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<PAGE>

================================================================================

                                  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 SEPTEMBER 30, 2004


                         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 [X] No [ ]

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

         As of November 2, 2004, 19,807,358 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of November 2, 2004,
31,005,585 shares of Acacia Research-CombiMatrix common stock were issued and
outstanding.

================================================================================

<PAGE>

<TABLE>
                                          ACACIA RESEARCH CORPORATION
                                               TABLE OF CONTENTS

<S>        <C>                                                                                              <C>
PART I.    FINANCIAL INFORMATION


           Item 1.   Financial Statements

                     Acacia Research Corporation Consolidated Financial Statements

                     Consolidated Balance Sheets as of September 30, 2004 and
                     December 31, 2003 (Unaudited).......................................................   1

                     Consolidated Statements of Operations and Comprehensive Income (Loss) for the
                     Three Months and Nine Months Ended September 30, 2004 and 2003 (Unaudited)..........   2

                     Consolidated Statements of Cash Flows for the Nine Months Ended
                     September 30, 2004 and 2003 (Unaudited).............................................   3

                     Notes to Consolidated Financial Statements (Unaudited)..............................   4


                     *CombiMatrix Group Financial Statements

                     Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited)...........  17

                     Statements of Operations for the Three Months and Nine Months Ended
                     September 30, 2004 and 2003 (Unaudited).............................................  18

                     Statements of Cash Flows for the Nine Months Ended
                     September 30, 2004 and 2003 (Unaudited).............................................  19

                     Notes to Financial Statements (Unaudited)...........................................  20


                     *Acacia Technologies Group Financial Statements

                     Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited)...........  24

                     Statements of Operations for the Three Months and Nine Months Ended
                     September 30, 2004 and 2003 (Unaudited).............................................  25

                     Statements of Cash Flows for the Nine Months Ended
                     September 30, 2004 and 2003 (Unaudited).............................................  26

                     Notes to Financial Statements (Unaudited)...........................................  27


           Item 2.   Management's Discussion and Analysis of Financial Condition and
                     Results of Operations...............................................................  32

           Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........................  69

           Item 4.   Controls and Procedures.............................................................  69

<PAGE>

PART II.   OTHER INFORMATION


           Item 1.   Legal Proceedings...................................................................  71

           Item 6.   Exhibits............................................................................  72


SIGNATURES...............................................................................................  73

EXHIBIT INDEX ...........................................................................................  74
</TABLE>


*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.

<PAGE>

<TABLE>
                                              ACACIA RESEARCH CORPORATION
                                              CONSOLIDATED BALANCE SHEETS
                                (In thousands, except share and per share information)
                                                      (UNAUDITED)


                                                                                      SEPTEMBER 30,      DECEMBER 31,
                                                                                          2004               2003
                                                                                     --------------     --------------
<S>                                                                                  <C>                <C>
                                   ASSETS

Current assets:
    Cash and cash equivalents ..................................................     $      32,322      $      31,949
    Short-term investments .....................................................            24,721             18,551
    Accounts receivable, net of allowance for doubtful accounts of
      $0 (2004) and $145 (2003) ................................................               496                323
    Prepaid expenses, inventory, and other assets ..............................             1,130              1,180
                                                                                     --------------     --------------
            Total current assets ...............................................            58,669             52,003

Property and equipment, net of accumulated depreciation and amortization .......             2,656              2,823
Patents, net of accumulated amortization of $4,358 (2004) and $3,165 (2003) ....            12,463             13,683
Goodwill .......................................................................            19,584             21,200
Other assets ...................................................................               174                331
                                                                                     --------------     --------------
                                                                                     $      93,546      $      90,040
                                                                                     ==============     ==============

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable, accrued expenses and other ...............................     $       4,007      $       3,244
    Current portion of deferred revenues .......................................             1,092             18,108
                                                                                     --------------     --------------
            Total current liabilities ..........................................             5,099             21,352

Deferred income taxes ..........................................................             3,051              3,260
Deferred revenues, net of current portion ......................................             3,352              3,901
Other liabilities ..............................................................               370                 --
                                                                                     --------------     --------------
            Total liabilities ..................................................            11,872             28,513
                                                                                     --------------     --------------

Minority interests .............................................................               780              1,127
                                                                                     --------------     --------------

Commitments and contingencies (Note 9)

