10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

Commission File Number 0-26068

 

ACACIA RESEARCH CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	95-4405754
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
500 Newport Center Drive, Newport Beach, CA	92660
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 480-8300

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 filing requirements for the past 90 days. Yes þ  No ¨

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

 Large accelerated filer   ¨ Accelerated filer  þ Non-accelerated filer  ¨

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

As of May 5, 2006, 27,849,409 shares of Acacia Research-Acacia Technologies common stock were issued and outstanding. As of May 5, 2006, 38,992,402 shares of Acacia Research-CombiMatrix common stock were issued and outstanding.

 ACACIA RESEARCH CORPORATION

Table of Contents

Part I. Financial Information
Item 1.	Financial Statements
	Acacia Research Corporation Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2006, and December 31, 2005 (Unaudited)	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	2
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	3
	Notes to Consolidated Financial Statements (Unaudited)	4
	*CombiMatrix Group Financial Statements
	Balance Sheets as of March 31, 2006, and December 31, 2005 (Unaudited)	21
	Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	22
	Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	23
	Notes to Financial Statements (Unaudited)	24
	*Acacia Technologies Group Financial Statements
	Balance Sheets as of March 31, 2006, and December 31, 2005 (Unaudited)	28
	Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	29
	Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	30
	Notes to Financial Statements (Unaudited)	31
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57

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Part II. Other Information
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
Signatures		59
Exhibit Index		60

*NOTE: We are presenting the Acacia Research Corporation consolidated unaudited interim financial statements and the separate unaudited interim financial statements for the CombiMatrix group and the Acacia Technologies group. The separate financial statements and accompanying notes of the two groups are being provided as additional disclosure regarding the financial performance of the two divisions and to provide investors with information regarding the potential value and operating results of the respective businesses, which may affect the respective share values. The separate financial statements should be reviewed in conjunction with Acacia Research Corporation’s consolidated financial statements and accompanying notes. The presentation of separate financial statements is not intended to indicate that we have changed the title to any of our assets or changed the responsibility for any of our liabilities, nor is it intended to indicate that the rights of our creditors have been changed. Acacia Research Corporation, and not the individual groups, is the issuer of the securities. Holders of the two securities are stockholders of Acacia Research Corporation and do not have a separate and exclusive interest in the respective groups.

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PART I--FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
	March 31,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	12,636		$	20,164
Short-term investments		40,430			39,009
Accounts receivable		4,577			5,332
Prepaid expenses, inventory, and other assets		2,189			2,115
Total current assets		59,832			66,620
Property and equipment, net of accumulated depreciation		2,297			2,484
Patents, net of accumulated amortization		29,954			31,712
Goodwill		17,039			18,980
Other assets		2,047			1,638
	$	111,169		$	121,434
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	4,655		$	3,924
Royalties and legal fees payable		2,115			3,758
Current portion of deferred revenues		781			804
Total current liabilities		7,551			8,486
Deferred income taxes		-			2,701
Deferred revenues, net of current portion		1,439			1,439
Other liabilities		3,249			1,464
Total liabilities		12,239			14,090
Minority interests		443			447
Commitments and contingencies (Note 10)
Redeemable stockholders' equity:
Preferred stock
Acacia Research Corporation, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock
Acacia Research - Acacia Technologies stock, par value $0.001 per share; 50,000,000 shares authorized; 27,766,909 and 27,722,242 shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively		28			28
Acacia Research - CombiMatrix stock, par value $0.001 per share; 50,000,000 shares authorized; 38,992,402 shares issued and outstanding as of March 31, 2006 and December 31, 2005		39			39
Additional paid-in capital		315,492			315,146
Deferred stock compensation		-			(1,400	)
Accumulated comprehensive income		(60	)		(2	)
Accumulated deficit		(217,012	)		(206,914	)
Total stockholders' equity		98,487			106,897
	$	111,169		$	121,434

The accompanying notes are an integral part of these consolidated financial statements.

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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share information)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Revenues:
License fees	$	4,717		$	1,863
Government contract		264			731
Products		924			278
Service contracts		57			60
Total revenues		5,962			2,932
Operating expenses:
Cost of government contract revenues		250			691
Cost of product sales		221			163
Research and development expenses (including non-cash stock compensation expense of $293 in 2006)		2,379			1,140
Marketing, general and administrative expenses (including non-cash stock compensation expense of $1,450 in 2006 and ($126) in 2005)		7,499			3,763
Legal expenses - patents		366			561
Inventor royalties and contingent legal fees expense - patents		2,271			647
Amortization of patents		1,617			1,190
Legal settlement credits		-			(179	)
Loss from equity investments		239			39
Total operating expenses		14,842			8,015
Operating loss		(8,880	)		(5,083	)
Other income (expense):
Interest and investment income		540			273
Loss on sale of interest in subsidiary		(84	)		-
Warrant (charges) credits		(1,740	)		-
Total other income (expense)		(1,284	)		273
Loss from continuing operations before income taxes		(10,164	)		(4,810	)
Benefit for income taxes		66			70
Loss from continuing operations		(10,098	)		(4,740	)
Discontinued operations:
Estimated loss on disposal of discontinued operations		-			(210	)
Net loss		(10,098	)		(4,950	)
Unrealized gains (losses) on short-term investments		(1	)		14
Unrealized gains (losses) on foreign currency translation		4			-
Sale of interest in subsidiary's cumulative translation adjustment		(61	)		8
Comprehensive loss	$	(10,156	)	$	(4,928	)
Earnings (loss) per common share:
Attributable to the Acacia Technologies group:
Net loss	$	(2,409	)	$	(1,874	)
Basic and diluted loss per share		(0.09	)		(0.08	)
Attributable to the CombiMatrix group:
Net loss	$	(7,689	)	$	(3,076	)
Basic and diluted loss per share		(0.20	)		(0.10	)
Weighted average shares:
Acacia Research - Acacia Technologies stock:
Basic and diluted		27,400,857			24,558,419
Acacia Research - CombiMatrix stock:
Basic and diluted		38,992,402			31,200,496

The accompanying notes are an integral part of these consolidated financial statements.

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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Cash flows from operating activities:
Net loss	$	(10,098	)	$	(4,950	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,878			1,482
Non-cash stock compensation		1,743			(126	)
Deferred taxes		(70	)		(70	)
Non-cash warrant charge (credit)		1,740			-
Non-cash legal settlement charges (credits)		-			(179	)
Estimated loss on disposal of discontinued operations		-			210
Loss from equity investments		239			39
Loss on sale of interest in subsidiary		84
Other		124			(28	)
Changes in assets and liabilities, excluding effect of business acquisition:
Accounts receivable		738			(862	)
Prepaid expenses, inventory and other assets		(497	)		(542	)
Accounts payable and accrued expenses		1,127			349
Royalties and legal fees payable		(1,643	)		481
Deferred revenues		29			399
Net cash used in operating activities from continuing operations		(4,606	)		(3,797	)
Net cash provided by (used in) operating activities from discontinued operations		245			(288	)
Net cash used in operating activities		(4,361	)		(4,085	)
Cash flows from investing activities:
Purchase of property and equipment		(175	)		(268	)
Purchase of available-for-sale investments		(5,028	)		(4,673	)
Sale of available-for-sale investments		3,605			15,184
Business acquisition		(16	)		(5,689	)
Purchase of additional interests in equity method investee		(650	)		(250	)
Patent acquisition costs		(550	)		(175	)
Sale of interest in subsidiary		(369	)		-
Net cash provided by (used in) investing activities		(3,183	)		4,129
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		-			19,530
Proceeds from the exercise of stock options		16			34
Net cash provided by financing activities		16			19,564
Effect of exchange rate on cash		-			9
(Decrease) increase in cash and cash equivalents		(7,528	)		19,617
Cash and cash equivalents, beginning		20,164			13,910
Cash and cash equivalents, ending	$	12,636		$	33,527

The accompanying notes are an integral part of these consolidated financial statements.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. Acacia Research Corporation (“we,” “us” and “our”) is comprised of two operating groups.

CombiMatrix Group

Our life sciences business, referred to as the “CombiMatrix group,” a division of Acacia Research Corporation, is comprised of our wholly owned subsidiary, CombiMatrix Corporation and CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix Molecular Diagnostics and includes all corporate assets, liabilities and transactions related to Acacia Research Corporation’s life sciences business.

The CombiMatrix group develops proprietary technologies and products and services in the areas of drug development, genetic analysis, nanotechnology research, defense and homeland security markets, and other markets where its products could be utilized. Among the technologies being developed by the CombiMatrix group is a platform technology to produce customizable arrays, which are semiconductor-based tools for use in identifying and determining the roles of genes, gene mutations and proteins. This technology has potential applications in the areas of genomics, proteomics, biosensors, drug discovery, drug development, diagnostics, combinatorial chemistry, material sciences and nanotechnology. Other technologies include proprietary molecular synthesis and screening methods for the discovery of potential new drugs. CombiMatrix Molecular Diagnostics, Inc., a wholly owned subsidiary located in Irvine, California, is exploring opportunities for the CombiMatrix group’s arrays in the field of molecular diagnostics. In January 2006, CombiMatrix Corporation sold 67% of its ownership interest in CombiMatrix K.K. to a third party. Refer to Note 12.

Acacia Technologies Group

The Acacia Technologies group, a division of Acacia Research Corporation, develops, acquires and licenses patented technologies. The Acacia Technologies group is primarily comprised of certain of Acacia Research Corporation’s wholly owned subsidiaries and limited liability companies including:

·Acacia Global Acquisition Corporation ·Acacia Media Technologies Corporation ·Acacia Patent Acquisition Corporation ·Acacia Technologies Services Corporation ·AV Technologies LLC ·Broadcast Data Retrieval Corporation ·Broadcast Innovation LLC ·Computer Cache Coherency Corporation ·Computer Docking Station Corporation ·Data Encryption Corporation ·Data Innovation LLC ·Financial Systems Innovation LLC ·High Resolution Optics Corporation ·Information Technology Innovation LLC ·InternetAd LLC ·IP Innovation LLC ·KY Data Systems LLC ·Microprocessor Enhancement Corporation ·New Medium LLC ·Product Activation Corporation ·TechSearch LLC ·VData LLC ·Resource Scheduling Corporation ·Software Collaboration Corporation ·Soundview Technologies, Inc. ·Spreadsheet Automation Corporation

The Acacia Technologies group also includes all corporate assets, liabilities, and related transactions of Acacia Research Corporation attributed to Acacia Research Corporation’s intellectual property licensing and enforcement business. Refer to “Business Acquisition” below for information on the Acacia Technologies group’s 2005 business acquisition activity.

The Acacia Technologies group currently controls 42 patent portfolios, which include over 160 U.S. patents, and certain foreign counterparts, covering technologies used in a wide variety of industries.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Business Acquisition. On January 28, 2005, Acacia Global Acquisition Corporation acquired the assets of Global Patent Holdings, LLC, which owned 11 patent licensing companies (“GPH Acquisition”). The acquisition provided the Acacia Technologies group ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries. Refer to Note 7 for a description of the acquisition transaction.

Other

In January 2006, our board of directors approved a plan for our wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company. We expect to complete the transaction in the third quarter of 2006, subject, however, to determining that there are no significant negative tax consequences to Acacia Research Corporation or our shareholders and completing the required filings with the Securities and Exchange Commission (“SEC”). If the conditions are met, Acacia Research Corporation will redeem all of the issued and outstanding shares of AR-CombiMatrix stock for all of the common stock of CombiMatrix Corporation, which will register its common stock under the Securities and Exchange Act of 1934. Following the redemption, CombiMatrix Corporation will apply to list its shares for trading on a national exchange.

On December 11, 2002, our stockholders voted in favor of a recapitalization transaction, which became effective on December 13, 2002, whereby we created two new classes of common stock called Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”) and Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”), and divided our existing Acacia Research Corporation common stock into shares of the two new classes of common stock. AR-CombiMatrix stock is intended to reflect separately the performance of Acacia Research Corporation’s CombiMatrix group. AR-Acacia Technologies stock is intended to reflect separately the performance of Acacia Research Corporation’s Acacia Technologies group. Although the AR-CombiMatrix stock and the AR-Acacia Technologies stock are intended to reflect the performance of our different business groups, they are both classes of common stock of Acacia Research Corporation and are not stock issued by the respective groups.

Liquidity and Risks

General. To date, we and our subsidiaries have relied primarily upon selling equity securities and payments from our strategic partners and licensees to generate the funds needed to finance the implementation of our plans of operation for our subsidiaries. Management believes that our cash and cash equivalent balances, anticipated cash flow from operations and other external sources of available credit will be sufficient to meet our cash requirements through at least June 30, 2007. We may be required to obtain additional financing. There can be no assurance that additional funding will be available on favorable terms, if at all. If we fail to obtain additional funding when needed, we may not be able to execute our business plans and our businesses may suffer.

The CombiMatrix Group. The CombiMatrix group is deploying new and unproven technologies and continues to develop its commercial products. The CombiMatrix group has several ongoing long-term development projects that involve experimental technology and may require several years and substantial expenditures to complete. Management believes that existing cash and cash equivalents and short-term investments are adequate to fund operations through at least June 30, 2007. However, the ability to meet business objectives is dependent upon the CombiMatrix group’s ability to raise additional financing, substantiate its technology and ultimately to fund itself from continuing operations. There can be no assurance that such funding will be available at acceptable terms or at all. The CombiMatrix group has a history of incurring net losses and net operating cash flow deficits.

The CombiMatrix group’s business operations are also subject to certain risks and uncertainties, including:

· market acceptance of products and services;

· technological advances that may make its products and services obsolete or less competitive;

· increases in operating costs, including costs for supplies, personnel and equipment;

· the availability and cost of capital; and

· governmental regulation that may restrict its business.

Historically, the CombiMatrix group has been substantially dependent on arrangements with strategic partners and has relied upon payments by its partners for a significant component of its working capital. The CombiMatrix group intends to enter into additional strategic partnerships to develop and commercialize future products. However, there can be no assurance that the CombiMatrix group will be able to implement its future plans. Failure to achieve its plans would have a material adverse effect on the CombiMatrix group’s and on Acacia Research Corporation’s ability to achieve their intended business objectives. The CombiMatrix group also depends on its ability to protect its intellectual property; the loss thereof or the CombiMatrix group’s failure to secure the issuance of additional patents covering elements of its business processes could materially harm its business and financial condition. The patents covering the CombiMatrix group’s core technology begin to expire in 2018.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The CombiMatrix group’s products and services are concentrated in a highly competitive market that is characterized by rapid technological advances, frequent changes in customer requirements and evolving regulatory requirements and industry standards. Failure to anticipate or respond adequately to technological advances, changes in customer requirements, changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of planned products or services, could have a material adverse effect on the CombiMatrix group’s business and operating results.

The Acacia Technologies Group. To date, the Acacia Technologies group has relied upon the receipt of license fee payments from the licensing of the Acacia Technologies group’s patented technologies and the selling of Acacia Research Corporation equity securities to generate the funds needed to finance the operations of the Acacia Technologies group. The Acacia Technologies group began to commercially license its DMT® technology in 2003. The GPH Acquisition provided the Acacia Technologies group with ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries. The GPH Acquisition, and other patent acquisitions during 2005 and 2006, expanded and diversified the Acacia Technologies group’s future potential revenue generating activities.

However, there can be no assurance that the Acacia Technologies group will be able to implement its future plans. Failure by management to achieve its plans would have a material adverse effect on the Acacia Technologies group and on Acacia Research Corporation’s ability to achieve its intended business objectives. The Acacia Technologies group’s success also depends on its ability to protect its intellectual property.

The timing of the receipt of revenues by the Acacia Technologies group’s business operations are subject to certain risks and uncertainties, including:

· market acceptance of our patented technologies and services;

· business activities and financial results of our licensees;

· technological advances that may make our patented technologies obsolete or less competitive;

· increases in operating costs, including costs for legal services, engineering and research and personnel;

· the availability and cost of capital; and

· governmental regulation that may restrict the Acacia Technologies group’s business.

The Acacia Technologies group relies on its proprietary rights and their protection. Although reasonable efforts will be taken to protect the Acacia Technologies group’s proprietary rights, the complexity of international trade secret, copyright, trademark and patent law, and common law, coupled with limited resources and the demands of quick delivery of technologies to market, create risk that these efforts will prove inadequate. Accordingly, if the Acacia Technologies group is unsuccessful with litigation to protect its intellectual property rights, the future revenues of the Acacia Technologies group could be adversely affected.

Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of Acacia Research Corporation and its wholly owned and majority-owned subsidiaries and investments accounted for under the equity method. Material intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnotes required by generally accepted accounting principles in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005, as reported by us in our Annual Report on Form 10-K. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The consolidated financial statements of Acacia Research Corporation include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of March 31, 2006, and results of operations and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results to be expected for the entire year.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Separate Group Presentation. AR-CombiMatrix stock and AR-Acacia Technologies stock are intended to reflect the separate performance of the respective division of Acacia Research Corporation. The CombiMatrix group and the Acacia Technologies group are not separate legal entities. Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock are stockholders of Acacia Research Corporation. As a result, holders of AR-CombiMatrix stock and AR-Acacia Technologies stock continue to be subject to all of the risks of an investment in Acacia Research Corporation and all of its businesses, assets and liabilities. The assets Acacia Research Corporation attributes to one of the groups could be subject to the liabilities of the other group. The group financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, and taken together, comprise all the accounts included in the corresponding consolidated financial statements of Acacia Research Corporation. The financial statements of the groups reflect the financial position, results of operations, and cash flows of the businesses included therein. The financial statements of the groups include the accounts or assets of Acacia Research Corporation specifically attributed to the groups and were prepared using amounts included in Acacia Research Corporation’s consolidated financial statements.

Minority interests represent participation of other stockholders in the net equity and in the division earnings and losses of the groups and are reflected in the caption “Minority interests” in the group financial statements. Minority interests adjust group net results of operations to reflect only the group’s share of the division earnings or losses of non-wholly owned investees.

Financial effects arising from one group that affect Acacia Research Corporation’s results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other group and the market price of the class of common stock relating to the other group. Any division net losses of the CombiMatrix group or of the Acacia Technologies group, and dividends or distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia Technologies stock, will reduce the assets of Acacia Research Corporation legally available for payment of dividends on AR-CombiMatrix stock or AR-Acacia Technologies stock.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Revision in the Classification of Certain Securities. In connection with the preparation of the 2005 consolidated financial statements, Acacia Research Corporation concluded that it was appropriate to classify its annuity investments as current investments.  Prior to 2005, such investments had been classified as cash and cash equivalents.  Accordingly, we have made adjustments to our consolidated statement of cash flows for the three months ended March 31, 2005, to reflect the gross purchases of these securities as investing activities rather than as a component of cash and cash equivalents.  This change in classification does not affect previously reported cash flows from operations or from financing activities in our previously reported statements of cash flows, and it does not affect our previously reported statements of operations for any period.

As of March 31, 2005, before this revision in classification, $4,860,000 of these current investments were classified as cash and cash equivalents on our consolidated balance sheet.  The impact of the revision in classification on consolidated cash flows from investing activities was not material for the any of the periods presented.

Stock-Based Compensation. Effective January 1, 2006, Acacia Research Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires that compensation cost relating to share-based payment transactions be recognized in the statement of operations. In March 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”), which requires stock-based compensation to be classified in the same expense line items as cash compensation (i.e. marketing, general and administrative and research and development expenses). The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

In addition, SFAS No. 123R requires stock-based compensation expense to be recorded only for those awards expected to vest using an estimated forfeiture rate. As such, SFAS No. 123R requires Acacia Research Corporation to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation expense recognized. Acacia Research Corporation considers several factors in connection with our estimates of pre-vesting forfeitures including types of awards, employee class, and historical pre-vesting forfeiture data. Estimates of pre-vesting forfeiture must be periodically revised in subsequent periods if actual forfeitures differ from those estimates. To the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised. Prior to the adoption of SFAS No. 123R, Acacia Research Corporation accounted for forfeitures as they occurred under the pro forma disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."  All references to stock-based compensation expense in these notes, upon adoption of SFAS No. 123R, refers to stock-based compensation net of estimated forfeitures, as required by SFAS No. 123R.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We adopted SFAS No. 123R using the modified prospective transition method. Under this transition method, compensation cost recognized for the quarter ended March 31, 2006 includes: (i) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in the pro forma footnote disclosures), and (ii) compensation cost for all stock-based awards granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123R). The cumulative effect of applying an estimated forfeiture percentage to stock-based payments granted prior to, but not yet vested as of, January 1, 2006 was not material.

Prior to January 1, 2006, Acacia Research Corporation accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. Acacia Research Corporation also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” ("SFAS No. 123"), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Because Acacia Research Corporation previously adopted only the pro forma disclosure provisions of SFAS No. 123, we will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS No. 123, except that forfeiture rates will be estimated for all awards, as required by SFAS No. 123R. In accordance with the requirements of the modified prospective transition method of adoption of SFAS No. 123R, the financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to stock-based awards.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the table below. Expected volatility is based on the separate historical volatility of the market prices of the AR-CombiMatrix stock and AR-Acacia Technologies stock. Volatilities of peer companies were also considered, when applicable, to address the lack of extensive historical volatility data for Acacia Research Corporation’s classes of common stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term assumption was determined in accordance with guidance set forth in SAB 107, which provides a “simplified method” for estimating the expected term for stock options, granted prior to December 31, 2007, that 1) are granted at-the-money, 2) have exercisability conditioned only on completion of a service condition through the vesting date, 3) require that employees who terminate their service prior to vesting must forfeit the options, 4) provide that employees who terminate their service after vesting are granted limited time to exercise their stock options (typically 30-90 days), and 5) are nontransferable and nonhedgeable. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting commencement date and the expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until these mid-points for each of the tranches may be averaged to provide an overall expected term.

The fair value of restricted stock awards is determined by the product of the number of shares granted and the grant date market price of the AR-Acacia Technologies stock or AR-CombiMatrix stock.

The fair value of share-based awards is expensed on a straight-line basis over the requisite service period (generally the vesting period of the award), which is generally two to four years.

The fair values of the options were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Risk free
	Interest Rate		Term		Volatility		Dividends
AR-CombiMatrix stock(1):
Three Months Ended March 31, 2006		4.31%		5.5 years		82%		0%
AR-Acacia Technologies stock:
Three Months Ended March 31, 2006		4.30%		6.7 years		75%		0%

_______________________________

(1) Weighted average assumptions also used in Black-Scholes computations related to the CombiMatrix Molecular Diagnostics 2005 Stock Award Plan.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table illustrates the impact of share-based compensation on reported amounts (in thousands, except for per share data):

	For the Three Months Ended March 31, 2006
		As Reported			Impact of Stock Based Compensation
Loss from continuing operations before income taxes	$	(10,164	)	$	(1,278	)
Net loss		(10,098	)		(1,278	)
Loss per share:
AR-Acacia Technologies stock
Stock-based compensation	$	-		$	(685	)
AR-Acacia Technologies stock - Basic and diluted	$	(0.09	)	$	(0.02	)
AR-CombiMatrix stock
Stock-based compensation	$	-		$	(593	)
AR-CombiMatrix stock - Basic and diluted	$	(0.20	)	$	(0.02	)

Stock-based compensation expense for the three months ended March 31, 2006 is included in research and development expenses and marketing, general and administrative expenses, as disclosed in the accompanying consolidated statement of operations and comprehensive loss.

Awards granted prior to Acacia Research Corporation’s implementation of SFAS No. 123R were accounted for under the recognition and measurement principles of APB No. 25 and related interpretations. Accordingly, no stock-based employee compensation cost was reflected in net loss in the accompanying unaudited consolidated statements of operations for the three months ended March 31, 2005, because all options granted under Acacia Research Corporation’s plans had exercise prices equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the pro forma effect on net loss and loss per share, if Acacia Research Corporation had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):

	AR-Acacia Technologies Stock		AR-Acacia CombiMatrix Stock
	Three Months Ended		Three Months Ended
	March 31, 2005		March 31, 2005
Income (loss) from operations as reported	$	(1,874)	$	(3,076)
Deduct: Pro forma stock-based compensation
fair value method (2)		(598)		(861)
Income (loss) from operations, pro forma	$	(2,472)	$	(3,937)
Basic earnings (loss) per share from operations as reported	$	(0.08)	$	(0.10)
Basic earnings (loss) per share from operations, pro forma	$	(0.10)	$	(0.13)
Diluted earnings (loss) per share from operations as reported	$	(0.08)	$	(0.10)
Diluted earnings (loss) per share from operations, pro forma	$	(0.10)	$	(0.13)
Weighted Average Assumptions used(1):
Risk free interest rate		3.68%		3.78%
Volatility		94.00%		88.00%
Expected term		5 years		5 years

________________________

(1) The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value calculations assume no expected dividends.

(2) The previously reported 2005 pro forma income (loss) from operations and related pro forma earnings (loss) per share amounts have been revised for a computational error in the amortization of stock compensation expense.

     SFAS No. 123R does not require the recording of deferred stock compensation charges in stockholder’s equity on the grant date of a stock based award.  As such, in accordance with SFAS No. 123R, all deferred stock compensation charges recorded under APB No. 25, totaling $1,400,000 at December 31, 2005, have been reversed upon adoption of SFAS No. 123R, with a corresponding reduction being recorded in consolidated additional paid-in capital.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.    EARNINGS PER SHARE

Earnings Per Share.Basic earnings per share for each class of common stock is computed by dividing the income or loss allocated to each class of common stock by the weighted average number of outstanding shares of that class of common stock. Diluted earnings per share is computed by dividing the income allocated to each class of common stock by the weighted average number of outstanding shares of that class of common stock including the dilutive effect of potential common shares. Potential common shares primarily consist of employee stock options and unvested restricted stock grants.

The earnings or losses allocated to each class of common stock are determined by Acacia Research Corporation’s board of directors. This determination is generally based on the net income or loss amounts of the corresponding group determined in accordance with accounting principles generally accepted in the United States of America. Acacia Research Corporation believes this method of allocation is systematic and reasonable. The Acacia Research Corporation board of directors can, at its discretion, change the method of allocating earnings or losses to each class of common stock at any time.

Weighted average share information for the periods presented was as follows:

	For the Three Months Ended
	March 31, 2006		March 31, 2005
Acacia Research - Acacia Technologies stock
Basic and diluted weighted average number of common shares outstanding		27,400,857		24,558,419
All outstanding stock options and restricted stock excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive		6,745,919		5,994,928
Acacia Research - CombiMatrix stock
Basic and diluted weighted average number of common shares outstanding		38,992,402		31,200,496
All outstanding stock options excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive		6,949,466		6,328,839

Outstanding stock options under the CombiMatrix Molecular Diagnostics 2005 Stock Award Plan, as disclosed at Note 9, have also been excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive.

4.    GOODWILL AND INTANGIBLES

The Acacia Technologies group had $121,000 of goodwill at March 31, 2006, and December 31, 2005. The CombiMatrix group had $16,918,000 and $18,859,000 of goodwill at March 31, 2006, and December 31, 2005, respectively.

