision Medical Systems, Inc.	DELAWARE
ChromaVision Oncology Services, Inc.	DELAWARE
Laureate Pharma, Inc.	DELAWARE
Mantas, Inc.	DELAWARE
Mensamind, Inc.	ILLINOIS
Pacific Title and Arts Studio, Inc.	DELAWARE
Penn-Sylvan Management, Inc.	PENNSYLVANIA
Safeguard 99 Capital, L.P.	DELAWARE
Safeguard 2000 Capital, L.P.	DELAWARE
Safeguard 2001 Capital, L.P.	DELAWARE
Safeguard Capital Management, Inc.	DELAWARE
Safeguard Delaware, Inc.	DELAWARE
Safeguard Fund Management, Inc.	DELAWARE
Safeguard Fund Management, L.P.	DELAWARE
Safeguard Partners Capital, L.P.	DELAWARE
Safeguard Scientifics (Delaware), Inc.	DELAWARE
Safeguard Scientifics Foundation	PENNSYLVANIA
Safeguard Technologies, Inc.	DELAWARE
SFINT, Inc.	DELAWARE
Sotas, Inc.	DELAWARE
SSI Management Company, Inc.	DELAWARE
SSI Partnership Holdings (Pennsylvania), Inc.	PENNSYLVANIA
SSIP (Delaware), Inc.	DELAWARE
XL Realty Corp.	FLORIDA

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Safeguard Scientifics, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 33-41853, 33-72560, 333-75501, 333-86777, 333-65092, 333-73284, 333-103976, and 333-118046) on Form S-8 and in the registration statements (Nos. 333-114794, 333-86675 and 333-32512) on Form S-3 of Safeguard Scientifics, Inc. and subsidiaries of our reports dated March 14, 2005, with respect to the consolidated balance sheets of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Safeguard Scientifics, Inc. Our report dated March 14, 2005, on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2004, contains an explanatory paragraph that states that Safeguard Scientifics, Inc. acquired Laureate Pharma, Inc. and Alliance acquired Mensamind, Inc. during 2004, and management excluded from its assessment of the effectiveness of internal control over financial reporting of Safeguard Scientifics, Inc. as of December 31, 2004, the internal control over financial reporting of Laureate Pharma, Inc. and Mensamind, Inc. associated with total assets of $37.4 million and total revenues of $1.0 million included in the consolidated financial statements of Safeguard Scientifics, Inc. and subsidiaries as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of Safeguard Scientifics, Inc. also excluded an evaluation of the internal control over financial reporting of Laureate Pharma, Inc. and Mensamind, Inc.

Our report with respect to the consolidated financial statements of Safeguard Scientifics, Inc. as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004 contains an explanatory paragraph regarding the adoption of SFAS No. 142, “Goodwill and Intangible Assets,” on January 1, 2002.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 14, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Anthony L. Craig, certify that:

1.	I have reviewed this annual report on Form 10-K of Safeguard Scientifics, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	SAFEGUARD SCIENTIFICS, INC.
Date: March 14, 2005	Anthony L. Craig
	Anthony L. Craig
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Christopher J. Davis, certify that:

1.	I have reviewed this annual report on Form 10-K of Safeguard Scientifics, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	SAFEGUARD SCIENTIFICS, INC.
Date: March 14, 2005	Christopher J. Davis
	Christopher J. Davis
	Executive Vice President and Chief Administrative and Financial Officer

EX-32.1

Exhibit 32.1

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

     In connection with the Annual Report of Safeguard Scientifics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Craig, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	SAFEGUARD SCIENTIFICS, INC.
Date: March 14, 2005	Anthony L. Craig
	Anthony L. Craig
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

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

In connection with the Annual Report of Safeguard Scientifics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Davis, Executive Vice President and Chief Administrative and Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	SAFEGUARD SCIENTIFICS, INC.
Date: March 14, 2005	Christopher J. Davis
	Christopher J. Davis
	Executive Vice President and Chief Administrative and Financial Officer