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; 19,795,525 and 19,739,984
          shares issued and outstanding as of September 30, 2004 and
          December 31, 2003, respectively ......................................                20                 20
        Acacia Research - CombiMatrix stock, par value $0.001 per share;
          50,000,000 shares authorized;  31,005,585 and 26,328,122 shares
          issued and outstanding as of September 30, 2004 and December 31,
          2003, respectively ...................................................                31                 26
    Additional paid-in capital .................................................           263,462            244,517
    Deferred stock compensation ................................................                 1               (766)
    Accumulated comprehensive income ...........................................               (59)                 8
    Accumulated deficit ........................................................          (182,561)          (183,405)
                                                                                     --------------     --------------
            Total stockholders' equity .........................................            80,894             60,400
                                                                                     --------------     --------------
                                                                                     $      93,546      $      90,040
                                                                                     ==============     ==============

                THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                           1
</TABLE>
<PAGE>
<TABLE>
                                                     ACACIA RESEARCH CORPORATION
                                CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                                       (In thousands, except share and per share information)
                                                             (UNAUDITED)


                                                                     FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                                   -------------------------------   -------------------------------
                                                                    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                                                        2004             2003             2004             2003
                                                                   --------------   --------------   --------------   --------------
<S>                                                                <C>              <C>              <C>              <C>
Revenues:
    Research and development contract ...........................  $          --    $          --    $      17,302    $          --
    License fees ................................................          2,240              186            3,505              211
    Government contract .........................................            685               --            1,603               --
    Service contracts ...........................................             16               10              102               23
    Products ....................................................             52              171              112              380
                                                                   --------------   --------------   --------------   --------------
        Total revenues ..........................................          2,993              367           22,624              614
                                                                   --------------   --------------   --------------   --------------

Operating expenses:
    Cost of government contract revenues ........................            647               --            1,505               --
    Cost of product sales .......................................             41               17               81               94
    Research and development expenses ...........................          1,140            1,726            3,932            6,219
    Non-cash stock compensation amortization - research and
      development ...............................................            (10)             243               91              525
    Marketing, general and administrative expenses ..............          4,771            3,675           12,621           11,482
    Non-cash stock compensation amortization - marketing,
      general and administrative ................................            157              421              634            1,055
    Goodwill impairment charge ..................................          1,616               --            1,616               --
    Amortization of patents .....................................            399              399            1,197            1,198
    Legal settlement charges (credits) ..........................            (90)              --              776               --
                                                                   --------------   --------------   --------------   --------------
        Total operating expenses ................................          8,671            6,481           22,453           20,573
                                                                   --------------   --------------   --------------   --------------
        Operating income (loss) .................................         (5,678)          (6,114)             171          (19,959)
                                                                   --------------   --------------   --------------   --------------

Other income (expense):
    Impairment charge ...........................................             --               --               --             (207)
    Interest income .............................................            218              180              568              572
    Realized gains on short-term investments ....................             --               32               --               94
    Other income ................................................             --               --               --                1
                                                                   --------------   --------------   --------------   --------------
        Total other income (expense) ............................            218              212              568              460
                                                                   --------------   --------------   --------------   --------------

Income (loss) from continuing operations before income taxes
  and minority interests ........................................         (5,460)          (5,902)             739          (19,499)

Benefit for income taxes ........................................             70               70              206              196
                                                                   --------------   --------------   --------------   --------------

Income (loss) from continuing operations before minority
  interests .....................................................         (5,390)          (5,832)             945          (19,303)

Minority interests ..............................................             --               --                3               30
                                                                   --------------   --------------   --------------   --------------

Income (loss) from continuing operations ........................         (5,390)          (5,832)             948          (19,273)
                                                                   --------------   --------------   --------------   --------------

Discontinued operations:
    Estimated loss on disposal of discontinued operations .......             --               --             (104)              --
                                                                   --------------   --------------   --------------   --------------

Net income (loss) ...............................................         (5,390)          (5,832)             844          (19,273)
                                                                   --------------   --------------   --------------   --------------
    Unrealized gains (losses) on short-term investments .........             19               (9)             (59)             (24)
    Unrealized gains (losses) on foreign currency translation ...             (1)              25               (8)              21
                                                                   --------------   --------------   --------------   --------------
Comprehensive income (loss) .....................................  $      (5,372)   $      (5,816)   $         777    $     (19,276)
                                                                   ==============   ==============   ==============   ==============