Acacia Research Corporation’s only identifiable intangible assets at March 31, 2006, and December 31, 2005, are patents and patent rights. The gross carrying amounts and accumulated amortization as of March 31, 2006, and December 31, 2005, related to patents and patent rights, by segment, are as follows (in thousands):

	Acacia Technologies Group						CombiMatrix Group						Consolidated
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
	2006			2005			2006			2005			2006			2005
Gross carrying amount - patents	$	30,251		$	30,392		$	12,095		$	12,095		$	42,346		$	42,487
Accumulated amortization		(7,949	)		(6,606	)		(4,443	)		(4,169	)		(12,392	)		(10,775	)
Patents, net	$	22,302		$	23,786		$	7,652		$	7,926		$	29,954		$	31,712

The Acacia Technologies group and the CombiMatrix group’s patents have remaining estimated economic useful lives up to 2013 and 2020, respectively. The weighted average remaining estimated economic useful life of the Acacia Technologies group’s patents is 5 years. Annual aggregate amortization expense for each of the five fiscal years through December 31, 2010 is estimated to be $5,414,000 in 2006, $5,375,000 in 2007, $4,052,000 in 2008, $3,602,000 in 2009 and $3,335,000 in 2010 for the Acacia Technologies group and $1,095,000 per year for the CombiMatrix group. At March 31, 2006, and December 31, 2005, all of our acquired intangible assets other than goodwill were subject to amortization.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2006, the Acacia Technologies group paid patent acquisition costs totaling $550,000 in connection with the acquisition of the rights to several additional patent portfolios. The patents have estimated economic useful lives of seven years. Refer to Note 7 for additions to patent related intangibles during the three months ended March 31, 2005.

As of March 31, 2006, the CombiMatrix group reduced its goodwill and deferred tax liability balances by $1,941,000, which were initially recorded in fiscal 2000, to properly reflect the reduction in its income tax valuation allowance after consideration of the deferred tax liability. As of March 31, 2006, the Acacia Technologies group reduced its patents and deferred tax liability by $691,000, which were initially recorded in fiscal 2002, to properly reflect the reduction in its income tax valuation allowance after consideration of the deferred tax liability.

5.    RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FAS No. 133 and FAS No. 140. FAS No. 155 simplifies accounting for certain hybrid instruments under FAS No. 133 by permitting fair value remeasurement for financial instruments that otherwise would require bifurcation and eliminating FAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provides that beneficial interests are not subject to the provisions of FAS No. 133. FAS No. 155 also eliminates the previous restriction under FAS No. 140 on passive derivative instruments that a qualifying special-purpose entity may hold. FAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year that begins after September 15, 2006. We do not expect the adoption of this statement to have a material impact on the Acacia Research Corporation, Acacia Technologies group or CombiMatrix group results of operations, financial position or cash flows.

In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets,” an amendment of FASB Statement No. 140. FAS No. 156 permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess to rights for impairment or the need for an increased obligation. FAS No. 156 also clarifies when a servicer should separately recognize servicing assets and liabilities, requires all separately recognized assets and liabilities to be initially measured at fair value, if practicable, permits a one-time reclassification of available-for-sales securities to trading securities by an entity with recognized servicing rights and requires additional disclosures for all separately recognized servicing assets and liabilities. FAS No. 156 is effective as of the beginning of an entity’s fiscal year that begins after September 15, 2006. We do not expect the adoption of this statement to have a material impact on the Acacia Research Corporation, Acacia Technologies group or CombiMatrix group results of operations, financial position or cash flows.

6.    EQUITY FINANCING

In February 2005, Acacia Research Corporation raised gross proceeds of $19,600,000 through the sale of 3,500,000 shares of AR-Acacia Technologies stock at a price of $5.60 per share in a registered direct offering. Net proceeds raised of approximately $19,532,000, which are net of related issuance costs, were attributed to the Acacia Technologies group. The shares of AR-Acacia Technologies stock were offered pursuant to an effective registration statement previously filed with the Securities and Exchange Commission.

7.    ACQUISITION

On January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned subsidiary of Acacia Research Corporation, acquired substantially all of the assets of Global Patent Holdings, LLC, a privately held patent holding company based in Northbrook, Illinois, which owned 11 patent licensing companies. The acquisition provided the Acacia Technologies group 100% ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries. As a result of the acquisition, we have expanded and diversified the Acacia Technologies group’s potential revenue generating activities.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The acquisition was accounted for in accordance with the purchase method of accounting. Under the purchase method of accounting, the purchase consideration is allocated to the assets acquired, including tangible assets, patents and other identifiable intangibles and liabilities assumed, based on their estimated fair values at the date of acquisition. The consolidated statement of operations includes the results of the acquired companies beginning on January 28, 2005, the date of acquisition. The aggregate purchase consideration was approximately $25,105,000, including $5.0 million of cash, the issuance of 3,938,832 shares of AR-Acacia Technologies stock valued at $19,293,000 (net of estimated common stock registration costs of $228,000) and acquisition costs, including registration costs, of $812,000. The value of the common shares issued was determined based on the average market price of AR-Acacia Technologies stock, as reported on NASDAQ, over the 5-day period (December 13 - December 17, 2004) before and after the terms of the acquisition were agreed to and announced.

The following table summarizes the total purchase consideration and the allocation of the consideration paid to the estimated fair value of the assets acquired and liabilities assumed (in thousands):

Purchase Consideration:
Cash paid	$	5,000
Fair value of AR-Acacia Technologies stock issued(1)		19,293
Acquisition and registration costs		812
Total purchase consideration	$	25,105
Purchase Price Allocation:
Estimated fair value of net tangible assets acquired at January 28, 2005	$	(26	)
Intangible assets acquired - patents and patent rights(1)		25,131
Total	$	25,105

____________________________________________

(1) Reflects non-cash investing activity.

Management was primarily responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed at the date of acquisition. Management considered a number of factors in estimating the fair value of the intangible assets acquired, including reference to an independent valuation. The patents and patent rights acquired were valued using a discounted cash flow model on a patent portfolio by portfolio basis, which estimated the future net cash flows expected to result from the licensing of each portfolio, taking into account potential infringers of the patents, usage of the underlying technologies, estimated license fee revenues, contingent legal fee arrangements, royalties due to former patent holders, other estimated costs, tax implications and other factors. A discount rate consistent with the risks associated with achieving the estimated net cash flows was used to estimate the present value of future estimated net cash flows. Management’s valuation resulted in an estimated fair value of patent related assets acquired of approximately $27,000,000, resulting in approximately $1,900,000 of excess fair value over the cost of net assets acquired, which has been allocated as a pro rata reduction to the amounts that otherwise would have been assigned to the assets acquired, in accordance with the purchase method of accounting.

Amounts attributable to patents and patent rights acquired are amortized using the straight-line method over the estimated economic useful lives of the underlying patents which range from two to seven years. At the date of acquisition, the estimated weighted average useful life of amortizable patent related intangibles acquired was approximately 6 years.

In connection with the acquisition described above, Acacia Global Acquisition Corporation entered into a consulting agreement with the former CEO of Global Patent Holdings, LLC who, as a result of the acquisition transaction, is also a shareholder of Acacia Research Corporation. The agreement requires the payment of $2,000,000 in consulting fees over a two-year period, and certain reimbursable consulting related expenses, commencing on the date of acquisition. Marketing, general and administrative expenses for the three months ended March 31, 2006 and March 31, 2005 include $273,000 and $195,000, respectively, in expenses related to the consulting agreement. Consulting services to be performed consist primarily of consultation on intellectual property matters associated with the patents and patent rights acquired in the transaction. The consulting fees will be expensed in the consolidated statement of operations as the consulting services are rendered during the two-year term of the consulting agreement. Acacia Global Acquisition Corporation may terminate the consulting agreement for cause as provided for in the agreement. The consulting agreement also contains certain automatic termination provisions, including; the failure by Acacia Global Acquisition Corporation to make timely consulting payments in accordance with the agreement; a significant decrease in working capital of Acacia Research Corporation, as defined in the agreement; material breach of the agreement by Acacia Global Acquisition Corporation; and the death of the consultant. Any occurrence of these conditions may require the payment of all remaining consulting fees outstanding under the agreement within thirty days of the occurrence of the termination event. Acacia Research Corporation also executed an agreement guaranteeing Acacia Global Acquisition Corporation’s performance of its obligations under the consulting agreement.

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ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The acquisition was treated for tax purposes as a taxable asset acquisition and, as such, Acacia Research Corporation did not record any book/tax basis differences and thus, no deferred income taxes were recorded in connection with the application of the purchase method of accounting. Differences between the book and tax amortization period for amounts allocated to patented related intangibles will give rise to deferred tax assets in future periods.

8.    COMMON STOCK PURCHASE WARRANT LIABILITY

Acacia Research Corporation’s classes of common stock are subject to certain redemption provisions in the event that Acacia Research Corporation sells, transfers, assigns or otherwise disposes of, in one transaction or a series of related transactions, all or substantially all of the properties and assets attributed to either group.

Acacia Research Corporation adopted FASB Staff Position No. 150-5 (“FSP No. 150-5”), effective July 1, 2005, which requires that warrants for shares that are redeemable be classified as liabilities, based on the fair values of the warrants, which are required to be marked to market at each balance sheet date. The fair value of contingently redeemable AR-CombiMatrix stock purchase warrants outstanding at March 31, 2006 and December 31, 2005 was $3,122,000 and $1,381,000, respectively. Warrant charges for the three months ended March 31, 2006, reflected in other income (expense), related to changes in the fair value of the warrant liability from January 1, 2006 to March 31, 2006, totaled $1,740,000.

The fair value of AR-CombiMatrix stock purchase warrants was determined using the Black-Scholes option-pricing model, assuming weighted average risk free interest rates of approximately 4.35% and 4.82% in December 2005 and March 31, 2006, respectively, volatility of 84% in December 2005 and 82% in March 2006, respectively, and terms of 2 to 4 years.

9.    STOCK BASED COMPENSATION PLANS

The 2002 Acacia Technologies Stock Incentive Plan (the “AR-Acacia Technologies Group Plan”) and the 2002 CombiMatrix Stock Incentive Plan (the “AR-CombiMatrix Group Plan”) were approved by the stockholders of Acacia Research Corporation in December 2002. The AR-Acacia Technologies Group Plan authorizes grants of stock options, stock awards and performance shares with respect to AR-Acacia Technologies stock. The AR-CombiMatrix Group Plan authorizes grants of stock options, stock awards and performance shares with respect to AR-CombiMatrix stock. Directors and certain officers and key employees with responsibilities involving both the Acacia Technologies group and the CombiMatrix group may be granted awards under both incentive plans in a manner which reflects their responsibilities. The board of directors believes that granting participants awards tied to performance of the group in which the participants work and, in certain cases the other group, is in the best interest of the Acacia Research Corporation and its stockholders. The terms of the AR-Acacia Technologies Group Plan and the AR-CombiMatrix Group Plan are identical except that AR-Acacia Technologies stock may be issued only under the AR-Acacia Technologies Group Plan and AR-CombiMatrix stock may be issued only under the AR-CombiMatrix Group Plan.

13

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Acacia Research Corporation’s compensation committee administers the discretionary option grant and stock issuance programs. This committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equivalent to the fair market value of the AR-CombiMatrix stock or AR-Acacia Technologies stock on the date of grant. Options generally begin to be exercisable six months to one year after grant and generally expire ten years after grant. Stock options generally vest over three to four years and restricted shares generally vest in full after two years (generally represents the requisite service period under SFAS No. 123R).

The authorized number of shares of common stock subject to the AR-Acacia Technologies Group Plan is 7,208,000 shares. The authorized number of shares of common stock subject to the AR-CombiMatrix Group Plan is 10,910,000 shares. The number of shares of common stock available for issuance under the AR-Acacia Technologies Group Plan and the AR-CombiMatrix Group Plan automatically increases on the first trading day of January each calendar year during the term of the Plan by an amount equal to three percent (3%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 500,000 shares for the AR-Acacia Technologies Group Plan and 600,000 shares for the AR-CombiMatrix Group Plan. The aggregate number of shares of common stock available for issuance under either Plan shall not exceed 20,000,000 shares. At March 31, 2006, shares available for grant are 36,000 and 2,647,000 under the AR-Acacia Technologies Group Plan and the AR-CombiMatrix Group Plan, respectively. The AR-Acacia Technologies Group Plan and the AR-CombiMatrix Group Plan do not segregate the number of securities remaining available for future issuance among stock options and other awards. The shares authorized for future issuance represents the total number of shares available through any combination of stock options or other awards. Upon the exercise of stock options or the granting of restricted stock, it is Acacia Research Corporation’s policy to issue new shares of the respective class of common stock.

A summary of option activity under our stock option plans for the three months ended March 31, 2006 is as follows:

AR-CombiMatrix Stock:	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2005		6,925,000			$6.82
Granted		78,000			$1.38
Exercised		-			-
Forfeited		(54,000	)		$3.87
Outstanding at March 31, 2006		6,949,000			$6.78
Vested and Exercisable at March 31, 2006		5,936,000			$7.31		5.6 years		$790,000

The weighted average fair value of stock options granted during the three months ended March 31, 2006 and 2005 was $0.97 and $2.44, respectively. No AR-CombiMatrix options were exercised during the three months ended March 31, 2006 and 2005. The fair value of options vested during the three months ended March 31, 2006 and 2005 was $1,136,000 and $942,000, respectively. As of March 31, 2006, the total unrecognized compensation expense related to nonvested stock option awards was $2,382,000, which is expected to be recognized over a weighted average term of approximately 1.5 years.

14

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

AR-Acacia Technologies Stock:	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2005		5,977,000			$7.64
Granted		465,000			$7.75
Exercised		(8,000	)		$2.12
Forfeited		(33,000	)		$2.90
Outstanding at March 31, 2006		6,401,000			$7.68
Vested and Exercisable		4,642,000			$8.41		5.2 years		$15,683,000

The weighted average grant date fair value of stock options granted during the three months ended March 31, 2006 and 2005 was $5.35 and $4.17, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $44,000 and $74,000, respectively. The fair value of options vested during the three months ended March 31, 2006 and 2005 was $1,021,000 and $278,000, respectively. As of March 31, 2006, the total unrecognized compensation expense related to nonvested stock option awards was $5,150,000, which is expected to be recognized over a weighted average term of approximately 2.5 years.

A summary of the status of AR-Acacia Technologies nonvested restricted shares as of March 31, 2006, and changes during the three months ended March 31, 2006, is as follows:

AR-Acacia Technologies Stock:	Nonvested Restricted Shares			Weighted Average Grant Date Fair Value
Nonvested restricted stock at December 31, 2005		338,000			$5.07
Granted		45,000			$7.89
Vested		(30,000	)		$7.16
Forfeited		(8,000	)		$4.70
Nonvested restricted stock at March 31, 2006		345,000			$5.27

As of March 31, 2006, the total unrecognized compensation expense related to nonvested restricted stock awards was $1,283,000, which is expected to be recognized over a weighted average period of approximately 1.5 years. The total fair value of shares vested during the three months ended March 31, 2006 was $215,000. There are no restricted share grants outstanding under the AR-CombiMatrix Group Plan.

At March 31, 2006, Acacia Research Corporation and its separate operating groups continue to record a full valuation allowance against its deferred tax assets due to management’s determination that the criteria for recognition have not been met. As such, the implementation and subsequent accounting for stock based awards under SFAS No. 123R did not have an impact on Acacia Research Corporation's or the separate group's deferred taxes or related tax provisions for the periods presented.

CombiMatrix Molecular Diagnostics 2005 Stock Award Plan

CombiMatrix Corporation’s wholly owned subsidiary, CMD, executed the CombiMatrix Molecular Diagnostics 2005 Stock Award Plan (the "CMD Plan") with plan provisions and terms similar to that of the AR-CombiMatrix Group Plan, as described above. As of December 31, 2005 and March 31, 2006, the CMD Plan had 4,000,000 shares of CMD common stock authorized for issuance and 1,692,000 options outstanding with exercise prices ranging from $0.10 to $0.20, and a weighted average exercise price of $0.10. As of March 31, 2006, 12,499 CMD options were vested and exercisable with a weighted average exercise price of $0.15, aggregate intrinsic value of $2,000 and weighted average remaining contractual term of approximately 10 years. No CMD options were granted, exercised or cancelled during the periods presented. As of March 31, 2006, the weighted average remaining contractual life of options outstanding under the CMD Plan was approximately 9 years.

Total stock compensation expense recognized for the three months ended March 31, 2006 was $6,000. As of March 31, 2006, the total unrecognized compensation expense related to nonvested stock option awards was $78,000 which is expected to be recognized over a weighted average term of 3 years. The fair value of options vested during the three months ended March 31, 2006 was not material.

15

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.    COMMITMENTS AND CONTINGENCIES

Collaborative and Research Agreements

On February 8, 2006, the CombiMatrix group executed a one-year, $2.1 million contract with the Department of Defense (“DoD”) to further the development of the CombiMatrix group's array technology for the detection of biological and chemical threat agents. Under the terms of the CombiMatrix group’s one-year contract with the DoD, the CombiMatrix group will perform research and development activities as described under the contract and will be reimbursed on a periodic basis for actual costs incurred to perform its obligations, plus a fixed fee, of up to $2.1 million. The CombiMatrix group expects to incur approximately $1,413,000 in research and development costs for the remainder of 2006 to complete its obligations to the DoD under this contract. As of March 31, 2006, the biological threat detection contract with the DoD was approximately 12% complete. In March 2004, the CombiMatrix group was awarded a two-year, $5.9 million contract with the DoD to further the development of the CombiMatrix group’s array technology for the detection of biological and chemical threat agents. The two-year $5.9 million contract was completed in December 2005.

In October 2004, the CombiMatrix group entered into an agreement to acquire up to a one-third ownership interest in Leuchemix, Inc. (“Leuchemix”), a private drug development firm, which is developing several compounds for the treatment of leukemia and other cancers. In accordance with the terms of the purchase agreement, the CombiMatrix group will purchase 3,137,500 shares of Series A Preferred Stock of Leuchemix for a total purchase price of $4,000,000. The ownership interest will be acquired and paid for quarterly over the two-year period commencing with the fourth quarter of 2004. In accordance with the terms of the purchase agreement, the CombiMatrix group made an additional $650,000 investment in Leuchemix during the three months ended March 31, 2006, resulting in an ownership interest of approximately 24% as of March 31, 2006. The CombiMatrix group will make additional investments in Leuchemix of $1,500,000 in 2006 in accordance with the terms of the agreement. The CombiMatrix group’s investment is being accounted for under the equity method.

Litigation and Patent Enforcement

Acacia Research Corporation is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on our financial position, results of operations or cash flows. Companies comprising the Acacia Technologies group are often required to engage in litigation to enforce their patents and patent rights.

On September 30, 2002, CombiMatrix Corporation and Dr. Donald Montgomery entered into a settlement agreement with Nanogen, Inc. to settle all pending litigation between the parties. During the three months ended March 31, 2005, the CombiMatrix group recorded a net non-cash credit totaling $179,000 in connection with certain anti-dilution provisions of the settlement agreement. The related liability reflected management’s estimate, as of each balance sheet date, of the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc. as a result of certain options and warrants exercised during the period, if any, and the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc. as of each balance sheet date pursuant to the anti-dilution terms of the agreement. The liability was adjusted at each balance sheet date for changes in the market value of the AR-CombiMatrix stock and is reflected as long-term until settled in equity. The anti-dilution provisions of the settlement agreement expired in September 2005 and thus, there is no liability recorded as of September 30, 2005, or in any future periods, and there were no charges or credits recognized during the period ending March 31, 2006.

In addition to other terms of the settlement agreement, CombiMatrix Corporation is also required to make quarterly payments to Nanogen, Inc. equal to 12.5% of payments to CombiMatrix Corporation from sales of products developed by CombiMatrix Corporation and its affiliates and based on the patents that had been in dispute in the litigation, up to an annual maximum of $1,500,000. The minimum quarterly payments under the settlement agreement are $25,000 per quarter until the patents expire in 2018. Royalties paid under the agreement during the three months ended March 31, 2006, and 2005, were $50,000 and $28,000, respectively.

Inventor Royalties and Contingent Legal Expenses

In connection with the acquisition of certain patents and patent rights, certain companies included in the Acacia Technologies group executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net license fee revenues (as defined in the respective agreements) generated by the Acacia Technologies group as a result of licensing the respective patents or patent portfolios. Inventor royalties paid pursuant to the agreements are expensed in the consolidated statement of operations and comprehensive loss in the period that the related license fee revenues are recognized.

16

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In connection with the Acacia Technologies group’s licensing and enforcement activities, the Acacia Technologies group may retain the services of law firms that specialize in intellectual property licensing and enforcement and patent law. These law firms may be retained on a contingent fee basis in which the law firms are paid on a scaled percentage of any negotiated license fees, settlements or judgments awarded based on how and when the license fees, settlements or judgments are obtained by the Acacia Technologies group. In instances where the Acacia Technologies group does not recover license fees from potential infringers, no contingent legal fees are paid; however, the Acacia Technologies group may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Legal fees advanced by contingent law firms that are required to be paid in the event that no license recoveries are obtained by the Acacia Technologies group are included in long-term liabilities in the statement of financial position.

Guarantees and Indemnifications

Acacia Research Corporation has made guarantees and indemnities under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases Acacia Research Corporation has indemnified its lessors for certain claims arising from the facility or the lease. Acacia Research Corporation indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia Research Corporation has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments Acacia Research Corporation could be obligated to make. To date, we have made no payments related to these guarantees and indemnities. Acacia Research Corporation estimates the fair value of its indemnification obligations as insignificant based on this history and insurance coverage and has therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.

11.    DISCONTINUED OPERATIONS

Results for the three months ended March 31, 2005, include a $210,000 charge, net of minority interests, related to estimated additional costs to be incurred in connection with the discontinued operations of Soundbreak.com (originally ceased operations in February 2001), related primarily to certain noncancellable lease obligations and a reduction in estimated amounts recoverable from existing sublease arrangements. The related lease obligations, which were guaranteed by Acacia Research Corporation, expired in August 2005. At March 31, 2006, assets consisted of cash and cash equivalents. At December 31, 2005, assets consisted of cash and cash equivalents and lease deposits. At March 31, 2006, liabilities related to miscellaneous accounts payable. At December 31, 2005, liabilities related primarily to miscellaneous payables and accrued lease termination costs. Refer to Note 13 for additional information on assets and liabilities related to discontinued operations for the periods presented.

12.    SALE OF INTEREST IN SUBSIDIARY

In January 2006, the CombiMatrix group expanded its relationship with one of its existing distributors, InBio, for the Asia Pacific region. Major components of the expanded relationship included the transfer of day-to-day operational responsibility and majority ownership of CombiMatrix K.K. to InBio, along with an expanded distribution agreement that encompasses Japan. InBio obtained 67% of the voting interests in CombiMatrix K.K. for a nominal amount of consideration. As a result, InBio assumed all operational and financial responsibilities of CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in CombiMatrix K.K. recorded in the statement of operations for three months ended March 31, 2006 was $84,000. Subsequent to the sale, the CombiMatrix group’s investment in CombiMatrix K.K. was accounted for under the equity method. The deconsolidation of CombiMatrix K.K. did not have a material impact on the consolidated or CombiMatrix group balance sheets as of March 31, 2006.

13.    CONSOLIDATING SEGMENT INFORMATION

Acacia Research Corporation has adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Our chief operating decision maker is considered to be Acacia Research Corporation’s Chief Executive Officer (“CEO”). The CEO reviews and evaluates financial information presented on a group basis as described below. Management evaluates performance based on the profit or loss from continuing operations and financial position of its segments. Acacia Research Corporation has two reportable segments as described earlier in Note 1.

Material intercompany transactions and transfers have been eliminated in consolidation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Presented below is consolidating financial information for our reportable segments reflecting the businesses of the CombiMatrix group and the Acacia Technologies group. Earnings attributable to each group has been determined in accordance with accounting principles generally accepted in the United States.

17

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Balance Sheets (In thousands) (unaudited)
	At March 31, 2006								At December 31, 2005
	Acacia								Acacia
	Technologies		CombiMatrix						Technologies		CombiMatrix
	Group		Group		Eliminations		Consolidated		Group		Group		Eliminations		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	9,193	$	3,443	$	-	$	12,636	$	14,498	$	5,666	$	-	$	20,164
Short-term investments		28,472		11,958		-		40,430		24,462		14,547		-		39,009
Accounts receivable		3,686		891		-		4,577		4,421		911		-		5,332
Prepaid expenses, inventory and other assets		1,497		692		-		2,189		1,406		709		-		2,115
Total current assets		42,848		16,984		-		59,832		44,787		21,833		-		66,620
Property and equipment, net of accumulated depreciation		118		2,179		-		2,297		121		2,363		-		2,484
Patents, net of accumulated amortization		22,302		7,652		-		29,954		23,786		7,926		-		31,712
Goodwill		121		16,918		-		17,039		121		18,859		-		18,980
Other assets		79		1,968		-		2,047		78		1,560		-		1,638
	$	65,468	$	45,701	$	-	$	111,169	$	68,893	$	52,541	$	-	$	121,434
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,785	$	2,870	$	-	$	4,655	$	1,441	$	2,483	$	-	$	3,924
Royalties and legal fees payable		2,115		-		-		2,115		3,758		-		-		3,758
Current portion of deferred revenues		600		181		-		781		639		165		-		804
Total current liabilities		4,500		3,051		-		7,551		5,838		2,648		-		8,486
Deferred income taxes		-		-		-		-		726		1,975		-		2,701
Deferred revenues, net of current portion		-		1,439		-		1,439		-		1,439		-		1,439
Other liabilities		127		3,122		-		3,249		83		1,381		-		1,464
Total liabilities		4,627		7,612		-		12,239		6,647		7,443		-		14,090
Minority interests		443		-		-		443		443		4		-		447
Redeemable stockholders' equity:
AR - Acacia Technologies stock		60,398		-		-		60,398		61,803		-		-		61,803
AR - CombiMatrix stock		-		38,089		-		38,089		-		45,094		-		45,094
Total stockholders' equity		60,398		38,089		-		98,487		61,803		45,094		-		106,897
	$	65,468	$	45,701	$	-	$	111,169	$	68,893	$	52,541	$	-	$	121,434

________________________

NOTE: Segment information for the Acacia Technologies group includes discontinued operations related to Soundbreak.com. Total assets related to discontinued operations totaled $372,000 and $741,000 at March 31, 2006, and December 31, 2005, respectively. Total liabilities related to discontinued operations totaled $49,000 and $144,000 at March 31, 2006, and December 31, 2005, respectively.

18

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Statement of Operations (In thousands) (unaudited)
	For the Three Months Ended March 31, 2006									For the Three Months Ended March 31, 2005
	Acacia									Acacia
	Technologies			CombiMatrix						Technologies			CombiMatrix
	Group			Group			Consolidated			Group			Group			Consolidated
Revenues:
Government contract	$	-		$	264		$	264		$	-		$	731		$	731
License fees		4,717			-			4,717			1,863			-			1,863
Products and service contracts		-			981			981			-			338			338
Total revenues		4,717			1,245			5,962			1,863			1,069			2,932
Operating expenses:
Cost of government contract revenues		-			250			250			-			691			691
Cost of product sales		-			221			221			-			163			163
Research and development expenses (including non-cash stock compensation expense)		-			2,379			2,379			-			1,140			1,140
Marketing, general and administrative expenses (including non-cash stock compensation expense)		3,537			3,962			7,499			1,610			2,153			3,763
Legal expenses - patents		366			-			366			561			-			561
Inventor royalties and contingent legal fees expense - patents		2,271			-			2,271			647			-			647
Amortization of patents		1,343			274			1,617			916			274			1,190
Legal settlement credits		-			-			-			-			(179	)		(179	)
Loss from equity investments		-			239			239			-			39			39
Total operating expenses		7,517			7,325			14,842			3,734			4,281			8,015
Operating loss		(2,800	)		(6,080	)		(8,880	)		(1,871	)		(3,212	)		(5,083	)
Other income (expense):
Interest and investment income		359			181			540			171			102			273
Loss on sale of interest in subsidiary		-			(84	)		(84	)		-			-			-
Warrant (charges) credits		-			(1,740	)		(1,740	)		-			-			-
Total other income (expense)		359			(1,643	)		(1,284	)		171			102			273
Loss from continuing operations before income  taxes		(2,441	)		(7,723	)		(10,164	)		(1,700	)		(3,110	)		(4,810	)
Benefit for income taxes		32			34			66			36			34			70
Loss from continuing operations		(2,409	)		(7,689	)		(10,098	)		(1,664	)		(3,076	)		(4,740	)
Discontinued operations:
Estimated loss on disposal of discontinued operations		-			-			-			(210	)		-			(210	)
Net loss	$	(2,409	)	$	(7,689	)	$	(10,098	)	$	(1,874	)	$	(3,076	)	$	(4,950	)

19

ACACIA RESEARCH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Statement of Cash Flows (In thousands) (unaudited)
	For The Three Months Ended March 31, 2006											For The Three Months Ended March 31, 2005
	Acacia											Acacia
	Technologies			CombiMatrix								Technologies			CombiMatrix
	Group			Group			Eliminations		Consolidated			Group			Group			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(2,409	)	$	(7,689	)	$	-	$	(10,098	)	$	(1,874	)	$	(3,076	)	$	-		$	(4,950	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,360			518			-		1,878			929			553			-			1,482
Non-cash stock compensation		1,048			695			-		1,743			-			(126	)		-			(126	)
Deferred taxes		(36	)		(34	)		-		(70	)		(36	)		(34	)		-			(70	)
Non-cash warrant charges (credit)		-			1,740			-		1,740			-			-			-			-
Non-cash legal settlement charges (credits)		-			-			-		-			-			(179	)		-			(179	)
Estimated loss on disposal of discontinued operations		-			-			-		-			210			-			-			210
Loss from equity investments		-			239			-		239			-			39			-			39
Loss on sale of interest in subsidiary		-			84			-		84			-			-			-			-
Other		-			124			-		124			-			(28	)		-			(28	)
Changes in assets and liabilities, excluding effect of business acquisition:
Accounts receivable		735			3			-		738			(698	)		(164	)		-			(862	)
Prepaid expenses, inventory and other assets		(456	)		(41	)		-		(497	)		(375	)		(197	)		30			(542	)
Accounts payable and accrued expenses		507			620			-		1,127			89			290			(30	)		349
Royalties and legal fees payable		(1,643	)		-			-		(1,643	)		481			-			-			481
Deferred revenues		(39	)		68			-		29			453			(54	)		-			399
Net cash used in operating activities from continuing operations		(933	)		(3,673	)		-		(4,606	)		(821	)		(2,976	)		-			(3,797	)
Net cash provided by (used in) operating activities from discontinued operations		245			-			-		245			(288	)		-			-			(288	)
Net cash used in operating activities		(688	)		(3,673	)		-		(4,361	)		(1,109	)		(2,976	)		-			(4,085	)
Cash flows from investing activities:
Purchase of property and equipment		(14	)		(161	)		-		(175	)		(16	)		(252	)		-			(268	)
Purchase of available-for-sale investments		(4,007	)		(1,021	)		-		(5,028	)		(35	)		(4,638	)		-			(4,673	)
Sale of available-for-sale investments		-			3,605			-		3,605			4,650			10,534			-			15,184
Business acquisition		(16	)		-			-		(16	)		(5,689	)		-			-			(5,689	)
Purchase of additional interests in equity method investee		-			(650	)		-		(650	)		-			(250	)		-			(250	)
Patent acquisition costs		(550	)		-			-		(550	)		(175	)		-			-			(175	)
Sale of interest in subsidiary		-			(369	)		-		(369	)		-			-			-			-
Net cash provided by (used in) investing activities		(4,587	)		1,404			-		(3,183	)		(1,265	)		5,394			-			4,129
Cash flows from financing activities:
Net cash attributed to the Acacia Technologies group		(30	)		-			-		(30	)		19,521			-			-			19,521
Net cash attributed to the CombiMatrix group		-			46			-		46			-			43			-			43
Net cash provided by (used in) financing activities		(30	)		46			-		16			19,521			43			-			19,564
Effect of exchange rate on cash		-			-			-		-			-			9			-			9
Increase (decrease) in cash and cash equivalents		(5,305	)		(2,223	)		-		(7,528	)		17,147			2,470			-			19,617
Cash and cash equivalents, beginning		14,498			5,666			-		20,164			10,925			2,985			-			13,910
Cash and cash equivalents, ending	$	9,193		$	3,443		$	-	$	12,636		$	28,072		$	5,455		$	-		$	33,527

20

COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
	March 31,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	3,443		$	5,666
Available-for-sale investments		11,958			14,547
Accounts receivable		891			911
Inventory, prepaid expenses and other assets		692			709
Total current assets		16,984			21,833
Property and equipment, net of accumulated depreciation		2,179			2,363
Patents, net of accumulated amortization		7,652			7,926
Goodwill		16,918			18,859
Other assets		1,968			1,560
	$	45,701		$	52,541
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable and accrued expenses	$	2,870		$	2,483
Current portion of deferred revenues		181			165
Total current liabilities		3,051			2,648
Deferred income taxes		-			1,975
Deferred revenues, net of current portion		1,439			1,439
Other liabilities		3,122			1,381
Total liabilities		7,612			7,443
Minority interests		-			4
Commitments and contingencies (Note 5)
Allocated net worth:
Funds allocated by Acacia Research Corporation		170,407			169,723
Accumulated net losses		(132,318	)		(124,629	)
Total allocated net worth		38,089			45,094
	$	45,701		$	52,541

The accompanying notes are an integral part of these financial statements.

21

COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Revenues:
Government contract	$	264		$	731
Products		924			278
Service contracts		57			60
Total revenues		1,245			1,069
Operating expenses:
Cost of government contract revenues		250			691
Cost of product sales		221			163
Research and development expenses (including non-cash stock compensation expense of $293 in 2006)		2,379			1,140
Marketing, general and administrative expenses (including non-cash stock compensation expense of $402 in 2006 and ($126) in 2005)		3,962			2,153
Amortization of patents		274			274
Legal settlement credits		-			(179	)
Loss from equity investments		239			39
Total operating expenses		7,325			4,281
Operating loss		(6,080	)		(3,212	)
Other income (expense):
Interest and investment income		181			102
Loss on sale of interest in subsidiary		(84	)		-
Warrant (charges) credits		(1,740	)		-
Total other income (expense)		(1,643	)		102
Loss from operations before income taxes		(7,723	)		(3,110	)
Benefit for income taxes		34			34
Division net loss	$	(7,689	)	$	(3,076	)

The accompanying notes are an integral part of these financial statements.

22

COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Cash flows from operating activities:
Division net loss from operations	$	(7,689	)	$	(3,076	)
Adjustments to reconcile division net loss from operations to net cash used in operating activities:
Depreciation and amortization		518			553
Non-cash stock compensation		695			(126	)
Deferred taxes		(34	)		(34	)
Non-cash warrant charges (credits)		1,740			-
Non-cash legal settlement charges (credits)		-			(179	)
Loss from equity investments		239			39
Loss on sale of interest in subsidiary		84
Other		124			(28	)
Changes in assets and liabilities:
Accounts receivable		3			(164	)
Inventory, prepaid expenses and other assets		(41	)		(197	)
Accounts payable and accrued expenses		620			290
Deferred revenues		68			(54	)
Net cash used in operating activities		(3,673	)		(2,976	)
Cash flows from investing activities:
Purchase of property and equipment		(161	)		(252	)
Purchase of available-for-sale investments		(1,021	)		(4,638	)
Sale of available-for-sale investments		3,605			10,534
Purchase of additional interests in equity method investee		(650	)		(250	)
Sale of interest in subsidiary		(369	)		-
Net cash provided by investing activities		1,404			5,394
Cash flows from financing activities:
Net cash flows attributed to the CombiMatrix group		46			43
Effect of exchange rate on cash		-			9
(Decrease) increase in cash and cash equivalents		(2,223	)		2,470
Cash and cash equivalents, beginning		5,666			2,985
Cash and cash equivalents, ending	$	3,443		$	5,455

The accompanying notes are an integral part of these financial statements.

23

COMBIMATRIX GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. Acacia Research Corporation is comprised of two separate divisions: the CombiMatrix group and the Acacia Technologies group.

Our life sciences business, referred to as the “CombiMatrix group,” a division of Acacia Research Corporation, is comprised of our wholly owned subsidiary, CombiMatrix Corporation and CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix Molecular Diagnostics and includes all corporate assets, liabilities and transactions related to Acacia Research Corporation’s life sciences business.

The CombiMatrix group develops proprietary technologies and products and services in the areas of drug development, genetic analysis, nanotechnology research, defense and homeland security markets, and other markets where its products could be utilized. Among the technologies being developed by the CombiMatrix group is a platform technology to produce customizable arrays, which are semiconductor-based tools for use in identifying and determining the roles of genes, gene mutations and proteins. This technology has potential applications in the areas of genomics, proteomics, biosensors, drug discovery, drug development, diagnostics, combinatorial chemistry, material sciences and nanotechnology. Other technologies include proprietary molecular synthesis and screening methods for the discovery of potential new drugs. CombiMatrix Molecular Diagnostics, Inc., a wholly owned subsidiary located in Irvine, California, is exploring opportunities for the CombiMatrix group’s arrays in the field of molecular diagnostics. In January 2006, CombiMatrix Corporation sold 67% of its ownership interest in CombiMatrix K.K. to a third party. Refer to Note 6.

In January 2006, Acacia Research Corporation's board of directors approved a plan for its wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company. The transaction is expected to be completed in the third quarter of 2006, subject, however, to determining that there are no significant negative tax consequences to Acacia Research Corporation or its shareholders and completing the required filings with the Securities and Exchange Commission, or SEC. If the conditions are met, Acacia Research Corporation will redeem all of the issued and outstanding shares of AR-CombiMatrix common stock for all of the common stock of CombiMatrix Corporation, which will register its common stock under the Securities and Exchange Act of 1934. Following the redemption, CombiMatrix Corporation will apply to list its shares for trading on a national exchange.

Liquidity and Risks. Refer to Note 1 to the Acacia Research Corporation consolidated financial statements for a discussion of consolidated and individual group liquidity and risks.

Basis of Presentation. The unaudited interim CombiMatrix group financial statements as of March 31, 2006, and for the interim periods presented, have been prepared in accordance with generally accepted accounting principles for interim financial information. These interim financial statements should be read in conjunction with the CombiMatrix group financial statements and Acacia Research Corporation’s consolidated financial statements and notes thereto for the year ended December 31, 2005. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The CombiMatrix group financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of its financial position as of March 31, 2006, and the results of its operations and its cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results to be expected for the entire year.

24

COMBIMATRIX GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

On December 11, 2002, Acacia Research Corporation’s stockholders voted in favor of a recapitalization transaction, which became effective on December 13, 2002, whereby Acacia Research Corporation created two new classes of common stock called Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”) and Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”), and divided Acacia Research Corporation’s existing Acacia Research Corporation common stock into shares of the two new classes of common stock.

AR-CombiMatrix stock is intended to reflect the separate performance of the CombiMatrix group, a division of Acacia Research Corporation. The CombiMatrix group is not a separate legal entity. Holders of AR-CombiMatrix stock are stockholders of Acacia Research Corporation. As a result, holders of AR-CombiMatrix stock are subject to all of the risks of an investment in Acacia Research Corporation and all of its businesses, assets and liabilities. The assets that Acacia Research Corporation attributes to the CombiMatrix group could be subject to the liabilities of the Acacia Technologies group.

The CombiMatrix group financial statements taken together with the Acacia Technologies group financial statements comprise all of the accounts included in the corresponding consolidated financial statements of Acacia Research Corporation. The financial statements of the CombiMatrix group reflect the financial position, results of operations, and cash flows of the businesses included therein. The financial statements of the CombiMatrix group include the accounts or assets of Acacia Research Corporation specifically attributed to the CombiMatrix group and were prepared using amounts included in Acacia Research Corporation’s consolidated financial statements.

Financial effects arising from one group that affect Acacia Research Corporation’s results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other group and the market price of the class of common stock relating to the other group. Any division net losses of the CombiMatrix group or the Acacia Technologies group and dividends or distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia Technologies stock or repurchases of preferred stock of Acacia Research Corporation will reduce the assets of Acacia Research Corporation legally available for payment of dividends on AR-CombiMatrix stock or AR-Acacia Technologies stock.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Stock-Based Compensation. Refer to Note 2 and Note 9 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

Earnings Per Share Information and Stock Option and Related Option Plan Information. Earnings per share and stock option and related option plan information is omitted from the CombiMatrix group footnotes because AR-CombiMatrix stock is part of the capital structure of Acacia Research Corporation. The CombiMatrix group is not a separate legal entity. Holders of AR-CombiMatrix stock are stockholders of Acacia Research Corporation. This presentation reflects the fact that the CombiMatrix group does not have legally issued common or preferred stock and AR-CombiMatrix stock transactions are not legal transactions of the CombiMatrix group. Refer to the Acacia Research Corporation consolidated financial statements for earnings per share information for Acacia Research Corporation’s classes of stock, computed using the two-class method in accordance with SFAS No. 128, “Earnings per Share.” Refer to the Acacia Research Corporation consolidated financial statements for disclosures regarding Acacia Research Corporation’s stock option plans.

3.    RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 5 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

4.    GOODWILL AND INTANGIBLE ASSETS

The CombiMatrix group’s only identifiable intangible assets are patents, which have remaining economic useful lives up to 2020. Annual aggregate amortization expense for each of the five fiscal years through December 31, 2010 is estimated to be $1,095,000 per year. At March 31, 2006 and December 31, 2005, all of the CombiMatrix group’s acquired intangible assets other than goodwill were subject to amortization.

25

COMBIMATRIX GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

As of March 31, 2006, the CombiMatrix group reduced its goodwill and deferred tax liability balances by $1,941,000, which were initially recorded in fiscal 2000, to properly reflect the reduction in its income tax valuation allowance after consideration of the deferred tax liability.

5.    COMMITMENTS AND CONTINGENCIES

On February 8, 2006, the CombiMatrix group executed a one-year, $2.1 million contract with the Department of Defense (“DoD”) to further the development of the CombiMatrix group's array technology for the detection of biological and chemical threat agents. Under the terms of the CombiMatrix group’s one-year contract with the DoD, the CombiMatrix group will perform research and development activities as described under the contract and will be reimbursed on a periodic basis for actual costs incurred to perform its obligations, plus a fixed fee, of up to $2.1 million. The CombiMatrix group expects to incur approximately $1,413,000 in research and development costs for the remainder of 2006 to complete its obligations to the DoD under this contract. As of March 31, 2006, the biological threat detection contract with the DoD was approximately 12% complete. In March 2004, the CombiMatrix group was awarded a two-year, $5.9 million contract with the DoD to further the development of the CombiMatrix group’s array technology for the detection of biological and chemical threat agents. The two-year $5.9 million contract was completed in December 2005.

In October 2004, the CombiMatrix group entered into an agreement to acquire up to a one-third ownership interest in Leuchemix, Inc. (“Leuchemix”), a private drug development firm, which is developing several compounds for the treatment of leukemia and other cancers. In accordance with the terms of the purchase agreement, the CombiMatrix group will purchase 3,137,500 shares of Series A Preferred Stock of Leuchemix for a total purchase price of $4,000,000. The ownership interest will be acquired and paid for quarterly over the two-year period commencing with the fourth quarter of 2004. In accordance with the terms of the purchase agreement, the CombiMatrix group made an additional $650,000 investment in Leuchemix during the three months ended March 31, 2006, resulting in an ownership interest of approximately 24% as of March 31, 2006. The CombiMatrix group will make additional investments in Leuchemix of $1,500,000 in 2006 in accordance with the terms of the agreement. The CombiMatrix group’s investment is being accounted for under the equity method.

On September 30, 2002, CombiMatrix Corporation and Dr. Donald Montgomery entered into a settlement agreement with Nanogen, Inc. to settle all pending litigation between the parties. During the three months ended March 31, 2005, the CombiMatrix group recorded a net non-cash credit totaling $179,000 in connection with certain anti-dilution provisions of the settlement agreement. The related liability reflected management’s estimate, as of each balance sheet date, of the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc. as a result of certain options and warrants exercised during the period, if any, and the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc. as of each balance sheet date pursuant to the anti-dilution terms of the agreement. The liability was adjusted at each balance sheet date for changes in the market value of the AR-CombiMatrix stock and is reflected as long-term until settled in equity. The anti-dilution provisions of the settlement agreement expired in September 2005 and thus, there is no liability recorded as of September 30, 2005, or in any future periods, and there were no charges or credits recognized during the period ending March 31, 2006

In addition to other terms of the settlement agreement, CombiMatrix Corporation is also required to make quarterly payments to Nanogen, Inc. equal to 12.5% of payments to CombiMatrix Corporation from sales of products developed by CombiMatrix Corporation and its affiliates and based on the patents that had been in dispute in the litigation, up to an annual maximum of $1,500,000. The minimum quarterly payments under the settlement agreement are $25,000 per quarter until the patents expire in 2018. Royalties paid under the agreement during the three months ended March 31, 2006, and 2005, were $50,000 and $28,000, respectively.

The CombiMatrix group is subject to claims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on the CombiMatrix group’s financial position, results of operations or cash flows.

26

COMBIMATRIX GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

6.    SALE OF INTEREST IN SUBSIDIARY

In January 2006, the CombiMatrix group expanded its relationship with one of its existing distributors, InBio, for the Asia Pacific region. Major components of the expanded relationship included the transfer of day-to-day operational responsibility and majority ownership of CombiMatrix K.K. to InBio, along with an expanded distribution agreement that encompasses Japan. InBio obtained 67% of the voting interests in CombiMatrix K.K. for a nominal amount of consideration. As a result, InBio assumed all operational and financial responsibilities of CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in CombiMatrix K.K. recorded in the statement of operations for three months ended March 31, 2006 was $84,000. Subsequent to the sale, the CombiMatrix group’s investment in CombiMatrix K.K. was accounted for under the equity method. The deconsolidation of CombiMatrix K.K. did not have a material impact on the CombiMatrix group balance sheet as of March 31, 2006.

27

ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
	March 31,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	9,193		$	14,498
Short-term investments		28,472			24,462
Accounts receivable		3,686			4,421
Prepaid expenses and other assets		1,497			1,406
Total current assets		42,848			44,787
Property and equipment, net of accumulated depreciation		118			121
Patents, net of accumulated amortization		22,302			23,786
Goodwill		121			121
Other assets		79			78
	$	65,468		$	68,893
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable and accrued expenses	$	1,785		$	1,441
Royalties and legal fees payable		2,115			3,758
Current portion of deferred revenues		600			639
Total current liabilities		4,500			5,838
Deferred income taxes		-			726
Other liabilities		127			83
Total liabilities		4,627			6,647
Minority interests		443			443
Commitments and contingencies (Note 7)
Allocated net worth:
Funds allocated by Acacia Research Corporation		145,091			144,087
Accumulated net losses		(84,693	)		(82,284	)
Total allocated net worth		60,398			61,803
	$	65,468		$	68,893

The accompanying notes are an integral part of these financial statements.

28

ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Revenues:
License fees	$	4,717		$	1,863
Total revenues		4,717			1,863
Operating expenses:
Marketing, general and administrative expenses (including non-cash stock compensation expense of $1,048 in 2006)		3,537			1,610
Legal expenses - patents		366			561
Contingent legal fees and royalties expenses - patents		2,271			647
Amortization of patents		1,343			916
Total operating expenses		7,517			3,734
Operating loss		(2,800	)		(1,871	)
Other income:
Interest income		359			171
Total other income		359			171
Loss from continuing operations before income taxes		(2,441	)		(1,700	)
Benefit for income taxes		32			36
Loss from continuing operations		(2,409	)		(1,664	)
Discontinued operations:
Estimated loss on disposal of discontinued operations		-			(210	)
Division net loss	$	(2,409	)	$	(1,874	)

The accompanying notes are an integral part of these financial statements.

29

ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	For the Three Months Ended
	March 31, 2006			March 31, 2005
Cash flows from operating activities:
Division net loss from continuing operations	$	(2,409	)	$	(1,874	)
Adjustments to reconcile division net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		1,360			929
Non-cash stock compensation		1,048			-
Deferred taxes		(36	)		(36	)
Estimated loss on disposal of discontinued operations		-			210
Changes in assets and liabilities, excluding effect of business acquisitions:
Accounts receivable		735			(698	)
Prepaid expenses and other assets		(456	)		(375	)
Accounts payable and accrued expenses		507			89
Royalties and legal fees payable		(1,643	)		481
Deferred revenues		(39	)		453
Net cash used in operating activities from continuing operations		(933	)		(821	)
Net cash provided by (used in) operating activities from discontinued operations		245			(288	)
Net cash used in operating activities		(688	)		(1,109	)
Cash flows from investing activities:
Purchase of property and equipment		(14	)		(16	)
Purchase of available-for-sale investments		(4,007	)		(35	)
Sale of available-for-sale investments		-			4,650
Business acquisition		(16	)		(5,689	)
Patent acquisition costs		(550	)		(175	)
Net cash used in investing activities		(4,587	)		(1,265	)
Cash flows from financing activities:
Net cash flows attributed to the Acacia Technologies group		(30	)		19,521
(Decrease) increase in cash and cash equivalents		(5,305	)		17,147
Cash and cash equivalents, beginning		14,498			10,925
Cash and cash equivalents, ending	$	9,193		$	28,072

The accompanying notes are an integral part of these financial statements.

30

ACACIA TECHNOLOGIES GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The Acacia Technologies group, a division of Acacia Research Corporation, develops, acquires and licenses patented technologies. The Acacia Technologies group is primarily comprised of certain of Acacia Research Corporation’s wholly owned subsidiaries and limited liability companies including:

·Acacia Global Acquisition Corporation ·Acacia Media Technologies Corporation ·Acacia Patent Acquisition Corporation ·Acacia Technologies Services Corporation ·AV Technologies LLC ·Broadcast Data Retrieval Corporation ·Broadcast Innovation LLC ·Computer Cache Coherency Corporation ·Computer Docking Station Corporation ·Data Encryption Corporation ·Data Innovation LLC ·Financial Systems Innovation LLC ·High Resolution Optics Corporation ·Information Technology Innovation LLC ·InternetAd LLC ·IP Innovation LLC ·KY Data Systems LLC ·Microprocessor Enhancement Corporation ·New Medium LLC ·Product Activation Corporation ·TechSearch LLC ·VData LLC ·Resource Scheduling Corporation ·Software Collaboration Corporation ·Soundview Technologies, Inc. ·Spreadsheet Automation Corporation

The Acacia Technologies group also includes all corporate assets, liabilities, and related transactions of Acacia Research Corporation attributed to Acacia Research Corporation’s intellectual property licensing and enforcement business. Refer to “Business Acquisition” below for information on the Acacia Technologies group’s 2005 business acquisition activity.

The Acacia Technologies group currently controls 42 patent portfolios, which include over 160 U.S. patents, and certain foreign counterparts, covering technologies used in a wide variety of industries.

Business Acquisition. On January 28, 2005, Acacia Global Acquisition Corporation acquired the assets of Global Patent Holdings, LLC, which owned 11 patent licensing companies (“GPH Acquisition”). The acquisition provided the Acacia Technologies group ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries. Refer to Note 6 for a description of the acquisition transaction.

Liquidity and Risks. Refer to Note 1 to the Acacia Research Corporation consolidated financial statements for a discussion of consolidated and individual group liquidity and risks.

Basis of Presentation. The unaudited interim Acacia Technologies group financial statements as of March 31, 2006, and for the interim periods presented, have been prepared in accordance with generally accepted accounting principles for interim financial information. These interim financial statements should be read in conjunction with the Acacia Technologies group financial statements and Acacia Research Corporation’s consolidated financial statements and notes thereto for the year ended December 31, 2005. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

31

ACACIA TECHNOLOGIES GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

The Acacia Technologies group financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of its financial position as of March 31, 2006, and the results of its operations and its cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results to be expected for the entire year.

On December 11, 2002, our stockholders voted in favor of a recapitalization transaction, which became effective on December 13, 2002, whereby we created two new classes of common stock called Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”) and Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”), and divided our existing Acacia Research Corporation common stock into shares of the two new classes of common stock.

AR-Acacia Technologies stock is intended to reflect the separate performance of the Acacia Technologies group, a division of Acacia Research Corporation. The Acacia Technologies group is not a separate legal entity. Holders of AR-Acacia Technologies stock are stockholders of Acacia Research Corporation. As a result, holders of AR-Acacia Technologies stock are subject to all of the risks of an investment in Acacia Research Corporation and all of its businesses, assets and liabilities. The assets Acacia Research Corporation attributes to Acacia Technologies group could be subject to the liabilities of the CombiMatrix group.

The Acacia Technologies group financial statements taken together with the CombiMatrix group financial statements comprise all of the accounts included in the corresponding consolidated financial statements of Acacia Research Corporation. The financial statements of Acacia Technologies group reflect the financial position, results of operations, and cash flows of the businesses included therein. The financial statements of the Acacia Technologies group include the accounts or assets of Acacia Research Corporation specifically attributed to the Acacia Technologies group and were prepared using amounts included in Acacia Research Corporation’s consolidated financial statements.

Financial effects arising from one group that affect Acacia Research Corporation’s results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other group and the market price of the class of common stock relating to the other group. Any division net losses of the CombiMatrix group or the Acacia Technologies group and dividends or distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia Technologies stock or repurchases of preferred stock of Acacia Research Corporation will reduce the assets of Acacia Research Corporation legally available for payment of dividends on AR-CombiMatrix stock or AR-Acacia Technologies stock.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Revision in the Classification of Certain Securities. In connection with the preparation of the 2005 financial statements, the Acacia Technologies group concluded that it was appropriate to classify its annuity investments as current investments.  Prior to 2005, such investments had been classified as cash and cash equivalents.  Accordingly, the Acacia Technologies group made adjustments to its statement of cash flows for the three months ended March 31, 2005, to reflect the gross purchases of these securities as investing activities rather than as a component of cash and cash equivalents.  This change in classification does not affect previously reported cash flows from operations or from financing activities in previously reported statements of cash flows, and it does not affect previously reported statements of operations for any period.

As of March 31, 2005, before this revision in classification, $4,860,000 of these current investments were classified as cash and cash equivalents on the Acacia Technologies group’s balance sheet.  The impact of the revision in classification on cash flows from investing activities was not material for the any of the periods presented.

Stock-Based Compensation. Refer to Note 2 and Note 9 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

Earnings Per Share Information and Stock Option and Related Option Plan Information. Earnings per share and stock option and related option plan information is omitted from the Acacia Technologies group footnotes because AR-Acacia Technologies stock is part of the capital structure of Acacia Research Corporation. The Acacia Technologies group is not a separate legal entity. Holders of AR-Acacia Technologies stock are stockholders of Acacia Research Corporation. This presentation reflects the fact that the Acacia Technologies group does not have legally issued common or preferred stock and AR-Acacia Technologies stock transactions are not legal transactions of the Acacia Technologies group. Refer to the Acacia Research Corporation consolidated financial statements for earnings per share information for Acacia Research Corporation’s classes of stock, computed using the two-class method in accordance with SFAS No. 128, “Earnings per Share.” Refer to the Acacia Research Corporation consolidated financial statements for disclosures regarding Acacia Research Corporation’s stock option plans.

32

ACACIA TECHNOLOGIES GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

3.    RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 5 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

4.    INTANGIBLE ASSETS

The Acacia Technologies group’s only identifiable intangible assets are patents and patent rights which have remaining economic useful lives of between 1 and 7 years. The weighted average remaining economic useful life of the Acacia Technologies group’s patents is approximately 5 years. Annual aggregate amortization expense for each of the five fiscal years through December 31, 2010 is estimated to be $5,414,000 in 2006, $5,375,000 in 2007, $4,052,000 in 2008, $3,602,000 in 2009 and $3,335,000 in 2010.At March 31, 2006, and December 31, 2005, all of the Acacia Technologies group’s acquired intangible assets other than goodwill were subject to amortization.