Earnings (loss) per common share:
  Attributable to the Acacia Technologies group:
    Net loss ....................................................  $      (1,842)   $      (1,296)   $      (3,984)   $      (4,368)
    Basic and diluted loss per share ............................          (0.09)           (0.07)           (0.20)           (0.22)

  Attributable to the CombiMatrix Group:
  Basic
    Net income (loss) ...........................................  $      (3,548)   $      (4,536)   $       4,828    $     (14,905)
    Basic earnings (loss) per share .............................          (0.11)           (0.18)            0.16            (0.64)
  Diluted
    Net income (loss) ...........................................  $      (3,548)   $      (4,536)   $       4,828    $     (14,905)
    Diluted earnings (loss) per share ...........................          (0.11)           (0.18)            0.16            (0.64)

Weighted average shares:
  Acacia Research - Acacia Technologies stock:
    Basic and diluted ...........................................     19,793,487       19,645,949       19,777,820       19,642,541
                                                                   ==============   ==============   ==============   ==============
  Acacia Research - CombiMatrix stock:
    Basic .......................................................     30,962,190       25,890,408       29,570,562       23,129,476
                                                                   ==============   ==============   ==============   ==============
    Diluted .....................................................     30,962,190       25,890,408       30,789,229       23,129,476
                                                                   ==============   ==============   ==============   ==============

                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                  2
</TABLE>
<PAGE>

<TABLE>
                                           ACACIA RESEARCH CORPORATION
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (In thousands)
                                                    (UNAUDITED)


                                                                                    FOR THE NINE MONTHS ENDED
                                                                                ---------------------------------
                                                                                 SEPTEMBER 30,      SEPTEMBER 30,
                                                                                     2004               2003
                                                                                --------------     --------------
<S>                                                                             <C>                <C>
Cash flows from operating activities:
  Net income (loss) from continuing operations ............................     $         948      $     (19,273)
  Adjustments to reconcile net income (loss) from continuing operations
    to net cash used in operating activities:
      Depreciation and amortization .......................................             2,080              2,293
      Minority interests ..................................................                --                (30)
      Non-cash stock compensation amortization ............................               725              1,580
      Deferred tax benefit ................................................              (209)              (210)
      Non-cash legal settlement charge ....................................               776                 --
      Non-cash impairment charges .........................................             1,616                207
      Other ...............................................................               (53)                69
Changes in assets and liabilities:
      Accounts receivable .................................................              (178)               134
      Prepaid expenses, inventory and other assets ........................               584               (173)
      Accounts payable, accrued expenses and other ........................               930               (618)
      Deferred revenues ...................................................           (17,565)            10,107
                                                                                --------------     --------------

      Net cash used in operating activities from continuing operations ....           (10,346)            (5,914)
      Net cash used in operating activities from discontinued operations ..              (636)              (350)
                                                                                --------------     --------------
      Net cash used in operating activities ...............................           (10,982)            (6,264)
                                                                                --------------     --------------

Cash flows from investing activities:
      Purchase of property and equipment, net .............................              (721)               (77)
      Purchase of available-for-sale investments ..........................           (44,949)           (26,561)
      Sale of available-for-sale investments ..............................            38,721             18,887
      Other ...............................................................                (5)                --
                                                                                --------------     --------------

      Net cash used in investing activities from continuing operations ....            (6,954)            (7,751)
      Net cash used in investing activities from discontinued operations ..              (198)              (356)
                                                                                --------------     --------------
      Net cash used in investing activities ...............................            (7,152)            (8,107)
                                                                                --------------     --------------

Cash flows from financing activities:
      Proceeds from the exercise of stock options and warrants ............             4,797                741
      Proceeds from sale of common stock, net of issuance costs ...........            13,715              4,862
                                                                                --------------     --------------

      Net cash provided by financing activities ...........................            18,512              5,603
                                                                                --------------     --------------

  Effect of exchange rate on cash .........................................                (5)               (13)
                                                                                --------------     --------------

  Increase (decrease) in cash and cash equivalents ........................               373             (8,781)

  Cash and cash equivalents, beginning ....................................            31,949             43,083
                                                                                --------------     --------------


  Cash and cash equivalents, ending .......................................     $      32,322      $      34,302
                                                                                ==============     ==============

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

                                                        3
</TABLE>
<PAGE>

                           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.