For the three months ended March 31, 2006, the Acacia Technologies group paid patent acquisition costs totaling $550,000 in connection with the acquisition of the rights to several additional patent portfolios. The patents have estimated economic useful lives of seven years. Refer to Note 6 for additions to patent related intangibles during the three months ended March 31, 2005.

As of March 31, 2006, the Acacia Technologies group reduced its patents and deferred tax liability by $691,000, which were initially recorded in fiscal 2002, to properly reflect the reduction in its income tax valuation allowance after consideration of the deferred tax liability.

5.    EQUITY FINANCING

In February 2005, Acacia Research Corporation raised gross proceeds of $19,600,000 through the sale of 3,500,000 shares of AR-Acacia Technologies stock at a price of $5.60 per share in a registered direct offering. Net proceeds raised of approximately $19,532,000, which are net of related issuance costs, were attributed to the Acacia Technologies group. The shares of AR-Acacia Technologies stock were offered pursuant to an effective registration statement previously filed with the Securities and Exchange Commission.

6.    ACQUISITION

On January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned subsidiary of Acacia Research Corporation, acquired substantially all of the assets of Global Patent Holdings, LLC, a privately held patent holding company based in Northbrook, Illinois, which owned 11 patent licensing companies. The acquisition provided the Acacia Technologies group 100% ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries. As a result of the acquisition, we have expanded and diversified the Acacia Technologies group’s potential revenue generating activities.

The acquisition was accounted for in accordance with the purchase method of accounting. Under the purchase method of accounting, the purchase consideration is allocated to the assets acquired, including tangible assets, patents and other identifiable intangibles and liabilities assumed, based on their estimated fair values at the date of acquisition. The consolidated statement of operations includes the results of the acquired companies beginning on January 28, 2005, the date of acquisition. The aggregate purchase consideration was approximately $25,105,000, including $5.0 million of cash, the issuance of 3,938,832 shares of AR-Acacia Technologies stock valued at $19,293,000 (net of estimated common stock registration costs of $228,000) and acquisition costs, including registration costs, of $812,000. The value of the common shares issued was determined based on the average market price of AR-Acacia Technologies stock, as reported on NASDAQ, over the 5-day period (December 13 - December 17, 2004) before and after the terms of the acquisition were agreed to and announced.

33

ACACIA TECHNOLOGIES GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the total purchase consideration and the allocation of the consideration paid to the estimated fair value of the assets acquired and liabilities assumed (in thousands):

Purchase Consideration:
Cash paid	$	5,000
Fair value of AR-Acacia Technologies stock issued(1)		19,293
Acquisition and registration costs		812
Total purchase consideration	$	25,105
Purchase Price Allocation:
Estimated fair value of net tangible assets acquired at January 28, 2005	$	(26	)
Intangible assets acquired - patents and patent rights(1)		25,131
Total	$	25,105

___________________________________

(1) Reflects non-cash investing activity.

Management was primarily responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed at the date of acquisition. Management considered a number of factors in estimating the fair value of the intangible assets acquired, including reference to an independent valuation. The patents and patent rights acquired were valued using a discounted cash flow model on a patent portfolio by portfolio basis, which estimated the future net cash flows expected to result from the licensing of each portfolio, taking into account potential infringers of the patents, usage of the underlying technologies, estimated license fee revenues, contingent legal fee arrangements, royalties due to former patent holders, other estimated costs, tax implications and other factors. A discount rate consistent with the risks associated with achieving the estimated net cash flows was used to estimate the present value of future estimated net cash flows. Management’s valuation resulted in an estimated fair value of patent related assets acquired of approximately $27,000,000, resulting in approximately $1,900,000 of excess fair value over the cost of net assets acquired, which has been allocated as a pro rata reduction to the amounts that otherwise would have been assigned to the assets acquired, in accordance with the purchase method of accounting.

Amounts attributable to patents and patent rights acquired are amortized using the straight-line method over the estimated economic useful lives of the underlying patents which range from two to seven years. At the date of acquisition, the estimated weighted average useful life of amortizable patent related intangibles acquired was approximately 6 years.

In connection with the acquisition described above, Acacia Global Acquisition Corporation entered into a consulting agreement with the former CEO of Global Patent Holdings, LLC who, as a result of the acquisition transaction, is also a shareholder of Acacia Research Corporation. The agreement requires the payment of $2,000,000 in consulting fees over a two-year period, and certain reimbursable consulting related expenses, commencing on the date of acquisition. Marketing, general and administrative expenses for the three months ended March 31, 2006 and March 31, 2005 include $273,000 and $195,000, respectively, in expenses related to the consulting agreement. Refer to Note 7 to the Acacia Research Corporation consolidated financial statements for a description of the consulting services and other terms of the related agreement.

The acquisition was treated for tax purposes as a taxable asset acquisition and, as such, Acacia Research Corporation did not record any book/tax basis differences and thus, no deferred income taxes were recorded in connection with the application of the purchase method of accounting.

7.    COMMITMENTS AND CONTINGENCIES

In connection with the acquisition of certain patents and patent rights, certain companies included in the Acacia Technologies group executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive royalties based on future net license fee revenues (as defined in the respective agreements) generated by the Acacia Technologies group as a result of licensing the respective patents or patent portfolios. Royalties paid pursuant to the agreements are expensed in the consolidated statement of operations in the period that the related license fee revenues are recognized.

34

ACACIA TECHNOLOGIES GROUP

(A Division of Acacia Research Corporation)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

In connection with the Acacia Technologies group’s licensing and enforcement activities, the Acacia Technologies group may retain the services of law firms that specialize in intellectual property licensing and enforcement and patent law. These law firms may be retained on a contingent fee basis in which the law firms are paid on a scaled percentage of any negotiated license fees, settlements or judgments awarded based on how and when the license fees, settlements or judgments are obtained by the Acacia Technologies group. In instances where the Acacia Technologies group does not recover license fees from potential infringers, no contingent legal fees are paid; however, the Acacia Technologies group may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Legal fees advanced by contingent law firms that are required to be paid in the event that no license recoveries are obtained by the Acacia Technologies group are included in long-term liabilities in the statement of financial position.

The Acacia Technologies group is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on the Acacia Technologies group’s financial position, results of operations or cash flows. From time to time, companies comprising the Acacia Technologies group engage in litigation to enforce their patents and patent rights.

8.    DISCONTINUED OPERATIONS

Results for the three months ended March 31, 2005, include a $210,000 charge, net of minority interests, related to estimated additional costs to be incurred in connection with the discontinued operations of Soundbreak.com (originally ceased operations in February 2001), related primarily to certain noncancellable lease obligations and a reduction in estimated amounts recoverable from existing sublease arrangements. The related lease obligations, which were guaranteed by Acacia Research Corporation, expired in August 2005. At March 31, 2006, assets consisted of cash and cash equivalents. At December 31, 2005, assets consisted of cash and cash equivalents and lease deposits. At March 31, 2006, liabilities related to miscellaneous accounts payable. At December 31, 2005, liabilities related primarily to miscellaneous payables and accrued lease termination costs. Refer to Note 11 to the Acacia Research Corporation consolidated financial statements for additional information on assets and liabilities related to discontinued operations for the periods presented.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto contained in Part I, Item 1 of this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our businesses or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006, and our Registration Statement on Form S-3 filed with the SEC on April 25, 2006, that discuss our businesses in greater detail.

This report contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning product development, capital expenditures, earnings, litigation, regulatory matters, markets for products and services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Additional factors that could cause such results to differ materially from those described in the forward-looking statements are set forth in connection with the forward-looking statements and in our “Risk Factors” incorporated by reference in Part II, Item 1A of this report.

Businesses

As used in this Form 10-Q, “we,” “us” and “our” refer to Acacia Research Corporation and its subsidiary companies.

Acacia Research Corporation, a Delaware corporation, was originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999.

The following discussion is based primarily on our unaudited consolidated balance sheet as of March 31, 2006, and on our unaudited consolidated statement of operations for the period from January 1, 2006, to March 31, 2006. The discussion compares the activities for the three months ended March 31, 2006, to the activities for the three months ended March 31, 2005. This information should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto. This information should also be read in conjunction with the “Risk Factors” incorporated by reference in Part II, Item 1A of this report.

Acacia Research Corporation is comprised of two operating groups, the CombiMatrix group, our life sciences business, and the Acacia Technologies group, our intellectual property licensing and enforcement business. Refer to Note 1 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report, for a description of Acacia Research Corporation’s operating groups.

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Overview

CombiMatrix Group

During the three months ended March 31, 2006, the CombiMatrix group’s operating activities included the recognition of $1.2 million in revenues, including $264,000 in government contract revenues, and $981,000 in CustomArrays^TM product and service revenues. CustomArray product and service revenues increased 190% from the first quarter of 2005 and 91% over the prior quarter, signaling continued growth of the CombiMatrix group’s business and acceptance of its products and services in the marketplace. Research and development expenses, excluding government contract costs, increased due primarily to the impact of the CombiMatrix group’s wholly owned subsidiary, CMD, which was formed and began research and development activities in the second quarter of 2005.

The CombiMatrix group made significant developments in a number of its strategic business objectives including its commercial array technology platform, its partnership with the U.S. government and in the area of clinical diagnostics.

Regarding its array platform, the CombiMatrix group announced the launch of several new product offerings during the first quarter of 2006 including the Influenza A genotyping array and the ElectraSense™ Influenza array system. The CombiMatrix group also executed several new microarray core facility and distribution agreements for its array products and services. The CombiMatrix group also received notice from the European Patent Office that it was granted a key patent covering its array technology in Europe.

In the area of national defense, the CombiMatrix group continued development efforts with the U.S. Department of Defense, or DoD, by executing a one-year, $2.1 million contract in February 2006 with the DoD to further develop its microarray technologies for the detection of biological and chemical threat agents. An additional $2.4 million appropriation for similar technology development was announced in January 2006 and contract terms are being negotiated. The CombiMatrix group further expanded its relationship with the U.S. Air Force to develop a personal health monitoring system utilizing the CombiMatrix group's CustomArray technology.

In the area of clinical diagnostics, CMD added Mansoor Mohammad, Ph.D. as its Chief Scientific Officer and member of its board of directors. With the addition of Dr. Mohammad, CMD began work on its comparative genomic hybridization, or CGH, array platform and began a co-development project with Array Genomics Inc. in France to market and sell CMD’s CGH arrays. In March 2006, CMD received laboratory certification from federal and state regulatory agencies, allowing CMD to begin performing laboratory tests for doctors, clinics and pathologists based on the CombiMatrix group’s microarray platform.

The CombiMatrix group announced additional accomplishments and activities during the three months ended March 31, 2006, as follows:

· In January 2006, the CombiMatrix group launched a series of catalog microarrays specifically designed for microRNA analysis. MicroRNAs (“miRNAs”) are small, RNA molecules encoded in the genomes of plants and animals. These highly conserved, ~21-mer RNAs regulate the expression of genes and are believed to be critical to controlling physiology in areas that include neural development, viral disease, and cancer. Each miRNA is thought to regulate multiple genes, and since hundreds of miRNA genes are predicted to be present in higher eukaryotes the potential regulatory circuitry afforded by miRNAs is enormous. There is evidence that miRNAs may act as key regulators of processes as diverse as early development, cell proliferation and cell death, apoptosis and fat metabolism, and cell differentiation.

· In January 2006, the CombiMatrix group signed a non-exclusive agreement with The University of Colorado Health Sciences Center under the CombiMatrix Group’s CombiCore™ access program. Under this agreement all University of Colorado researchers can purchase, through their microarray core facility, the CombiMatrix group's CustomArrays™ and CatalogArrays™, including array processing services performed at the University of Colorado Health Science Center Microarray Core Facility.

· In January 2006, the CombiMatrix group entered into a non-exclusive distribution agreement with Cold Spring Biotech to distribute the CombiMatrix group's products and services in mainland China, Taiwan, and Hong Kong. Under the terms of the agreement, Cold Spring Biotech will market and sell CustomArrays™ and CatalogArrays™, including the recently introduced Influenza A Research Microarray.

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· In January 2006, the CombiMatrix group signed a non-exclusive agreement with The University of California Davis under the CombiMatrix group's CombiCore™ access program. Under this agreement all University of California Davis researchers can purchase, through the UC Davis Genome Center, the CombiMatrix group's CustomArrays™ and CatalogArrays™, including array processing services performed at the UC Davis Genome Center.

· In January 2006, the CombiMatrix group expanded its relationship with its existing partner, INBIO, for the Asia Pacific region. Major components of the expanded relationship include the transfer of day-to-day operational responsibility and majority ownership of CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix K.K. (the “KK”) to INBIO along with an expanded distribution agreement that encompasses Japan. INBIO obtained 67% of the voting interests in the KK and expanded its distribution agreements with the CombiMatrix group. INBIO assumed all operational and financial responsibilities of the KK including its liabilities.

· In January 2006, the CombiMatrix group announced that the 2006 U.S. Defense Appropriations Bill signed by President Bush included an allocation of $2.4 million to fund efforts by the CombiMatrix group to further develop its microarray technologies for the detection of biological and chemical threat agents.

· In February 2006, the CombiMatrix group began work on its one-year, $2.1 million contract with the DoD. Funding for this contract, which focuses on the use of the CombiMatrix group's array technology for military and antiterrorist applications, was previously announced as part of the DoD budget. The CombiMatrix group's development program with the DoD is focused on the integration of the CombiMatrix group’s biotechnology with microelectronics and microfluidics and the development of an automated system with maximum flexibility and sensitivity for biothreat agents with reduced size and cost.

· In February 2006, the CombiMatrix group launched its Influenza A detection and genotyping technology on the CustomArray™ 4X2K platform. This was another step in the CombiMatrix group’s expansion of its product line and another step in the CombiMatrix group’s goal to make Influenza A technology more available and affordable. The CombiMatrix group’s 4X2K Influenza A Research Microarray is a member of the CatalogArray™ product line and can detect and accurately type flu strains using a protocol that requires less than four hours start to finish, at a cost per test much lower than with the earlier CustomArray12K version. This microarray can identify H5N1 bird flu. Unlike other products on the market, it can provide information on the subtype of H5 influenzas while simultaneously identifying all other strains of Influenza A and providing a rich amount of information on mutations and novel strains of flu not yet seen.

· In February 2006, the CombiMatrix group established a Cooperative Research and Development Agreement (“CRDA”) with the U.S. Air Force Research Laboratory, Human Effectiveness Directorate, Biosciences and Protection Division, Applied Biotechnology Branch (AFRL/HEPB). The CRDA will focus on “Development of a Biomonitor Device with Biomarker-based Microarrays.” Under the CRDA, AFRL/HEPB and CombiMatrix will develop a personal health monitoring system utilizing the CombiMatrix group’s CustomArray™ technology. The goal of the program is to develop a miniaturized device capable of analyzing multiple biomarkers (either DNA or protein) that would aid the U.S. Department of Defense in its mission to effectively monitor the health status of military service personnel before, during, and after deployment where untoward exposures may impact on their performance or health.

· In March 2006, the CombiMatrix group launched the ElectraSense™ Influenza Typing System based on the CombiMatrix group’s propriety electrochemical detection technology and its Influenza A Typing Microarray. The CombiMatrix group's is prepared to make this system available to domestic and international government agencies that are engaged in monitoring influenza and planning for a potential pandemic. Using this system, government agencies can verify, before disseminating potentially alarming information to the public, whether samples contain a highly pathogenic substrain of H5N1 or one of the several non-lethal substrains of H5N1. The system is designed for research use, surveillance and monitoring applications, use for animal studies, and other applications not requiring FDA registration. The CombiMatrix group's will seek FDA approval for this product.

· In March 2006, renowned microarray and genomics expert Mansoor Mohammed, Ph.D. joined CMD as its Chief Scientific Officer and a member of its board of directors. Dr. Mohammed has been at the forefront of research and development in the fields of CGH and microarray technologies for his entire professional career. Between 2001 and 2003, he produced the world’s first commercially viable whole-genome Bacterial Artificial Chromosome (“BAC”) array and co-authored one of its seminal clinical applications. A BAC array is a highly efficient and accurate means of detecting genetic abnormalities responsible for a variety of human maladies, such as Down Syndrome, autism, and cancer.

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· In March 2006, CMD and Array Genomics Inc. (AG), Nr. Paris, France, announced that they will co-develop, market, and sell a new series of CGH microarray products and services internationally, using expertise and technology from both companies. The initial products, which will be manufactured in the U.S. by CMD and distributed in Europe by AG, are a series of arrays for the diagnosis of mental retardation anomalies. It is anticipated that the arrays will begin generating revenue for both companies within the next several weeks.

· In March 2006, the CombiMatrix group was granted a key patent in Europe (EP1185363B1), titled “Self-Assembling Arrays” by the European Patent Office. This European Patent was registered throughout the European Union in Germany, France, Spain, Great Britain, and Italy, and the opposition period has passed. A corresponding U.S. patent is pending in the U.S. Patent and Trademark Office and is moving through the process. The European patent claims both self-assembled arrays and a method for making self-assembled arrays on electrode arrays with self-assembled antibodies. This microarray configuration is especially useful for arraying proteins specifically antibodies. The technology enables products such as multiplexed immunoassays, monitoring of biowarfare and terrorist agents, and general protein analysis tools.

· In March 2006, CMD received certification to operate as a clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act (“CLIA”), a regulatory program that monitors the quality of laboratory testing. According to CLIA, any laboratory in the U.S. that conducts testing on human specimens for purposes other than research must be certified.

Acacia Technologies Group

The Acacia Technologies group’s operating activities for the three months ended March 31, 2006, were principally focused on the continued development, licensing and enforcement of its patent portfolios, including the continued pursuit of multiple ongoing technology licensing programs and the commencement of new technology licensing programs. In addition, we continued our focus on business development, including the acquisition of additional patent portfolios and the continued pursuit of opportunities to partner with patent owners and provide Acacia Technologies group’s unique intellectual property licensing, development and enforcement services.

Revenues for the three months ended March 31, 2006 were $4.7 million, as compared to $1.9 million for the three months ended March 31, 2005. Revenues for the three months ended March 31, 2006 included license fees from 21 new licensing agreements covering 9 of our technology licensing programs. The Acacia Technologies group generated revenues from 3 new technology licensing programs during the quarter, and to date, the Acacia Technologies group has generated revenues from 16 of its technology licensing programs. License fee revenues for the three months ended March 31, 2006 included fees from the licensing of our DMT® technology, Audio/Video Enhancement and Synchronization technology, Credit Card Fraud Protection technology, Enhanced Internet Navigation technology, Interstitial Internet Advertising technology, Laptop Connectivity technology, Multi-Dimensional Bar Code technology, Resource Scheduling technology, and Web Conferencing and Collaboration Software technology.

Marketing, general and administrative expenses increased during the three months ended March 31, 2006, as compared to the same period in 2005, due primarily to the hiring of additional patent licensing and business development personnel since March 31, 2005, three full months of GPH Acquisition related consulting expenses and an increase in other corporate, general and administrative expenses associated with ongoing operations. Patent related legal expenses decreased during the three months ended March 31, 2006, as compared to the same period in 2005, due to a decrease in patent prosecution and patent enforcement activity in the quarter.

During the three months ended March 31, 2006, the Acacia Technologies group continued to execute its business strategy in the area of patent portfolio acquisitions, including the acquisition of, or the acquisition of the rights to, the following patent portfolios:

· File Locking in Shared Storage Network Patent. Acquired rights to a patent relating to a file locking system for use in shared storage networks such as iSCSI. The use of the patented technology removes a single point of failure for companies migrating existing Storage Area Network (SAN) implementations to iSCSI or for those creating new shared storage networks.

· Remote Video Camera Patents. Acquired patents relating to remote control of video cameras and other devices used in areas such as videoconferencing and surveillance systems. The uses of the patented technology include improved remote management of video camera functions such as pan, tilt, and focus, and improved device control in a networked videoconferencing system.

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· Audio Communications Fraud Detection Patents. Acquired rights to patents relating to the detection of fraud in connection with paid communication services, such as audio communications. The patented technology generally relates to a process for detecting, reducing and preventing fraud in connection with payments for certain communication services, including audio sessions delivered via the telephone, Internet, and other communication networks.

· Micromirror Digital Display Patents. Acquired a patent portfolio relating to the use of micromirrors to create a digital image in televisions, monitors, and projectors. The patented technology generally relates to techniques for using micromirrors to display a color image having gray scale gradations and is utilized in large screen televisions and projectors.

2005 Acquisition. On January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned subsidiary of Acacia Research Corporation, acquired substantially all of the assets of Global Patent Holdings, LLC, a privately held patent holding company based in Northbrook, Illinois, which owned 11 patent licensing companies (“GPH Acquisition”). The acquisition provided the Acacia Technologies group 100% ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts, and cover technologies used in a wide variety of industries, as set forth below. As a result of the acquisition, we have expanded and diversified the Acacia Technologies group’s revenue generating opportunities and accelerated the execution of the Acacia Technologies group’s business strategy of acquiring, developing and licensing patented technologies.

Patent Enforcement Litigation

Companies comprising the Acacia Technologies group are often required to engage in litigation to enforce their patents and patent rights. In the litigation listed below, certain companies comprising the Acacia Technologies group are parties to ongoing litigation alleging infringement of certain of our patented technologies by the companies listed. Current patent enforcement litigation, by related patented technology, is as follows:

Audio/Video Enhancement and Synchronization Technology

Image Resolution Enhancement Technology

IP Innovation, LLC and Technology Licensing Corporation v. Lexmark International, Inc. United States District Court for the Northern District of Illinois. Filed 10/23/02. Case No. 1:02-cv-07611.

IP Innovation, LLC and Technology Licensing Corporation v. Dell Computer Corporation. United States District Court for the Northern District of Illinois. Filed 5/15/03. Case No. 1:03-cv-03245.

Technology Licensing Corporation and AV Technologies, LLC v. Thomson, Inc. United States District Court for the Eastern District of California. Filed 6/20/03. Case No. 2:03-cv-01329.

New Medium Technologies, LLC and AV Technologies, LLC v. Barco NV, Miranda Technologies, LG Philips LCD, Sanyo Electric Co., Ltd., and Toshiba Corporation, LG Electronics and Royal Philips Electronics. United States District Court for the Northern District of Illinois. Filed 9/29/05. Case No. 1:05-cv-05620.

Broadcast Data Retrieval Technology

Broadcast Data Retrieval Corporation v. Sirius Satellite Radio, Inc. United States District Court for the Central District of California. Filed 2/27/06. Case No. 2:06-cv-01190.

Sirius Satellite Radio Inc. v. Acacia Research Corporation and Acacia Global Acquisition Corporation. United States District Court for the Southern District of New York. On appeal to the U.S. Court of Appeals for the Federal Circuit. Notice of Appeal Filed 3/22/06. Lower Court Case No. 1:05-cv-07495.

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Computer Memory Cache Coherency Technology

Computer Cache Coherency Corporation v. VIA Technologies, Inc., Via Technologies, Inc. (USA) and Intel Corporation. United States District Court for the Northern District of California. Filed 12/2/04. Case No. 5:05-cv-01668.

Credit Card Fraud Protection Technology

Financial Systems Innovation, LLC and Paul N. Ware v. Gap, Inc., Racetrac Petroleum, Inc. and The Kroger Company. United States District Court for the Northern District of Georgia. Filed 3/3/04. Case No. 4:04-cv-00065.

Financial Systems Innovation, LLC and Paul N. Ware v. Williams-Sonoma, Inc., Linens N Things, Inc. and Costco Wholesale Corporation. United States District Court for the Northern District of Texas. Filed 6/30/04. Case No. 4:04-cv-00479.

Financial Systems Innovation, LLC and Paul N. Ware v. Circuit City Stores, Inc., Officemax Incorporated, Staples, Inc., Cracker Barrel Old Country Store, Inc., Fry’s Electronics, Inc., and Rite Aid Corporation. United States District Court for the Northern District of Georgia. Filed 7/19/05. Case No. 4:05-cv-00156.

Reinalt-Thomas Corporation, dba Discount Tire Corporation, v. Acacia Research Corporation, Paul N. Ware and Financial Systems Innovation, LLC. United States District Court for the District of Arizona. Filed 10/27/05. Case No. 2:05-cv-03459.

Financial Systems Innovation, LLC and Paul Ware v. Discount Tire Company of Georgia, Inc. and Reinalt-Thomas Corporation, dba Discount Tire Company. United States District Court for the Northern District of Georgia. Filed 11/21/05. Case No. 4:05-cv-00252.

Lone Star Steakhouse and Saloon, Inc. v. Acacia Technologies group and Financial Systems Innovation, LLC. United States District Court for the District of Kansas. Filed 8/5/05. Case No. 6:05-cv-01249.

Data Encryption and Product Activation Technology

Data Encryption Corporation v. Microsoft Corporation and Dell Computer Corporation. United States District Court for the Central District of California. Filed 7/29/05. Case No. 2:05-cv-05531.

Digital Media Transmission Technology

In accordance with the Transfer Order issued February 24, 2005, by the Judicial Panel on Multidistrict Litigation, all of the following Digital Media Transmission Technology cases have been transferred to the Northern District of California. The lead case number is 5:05-cv-01114.

Acacia Media Technologies Corporation v. Comcast Cable Communications, LLC, Charter Communications, Inc., The DirectTV Group, Inc., Echostar Communications Corporation, Cox Communications, Inc., Hospitality Network, Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand TV services), Mediacom, LLC, Armstrong Group, Arvig Communication Systems, Block Communications, Inc., Cable America Corporation, Cable One, Inc., Cannon Valley Communications, Inc., East Cleveland Cable TV and Communications, LLC, Loretel Cablevision, Massillon Cable TV, Inc., Mid-Continent Media, Inc., NPG Cable, Inc., Savage Communications, Inc., Sjoberg's Cablevision, Inc., US Cable Holdings LP, and Wide Open West, LLC, Time Warner Cable, Cablevision Systems Corporation, Insight Communications Company, Cebridge Communications and Bresnan Communications.

Acacia Media Technologies Corporation v. New Destiny Internet Group, Inc., Audio Communications Inc., VS Media Inc., Ademia Multimedia, LLC, International Web Innovations, Inc., Offendale Commercial BV, Ltd., Adult Entertainment Broadcast Network, Cybertrend, Inc., Lightspeed Media Corporation, Adult Revenue Services, Innovative Ideas International, AskCS.com, Game Link, Inc., Club Jenna, Inc., Cybernet Ventures, Inc., ACMP, LLC, Global AVS, Inc. d/b/a DrewNet, ICS, Inc. / AP Net Marketing, Inc., and National A-1 Advertising.

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Interactive Television Technology

Broadcast Innovation, LLC and IO Research, Ltd. v. Charter Communications, Inc. United States District Court for the District of Colorado. Case No. 1:03-cv-02223. On appeal to the U.S. Court of Appeals for the Federal Court from 9/28/04 to 11/21/05. Remanded to the U. S. District Court for further proceedings on 11/21/05.

Broadcast Innovation, LLC v. Echostar Communications Corporation. United States District Court for the District of Colorado. Filed 11/9/01. Case No. 1:01-cv-02201.

Interstitial Internet Advertising Technology

InternetAd Systems, LLC v. Aerovias de Mexico, S.A. de C.V. United States District Court for the Northern District of Texas. Filed 10/5/05. Case No. 3:05-cv-01969.

InternetAd Systems, LLC v. Midwest Airlines, Inc., Singapore Airlines Limited. United States District Court for the Northern District of Texas. Filed 12/30/05. Case No. 3:05-cv-02532.

Laptop Connectivity Technology

Computer Docking Station Corporation v. Dell, Inc., Gateway, Inc., Hewlett-Packard Company, Toshiba America, Inc., Toshiba America Information Systems, Inc., and Lenovao (United States), Inc. United States District Court for the Western District of Wisconsin. Filed 1/17/06. Case No. 06-cv-0032.

Microprocessor Enhancement Technology

Microprocessor Enhancement Corporation and Michael H. Branigin v. Texas Instruments, Incorporated. United States District Court for the Central District of California. Filed 4/7/05. Case No. 8:05-cv-00323.

Microprocessor Enhancement Corporation and Michael H. Branigin v. Intel Corporation. United States District Court for the Central District of California. Filed 8/3/05. Case No. 2:05-cv-05667.

Multi-Dimensional Bar Code Technology

VCode Holdings, Inc. and VData, LLC v. Toshiba Corporation, Brother Industries, Ltd., and Sato Corporation. United States District Court for the District of Minnesota. Filed 10/4/05. Case No. 0:05-cv-02329.

VCode Holdings, Inc. and VData, LLC v. Mitsubishi Corporation. United States District Court for the District of Minnesota. Filed 9/8/05.  Case No. 0:05-cv-02079.

Cognex Corporation v. VCode Holdings, Inc., VData LLC, Acacia Research Corporation, TechSearch, LLC and Veritec Inc. United States District Court for the District of Minnesota. Filed 3/13/06. Case No. 0:06-cv-01040.

Resource Scheduling Technology

Resource Scheduling Corporation v. Cerner Corporation, McKesson Corporation, Picis, Inc., Res-Q Healthcare Systems, Inc. United States District Court for the Eastern District Texas. Filed 2/1/06. Case No. 2:06-cv-00044.

Epic Systems Corporation v. Acacia Research Corporation and Resource Scheduling Corporation. United States District Court for the District of Delaware. Filed 4/19/06. Case No. 1:06-cv-00255.

Spreadsheet Automation Technology

Spreadsheet Automation Corporation v. Microsoft Corporation. United States District Court for the Eastern District of Texas. Filed 3/28/05. Case No. 2:05-cv-00127.

Critical Accounting Estimates

Our unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2005 Annual Report on Form 10-K, filed on March 16, 2006, in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates section. In addition, refer to Note 2 to the consolidated interim financial statements included in Part I, Item 1 of this report.

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Stock-based Compensation Expense

Effective January 1, 2006, Acacia Research Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires all share based-payments to be recognized as expense in the statement of operations. In March 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”), which requires stock-based compensation to be classified in the same expense line items as cash compensation (i.e. marketing, general and administrative and research and development expenses). The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using a Black-Scholes option pricing model), and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our classes of common stock and employee stock option exercise behavior. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

SFAS No. 123R also requires stock-based compensation expense to be recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, SFAS No. 123R requires Acacia Research Corporation to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation expense recognized. Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if actual forfeitures differ from those estimates. We consider several factors in connection with our estimate of pre-vesting forfeitures including types of awards, employee class, and historical pre-vesting forfeiture data. The estimation of stock awards that will ultimately vest requires judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Refer to Notes 2 and 9 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report for more information.

Acacia Research Corporation Consolidated

Comparison of the Results of Operations for the Three Months Ended March 31, 2006 and 2005

Net Loss (In thousands)

	For the Three Months Ended
		March 31, 2006			March 31, 2005
Net loss	$	(10,098	)	$	(4,950	)

The changes in net loss were primarily due to operating results and activities as discussed below.

Revenues and Cost of Revenues (In thousands)

	For the Three Months Ended
		March 31, 2006			March 31, 2005
License fees	$	4,717		$	1,863
Government contract		264			731
Cost of government contract revenues		(250	)		(691	)
Products		924			278
Cost of product sales		(221	)		(163	)
Service contracts		57			60

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License Fees. License fee revenues recognized by the Acacia Technologies group fluctuate from period to period based on the following factors:

· the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;

· the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments;

· fluctuations in the total number of agreements executed;

· fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;

· the timing of the receipt of periodic license fee payments and/or reports from licensees;

· fluctuations in the net number of active licensees period to period; and

· other factors.

Costs incurred in connection with the Acacia Technologies group’s ongoing licensing activities, other than inventor royalties expense and contingent legal fees expense, are included in marketing, general and administrative expenses.

Government Contract and Cost of Government Contract Revenues. The decrease was due to the completion, in December 2005, of the CombiMatrix group’s commitments under its previous two-year, $5.9 million research and development contract with the DoD to further the development of the CombiMatrix group’s array technology for the detection of biological threat agents. In February 2006, the CombiMatrix group executed a new one-year, $2.1 million contract with the DoD to further the development of its biological and chemical detector system. Government contract revenues and contract costs were lower during the three months ended March 31, 2006, as compared to the three months ended March 31, 2005, due to the commencement of work under the new $2.1 million contract in February 2006, as compared to three full months of activity under the previous $5.9 million contract during the prior year quarter.

Under the terms of its DoD contracts, the CombiMatrix group is reimbursed on a periodic basis for actual costs incurred to perform its obligations, plus a fixed fee. Revenues are recognized under the percentage-of-completion method of accounting, using the cost-to-cost approach to measure completeness at the end of each reporting period. Cost of government contract revenues reflect research and development expenses incurred in connection with the CombiMatrix group’s commitments under its current contract with the DoD, which was approximately 12% complete as of March 31, 2006. The CombiMatrix group expects to incur approximately $1.4 million in research and development costs for the remainder of 2006, to complete its obligations to the DoD under the new $2.1 million contract.

Product Revenues and Cost of Product Sales. Product revenues and costs of product sales relate to domestic and international sales of the CombiMatrix group’s array products. Product revenues include the sale of DNA synthesizer instruments and CustomArray 12K DNA expression arrays and related hardware during the first quarter of 2006, compared to only 12K DNA expression arrays during the comparable quarter in 2005. The increase in product revenues was due primarily to the increased product offerings currently available to the CombiMatrix group’s customers, which includes 12K and 4X2K arrays, DNA synthesizer instruments and related hardware, as compared to only the 902 and 12K expression arrays in the comparable 2005 quarter. The increase in gross margins was due primarily to the impact of the mix of product sales during the periods presented. Revenues for the three months ended March 31, 2006 included a higher percentage of product revenues from the sale of DNA synthesizer instruments, which generally have a higher gross margin than the expression array products.

Operating Expenses (In thousands)

		For the Three Months Ended
		March 31, 2006		March 31, 2005
Research and development expenses (including non-cash stock compensation charges of $293 (2006) and $0 (2005))	$	2,379	$	1,140

44

Research and Development Expenses. During the first quarter of 2006 and 2005, the CombiMatrix group continued internal research and development efforts to improve and expand the CombiMatrix group’s technology and product offerings. The increase in internal research and development expenses was due primarily to the impact of the CombiMatrix group’s wholly owned subsidiary, CMD, which was formed and began research and development activities in the second quarter of 2005. The increase also reflects $293,000 in non-cash stock compensation charges recorded in connection with the adoption of SFAS No. 123R, effective January 1, 2006, as described above under “Critical Accounting Estimates.”

Future research and development expenses will continue to be incurred in connection with the CombiMatrix group’s ongoing internal research and development efforts in the areas of genomics, diagnostics, drug discovery and development. The CombiMatrix group expects its research and development expenses to continue to fluctuate and such expenses could increase in future periods as additional internal research and development programs are undertaken and/or as new research and development collaborations are executed with strategic partners.

		For the Three Months Ended
		March 31, 2006		March 31, 2005
Marketing, general and administrative expenses (including non-cash stock compensation charges (credits) of $1,450 (2006) and $ (126) (2005))	$	7,499	$	3,763
Legal expenses - patents		366		561
Inventor royalties and contingent legal fees expenses - patents		2,271		647
Amortization of patents		1,617		1,190
Loss from equity investment		239		39

Marketing, General and Administrative Expenses. The increase primarily reflects Acacia Research Corporation’s adoption of SFAS No. 123R, effective January 1, 2006, which requires public companies to measure all employee stock-based compensation awards using a fair-value method and record such expense in their consolidated financial statements, as described under “Critical Accounting Estimates.” Non-cash stock compensation charges included in marketing, general and administrative expense for the three months ended March 31, 2006 totaled $1.5 million, as compared to a credit of $126,000 for the three months ended March 31, 2005.

Excluding the impact of the adoption of SFAS No. 123R, the change in marketing, general and administrative expenses was due primarily to an increase in personnel costs related to the addition of patent licensing and business development personnel for the Acacia Technologies group since the end of the first quarter of 2005 of approximately $443,000, an increase of $118,000 in consulting fees primarily related to three full months of GPH Acquisition related consulting expenses during the three months ended March 31, 2006, as compared to two months during the three months ended March 31, 2005, and an increase in the Acacia Technologies group’s other corporate, general and administrative expenses of $318,000. The net increase in the Acacia Technologies group’s other corporate, general and administrative expenses was comprised of an increase in accounting, tax and legal fees of $235,000, $54,000 of which were incurred in connection with the proposed split-off transaction, an increase in patent research and maintenance expenses related to new and existing patent portfolios of $74,000, and an increase in office rent and other facilities costs of $46,000, which were partially offset by a decrease in other general and administrative expenses of $37,000. The change also reflects an increase in general and administrative expenses incurred by CMD, which commenced operations in the second quarter of 2005, of $861,000, and an increase in the CombiMatrix group’s other corporate, general and administrative expenses related to ongoing operations of $420,000. The net increase in the CombiMatrix group’s other corporate, general and administrative expenses was comprised of an increase in legal, consulting, accounting and other professional fees of $580,000, $330,000 of which were incurred in connection with the proposed split-off transaction, including costs associated with the preparation of the related S-1 registration statement and other split-off securities issues, partially offset by a decrease in sales, marketing and other general and administrative expenses of $160,000.

Legal Expense - Patents (Acacia Technologies group only). Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside patent attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. Refer to "Patent Enforcement Litigation" included in Part II, Item 2, above.  We expect patent-related legal expenses to continue to fluctuate based on the factors summarized above in connection with the Acacia Technologies group’s ongoing patent commercialization and enforcement programs.

45

Inventor Royalties and Contingent Legal Fees Expense. During the three months ended March 31, 2006 and 2005, the Acacia Technologies group incurred inventor royalties expenses of $1.3 million and $282,000, respectively, and contingent legal fees expenses of $988,000 and $365,000, respectively. The majority of patent and patent rights agreements associated with patent portfolios acquired are subject to agreements with inventors that contain provisions granting to the original patent owners the right to receive inventor royalties based on future net revenues, as defined in the respective agreements and are also subject to contingent legal fee arrangements with outside attorneys engaged on a contingent fee basis. As such, inventor royalties and contingent legal fees expenses in future periods will continue to fluctuate in accordance with the timing and amount of related revenues recognized by the Acacia Technologies group from these patent portfolios.

Amortization of Patents. The increase was due primarily to three full months of patent amortization expense resulting from the January 28, 2005 GPH Acquisition for the three months ended March 31, 2006, as compared to two months of amortization in comparable 2005 period. In addition, amortization expense includes additional charges related to certain of the patent portfolios acquired by the Acacia Technologies group subsequent to March 31, 2005. Patent amortization charges will continue to be significant in future periods as the Acacia Technologies group continues to amortize acquired patent related costs over a weighted average remaining economic useful life of approximately 5 years.

Loss from Equity Investment. As of March 31, 2006 and 2005, the CombiMatrix group owned 24% and 6%, respectively, of Leuchemix Inc., or Leuchemix, a private drug development firm, which is developing several compounds for the treatment of leukemia and other cancers. The CombiMatrix group’s equity in the losses of Leuchemix increased due to the CombiMatrix group’s increased ownership in Leuchemix as well as an increase in expenses incurred by Leuchemix. The CombiMatrix group is under a contractual commitment to increase ownership to approximately 33% during 2006 and as a result, equity in loss of Leuchemix is expected to increase in future periods.

Other

Warrant Charges (Credits). In accordance with SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” or SFAS No. 150, and related interpretations, certain AR-CombiMatrix stock purchase warrants outstanding at March 31, 2006 have been classified as a long-term liability due to certain redemption provisions associated with the underlying AR-CombiMatrix stock. Changes in the fair value of the stock purchase warrant liability are reflected in the statement of operations. Refer to Note 8 to the Acacia Research Corporation consolidated financial statements in Part I, Item 1 of this report.

Loss on Sale of Investment. In January 2006, the CombiMatrix group expanded its relationship with one of its existing distributors, InBio, for the Asia Pacific region. Major components of the expanded relationship included the transfer of day-to-day operational responsibility and majority ownership of CombiMatrix K.K. to InBio, along with an expanded distribution agreement that encompasses Japan. InBio obtained 67% of the voting interests in CombiMatrix K.K. for a nominal amount of consideration. As a result, InBio assumed all operational and financial responsibilities of CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in CombiMatrix K.K. was $84,000. Subsequent to the sale, the CombiMatrix group’s investment in CombiMatrix K.K. was accounted for under the equity method. The deconsolidation of CombiMatrix K.K. did not have a material impact on the consolidated or CombiMatrix group balance sheets as of March 31, 2006. The impact on the statement of operations resulting from the transition to the equity method of accounting for the CombiMatrix group's investment in CombiMatrix K.K. was not material during the periods presented.

Estimated Loss on Discontinued Operations. Results for the three months ended March 31, 2005, include a $210,000 charge, net of minority interests, related to estimated additional costs to be incurred in connection with the discontinued operations of Soundbreak.com (originally ceased operations in February 2001), related primarily to certain noncancellable lease obligations and a reduction in estimated amounts recoverable from existing sublease arrangements. The related lease obligations expired in August 2005.

Inflation

Inflation has not had a significant impact on Acacia Research Corporation.

46

Liquidity and Capital Resources

Acacia Research Corporation’s consolidated cash and cash equivalents and short-term investments totaled $53.1 million at March 31, 2006, compared to $59.2 million at December 31, 2005. Working capital at March 31, 2006, was $52.3 million, compared to $58.1 million at December 31, 2005. The change in working capital was due primarily to the impact of net cash flow activities as discussed below.

The net increase (decrease) in cash and cash equivalents for the three months ended March 31, 2006, and 2005 was comprised of the following (in thousands):

	For the Three Months Ended March 31, 2006									For the Three Months Ended March 31, 2005
	Acacia									Acacia
	Technologies			CombiMatrix						Technologies			CombiMatrix
	Group			Group			Consolidated			Group			Group			Consolidated
Net cash provided by (used in):
Operating activities (including discontinued operations of $245 in 2006 and ($288) in 2005)	$	(688	)	$	(3,673	)	$	(4,361	)	$	(1,109	)	$	(2,976	)	$	(4,085	)
Investing activities		(4,587	)		1,404			(3,183	)		(1,265	)		5,394			4,129
Financing activities		(30	)		46			16			19,521			43			19,564
Effect of exchange rate on cash		-			-			-			-			9			9
Increase (decrease) in cash and cash equivalents	$	(5,305	)	$	(2,223	)	$	(7,528	)	$	17,147		$	2,470		$	19,617

Cash receipts from customers for the CombiMatrix group for the three months ended March 31, 2006, were $1.3 million, comprised of $677,000 from the sale of array products and services and $616,000 in payments received from the DoD. Cash receipts in the comparable 2005 period totaled $939,000, comprised of $288,000 from the sale of array products and services and $651,000 in payments received from the DoD. Cash outflows from operations for the CombiMatrix group for the three months ended March 31, 2006, increased to $5.0 million, as compared to $3.9 million in the comparable 2005 period, due primarily to an increase in research and development, marketing, general and administrative expenses related to CMD as described above, and the impact of the timing of vendor payments and related accruals.

Cash receipts from licensees for the Acacia Technologies group for the three months ended March 31, 2006, increased to $5.4 million from $1.6 million in the comparable 2005 period. Cash outflows from operations for the Acacia Technologies group for the three months ended March 31, 2006, increased to $6.1 million from $2.4 million in the comparable 2005 period, due to increases in personnel expenses, corporate, general and administrative expenses, consulting expenses, inventor royalties expenses and contingent legal fees expenses, partially offset by a decrease in patent related legal expenses, as described earlier, and the impact of the timing of payments and related accruals.

The change in net cash flows used in investing activities was due to net purchases and sales of available-for-sale investments by the Acacia Technologies group and the CombiMatrix group, respectively, in connection with ongoing short-term cash management activities. Net cash outflows from investing activities for the three months ended March 31, 2006 also included Acacia Technologies group patent related acquisitions costs totaling $550,000 and the CombiMatrix group’s additional contractual investment in Leuchemix totaling $650,000. Net cash outflows from investing activities for the three months ended March 31, 2005 included the cash consideration and related acquisition and registration costs paid by the Acacia Technologies group in connection with the GPH Acquisition and the CombiMatrix group’s additional contractual investment in Leuchemix of $250,000. Fixed asset purchases for the three months ended March 31, 2006 and 2005, primarily related to the CombiMatrix group were $175,000 and $268,000, respectively.

Net cash flows provided by financing activities during the three months ended March 31, 2005 included net proceeds of approximately $19.5 million from the sale of 3.5 million shares of AR-Acacia Technologies stock in a registered direct offering.

Management believes that our cash and cash equivalent balances, anticipated cash flow from operations, and other external sources of available credit, will be sufficient to meet our cash requirements through June 30, 2007. We may however encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth in our Risk Factors on pages 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and 15 of our pending shelf registration statement on Form S-3 filed with the SEC on April 25, 2006, incorporated by reference herein. Any efforts to seek additional funding could be made through equity, debt or other external financing and there can be no assurance that additional funding will be available on favorable terms, if at all. If we fail to obtain additional funding when needed, we may not be able to execute our business plans and our business may suffer.

47

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet financing arrangements, other than operating leases. We have no significant commitments for capital expenditures in 2006. Other than as set forth below, we have no committed lines of credit or other committed funding or long-term debt. The following table lists our material known future cash commitments as of March 31, 2006:

	Payments Due by Period (in thousands)
Contractual Obligations		Remaining 2006		2007		2008		2009		2010 and Thereafter
Operating leases	$	1,803	$	2,480	$	2,180	$	588	$	1,355
Minimum royalty payments(1)		75		100		100		100		875
Leuchemix equity purchases(2)		1,500		-		-		-		-
Consulting contract(3)		832		99		-		-		-
Total contractual cash obligations	$	4,210	$	2,679	$	2,280	$	688	$	2,230

____________________________________

(1) Refer to Note 10 to the Acacia Research Corporation consolidated financial statements for a description of the September 30, 2002 settlement agreement between CombiMatrix Corporation and Dr. Donald Montgomery and Nanogen.

(2) Refer to Note 10 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report for additional information regarding the October 2004 Leuchemix transaction.

(3) Reflects $2.0 million consulting contract commitment, including reimbursable expenses, to be paid over two years in connection with the Acacia Technologies group’s GPH Acquisition, as described above.

In connection with the acquisition of certain patents and patent rights, certain companies included in the Acacia Technologies group executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive royalties based on future net license fee revenues (as defined in the respective agreements) generated by the Acacia Technologies group as a result of licensing the respective patents or patent portfolios. Royalties paid pursuant to the agreements are expensed in the consolidated statement of operations in the period that the related license fee revenues are recognized.

Recent Accounting Pronouncements

Refer to Note 5 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by the U.S. government, U.S. corporations, institutional money market funds and other money market instruments. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income received without significantly increasing risk. To minimize risk, we maintain a portfolio of cash, cash equivalents and short-term investments in a variety of investment-grade securities and with a variety of issuers, including corporate notes, commercial paper and money market instruments. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any derivative financial instruments.

48

DISCUSSION OF SEGMENTS’ OPERATIONS, FINANCIAL RESOURCES AND LIQUIDITY

COMBIMATRIX GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS

(A Division of Acacia Research Corporation)

You should read this discussion in conjunction with the CombiMatrix group financial statements and related notes and the Acacia Research Corporation consolidated financial statements and related notes, both included in Part I, Item 1 of this report. Historical results and percentage relationships are not necessarily indicative of operating results for any future periods.

General

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” for a general overview of the CombiMatrix group’s business.

Although AR-CombiMatrix stock is intended to reflect the separate performance of the CombiMatrix group, rather than the performance of Acacia Research Corporation as a whole, the CombiMatrix group is not a separate legal entity. Holders of AR-CombiMatrix stock are stockholders of Acacia Research Corporation. As a result, they continue to be subject to all of the risks of an investment in Acacia Research Corporation and all of its businesses, assets and liabilities. The assets Acacia Research Corporation attributes to the CombiMatrix group could be subject to the liabilities of the Acacia Technologies group. Refer to Note 1 to our consolidated financial statements included in Part I, Item 1 of this report for details regarding our separate group presentation and our classes of common stock.

CombiMatrix Group

(A Division of Acacia Research Corporation)

Comparison of the Results of Operations for the Three Months Ended March 31, 2006 and 2005

Division Net Loss (In thousands)

	For the Three Months Ended
	March 31, 2006			March 31, 2005
Division net loss	$	(7,689	)	$	(3,076	)

The changes in net loss were primarily due to operating results and activities as discussed below.

Revenues and Cost of Revenues (In thousands)

		For the Three Months Ended
		March 31, 2006			March 31, 2005
Government contract	$	264		$	731
Cost of government contract revenues		(250	)		(691	)
Products		924			278
Cost of product sales		(221	)		(163	)
Service contracts		57			60

Government Contract and Cost of Government Contract Revenues. The decrease was due to the completion, in December 2005, of the CombiMatrix group’s commitments under its previous two-year $5.9 million research and development contract with the DoD to further the development of the CombiMatrix group’s array technology for the detection of biological threat agents. In February 2006, the CombiMatrix group executed a new one-year, $2.1 million contract with the DoD to further the development of its biological and chemical detector system. Government contract revenues and contract costs were lower during the three months ended March 31, 2006, as compared to the three months ended March 31, 2005, due to the commencement of work under the new $2.1 million contract in February 2006, as compared to three full months of activity under the previous $5.9 million contract during the prior year quarter.

49

Under the terms of its DoD contracts, the CombiMatrix group is reimbursed on a periodic basis for actual costs incurred to perform its obligations, plus a fixed fee. Revenues are recognized under the percentage-of-completion method of accounting, using the cost-to-cost approach to measure completeness at the end of each reporting period. Cost of government contract revenues reflect research and development expenses incurred in connection with the CombiMatrix group’s commitments under its current contract with the DoD, which was approximately 12% complete as of March 31, 2006. The CombiMatrix group expects to incur approximately $1.4 million in research and development costs for the remainder of 2006, to complete its obligations to the DoD under the new $2.1 million contract.

Product Revenues and Cost of Product Sales. Product revenues and costs of product sales relate to domestic and international sales of the CombiMatrix group’s array products. Product revenues include the sale of DNA synthesizer instruments and CustomArray 12K DNA expression arrays and related hardware during the first quarter of 2006, compared to only 12K DNA expression arrays during the comparable quarter in 2005. The increase in product revenues was due primarily to the increased product offerings currently available to the CombiMatrix group’s customers, which includes 12K and 4X2K arrays, DNA synthesizer instruments and related hardware, as compared to only the 902 and 12K expression arrays in the comparable 2005 quarter. The increase in gross margins was due primarily to the impact of the mix of product sales during the periods presented. Revenues for the three months ended March 31, 2006 included a higher percentage of product revenues from the sale of DNA synthesizer instruments, which generally have a higher gross margin than the expression array products.

Operating Expenses (In thousands)

	For the Three Months Ended
	March 31, 2006		March 31, 2005
Research and development expenses (including non-cash stock compensation charges of $293 (2006) and $0 (2005))	$	2,379	$	1,140

Research and Development Expenses. During the first quarter of 2006 and 2005, the CombiMatrix group continued internal research and development efforts to improve and expand the CombiMatrix group’s technology and product offerings. The increase in internal research and development expenses was due primarily to the impact of the CombiMatrix group’s wholly owned subsidiary, CombiMatrix Molecular Diagnostics, or CMD, which was formed and began research and development activities in the second quarter of 2005. The increase also reflects $293,000 in non-cash stock compensation charges recorded in connection with the adoption of SFAS No. 123R, effective January 1, 2006, as described above under “Critical Accounting Estimates.”

Future research and development expenses will continue to be incurred in connection with the CombiMatrix group’s ongoing internal research and development efforts in the areas of genomics, diagnostics, drug discovery and development. The CombiMatrix group expects its research and development expenses to continue to fluctuate and such expenses could increase in future periods as additional internal research and development agreements are undertaken and/or as new research and development collaborations are executed with strategic partners.

		For the Three Months Ended
		March 31, 2006		March 31, 2005
Marketing, general and administrative expenses (including non-cash stock compensation charges (credits) of $402 (2006) and $ (126) (2005))	$	3,962	$	2,153
Loss from equity investment		239		39

Marketing, General and Administrative Expenses. The increase reflects the CombiMatrix group’s adoption of SFAS No. 123R, effective January 1, 2006, which requires public companies to measure all employee stock-based compensation awards using a fair-value method and record such expense in their consolidated financial statements, as described under “Critical Accounting Estimates.” Non-cash stock compensation charges included in marketing, general and administrative expense for the three months ended March 31, 2006 totaled $402,000, as compared to a credit of $126,000 for the three months ended March 31, 2005.

Excluding the impact of the adoption of SFAS No. 123R, the change in marketing, general and administrative expenses was due primarily to an increase in general and administrative expenses incurred by CMD, which commenced operations in the second quarter of 2005, of $861,000, and an increase in the CombiMatrix group’s other corporate, general and administrative expenses related to ongoing operations of $420,000. The net increase in the CombiMatrix group’s other corporate, general and administrative expenses was comprised of an increase in legal, consulting, accounting and other professional fees of $580,000, $330,000 of which were incurred in connection with the proposed split-off transaction, including costs associated with the preparation of the related S-1 registration statement and other split-off securities issues, partially offset by a decrease in sales, marketing and other general and administrative expenses of $160,000.

50

Loss from Equity Investment. As of March 31, 2006 and 2005, the CombiMatrix group owned 24% and 6%, respectively, of Leuchemix Inc., or Leuchemix, a private drug development firm, which is developing several compounds for the treatment of leukemia and other cancers. The CombiMatrix group’s equity in the losses of Leuchemix increased due to the CombiMatrix group’s increased ownership in Leuchemix as well as an increase in expenses incurred by Leuchemix. The CombiMatrix group is under a contractual commitment to increase ownership to approximately 33% during 2006 and as a result, equity in loss of Leuchemix is expected to increase in future periods.

Other

Warrant Charges (Credits). In accordance with SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” or SFAS No. 150, and related interpretations, certain AR-CombiMatrix stock purchase warrants outstanding at March 31, 2006 have been classified as a long-term liability due to certain redemption provisions associated with the underlying AR-CombiMatrix stock. Changes in the fair value of the stock purchase warrant liability are reflected in the statement of operations. Refer to Note 8 to the Acacia Research Corporation consolidated financial statements in Part I, Item 1 of this report.

Loss on Sale of Investment. In January 2006, the CombiMatrix group expanded its relationship with one of its existing distributors, InBio, for the Asia Pacific region. Major components of the expanded relationship included the transfer of day-to-day operational responsibility and majority ownership of CombiMatrix K.K. to InBio, along with an expanded distribution agreement that encompasses Japan. InBio obtained 67% of the voting interests in CombiMatrix K.K. for a nominal amount of consideration. As a result, InBio assumed all operational and financial responsibilities of CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in CombiMatrix K.K. was $84,000. Subsequent to the sale, the CombiMatrix group’s investment in CombiMatrix K.K. was accounted for under the equity method. The deconsolidation of CombiMatrix K.K. did not have a material impact on the CombiMatrix group balance sheet as of March 31, 2006. The impact on the statement of operations resulting from the transition to the equity method of accounting for the CombiMatrix group's investment in CombiMatrix K.K. was not material during the periods presented.

Inflation

Inflation has not had a significant impact on the CombiMatrix group in the current or prior periods.

Liquidity and Capital Resources

At March 31, 2006, cash and cash equivalents and short-term investments totaled $15.4 million compared to $20.2 million at December 31, 2005. Working capital at March 31, 2006, was $13.9 million, compared $19.2 million at December 31, 2005. The change in working capital was due primarily to the impact of net cash flow activities as discussed below.

The net (decrease) increase in cash and cash equivalents for the three months ended March 31, 2006, and 2005, was comprised of the following (in thousands):

	For the Three Months Ended
	March 31, 2006			March 31, 2005
Net cash provided by (used in):
Operating activities	$	(3,673	)	$	(2,976	)
Investing activities		1,404			5,394
Financing activities		46			43
Effect of exchange rate on cash		-			9
Increase (decrease) in cash and cash equivalents	$	(2,223	)	$	2,470

Cash receipts from customers for the CombiMatrix group for the three months ended March 31, 2006, were $1.3 million, comprised of $677,000 from the sale of array products and services and $616,000 in payments received from the DoD. Cash receipts in the comparable 2005 period totaled $939,000, comprised of $288,000 from the sale of array products and services and $651,000 in payments received from the DoD. Cash outflows from operations for the CombiMatrix group for the three months ended March 31, 2006, increased to $5.0 million, as compared to $3.9 million in the comparable 2005 period, due primarily to an increase in research and development, marketing general and administrative expenses related to CMD as described above and the impact of the timing of vendor payments and related accruals.

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The change in net cash flows used in investing activities was due primarily to net sales of available-for-sale investments by the CombiMatrix group in connection with ongoing short-term cash management activities. For the period ending March 31, 2006, the CombiMatrix group incurred $161,000 of capital expenditures and $650,000 in purchasing of Leuchemix preferred stock compared to $252,000 and $250,000, respectively, in the comparable 2005 quarter.

Management believes that the CombiMatrix group’s cash and cash equivalent balances, anticipated cash flow from operations and other external sources of available credit will be sufficient to meet its cash requirements through June 30, 2007. The CombiMatrix group may however encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated, including those set forth in our Risk Factors on pages 3, 4, 5, 6, 7, 8, 9, 10, 11 and 12 of our pending shelf registration statement on Form S-3 filed with the SEC on April 25, 2006, incorporated by reference herein. Any efforts to seek additional funding could be made through equity, debt or other external financing and there can be no assurance that additional funding will be available on favorable terms, if at all. If the CombiMatrix group fails to obtain additional funding when needed, it may not be able to execute its business plans and its business may suffer.

Off-Balance Sheet Arrangements

The CombiMatrix group has not entered into off-balance sheet financing arrangements, other than operating leases. The CombiMatrix group has no significant commitments for capital expenditures in 2006. Other than as set forth below, the CombiMatrix group has no committed lines of credit or other committed funding or long-term debt. The following table lists the CombiMatrix group’s material known future cash commitments as of March 31, 2006:

		Payments Due by Period (in thousands)
Contractual Obligations		Remaining 2006		2007		2008		2009		2010 and Thereafter
Operating leases (2)	$	1,415	$	1,937	$	1,615	$	-	$	-
Minimum royalty payments(1)		75		100		100		100		875
Leuchemix equity purchases(3)		1,500		-		-		-		-
Total contractual cash obligations	$	2,990	$	2,037	$	1,715	$	100	$	875

_________________________

(1) Refer to Note 10 to the Acacia Research Corporation consolidated financial statements for a description of the September 30, 2002 settlement agreement between CombiMatrix Corporation and Dr. Donald Montgomery and Nanogen.

(2) Excludes any allocated rent expense in connection with Acacia Research Corporation’s management allocation policies.

(3) Refer to Note 10 to the CombiMatrix group financial statements for additional information regarding the October 2004 Leuchemix transaction.

Recent Accounting Pronouncements

Refer to Note 5 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

Quantitative and Qualitative Disclosures About Market Risk

The CombiMatrix group’s exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of the group’s investments are in short-term debt securities issued by the U.S. treasury and by U.S. corporations. The primary objective of the group’s investment activities is to preserve principal while at the same time maximizing the income the CombiMatrix group receives without significantly increasing risk. To minimize risk, the CombiMatrix group maintains its portfolio of cash, cash equivalents and short-term investments in a variety of investment-grade securities and with a variety of issuers, including corporate notes, commercial paper, government securities and money market funds. Due to the nature of its short-term investments, we believe that the CombiMatrix group is not subject to any material market risk exposure.

52

ACACIA TECHNOLOGIES GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS

(A Division of Acacia Research Corporation)

You should read this discussion in conjunction with the Acacia Technologies group financial statements and related notes and the Acacia Research Corporation consolidated financial statements and related notes, both included in Part I, Item 1 of this report. Historical results and percentage relationships are not necessarily indicative of operating results for any future periods.

General

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” for a general overview of the Acacia Technologies group’s business.

Although the AR-Acacia Technologies stock is intended to reflect the separate performance of the Acacia Technologies group, rather than the performance of Acacia Research Corporation as a whole, the Acacia Technologies group is not a separate legal entity. Holders of the AR-Acacia Technologies stock are stockholders of Acacia Research Corporation. As a result, they continue to be subject to all of the risks of an investment in Acacia Research Corporation and all of Acacia Research Corporation’s businesses, assets and liabilities. The assets Acacia Research Corporation attributes to the Acacia Technologies group could be subject to the liabilities of the CombiMatrix group. Refer to Note 1 to our consolidated financial statements included in Part I, Item 1 of this report for details regarding our separate group presentation and our classes of common stock.

Acacia Technologies Group

(A Division of Acacia Research Corporation)

Comparison of the Results of Operations for the Three Months Ended March 31, 2006 and 2005

Division Net Loss (In thousands)

	For the Three Months Ended
	March 31, 2006			March 31, 2005
Division net loss	$	(2,409	)	$	(1,874	)

The changes in net loss were primarily due to operating results and activities as discussed below.

Revenues (In thousands)

	For the Three Months Ended
		March 31, 2006		March 31, 2005
License fees	$	4,717	$	1,863

License Fees. License fee revenues recognized fluctuate from period to period based on the following:

· the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;

· the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments;

· fluctuations in the total number of agreements executed;

· fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;

· the timing of the receipt of periodic license fee payments and/or reports from licensees;

· fluctuations in the net number of active licensees period to period; and

· other factors.  

Costs incurred in connection with the Acacia Technologies group’s ongoing licensing activities, other than inventor royalties expense and contingent legal fees expense, are included in marketing, general and administrative expenses.

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Operating Expense (In thousands)

	For the Three Months Ended
		March 31, 2006		March 31, 2005
Marketing, general and administrative expenses (including non-cash stock compensation charges of $1,048 (2006) and $0 (2005))	$	3,537	$	1,610
Legal expenses - patents		366		561
Contingent legal fees and royalties expenses - patents		2,271		647
Amortization of patents		1,343		916

Marketing, General and Administrative Expenses. The increase is primarily due to the Acacia Technologies group’s adoption of SFAS No. 123R, effective January 1, 2006, which requires public companies to measure all employee stock-based compensation awards using a fair-value method and record such expense in their consolidated financial statements, as described under “Critical Accounting Estimates.” Non-cash stock compensation charges included in marketing, general and administrative expense for the three months ended March 31, 2006 totaled $1.0 million, as compared to a $0 for the three months ended March 31, 2005.

Excluding the impact of the adoption of SFAS No. 123R, the change in marketing, general and administrative expenses was due primarily to an increase in personnel costs related to the addition of patent licensing and business development personnel for the Acacia Technologies group since the end of the first quarter of 2005 of approximately $443,000, an increase of $118,000 in consulting fees primarily related to three full months of GPH Acquisition related consulting expenses during the three months ended March 31, 2006, as compared to two months during the three months ended March 31, 2005, and an increase in the Acacia Technologies group’s other corporate, general and administrative expenses of $318,000. The net increase in the Acacia Technologies group’s other corporate, general and administrative expenses was comprised of an increase in accounting, tax and legal fees of $235,000, $54,000 of which were incurred in connection with the proposed split-off transaction, an increase in patent research and maintenance expenses related to new and existing patent portfolios of $74,000, and an increase in office rent and other facilities costs of $46,000, which were partially offset by a decrease in other general and administrative expenses of $37,000.

Legal Expense - Patents (Acacia Technologies group only). Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside patent attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. The Acacia Technologies group currently has 29 ongoing law suits to enforce its patented technologies against a total of 104 defendants. We expect patent-related legal expenses to continue to fluctuate based on the factors summarized above in connection with the Acacia Technologies group’s ongoing patent commercialization and enforcement programs.

Inventor Royalties and Contingent Legal Fees Expense. During the three months ended March 31, 2006 and 2005, the Acacia Technologies group incurred inventor royalties expenses of $1.3 million and $282,000, respectively, and contingent legal fees expenses of $988,000 and $365,000, respectively. The majority of patent and patent rights agreements associated with patent portfolios acquired are subject to agreements with inventors that contain provisions granting to the original patent owners the right to receive inventor royalties based on future net revenues, as defined in the respective agreements and are also subject to contingent legal fee arrangements with outside attorneys engaged on a contingent fee basis. As such, inventor royalties and contingent legal fees expenses in future periods will continue to fluctuate in accordance with the timing and amount of related revenues recognized by the Acacia Technologies group from these patent portfolios.

Amortization of Patents. The increase was due primarily to three full months of patent amortization expense resulting from the January 28, 2005 GPH Acquisition for the three months ended March 31, 2006, as compared to two months of amortization in comparable 2005 period. In addition, amortization expense includes additional charges related to certain of the patent portfolios acquired by the Acacia Technologies group subsequent to March 31, 2005. Patent amortization charges will continue to be significant in future periods as the Acacia Technologies group continues to amortize acquired patent related costs over a weighted average remaining economic useful life of approximately 5 years.

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Other

Results for the three months ended March 31, 2005, include a $210,000 charge, net of minority interests, related to estimated additional costs to be incurred in connection with the discontinued operations of Soundbreak.com (originally ceased operations in February 2001), related primarily to certain noncancellable lease obligations and a reduction in estimated amounts recoverable from existing sublease arrangements. The related lease obligations expired in August 2005.

Inflation

Inflation has not had a significant impact on the Acacia Technologies group in the current or previous periods.

Liquidity and Capital Resources

The Acacia Technologies group’s cash and cash equivalents and short-term investments totaled $37.7 million at March 31, 2006, compared to $39.0 million at December 31, 2005. Working capital at March 31, 2006, was $38.3 million, compared to $38.9 million at December 31, 2005.

The net increase (decrease) in cash and cash equivalents for the three months ended March 31, 2006, and 2005, was comprised of the following (in thousands):

	For the Three Months Ended
	March 31, 2006			March 31, 2005
Net cash provided by (used in):
Operating activities (including discontinued operations of $245 in 2006 and ($288) in 2005)	$	(688	)	$	(1,109	)
Investing activities		(4,587	)		(1,265	)
Financing activities		(30	)		19,521
(Decrease) increase in cash and cash equivalents	$	(5,305	)	$	17,147

Cash receipts from licensees for the Acacia Technologies group for the three months ended March 31, 2006, increased to $5.4 million from $1.6 million in the comparable 2005 period. Net cash outflows from operations for the Acacia Technologies group for the three months ended March 31, 2006, increased to $6.1 million from $2.4 million in the comparable 2005 period, due to increases in personnel expenses, corporate, general and administrative expenses, consulting expenses, inventor royalties expense and contingent legal fees expenses, partially offset by a decrease in patent related legal expenses, as described earlier, and the impact of the timing of payments and related accruals.

The change in net cash flows used in investing activities was due to net purchases of available-for-sale investments in connection with ongoing short-term cash management activities. Net cash outflows from investing activities for the three months ended March 31, 2006 also included Acacia Technologies group patent related acquisitions costs totaling $550,000. Net cash outflows from investing activities for the three months ended March 31, 2005 reflects the cash consideration and related acquisition and registration costs paid in connection with the GPH Acquisition.

Net cash flows provided by financing activities during the three months ended March 31, 2005 included net proceeds of approximately $19.5 million from the sale of 3.5 million shares of AR-Acacia Technologies stock in a registered direct offering.

Management believes that the Acacia Technologies group’s cash and cash equivalent balances, anticipated cash flow from operations and other external sources of available credit, will be sufficient to meet the its cash requirements through June 30, 2007. The Acacia Technologies group may however encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated, including those set forth in our Risk Factors on pages 3, 4, 12, 13 and 15 of our pending shelf registration statement on Form S-3 filed with the SEC on April 25, 2006, incorporated by reference herein. Any efforts to seek additional funding could be made through equity, debt or other external financing and there can be no assurance that additional funding will be available on favorable terms, if at all. If the Acacia Technologies group fails to obtain additional funding when needed, it may not be able to execute its business plans and its business may suffer.

55

Off-Balance Sheet Arrangements

The Acacia Technologies group has not entered into off-balance sheet financing arrangements, other than operating leases. The Acacia Technologies group has no significant commitments for capital expenditures in 2006. Other than as set forth below, the Acacia Technologies group has no committed lines of credit or other committed funding or long-term debt. The following table lists the Acacia Technologies group’s material known future cash commitments as of March 31, 2006:

	Payments Due by Period (in thousands)
Contractual Obligations		Remaining 2006		2007		2008		2009		2010 and Thereafter
Operating leases (1)	$	388	$	543	$	565	$	588	$	1,355
Consulting contract (2)		832		99		-		-		-
Total contractual cash obligations	$	1,220	$	642	$	565	$	588	$	1,355

_____________________

(1) Excludes any allocated rent expense in connection with Acacia Research Corporation’s management allocation policies.

(2) Reflects $2.0 million consulting contract commitment, including reimbursable expenses, to be paid over two years in connection with the Acacia Technologies group’s purchase of the assets of Global Patent Holdings, LLC in January 2005, as described above.

In connection with the acquisition of certain patents and patent rights, certain companies included in the Acacia Technologies group executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive royalties based on future net license fee revenues (as defined in the respective agreements) generated by the Acacia Technologies group as a result of licensing the respective patents or patent portfolios. Royalties paid pursuant to the agreements are expensed in the consolidated statement of operations in the period that the related license fee revenues are recognized.

Recent Accounting Pronouncements

Refer to Note 5 to the Acacia Research Corporation consolidated financial statements included in Part I, Item 1 of this report.

Quantitative and Qualitative Disclosures About Market Risk

The Acacia Technologies group’s exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by United States corporations, institutional money market funds and other money market instruments. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income received without significantly increasing risk. To minimize risk, we maintain a portfolio of cash, cash equivalents and short-term investments in a variety of investment-grade securities and with a variety of issuers, including U.S. government and corporate notes and bonds, commercial paper and money market instruments. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any derivative financial instruments.

56

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Quantitative and Qualitative Disclosures About Market Risk” for Acacia Research Corporation, the CombiMatrix group and the Acacia Technologies group, in Part I, Item 2., incorporated by reference.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a)Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC.

Changes in Internal Controls

(b)There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended March 31, 2006) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

57

PART II--OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Refer to Note 10 to the Acacia Research Corporation consolidated financial statements, contained in Part I, Item 1 of this report, and hereby incorporated by reference.

Item 1A. RISK FACTORS

An investment in our stock involves a number of risks. Before making a decision to purchase our securities, you should carefully consider all of the risks described in this quarterly report and in our annual report on Form 10-K for the year ending December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006. If any of the risks incorporated by reference into this quarterly report or into our annual report actually occur, our business, financial condition and results of operations could be materially adversely affected. If this were to occur, the trading price of our securities could decline significantly and you may lose all or part of your investment. You should carefully review the “Risk Factors” set forth on pages 3 through 22 of our registration statement on Form S-3 filed with the SEC on April 25, 2006, and hereby incorporated by reference.

Item 5. OTHER INFORMATION

Amendment to the Lease Agreement, dated March 14, 2006, by and between The Irvine Company LLC, a Delaware limited liability company, and Acacia Research Corporation, a Delaware Corporation

Acacia Research Corporation leases approximately 12,140 square feet of office space in Newport Beach, California, under a lease agreement that originally expired in February 2007. In February 2006, Acacia Research Corporation executed an amendment to the Newport Beach, California location lease agreement extending the lease term until 2012 and adjusting the basic rent from $43,061 per month to $45,525 per month, effective February 15, 2007. Pursuant to the terms of the amend lease agreement, total minimum lease payments from February 15, 2007 through February 29, 2012 total approximately $2,986,000. The amendment to the Newport Beach, California location lease agreement is included in Part II, Item 6. “Exhibits,” as Exhibit 10.1 below.

Item 6. EXHIBITS

10.1	Amendment to the Lease Agreement, dated March 14, 2006, by and between The Irvine Company LLC, a Delaware limited liability company, and Acacia Research Corporation, a Delaware Corporation
31.1	Certifications of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Risk Factors incorporated by reference into Part II, Item 1A

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SIGNATURES

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

ACACIA RESEARCH CORPORATION
By:	/s/ Paul R. Ryan
	Paul R. Ryan Chief Executive Officer (Authorized Signatory)

By:	/s/ Clayton J. Haynes
	Clayton J. Haynes Chief Financial Officer /Treasurer (Principal Financial Officer)

Date: May 10, 2006

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EXHIBIT INDEX

EXHIBIT NUMBER	EXHIBIT
10.1	Amendment to the Lease Agreement, dated March 14, 2006, by and between The Irvine Company LLC, a Delaware limited liability company, and Acacia Research Corporation, a Delaware Corporation
31.1	Certifications of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Risk Factors incorporated by reference into Part II, Item 1A

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EX-10.1

EXHIBIT 10.1

THIRD AMENDMENT TO LEASE

I.PARTIES AND DATE.

This Amendment to Lease dated March 14, 2006, is by and between THE IRVINE COMPANY LLC, a Delaware limited liability company, formerly The Irvine Company, a Delaware corporation ("Landlord"), and ACACIA RESEARCH CORPORATION, a Delaware corporation ("Tenant').

II.RECITALS.

On January 28, 2002, Landlord and Tenant entered into an office space lease for space in a building located at 500 Newport Center Drive, Suite 700, Newport Beach, California ("Premises"), which lease was amended by a First Amendment to Lease dated August 13, 2004, wherein Suite 780 was added to the Premises, and a Second Amendment to Lease dated February 9, 2005, wherein Suite 750 was added to the Premises (as amended, the "Lease").

Landlord and Tenant each desire to modify the Lease to extend the Lease Term, adjust the Basic Rent, and make such other modifications as are set forth in "III. MODIFICATIONS" next below.

III.MODIFICATIONS.

A.Basic Lease Provisions. The Basic Lease Provisions are hereby amended as follows:

1.Item 5 is hereby deleted in its entirety and the following substituted in lieu thereof:

"5. Lease Term: The Term of this Lease shall expire at midnight on February 29, 2012."

2.Effective as of February 15, 2007, Item 6 shall be deleted in its entirety and the following shall be substituted in lieu thereof:

"6. Basic Rent: Forty-Five Thousand Five Hundred Twenty-Five Dollars ($45,525.00) per month.

Rental Adjustments:

Commencing February 15, 2008, the Basic Rent shall be Forty-Seven Thousand Three Hundred Forty-Six Dollars ($47,346.00) per month.

Commencing February 15, 2009, the Basic Rent shall be Forty-Nine Thousand Two Hundred Thirty-Nine Dollars and Eighty-Four Cents ($49,239.84) per month.

Commencing February 15, 2010, the Basic Rent shall be Fifty-One Thousand Two Hundred Nine Dollars and Forty-Three Cents ($51,209.43) per month.

Commencing February 15, 2011, the Basic Rent shall be Fifty-Three Thousand Two Hundred Fifty-Seven Dollars and Eighty-One Cents ($53,257.81) per month."

1

3.Effective as of February 15, 2007, Item 7 shall be deleted in its entirety and the following shall be substituted in lieu thereof:

"7. Property Tax Base: The Property Taxes per rentable square foot incurred by Landlord and attributable to the twelve month period ending June 30, 2007.

Building Cost Base: The Building Costs per rentable square foot incurred by Landlord and attributable to the twelve month period ending June 30, 2007.

Expense Recovery Period: Every twelve month period during the Term (or portion thereof during the first and last Lease years) ending June 30."

4.Effective as of February 15, 2007, Item 12 shall be deleted in its entirety and the following shall be substituted in lieu thereof:

"12. Parking: Forty-Four (44) unreserved vehicle parking spaces."

B.OperatingExpenses. Notwithstanding any contrary provision in the Lease, Landlord hereby agrees that Tenant shall not be obligated to pay Landlord for Operating Expenses accruing during the twelve (12) month period commencing February 15, 2007.

C.RightofFirstOffer. Section 2.4 of the Lease entitled "Right of First Offer' is hereby deleted in its entirety and nothing shall be substituted in lieu thereof.

D.RighttoExtendThisLease. Section 3.2 of the Lease entitled "Right to Extend This Lease" shall remain in full force and effect during the extension period ending February 29, 2012.

E.Parking. Notwithstanding any contrary provision in the Lease, effective as of February 15, 2007, Landlord shall provide to Tenant, and Tenant may lease from Landlord, all or a portion of the vehicle parking spaces set forth in Item 12 of the Basic Lease Provisions (asreflected in the revised parking allotment set forth in Section III.A.4 oft is Amendment) (the "Allotted Stalls"). Landlord agrees that Tenant may convert up to ten (10) of the Allotted Stalls to reserved stalls by providing written notice of such election to Landlord prior to February 15, 2007 (the "Converted Stalls"). Tenant acknowledges that, if such written notice of election is not delivered to Landlord prior to February 15, 2007, then the conversion of the unreserved stalls to reserved stalls shall be subject to the month to month availability of such reserved stalls as determined by Landlord. Any of the Allotted Stalls (including the Converted Stalls) that Tenant fails to lease continuously from and after February 15, 2007, shall thereafter be at Landlord's scheduled rates from time to time. Effective as of February 15, 2007 and subject to the foregoing, the stall charges for the foregoing stalls shall be Seventy Dollars ($70.00) per unreserved Allotted Stall per month, and One Hundred Dollars ($100.00) per Converted Stall per month, if applicable; provided that each of such rates shall be increased in the amount of Five Dollars ($5.00) per month on each annual anniversary of February 15, 2007, commencing February 15, 2008 and continuing through February 29, 2012. Thereafter, the stall charges shall be at Landlord's scheduled parking rates from time to time.

F.Tenant Improvement. Subject to the provisions below, Landlord shall cause its contractor to repaint all painted wall surfaces in the Premises with Landlord's building standard paint. Landlord's total contribution for the Tenant Improvements shall not exceed Twenty-Two Thousand Ninety-Six Dollars ($22,096.00) ("Landlord Contribution"). It is understood that Landlord shall be entitled to a supervision/administrative fee equal to five percent (5%) of the total hard and soft construction cost, which fee shall be paid from the Landlord Contribution. Any excess cost shall be borne solely by Tenant and shall be paid to Landlord within ten (10) days following Landlord's billing for such excess cost. It is further understood that the re-painting shall be completed during Tenant's occupancy of the Premises. In this regard, Tenant agrees to assume any risk of injury, loss or damage which may result and that no rental abatement shall result while the Premises are being repainted. Tenant further agrees that it shall be solely responsible for relocating its office equipment, furniture and furnishings in the Premises as necessary in order to accommodate such improvement work. Tenant shall notify Landlord in writing if and when it desires to have Landlord perform the foregoing work and shall allow Landlord sufficient access to the Premises therefor; provided, however, that if the Tenant Improvements are not completed by February 15, 2008, for any reason other than a delay caused by Landlord, then Landlord shall have no further responsibility to perform any such work.

2

IV.GENERAL.

A.Effect of Amendments. The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment.

B.Entire Agreement. This Amendment embodies the entire understanding between Landlord and Tenant with respect to the modifications set forth in "III. MODIFICATIONS" above and can be changed only by a writing signed by Landlord and Tenant.

C.Counterparts. If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation.

D.Defined Terms. All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment.

E.Authority. If Tenant is a corporation, limited liability company or partnership, or is comprised of any of them, each individual executing this Amendment for the corporation, limited liability company or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of such entity and that this Amendment is binding upon such entity in accordance with its terms.

F.Attorneys' Fees. The provisions of the Lease respecting payment of attorneys' fees shall also apply to this Amendment.

3

V.EXECUTION.

Landlord and Tenant executed this Amendment on the date as set forth in "I. PARTIES AND DATE." above.

LANDLORD:	TENANT:
THE IRVINE COMPANY LLC	ACACIA RESEARCH CORPORATION
By:  /S/ STEVEN M. CASE	By:  /S/ PAUL R. RYAN
Steven M. Case Senior Vice President, Leasing Office Properties	Printed Name: Paul Ryan Title:  Chairman & CEO

By:  /S/ STEVEN E. CLATON	By:  /S/ CLAYTON J. HAYNES
Steven E. Claton Vice President, Office Properties	Printed Name: Clayton J. Haynes Title:  CFO

4

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Paul R. Ryan, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Acacia Research Corporation;

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 officer 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 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 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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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 the 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 control 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.

Dated:  May 10, 2006	/s/ Paul R. Ryan
	Paul R. Ryan Chairman and Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Clayton J. Haynes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Acacia Research Corporation;

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 officer 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 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 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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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 the 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 control 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.

Dated:  May 10, 2006	/s/ Clayton J. Haynes
	Clayton J. Haynes Chief Financial Officer (Principal 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 Quarterly Report of Acacia Research Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2006, as filed with the Securities and Exchange Commission on May 10, 2006 (the “Report”), I, Paul R. Ryan, Chairman 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) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Paul R. Ryan                               

Paul R. Ryan

Chairman and Chief Executive Officer

(Principal Executive Officer)

May 10, 2006

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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 Quarterly Report of Acacia Research Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2006, as filed with the Securities and Exchange Commission on May 10, 2006 (the “Report”), I, Clayton J. Haynes, Chief 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) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Clayton J. Haynes                       

Clayton J. Haynes

Chief Financial Officer

(Principal Financial Officer)

May 10, 2006

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

EXHIBIT 99.1

RISK FACTORS

An investment in our stock involves a number of risks. Before making a decision to purchase our securities, you should carefully consider all of the risks described in this prospectus. If any of the risks discussed in this prospectus actually occur, our business, financial condition and results of operations could be materially adversely affected. If this were to occur, the trading price of our securities could decline significantly and you may lose all or part of your investment.

GENERAL RISKS

We have a history of losses and will probably incur additional losses in the future.

We have sustained substantial losses since our inception resulting in an accumulated deficit, as of December 31, 2005, of $206.9 million on a consolidated basis. We may never become profitable, or if we do, we may not be able to sustain profitability. We expect to incur significant research and development, marketing, general and administrative and legal expenses. As a result, it is more likely than not that we will incur losses for the foreseeable future.

If we, or our subsidiaries, encounter unforeseen difficulties and cannot obtain additional funding on favorable terms, our business may suffer.

Acacia Research Corporation's consolidated cash and cash equivalents along with short-term investments totaled $59.2 million at December 31, 2005.

To date, the CombiMatrix group has relied primarily upon selling equity securities, as well as payments from strategic partners, to generate the funds needed to finance the implementation of the CombiMatrix group’s business strategies. To date, the Acacia Technologies group has relied primarily upon selling of equity securities and payments from our licensees to generate the funds needed to finance the operations of the Acacia Technologies group.

We cannot assure you that we will not encounter unforeseen difficulties, including the outside influences identified above, that may deplete our capital resources more rapidly than anticipated. As a result, our subsidiary companies may be required to obtain additional financing through bank borrowings, debt or equity financings or otherwise, which would require us to make additional investments or face a dilution of our equity interests. Any efforts to seek additional funds could be made through equity, debt or other external financings. Nevertheless, we cannot assure that additional funding will be available on favorable terms, if at all. If we fail to obtain additional funding when needed for our subsidiary companies and ourselves, we may not be able to execute our business plans and our business may suffer.

Because we have a limited operating history, we cannot assure that our operations will be profitable.

We commenced operations in 1993 and, accordingly, have a limited operating history. In addition, certain of our subsidiary companies are in the early stages of development and/or operations and have limited operating histories. We also recently acquired eleven (11) new subsidiaries, and although we conducted customary due diligence before completing the acquisition, we cannot assure that our projections for profitability will be accurate because of our limited history with these new companies. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies with such limited operating histories. Since we have a limited operating history, we cannot assure you that our operations will be profitable or that we will generate sufficient revenues to meet our expenditures and support our activities.

We have sustained substantial losses since our inception resulting in an accumulated deficit as of December 31, 2005, of $206.9 million on a consolidated basis. If we continue to incur operating losses in future periods, we may not have enough money to expand our business and our subsidiary companies’ businesses in the future.

Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.

Our growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources. Further, as our subsidiary companies’ businesses grow, we will be required to manage multiple relationships. Any further growth by us or our subsidiary companies or an increase in the number of our strategic relationships will increase this strain on our managerial, operational and financial resources. This strain may inhibit our ability to achieve the rapid execution necessary to successfully implement our business plan.

Our future success depends on our ability to expand our organization to match the growth of our subsidiaries.

As our subsidiaries grow, the administrative demands upon Acacia Research Corporation will grow, and our success will depend upon our ability to meet those demands. These demands include increased accounting, management, legal services, staff support, and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.

The availability of shares for sale in the future could reduce the market price of our common stock.

In the future, we may issue securities to raise cash for acquisitions. We may also pay for interests in additional subsidiary companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.

In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of Acacia Research Corporation that might otherwise result in our stockholders receiving a premium over the market price of their shares.

Provisions of Delaware law and our certificate of incorporation and bylaws could make the following more difficult: the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include:

· section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder;

· amendment of our bylaws by the stockholders requires a two-thirds approval of the outstanding shares;

· the authorization in our certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover;

· provisions in our bylaws eliminating stockholders’ rights to call a special meeting of stockholders, which could make it more difficult for stockholders to wage a proxy contest for control of our board of directors or to vote to repeal any of the anti-takeover provisions contained in our certificate of incorporation and bylaws; and

· the division of our board of directors into three classes with staggered terms for each class, which could make it more difficult for an outsider to gain control of our board of directors.

Such potential obstacles to a takeover could adversely affect the ability of our stockholders to receive a premium price for their stock in the event another company wants to acquire us.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the Securities and Exchange Commission and by NASDAQ, will result in increased costs to us as we evaluate the implications of any new rules and respond to their requirements. New rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with any new rules and regulations.

RISKS RELATING TO THE COMBIMATRIX GROUP

The risk factors beginning on this page discuss risks relating to the CombiMatrix group. Because each holder of AR- CombiMatrix stock is also a holder of the common stock of one company, Acacia Research Corporation, the risks associated with the Acacia Technologies group could affect our AR-CombiMatrix stock. As such, we urge you to read carefully the section “Risks Relating to the Acacia Technologies Group” below.

Because our CombiMatrix group business operations are subject to many uncontrollable outside influences, it may not succeed.

Our CombiMatrix group's business operations are subject to numerous risks from outside influences, including the following:

· Technological advances may make our CombiMatrix group semiconductor based array technology obsolete or less competitive, and as a result, our revenue and the value of our assets could become obsolete or less competitive.

Our CombiMatrix group products and services are dependent upon our semiconductor based array technology. The semiconductor based array technology is an advancement in conventional arrays that are used for the same purpose. Current array technologies have revolutionized drug discovery and development, and we believe that our CombiMatrix group's array technology provides characteristics, including flexibility, superior cost metrics, and performance, which address certain needs of the life sciences market which are not addressed by conventional arrays and offers the latest in technological advances in this area. Our products and services are substantially dependent upon our ability to offer the latest in semiconductor based array technology in the SNP genotyping, gene expression profiling and proteomic markets. We believe technological advances of conventional arrays and semiconductor based arrays are currently being developed by our existing competition and potential new competitors in the market, including Affymetrix, Inc., Agilent Technologies, Inc., Applera Corporation, Becton, Dickinson and Company, Ciphergen Biosystems, Inc., Gene Logic Inc., Illumina, Inc., Johnson & Johnson, Nanogen, Inc., Orchid Biosciences, Inc., Roche Diagnostics GmbH and Sequenom, Inc. We also expect to face additional competition from new market entrants and consolidation of our existing competitors. Many of the CombiMatrix group's competitors have existing strategic relationships with major pharmaceutical and biotechnology companies, greater commercial experience and substantially greater financial and personnel resources than we do. We expect new competitors to emerge and the intensity of competition to increase in the future. If these companies are able to offer technological advances to conventional arrays or semiconductor based arrays, our products may become less valuable or even obsolete. While we continue to invest resources in research and development to enhance the technology of our products and services, we cannot provide any assurance that our competitors or new competitors will not enter the market with the same or similar technological advances before we are able to do so.

· New environmental regulation may materially increase the net losses of our CombiMatrix group

The CombiMatrix group's operations involve the use, transportation, storage and disposal of hazardous substances, and as a result it is subject to environmental and health and safety laws and regulations. Any changes in these laws and regulations could increase the CombiMatrix group's compliance costs, and as a result, could materially increase the net losses of our CombiMatrix group.

· Our technologies face uncertain market value

Our CombiMatrix group includes the following technologies and products that were recently introduced into the market: CustomArray^TM, DNA Microarray, 12K DNA expression array and related products, Design-on-Demand^TM Arrays, and NanoArray^TM technology and our Bench-Top DNA Microarray Synthesizer for CustomArray^TM. These technologies and products have not gained widespread market acceptance, and we cannot provide any assurance that the increase, if any, in market acceptance of these technologies and products will meet or exceed our expectations.

Further, our CombiMatrix group is currently developing the following technologies and products that have not yet been introduced into the market: (a) microarray technology for the detection of biological threat agents, (b) molecular diagnostics drug discovery and development using the CustomArray^TM platform, and (c) additional products for the research and development and diagnostics markets including higher density arrays. The level of market acceptance of these technologies and products will have a significant impact upon our results of operations, and we cannot provide any assurance that the increase, if any, in market acceptance of these technologies and products will meet or exceed our expectations.

· The foregoing outside influences may affect other risk factors described in this Prospectus

Any one of the foregoing outside influences may cause our company to need additional financing to meet the challenges presented or to compensate for a loss in revenue, and we may not be able to obtain the needed financing. See the heading “If we, or our subsidiaries, encounter unforeseen difficulties and cannot obtain additional funding on favorable terms, our business may suffer” below. Further, any one of the foregoing outside influences affecting the CombiMatrix group could make it less likely that our CombiMatrix group will be able to gain acceptance of its array technology by researchers in the pharmaceutical, biotechnology and academic communities. See the heading “If the CombiMatrix group's new and unproven technology is not used by researchers in the pharmaceutical, biotechnology and academic communities, its business will suffer” below.

The CombiMatrix group has a history of losses and expects to incur additional losses in the future.

The CombiMatrix group has sustained substantial losses since its inception. The CombiMatrix group may never become profitable, or if it does, it may never be able to sustain profitability. We expect the CombiMatrix group to incur significant research and development, marketing, general and administrative expenses. As a result, we expect the CombiMatrix group to incur losses for the foreseeable future.

The CombiMatrix group must enter into new strategic partnerships to generate revenue consistent with its operating history as a result of the completion of the relationship with Roche Diagnostics GmbH.

In March 2004, the CombiMatrix group completed all phases of its research and development agreement with Roche Diagnostics GmbH (“Roche”). As a result of completing all of its obligations under this agreement and in accordance with the CombiMatrix group's revenue recognition policies for multiple-element arrangements, the CombiMatrix group recognized all previously deferred Roche related contract revenues totaling $17,302,000 during the first quarter of 2004. To date, the CombiMatrix group has relied primarily upon selling equity securities, as well as payments from strategic partners, to generate the funds needed to finance the implementation of the CombiMatrix group's business strategies. The CombiMatrix group has historically been dependent on its arrangements with Roche, and has relied upon payments by Roche and other partners for a majority of its working capital. The CombiMatrix group intends to enter into additional strategic partnerships to develop and commercialize future products. The CombiMatrix group is deploying unproven technologies and continues to develop its commercial products. There can be no assurance that the CombiMatrix group will be able to implement its future plans. Failure by management to achieve its plans would have a material adverse effect on the CombiMatrix group's and Acacia Research Corporation's ability to achieve its intended business objectives.

The CombiMatrix group may fail to meet market expectations because of fluctuations in its quarterly operating results, which could cause its stock price to decline.

The CombiMatrix group's revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods the CombiMatrix group's revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our AR-CombiMatrix stock to decline. The following are among the factors that could cause the CombiMatrix group's operating results to fluctuate significantly from period to period:

· its unpredictable revenue sources, as described below;

· the nature, pricing and timing of the CombiMatrix group's and its competitors' products;

· changes in the CombiMatrix group's and its competitors' research and development budgets;

· expenses related to, and the CombiMatrix group's ability to comply with, governmental regulations of its products and processes; and

· expenses related to, and the results of, patent filings and other proceedings relating to intellectual property rights.

The CombiMatrix group anticipates significant fixed expenses due in part to its need to continue to invest in product development. It may be unable to adjust its expenditures if revenues in a particular period fail to meet its expectations, which would harm its operating results for that period. As a result of these fluctuations, the CombiMatrix group believes that period-to-period comparisons of the CombiMatrix group's financial results will not necessarily be meaningful, and you should not rely on these comparisons as an indication of its future performance.

The CombiMatrix group's revenues will be unpredictable, and this may harm its financial condition.

The amount and timing of revenues that the CombiMatrix group may realize from its business will be unpredictable because:

· whether products and services are commercialized and generate revenues depends, in part, on the efforts and timing of its potential customers; and

· its sales cycles may be lengthy.

As a result, the CombiMatrix group's revenues may vary significantly from quarter to quarter, which could make its business difficult to manage and cause its quarterly results to be below market expectations. If this happens, the price of the CombiMatrix group's common stock may decline significantly.

Technology company stock prices are especially volatile, and this volatility may depress the price of our AR-CombiMatrix stock.

The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly biotechnology companies, has been highly volatile. In addition, our stock has historically experienced greater price fluctuations than the biotechnology index of other Nasdaq listed stock. We believe that various factors may cause the market price of our AR-CombiMatrix stock to fluctuate, perhaps substantially, including, among others, announcements of:

· its or its competitors' technological innovations;

· developments or disputes concerning patents or proprietary rights;

· supply, manufacturing or distribution disruptions or other similar problems;

· proposed laws regulating participants in the biotechnology industry;

· developments in relationships with collaborative partners or customers;

· its failure to meet or exceed securities analysts' expectations of its financial results; or

· a change in financial estimates or securities analysts' recommendations.

In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our AR-CombiMatrix stock was the object of securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources, which could materially harm the business and financial results of the CombiMatrix group.

The CombiMatrix group is deploying new and unproven technologies which makes evaluation of its business and prospects difficult, and it may be forced to cease operations if it does not develop commercially successful products.

The CombiMatrix group has not proven its ability to commercialize products on a large scale. In order to successfully commercialize products on a large scale, it will have to make significant investments, including investments in research and development and testing, to demonstrate their technical benefits and cost-effectiveness. Problems frequently encountered in connection with the commercialization of products using new and unproven technologies might limit its ability to develop and commercialize its products. For example, the CombiMatrix group's products may be found to be ineffective, unreliable or otherwise unsatisfactory to potential customers. The CombiMatrix group may experience unforeseen technical complications in the processes it uses to develop, manufacture, customize or receive orders for its products. These complications could materially delay or limit the use of products the CombiMatrix group attempts to commercialize, substantially increase the anticipated cost of its products or prevent it from implementing its processes at appropriate quality and scale levels, thereby causing its business to suffer.

The CombiMatrixgroup may need to raise additional capital in the future, and if additional capital is not available on acceptable terms, the CombiMatrix group may have to curtail or cease operations.

The CombiMatrix group's future capital requirements will be substantial and will depend on many factors including how quickly it commercializes its products, the progress and scope of its collaborative and independent research and development projects, the filing, prosecution, enforcement and defense of patent claims and the need to obtain regulatory approval for certain products in the United States or elsewhere. Changes may occur that would cause the CombiMatrix group's available capital resources to be consumed significantly sooner than it expects.

The CombiMatrix group may be unable to raise sufficient additional capital on favorable terms or at all. If it fails to do so, it may have to curtail or cease operations or enter into agreements requiring it to relinquish rights to certain technologies, products or markets because it will not have the capital necessary to exploit them.

If the CombiMatrix group does not enter into successful partnerships and collaborations with other companies, it may not be able to fully develop its technologies or products, and its business would be harmed.

Since the CombiMatrix group does not possess all of the resources necessary to develop and commercialize products that may result from its technologies on a mass scale, it will need either to grow its sales, marketing and support group or make appropriate arrangements with strategic partners to market, sell and support its products. The CombiMatrix group believes that it will have to enter into additional strategic partnerships to develop and commercialize future products. If it does not enter into adequate agreements, or if its existing arrangements or future agreements are not successful, its ability to develop and commercialize products will be impacted negatively, and its revenues will be adversely affected.

Historically, the CombiMatrix group was substantially dependent on its arrangement with Roche. The CombiMatrix group relied on payments by Roche to fund the majority of its resources engaged in fulfilling its contractual obligations to Roche. Roche's primary service to the CombiMatrix group is to distribute its technology platform. If the CombiMatrix group were to lose its relationship with Roche, the CombiMatrix group would continue to distribute its technology platform itself or be required to establish a distribution agreement with other partners. This could prove difficult, time-consuming and expensive, and the CombiMatrix group may not be successful in achieving this objective.

The CombiMatrix group has limited experience commercially manufacturing, marketing or selling any of its potential products, and unless it develops these capabilities, it may not be successful.

Even if the CombiMatrix group is able to develop its products for commercial release on a large-scale, it has limited experience in manufacturing its products in the volumes that will be necessary for it to achieve commercial sales and in marketing or selling its products to potential customers. We cannot assure you that the CombiMatrix group will be able to commercially produce its products on a timely basis, in sufficient quantities or on commercially reasonable terms.

The CombiMatrix group faces intense competition and we cannot assure you that it will be successful.

The CombiMatrix group expects to compete with companies that design, manufacture and market instruments for analysis of genetic variation and function and other applications using established sequential and parallel testing technologies. The CombiMatrix group is also aware of other biotechnology companies that have or are developing testing technologies for the SNP genotyping, gene expression profiling and proteomic markets. The CombiMatrix group anticipates that it will face increased competition in the future as new companies enter the market with new technologies and its competitors improve their current products.

The markets for the CombiMatrix group's products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and new product introductions. One or more of the CombiMatrix group's competitors may offer technology superior to those of the CombiMatrix group and render its technology obsolete or uneconomical. Many of its competitors have greater financial and personnel resources and more experience in marketing, sales and research and development than it has. Some of its competitors currently offer arrays with greater density than it does and have rights to intellectual property, such as genomic information or proprietary technology, which provides them with a competitive advantage. If the CombiMatrix group were not able to compete successfully, its business and financial condition would be materially harmed.

If the CombiMatrix group's new and unproven technology is not used by researchers in the pharmaceutical, biotechnology and academic communities, its business will suffer.

The CombiMatrix group's products may not gain market acceptance. In that event, it is unlikely that its business will succeed. Biotechnology and pharmaceutical companies and academic research centers have historically analyzed genetic variation and function using a variety of technologies, and many of them have made significant capital investments in existing technologies. Compared to existing technologies, the CombiMatrix group's technologies are new and unproven. In order to be successful, its products must meet the commercial requirements of the biotechnology, pharmaceutical and academic communities as tools for the large-scale analysis of genetic variation and function. Market acceptance will depend on many factors, including:

· the development of a market for its tools for the analysis of genetic variation and function, the study of proteins and other purposes;

· the benefits and cost-effectiveness of its products relative to others available in the market;

· its ability to manufacture products in sufficient quantities with acceptable quality and reliability and at an acceptable cost;

· its ability to develop and market additional products and enhancements to existing products that are responsive to the changing needs of its customers;

· the willingness and ability of customers to adopt new technologies requiring capital investments or the reluctance of customers to change technologies in which they have made a significant investment; and

· the willingness of customers to transmit test data and permit the CombiMatrix group to transmit test results over the Internet, which will be a necessary component of its product and services packages unless customers purchase or license its equipment for use in their own facilities.

If the market for analysis of genomic information does not develop or if genomic information is not available to the CombiMatrix group's potential customers, its business will not succeed.

The CombiMatrix group is designing its technology primarily for applications in the biotechnology, pharmaceutical and academic communities. The usefulness of the CombiMatrix group's technology depends in part upon the availability of genomic data. The CombiMatrix group is initially focusing on markets for analysis of genetic variation and function, namely gene expression profiling. These markets are new and emerging, and they may not develop as the CombiMatrix group anticipates, or at all. Also, researchers may not seek or be able to convert raw genomic data into medically valuable information through the analysis of genetic variation and function. If genomic data is not available for use by the CombiMatrix group's customers or if its target markets do not emerge in a timely manner, or at all, demand for its products will not develop as it expects, and it may never become profitable.

The CombiMatrix group's future success depends on the continued service of its engineering, technical and key management personnel and its ability to identify, hire and retain additional engineering, technical and key management personnel.

There is intense competition for qualified personnel in the CombiMatrix group's industry, particularly for engineers and senior level management. Loss of the services of, or failure to recruit, engineers or other technical and key management personnel could be significantly detrimental to the group and could adversely affect its business and operating results. The CombiMatrix group may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of its products and business or to replace engineers or other qualified personnel who may leave the group in the future. The CombiMatrix group's anticipated growth is expected to place increased demands on its resources and likely will require the addition of new management personnel.

The expansion of the CombiMatrix group's product lines may subject it to regulation by the united states food and drug administration and foreign regulatory authorities, which could prevent or delay its introduction of new products.

If the CombiMatrix group manufactures, markets or sells any products for any regulated clinical or diagnostic applications, those products will be subject to extensive governmental regulation as medical devices in the United States by the FDA and in other countries by corresponding foreign regulatory authorities. The process of obtaining and maintaining required regulatory clearances and approvals is lengthy, expensive and uncertain. Products that CombiMatrix Corporation manufactures, markets or sells for research purposes only are not subject to governmental regulations as medical devices or as analyte specific reagents to aid in disease diagnosis. We believe that the CombiMatrix group's success will depend upon commercial sales of improved versions of products, certain of which cannot be marketed in the United States and other regulated markets unless and until the CombiMatrix group obtains clearance or approval from the FDA and its foreign counterparts, as the case may be. Delays or failures in receiving these approvals may limit our ability to benefit from new CombiMatrix group products.

As the CombiMatrix group's operations expand, its costs to comply with environmental laws and regulations will increase, and failure to comply with these laws and regulations could harm its financial results.

The CombiMatrix group's operations involve the use, transportation, storage and disposal of hazardous substances, and as a result it is subject to environmental and health and safety laws and regulations. As the CombiMatrix group expands its operations, its use of hazardous substances will increase and lead to additional and more stringent requirements. The cost to comply with these and any future environmental and health and safety regulations could be substantial. In addition, the CombiMatrix group's failure to comply with laws and regulations, and any releases of hazardous substances into the environment or at its disposal sites, could expose the CombiMatrix group to substantial liability in the form of fines, penalties, remediation costs and other damages, or could lead to a curtailment or shut down of its operations. These types of events, if they occur, would adversely impact the group's financial results.

The CombiMatrix group's business depends on issued and pending patents, and the loss of any patents or the group's failure to secure the issuance of patents covering elements of its business processes would materially harm its business and financial condition.

The CombiMatrix group's success depends on its ability to protect and exploit its intellectual property. The CombiMatrix group currently has four patents issued in the United States, three patents issued in Europe and 80 patent applications pending in the United States, Europe and elsewhere. The patents covering the CombiMatrix group's core technology begin to expire January 5, 2018.

The patent application process before the United States Patent and Trademark Office and other similar agencies in other countries is initially confidential in nature. Patents that are filed outside the United States, however, are published approximately eighteen months after filing. The CombiMatrix group cannot determine in a timely manner whether patent applications covering technology that competes with its technology have been filed in the United States or other foreign countries or which, if any, will ultimately issue or be granted as enforceable patents. Some of the CombiMatrix group's patent applications may claim compositions, methods or uses that may also be claimed in patent applications filed by others. In some or all of these applications, a determination of priority of inventorship may need to be decided in a proceeding before the United States Patent and Trademark Office or a foreign regulatory body or a court. If the CombiMatrix group is unsuccessful in these proceedings, it could be blocked from further developing, commercializing or selling products. Regardless of the ultimate outcome, this process is time-consuming and expensive.

Any inability to adequately protect the CombiMatrix group's proprietary technologies could materially harm the CombiMatrix group's competitive position and financial results.

If the CombiMatrix group does not protect its intellectual property adequately, competitors may be able to use its technologies and erode any competitive advantage that it may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights abroad. These problems can be caused by the absence of rules and methods for defending intellectual property rights.

The patent positions of companies developing tools for the biotechnology, pharmaceutical and academic communities, including the CombiMatrix group's patent position, generally are uncertain and involve complex legal and factual questions. The CombiMatrix group will be able to protect its proprietary rights from unauthorized use by third parties only to the extent that its proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The CombiMatrix group's existing patents and any future issued or granted patents it obtains may not be sufficiently broad in scope to prevent others from practicing its technologies or from developing competing products. There also is a risk that others may independently develop similar or alternative technologies or designs around the CombiMatrix group's patented technologies. In addition, others may oppose or invalidate its patents, or its patents may fail to provide it with any competitive advantage. Enforcing the CombiMatrix group's intellectual property rights may be difficult, costly and time-consuming and ultimately may not be successful.

The CombiMatrix group also relies upon trade secret protection for its confidential and proprietary information. While it has taken security measures to protect its proprietary information, these measures may not provide adequate protection for its trade secrets or other proprietary information. The CombiMatrix group seeks to protect its proprietary information by entering into confidentiality and invention disclosure and transfer agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose its proprietary information, and the CombiMatrix group may not be able to meaningfully protect its trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to its trade secrets.

Any litigation to protect the CombiMatrix group's intellectual property, or any third-party claims of infringement, could divert substantial time and money from the CombiMatrix group's business and could shut down some of its operations.

The CombiMatrix group's commercial success depends in part on its non-infringement of the patents or proprietary rights of third parties. Many companies developing tools for the biotechnology and pharmaceutical industries use litigation aggressively as a strategy to protect and expand the scope of their intellectual property rights. Accordingly, third parties may assert that the CombiMatrix group is employing their proprietary technology without authorization. In addition, third parties may claim that use of the CombiMatrix group's technologies infringes their current or future patents. The CombiMatrix group could incur substantial costs and the attention of its management and technical personnel could be diverted while defending ourselves against any of these claims. The CombiMatrix group may incur the same liabilities in enforcing its patents against others. The CombiMatrix group has not made any provision in its financial plans for potential intellectual property related litigation, and it may not be able to pursue litigation as aggressively as competitors with substantially greater financial resources.

If parties making infringement claims against the CombiMatrix group are successful, they may be able to obtain injunctive or other equitable relief, which effectively could block the CombiMatrix group's ability to further develop, commercialize and sell products, and could result in the award of substantial damages against it. If the CombiMatrix group is unsuccessful in protecting and expanding the scope of its intellectual property rights, its competitors may be able to develop, commercialize and sell products that compete with it using similar technologies or obtain patents that could effectively block its ability to further develop, commercialize and sell its products. In the event of a successful claim of infringement against the CombiMatrix group, we may be required to pay substantial damages and either discontinue those aspects of its business involving the technology upon which it infringed or obtain one or more licenses from third parties. While the CombiMatrix group may license additional technology in the future, it may not be able to obtain these licenses at a reasonable cost, or at all. In that event, it could encounter delays in product introductions while it attempts to develop alternative methods or products, which may not be successful. Defense of any lawsuit or failure to obtain any of these licenses could prevent it from commercializing available products.

If we encounter unforeseen difficulties and cannot obtain additional funding on favorable terms, our business may suffer.

Our CombiMatrix group’s cash and cash equivalents along with short-term investments totaled $20.2 million at December 31, 2005.

To date, the CombiMatrix group has relied primarily upon selling equity securities, as well as payments from strategic partners, to generate the funds needed to finance the implementation of its business strategies. We cannot assure you that the CombiMatrix group will not encounter unforeseen difficulties, including the outside influences identified above, that may deplete its capital resources more rapidly than anticipated. As a result, the CombiMatrix group subsidiary companies may be required to obtain additional financing through bank borrowings, debt or equity financings or otherwise, which would require us to make additional investments or face a dilution of our equity interests. Any efforts to seek additional funds could be made through equity, debt or other external financings. Nevertheless, we cannot assure that additional funding will be available on favorable terms, if at all. If the CombiMatrix group fails to obtain additional funding when needed for its subsidiary companies, the CombiMatrix group may not be able to execute its business plans and its business may suffer.

Because we have a limited operating history, we cannot assure that our operations will be profitable.

The CombiMatrix group commenced operations in 1996, and accordingly, have a limited operating history. In addition, the CombiMatrix group is still in the early stages of development and/or operations of much of its business and have a limited operating history. You should consider the CombiMatrix group’s prospects in light of the risks, expenses and difficulties frequently encountered by companies with such limited operating histories. Since the CombiMatrix group has a limited operating history, we cannot assure you that its operations will be profitable or that it will generate sufficient revenues to meet its expenditures and support its activities.

The CombiMatrix group has sustained substantial losses since its inception. If the CombiMatrix group continues to incur operating losses in future periods, it may not have enough money to expand its business and its subsidiary companies’ businesses in the future.

Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.

Our CombiMatrix group’s growth has placed, and is expected to continue to place, a strain on its managerial, operational and financial resources. Further, as its subsidiary companies’ businesses grow, the CombiMatrix group will be required to manage multiple relationships. Any further growth by the CombiMatrix group or its subsidiary companies or an increase in the number of our strategic relationships will increase this strain on the CombiMatrix group’s managerial, operational and financial resources. This strain may inhibit the CombiMatrix group’s ability to achieve the rapid execution necessary to successfully implement its business plan.

Our future success depends on our ability to expand our organization to match the growth of our subsidiaries.

As the CombiMatrix group subsidiaries grow, the administrative demands upon its management will grow, and its success will depend upon its ability to meet those demands. These demands include increased accounting, management, legal services, staff support for the CombiMatrix group’s board of directors, and general office services. The CombiMatrix group may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of the CombiMatrix group’s control. Further, the CombiMatrix group will need to effectively manage the training and growth of its staff to maintain an efficient and effective workforce, and its failure to do so could adversely affect its business and operating results.

RISKS RELATING TO THE ACACIA TECHNOLOGIES GROUP

The risk factors beginning on this page discuss risks relating to the Acacia Technologies group. Because each holder of AR- Acacia Technologies stock is also a holder of the common stock of one company, Acacia Research Corporation, the risks associated with the CombiMatrix group could affect our AR-Acacia Technologies stock. As such, we urge you to read carefully the section “Risks Relating to the CombiMatrix Group” above.

Because our business operations are subject to many uncontrollable outside influences, we may not succeed.

Our Acacia Technologies group’s business operations are subject to numerous risks from outside influences, including the following:

· New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase Acacia Technologies group’s operating costs and decrease its revenue.

Our Acacia Technology group acquires patents with enforcement opportunities and is spending a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented either by Congress, the United States Patent and Trademark Office, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our expenses and revenue. For example, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions. While we are not aware that any such changes are likely to occur in the foreseeable future, we cannot assure you that such changes will not occur.

· Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.

It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.

· More patent applications are filed each year resulting in longer delays in getting patents issued by the United States Patent and Trademark Office.

Our Acacia Technology group holds and continues to acquire pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The delays could cause delays in recognizing revenue from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market. See the subheading “Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents,” below.

· Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.

Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges, and as a result, we believe that the risk of delays in our patent enforcement actions will have a greater affect on our business in the future unless this trend changes.

· Any Reductions in the funding of the United States Patent and Trademark Office could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications.

The assets of Acacia Technologies group consists of patent portfolios, including pending patent applications before the U.S. Patent and Trademark Office (USPTO). The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses.

· Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents.

Our Acacia Technologies group expects to encounter competition in the area of patent acquisition and enforcement as the number of companies entering this market is increasing. This includes competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Companies such as British Technology Group, Rembrandt Management Group, and Intellectual Ventures LLC are already in the business of acquiring the rights to patents for the purpose of enforcement, and we expect more companies to enter the market. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues.

· Our patented technologies face uncertain market value.

Our Acacia Technologies group has acquired patents and technologies that are at early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. See the related risk factor below.

· As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents.

We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This may increase the risks associated with an investment in our company.

· The foregoing outside influences may affect other risk factors described in this prospectus.

Any one of the foregoing outside influences may cause our company to need additional financing to meet the challenges presented or to compensate for a loss in revenue, and we may not be able to obtain the needed financing. See the heading “If we, or our subsidiaries, encounter unforeseen difficulties and cannot obtain additional funding on favorable terms, our business may suffer” above.

The Acacia Technologies group has incurred losses in the past and expects to incur additional losses in the future.

The Acacia Technologies group has sustained substantial losses in the past. We expect the Acacia Technologies group to incur significant legal, marketing, general and administrative expenses. As a result, we expect the Acacia Technologies group to incur losses for the foreseeable future.

The Acacia Technologies group may fail to meet market expectations because of fluctuations in its quarterly operating results, which could cause the price of AR-Acacia Technologies stock to decline.

The Acacia Technologies group’s revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods the Acacia Technologies group’s revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our AR-Acacia Technologies stock to decline. The following are among the factors that could cause the Acacia Technologies group’s operating results to fluctuate significantly from period to period:

· the performance of our third-party licensees;

· costs related to acquisitions, alliances, licenses and other efforts to expand our operations;

· the timing of payments under the terms of any customer or license agreements into which the Acacia Technologies group may enter; and

· expenses related to, and the results of, patent filings and other enforcement proceedings relating to intellectual property rights, as more fully described in this section.

The Acacia Technologies group’s revenues will be unpredictable, and this may harm its financial condition.

Acacia Global Acquisition Corporation's acquisition of the assets of Global Patent Holdings, LLC in 2005, provided the Acacia Technologies group with ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts. Rights to additional patent portfolios were acquired subsequent to the acquisition of the assets of Global Patent Holdings, bringing the total number of patent portfolios controlled by the Acacia Technologies group to 42, covering technologies used in a wide variety of industries. The acquisitions expand and diversify the Acacia Technologies group's revenue generating opportunities. The Acacia Technologies group believes that its cash and cash equivalent balances, anticipated cash flow from operations and other external sources of available credit, will be sufficient to meet its cash requirements through June 30, 2007. However, due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt of license fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of our existing licensees and other factors, we cannot currently predict the amount and timing of the receipt of license fee revenues with a sufficient degree of precision.

As a result, the Acacia Technologies group’s revenues may vary significantly from quarter to quarter, which could make its business difficult to manage and cause its quarterly results to be below market expectations. If this happens, the price of our AR-Acacia Technologies stock may decline significantly.

Technology company stock prices are especially volatile, and this volatility may depress the price of our AR-Acacia Technologies stock.

The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our AR-Acacia Technologies stock to fluctuate, perhaps substantially, including, among others, the following:

· announcements of developments in our patent enforcement actions;

· developments or disputes concerning our patents;

· our or our competitors’ technological innovations;

· developments in relationships with licensees;

· variations in our quarterly operating results;

· our failure to meet or exceed securities analysts’ expectations of our financial results; or

· a change in financial estimates or securities analysts’ recommendations;

· changes in management’s or securities analysts’ estimates of our financial performance;

· changes in market valuations of similar companies;

· announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new technologies, or patents; and

· failure to complete significant transactions.

For example, the Nasdaq Computer Index had a range of $842.8-$1,037.2 during the 52-weeks ended December 31, 2005. Over the same period, our AR-Acacia Technologies stock fluctuated within a range of $4.38- $7.83. We believe fluctuations in our stock price during this period could have been caused by court rulings in our patent enforcement actions. Court rulings in patent enforcement actions are often difficult to understand, even when favorable or neutral to the value of our patents, and we believe that investors in the market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets.

In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our AR-Acacia Technologies stock was the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could materially harm the business and financial results of the Acacia Technologies group.

The markets served by the Acacia Technologies group are subject to rapid technological change, and if the Acacia Technologies group is unable to develop and acquire new technologies and patents, its revenues could stop growing or could decline.

The markets served by the licensees of Acacia Technologies group frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. Products for communications applications, high-speed computing applications, as well as other applications covered by the Acacia Technologies group’s intellectual property, are based on continually evolving industry standards. The Acacia Technologies group’s ability to compete in the future will, however, depend on its ability to identify and ensure compliance with evolving industry standards. This will require our continued efforts and success of acquiring new patent portfolios with licensing and enforcement opportunities. However, we expect to have sufficient liquidity and capital resources for the foreseeable future in order to maintain the level of acquisitions we believe we need to keep pace with these technological advances. However, outside influences may cause the need for greater liquidity and capital resources than expected, as described under the caption “Because our business operations are subject to many uncontrollable outside influences, we may not succeed” above.

The success of our Acacia Technologies group depends in part upon our ability to retain the best legal counsel to represent us in patent enforcement litigation.

In addition, the success of the Acacia Technologies group depends upon our ability to retain the best legal counsel to prosecute patent infringement litigation. As our patent enforcement actions increase, it will become more difficult to find the best legal counsel to handle all of our cases because many of the best law firms may have a conflict of interest that prevents its representation of our company.

RISKS RELATING TO OUR CAPITAL STRUCTURE

If we complete the spin off of CombiMatrix Corporation, holders of AR-CombiMatrix stock will no longer be shareholders of our company and may not be able to trade their stock on Nasdaq or a national exchange.

In January 2006, our board of directors approved a plan for our wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company, subject to our Board and the directors of CombiMatrix Corporation determining that there will be no significant negative tax consequences to either company or the shareholders and completing the required filings with the SEC. If the conditions are met, we will redeem all of the issued and outstanding shares of AR-CombiMatrix stock, including any shares of AR-CombiMatrix stock sold pursuant to this prospectus, for all of the common stock of CombiMatrix Corporation. Although AR-CombiMatrix stock is currently traded on Nasdaq, CombiMatrix Corporation will need to apply for a new listing of its common stock following the redemption. There can be no assurance that CombiMatrix Corporation’s common stock will be accepted for listing on Nasdaq or any national exchange. CombiMatrix Corporation’s failure to establish a market for its common stock on Nasdaq or another national exchange could significantly reduce the value of CombiMatrix Corporation’s common stock.

Holders of both classes of our stock are stockholders of one company, and the financial performance of one group could affect the other, thus exposing the holders of each group’s stock to the risks of an investment in the entire company.

Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock are stockholders of a single company. The CombiMatrix group and the Acacia Technologies group are not separate legal entities. As a result, stockholders will continue to be subject to all of the risks of an investment in Acacia Research Corporation and all of our businesses, assets and liabilities. The issuance of our AR-CombiMatrix stock and our AR-Acacia Technologies stock and the allocation of assets and liabilities and stockholders’ equity between the CombiMatrix group and the Acacia Technologies group did not result in a distribution or spin-off to stockholders of any of our assets or liabilities and did not affect ownership of our assets or responsibility for our liabilities or those of our subsidiaries. The assets we attribute to the Acacia Technologies group could be subject to the liabilities of the CombiMatrix group, whether such liabilities arise from lawsuits, contracts or indebtedness that we attribute to the other group. If we are unable to satisfy one group’s liabilities out of the assets we attribute to it, we may be required to satisfy those liabilities with assets we have attributed to the other group. However, our business is conducted by our operating subsidiaries. Creditors of one subsidiary may not make claims against the assets of another subsidiary, absent a separate guaranty from the other subsidiaries. None of our subsidiaries currently guaranty the obligations of other subsidiaries.

Financial effects from one group that affect our consolidated results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other group and the market price of the common stock relating to the other group. In addition, net losses of either group and dividends or distributions on, or repurchases of, either class of common stock will reduce the funds we can pay as dividends on each class of common stock under Delaware law. For these reasons, you should read our consolidated financial information with the financial information we provide for each group elsewhere in this prospectus.

The market price of either class of our common stock may not reflect the separate performance of the group related to that class of common stock.

The market price of our AR-CombiMatrix stock or AR-Acacia Technologies stock may not reflect the separate performance of the business of the group relating to that class of common stock. The market price of either class of common stock could simply reflect the performance of Acacia Research Corporation as a whole, or the market price of either class of common stock could move independently of the performance of the business of either group. Investors may discount the value of either class of common stock because it is part of a common enterprise rather than a stand-alone company.

The market price of either class of our common stock may be affected by factors that do not affect traditional common stock.

· The complex nature of the terms of our AR-CombiMatrix stock and AR-Acacia Technologies stock may adversely affect the market price of either class of common stock.

The complex nature of the terms of our two classes of common stock, such as the convertibility of AR-CombiMatrix stock into AR-Acacia Technologies stock, or vice versa, and the potential difficulties investors may have understanding these terms, may adversely affect the market price of either class of common stock.

· The market price of our AR-Acacia Technologies stock may be adversely affected by the fact that holders have limited legal interests in the group relating to the class of common stock.

For example, as described in greater detail in the subsequent risk factors, holders of either class of common stock generally do not have separate class voting rights with respect to significant matters affecting either group. In addition, upon our liquidation or dissolution, holders of either class of common stock will not have specific rights to the assets of the group relating to the class of common stock held and will not be entitled to receive proceeds that are proportional to the relative performance of that group. The voting rights of the AR-Acacia Technologies stock fluctuates based upon the relative market prices of the AR-CombiMatrix stock and the AR-Acacia Technologies stock. The record date for our last stockholder meeting was March 14, 2005, and holders of AR-Acacia Technologies stock had 1.665 votes per share, and holders of AR-CombiMatrix stock had one vote per share.

· The market price of our AR-Acacia Technologies stock may be adversely affected by events involving the CombiMatrix group or the performance of the AR-CombiMatrix stock.

Events, such as earnings announcements or other developments concerning one group that the market does not view favorably and which thus adversely affect the market price of the class of common stock relating to that group, may adversely affect the market price of the class of common stock relating to the other group. Because both classes of common stock are common stock of Acacia Research Corporation, an adverse market reaction to one class of common stock may, by association, cause an adverse reaction to the other class of common stock. This reaction may occur even if the triggering event was not material to us as a whole.

The holders of AR-CombiMatrix stock and the holders of AR-Acacia Technologies stock have only limited separate stockholder rights.

Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock have the rights customarily held by common stockholders. They also have these specific rights related to their corresponding group:

· certain rights with regard to dividends and liquidation;

· requirements for a mandatory dividend, redemption or conversion upon the disposition of all or substantially all of the assets of their corresponding group;

· a right to vote on matters as a separate voting class in the limited circumstances provided under Delaware law, by stock exchange rules or as determined by our board of directors (such as an amendment of our certificate of incorporation that changes the rights, privileges or preferences of the class of stock held by such stockholders); and

· we will not hold separate stockholder meetings for holders of AR-CombiMatrix stock and AR-Acacia Technologies stock.

The holders of AR-CombiMatrix stock and the holders of AR-Acacia Technologies stock will have certain limits on their respective voting powers.

· Group common stock with a majority of voting power can control voting outcomes.

The holders of AR-CombiMatrix stock and AR-Acacia Technologies stock will vote together as a single class, except in limited circumstances. If a separate vote on a matter by the holders of either our AR-CombiMatrix stock or our AR-Acacia Technologies stock is not required under Delaware law or by stock exchange rules, and if our board of directors does not require a separate vote, either class of common stock that is entitled to more than the number of votes required to approve such matter could control the outcome of such vote - even if the matter involves a divergence or conflict of the interests between the holders of our AR-CombiMatrix stock and our AR-Acacia Technologies stock . In addition, if the holders of common stock having a majority of the voting power of all shares of common stock outstanding approve a merger, the terms of which did not require separate class voting under stock exchange rules, then the merger could be consummated - even if the holders of a majority of either class of common stock were to vote against the merger.

The last time we determined the floating voting power of our AR-Acacia Technologies stock was for our annual meeting to be held on May 16, 2006, and our record date for voting purposes was March 27, 2006. As of March 27, 2006, the record date for the Annual Meeting, 27,766,909 shares of AR - Acacia Technologies stock and 38,992,402 shares of AR - CombiMatrix stock, the only outstanding voting securities of the Company, were issued and outstanding. At the meeting, each outstanding share of AR - Acacia Technologies stock will be entitled to 4.043votes, and each outstanding share of AR - CombiMatrix stock will be entitled to one vote. The voting rights of the AR - Acacia Technologies stock have been determined based on the market values of each class of Acacia common stock in accordance with the formula set forth in our Restated Certificate of Incorporation. The holders of AR - Acacia Technologies stock and AR - CombiMatrix stock will vote together as a single class at the meeting. Collectively, holders of AR-Acacia Technologies stock had a total of 112,261,613 potential votes, or approximately 74.22% of the total available votes. As the number of issued and outstanding shares of each class of stock increases, and as the market price of each class of stock fluctuates, the relative voting power between the classes of stock could change significantly.

· Group common stock with less than majority voting power can block action if a class vote is required.

If Delaware law, stock exchange rules or our board of directors requires a separate vote on a matter by the holders of either our AR-CombiMatrix stock or our AR-Acacia Technologies stock, such as a proposal to amend the terms of one class of stock, those holders could prevent approval of the matter, even if the holders of a majority of the total number of votes cast or entitled to be cast, voting together as a class, were to vote in favor of it.

· Holders of only one class of common stock cannot ensure that their voting power will be sufficient to protect their interests.

Since the relative voting power per share of AR-CombiMatrix stock and AR-Acacia Technologies stock will fluctuate based on the market values of the two classes of common stock, the relative voting power of a class of common stock could decrease. As a result, holders of shares of only one of the two classes of common stock cannot ensure that their voting power will be sufficient to protect their interests.

Our Restated Certificate of Incorporation may be amended to increase or decrease the authorized shares of either class of common stock without the approval of each class voting separately.

Our restated certificate of incorporation provides that an amendment to our restated certificate to increase or decrease the number of authorized shares of either class of common stock will require the approval of the holders of a majority of the voting power of all shares of common stock, voting together as a single class, and will not require the approval of each class of stock voting as a separate class. Accordingly, if the holders of one class of common stock hold a majority of the voting power of all shares of common stock, then that majority could approve an amendment to our restated certificate to increase or decrease the authorized shares of stock of either class without the approval of the holders of the minority class of stock.

Stockholders may not have any remedies for breach of fiduciary duties if any action by our directors or officers has a disadvantageous effect on either class of common stock.

Stockholders may not have any remedies if any action or decision of our directors and officers has a disadvantageous effect on either class of common stock compared to the other class of common stock. We are not aware of any legal precedent under Delaware law involving the fiduciary duties of directors and officers of corporations having two classes of common stock, or separate classes or series of capital stock, the rights of which, like our AR-CombiMatrix stock and AR-Acacia Technologies stock, are defined by reference to separate businesses of the corporation.

Principles of Delaware law established in cases involving differing treatment of two classes of capital stock or two groups of holders of the same class of capital stock provide that a board of directors owes an equal duty to all stockholders regardless of class or series. Under these principles of Delaware law and the related principle known as the “business judgment rule,” absent abuse of discretion, a good faith business decision made by a disinterested and adequately informed board of directors, board of directors’ committee or officer with respect to any matter having different effects on holders of AR-CombiMatrix stock and holders of AR-Acacia Technologies stock would be a defense to any challenge to such determination made by or on behalf of the holders of either class of common stock.

Numerous potential conflicts of interests exist between our AR-CombiMatrix stock and our AR-Acacia Technologies stock which may be difficult to resolve by our board or which may be resolved adversely to one of the classes.

The existence of separate classes of common stock could give rise to occasions when the interests of the holders of AR-CombiMatrix stock and AR-Acacia Technologies stock diverge or conflict. Examples include determinations by our directors or officers to:

· pay or omit the payment of dividends on AR-CombiMatrix stock or AR-Acacia Technologies stock ;

· allocate consideration to be received by holders of each of the classes of common stock in connection with a merger or consolidation involving Acacia Research Corporation;

· convert one class of common stock into shares of the other; approve certain dispositions of the assets of either group;

· allocate the proceeds of future issuances of our stock either to the Acacia Technologies group or the CombiMatrix group;

· allocate corporate opportunities between the groups;

· make other operational and financial decisions with respect to one group that could be considered detrimental to the other group; and

· Acacia Technology group may seek to license and enforce its patented technologies against companies that have business relationships or potential business relationships with CombiMatrix group.

When making decisions with regard to matters that create potential diverging or conflicting interests, our directors and officers will act in accordance with their fiduciary duties, the terms of our restated certificate of incorporation, and, to the extent applicable, our management and allocation policies.

The performance of one group or the dividends paid to one group may adversely affect the dividends available for the other group.

Our board of directors currently has no intention to pay dividends on our AR-CombiMatrix stock or our AR-Acacia Technologies stock. Determinations as to future dividends on our AR-CombiMatrix stock and our AR-Acacia Technologies stock will be based primarily on the financial condition, results of operations and business requirements of the relevant group and Acacia Research Corporation as a whole. Subject to the limitations referred to below, our board of directors has the authority to declare and pay dividends on our AR-CombiMatrix stock and our AR-Acacia Technologies stock in any amount and could, in its sole discretion, declare and pay dividends exclusively on our AR-CombiMatrix stock, exclusively on our AR-Acacia Technologies stock, or on both, in equal or unequal amounts. Our board of directors will not be required to consider the amount of dividends previously declared on each class, the respective voting or liquidation rights of each class or any other factor.

The performance of one group may cause our board of directors to pay more or less dividends on the common stock relating to the other group than if that other group was a stand-alone company. In addition, Delaware law and our restated certificate of incorporation impose limitations on the amount of dividends which may be paid on each class of common stock.

Proceeds of mergers or consolidations may be allocated unfavorably.

Our restated certificate of incorporation does not contain any provisions governing how consideration to be received by holders of common stock in connection with a merger or consolidation involving Acacia Research Corporation is to be allocated among holders of each class of common stock. Our board of directors will determine the percentage of the consideration to be allocated to holders of each class of common stock in any such transaction. Such percentage may be materially more or less than that which might have been allocated to such holders had our board of directors chosen a different method of allocation.

Holders of either class of common stock may be adversely affected by a conversion of group common stock.

Our board of directors could, in its sole discretion and without stockholder approval, determine to convert shares of AR-Acacia Technologies stock into shares of AR-CombiMatrix stock, or vice versa, at a time when either or both classes of common stock may be considered to be overvalued or undervalued. Any such conversion would dilute the interests in Acacia Research Corporation of the holders of the class of common stock being issued in the conversion. It could also give holders of shares of the class of common stock converted a greater or lesser premium than any premium that might be paid by a third-party buyer of all or substantially all of the assets of the group whose stock is converted.

Holders of either class of common stock could be adversely affected by a disposition of the assets attributed to their respective groups.

Our board of directors could, in its sole discretion and without stockholder approval, determine to dispose of all or substantially all the assets of a group. If a disposition of group assets occurs at a time when those assets are considered undervalued, then holders of that group’s stock would receive less consideration than they could have received had the assets been disposed of at a time when they had a higher value.

Proceeds of future issuances of our stock could be attributed unfavorably.

We may in the future issue a new class of stock, such as a class of preferred stock, or additional shares of AR-CombiMatrix stock or AR-Acacia Technologies stock. Proceeds from any future issuance of any class of stock would be attributed among the CombiMatrix group or the Acacia Technologies group as determined by our board of directors. There is no requirement that the proceeds from an issuance of AR-CombiMatrix stock or AR-Acacia Technologies stock be attributed to the corresponding group. Such allocations might be materially more or less for the respective groups than what might have been attributed had our board of directors chosen a different allocation method. Also, any designated preferred class may be designed to reflect the performance of Acacia Research Corporation as a whole, rather than the performance of the CombiMatrix group or the Acacia Technologies group.

Allocation of corporate opportunities could favor one group over another.

Our board of directors may be required to allocate corporate opportunities between the groups. In some cases, our directors could determine that a corporate opportunity, such as a business that we are acquiring, should be shared by the groups. Any such decisions could favor one group at the expense of the other.

Other operational and financial decisions which may favor one group over the other.

Our board of directors or our senior officers will review other operational and financial matters affecting the CombiMatrix group and the Acacia Technologies group, including the allocation of financing resources and capital, technology and know-how and corporate overhead, taxes, debt, interest and other matters. Any decision of our board of directors or our senior officers in these matters could favor one group at the expense of the other.

Our board of directors may change our management and allocation policies without stockholder approval to the detriment of either group.

Our board of directors may modify or rescind our policies with respect to the allocation of corporate overhead, taxes, debt, interest and other matters, or may adopt additional policies, in its sole discretion without stockholder approval. A decision to modify or rescind these policies, or adopt additional policies could have different effects on holders of either class of common stock or could result in a benefit or detriment to one class of stockholders compared to the other class. Our board of directors will make any such decision in accordance with its good faith business judgment that the decision is in the best interests of Acacia Research Corporation and all of our stockholders as a whole.

Either group may finance the other group on terms unfavorable to one of the groups.

We may transfer cash and other property between groups to finance their business activities. The group providing the financing will be subject to the risks relating to the group receiving the financing. We will account for those transfers generally as a short-term or long-term loan between groups or as a repayment of a previous borrowing.

There are limits on the consideration which may be received by the stockholders in the event of the disposition of assets of a group.

Our restated certificate of incorporation provides that if a disposition of all or substantially all of the properties and assets of either group occurs, we must, subject to certain exceptions:

· distribute through a dividend or redemption to holders of the class of common stock relating to such group an amount equal to the net proceeds of such disposition; or

· convert at a 10% premium such common stock into shares of the class of common stock relating to the other group.

If the group subject to the disposition were a separate, independent company and its shares were acquired by another person, certain costs of that disposition, including corporate level taxes, might not be payable in connection with that acquisition. As a result, stockholders of the separate, independent company might receive a greater amount than the net proceeds that would be received by holders of the class of common stock relating to that group if the assets of such group were sold. In addition, we cannot assure you that the net proceeds per share of the common stock relating to that group will be equal to or more than the market value per share of such common stock prior to or after announcement of a disposition.

The term “substantially all of the properties and assets” of a group is subject to potentially conflicting interpretations. Resolution of such a dispute could adversely impact the holders of either the class of common stock related to the assets being disposed or the holders of the other class because the consideration, if any, to be received by the holders of the class related to the disposed assets may depend on whether the disposition involved “substantially all” of the properties and assets of that class.

Holders of either class of common stock may be adversely affected by a redemption of their common stock.

We are entitled to redeem the outstanding common stock relating to a group when all or substantially all of that group’s assets are sold. We can redeem the assets for cash, securities, a combination of cash and securities or other property at fair value. A disposition-related redemption could occur when the assets being disposed of are considered undervalued. If that were the case, the holders of our common stock related to that group would receive less consideration for their shares than they may deem reasonable.

We can also redeem on a pro rata basis all of the outstanding shares of a group’s common stock for shares of the common stock of one or more of our wholly owned subsidiaries. If this were to occur, the holders of the redeemed class of common stock would no longer have stockholder voting rights in Acacia Research Corporation or any other benefits to be derived from holding a class of stock in Acacia Research Corporation. In addition, if the outstanding shares of a class of our common stock are redeemed for shares that are not publicly traded, the holders of such redeemed stock will no longer be able to publicly trade their shares and accordingly their investment will be substantially less liquid.

Our capital structure and the variable vote per share could enable a potential acquirer to take control of our company through the acquisition of only one of the classes of our common stock.

A potential acquirer could acquire control of Acacia Research Corporation by acquiring shares of common stock having a majority of the voting power of all shares of common stock outstanding. Such a majority could be obtained by acquiring a sufficient number of shares of both classes of common stock or, if one class of common stock has a majority of such voting power, only shares of that class. Currently, our AR-Acacia Technologies stock has a majority of the voting power. As a result, currently, it might be possible for an acquirer to obtain control of Acacia Research Corporation by purchasing only shares of AR-Acacia Technologies stock.

Decisions by directors and officers that affect differently one class of our common stock compared to the other could adversely affect the market value of either or both of the classes of our common stock.

The relative voting power per share of our AR-CombiMatrix stock and our AR-Acacia Technologies stock and the number of shares of one class of common stock issuable upon the conversion of the other class of common stock will vary depending upon the relative market values of our AR-CombiMatrix stock and our AR-Acacia Technologies stock. The market value of either or both classes of common stock could be affected by market reaction to decisions by our board of directors or our management that investors perceive to affect differently one class of common stock compared to the other. These decisions could involve changes to our management and allocation policies, allocations of corporate opportunities and financing resources between groups, and changes in dividend policies.

Investors may not value our AR-CombiMatrix stock and our AR-Acacia Technologies stock based on group financial information and policies.

We cannot assure you that investors will value our AR-CombiMatrix stock and our AR-Acacia Technologies stock based on the reported financial results and prospects of the separate groups or the dividend policies established by our board of directors with respect to those groups. Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock will continue to be common stockholders of Acacia Research Corporation subject to all the risks associated with an investment in Acacia Research Corporation as a whole. Additionally, the separate stockholder rights related to each group are limited and relate to events that may never occur, such as dividend and liquidation rights and the disposition of all or substantially all of the assets of a group. Accordingly, investors may discount the value of AR-CombiMatrix stock and AR-Acacia Technologies stock because both groups are part of a common enterprise rather than a stand-alone entity and each class of stock has limited separate stockholder rights.

Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock may not receive a premium from an investor acquiring control of their respective classes of stock.

Control of AR-CombiMatrix stock or AR-Acacia Technologies stock may not provide control of Acacia Research Corporation as a whole. Accordingly, unlike many acquisition transactions, holders of AR-CombiMatrix stock and AR-Acacia Technologies stock may not receive a controlling interest premium from an investor acquiring control of their respective classes of stock.

There are certain provisions in our two-class capital structure that could have anti-takeover effects.

The existence of the two classes of common stock could, under certain circumstances, prevent stockholders from profiting from an increase in the market value of their shares as a result of a change in control of Acacia Research Corporation by delaying or preventing such change in control. The existence of two classes of common stock could present complexities and could, in certain circumstances, pose obstacles, financial and otherwise, to an acquiring person. We could, in the sole discretion of our board of directors and without stockholder approval, exercise the right to convert the shares of one class of common stock into shares of the other at a 10% premium over their respective average market values. This conversion could result in additional dilution to persons seeking control of Acacia Research Corporation.

Our board of directors could issue shares of preferred stock or common stock that could be used to create voting or other impediments to discourage persons seeking to gain control of Acacia Research Corporation, and preferred stock could also be privately placed with purchasers favorable to our board of directors in opposing such action.