         Our life sciences business, referred to as the "CombiMatrix group," is
primarily comprised of our wholly owned subsidiary, CombiMatrix Corporation and
CombiMatrix Corporation's wholly owned subsidiary, CombiMatrix K.K. CombiMatrix
Corporation is a life sciences technology company with a proprietary system for
rapid, cost competitive creation of DNA and other compounds on a programmable
semiconductor chip. This proprietary technology has applications in the areas of
genomics, proteomics, biosensors, drug discovery, drug development, diagnostics,
combinatorial chemistry, material sciences and nanotechnology. CombiMatrix K.K.,
a Japanese corporation located in Tokyo, is exploring opportunities for
CombiMatrix Corporation's active array system with pharmaceutical and
biotechnology companies in the Asian market.

         Our intellectual property licensing business, referred to as the
"Acacia Technologies group," acquires, develops and licenses intellectual
property, and is comprised primarily of Acacia Research Corporation's wholly
owned subsidiaries, Acacia Media Technologies Corporation ("Acacia Media
Technologies"), Soundview Technologies, Inc. ("Soundview Technologies") and
Acacia Internet Access Corporation. The Acacia Technologies group is responsible
for the development, acquisition, licensing and protection of intellectual
property and proprietary technologies and is pursuing additional licensing and
strategic business alliances with companies in the intellectual property
licensing industry.

         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 stock ("AR-CombiMatrix stock") and Acacia Research-Acacia
Technologies 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.

         BASIS OF PRESENTATION. The accompanying unaudited consolidated
financial statements include the accounts of Acacia Research Corporation and its
wholly owned and majority-owned subsidiaries. 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 Securities and Exchange Commission. These interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2003, 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 presentation of our financial position as
of September 30, 2004 and results of operations and cash flows for the interim
periods presented. The results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the entire year.

         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


                                       4
<PAGE>

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 condition, 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.

         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

         REVENUE RECOGNITION. We recognize revenue in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition" ("SAB No. 104") and related
authoritative pronouncements. Revenues from multiple-element arrangements are
accounted for in accordance with Emerging Issues Task Force ("EITF") Issue
00-21, "Revenue Arrangements with Multiple Deliverables." Revenue is recognized
when (i) persuasive evidence of an arrangement exists, (ii) all obligations have
been performed pursuant to the terms of the license agreement, (iii) amounts are
fixed or determinable and (iv) collectibility of amounts is reasonably assured.

         COMBIMATRIX GROUP

         Revenues from multiple-element arrangements involving license fees,
up-front payments and milestone payments, which are received and/or billable by
us in connection with other rights and services that represent continuing
obligations of ours, are deferred until all of the elements have been delivered
or until we have established objective and verifiable evidence of the fair value
of the undelivered elements.

         Revenues from government grants and contracts are recognized in
accordance with Accounting Research Bulletin ("ARB") No. 43, "Government
Contracts," and related pronouncements. Accordingly, revenues are recognized
under the percentage-of-completion method of accounting, using the cost-to-cost
approach to measure completeness at each reporting period. Under the
percentage-of-completion method of accounting, contract revenues and expenses
are recognized in the period that work is performed based on the percentage of
actual incurred costs to estimated total contract costs. Actual contract costs
and cost estimates include direct charges for labor and materials and indirect
charges for labor, overhead and certain general and administrative charges.
Contract change orders and claims are included when they can be reliably
estimated and are considered probable. For contracts that extend over a one-year
period, revisions in contract cost estimates, if they occur, have the effect of
adjusting current period earnings applicable to performance in prior periods.
Should current contract estimates indicate an overall future loss to be
incurred, a provision is made for the total anticipated loss in the current
period.

         Revenue from the sale of products and services is recognized when
delivery has occurred or services have been rendered.

         Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as current. Deferred revenues will
be recognized as revenue in future periods when the applicable revenue
recognition criteria as described above are met.

         ACACIA TECHNOLOGIES GROUP

         Under the terms of our digital media transmission ("DMT(R)") license
agreements, the Acacia Technologies group grants non-exclusive licenses for the
use of its patented DMT(R) technology. All of the Acacia Technologies group's
material DMT(R) license agreements provide for license fee payments to be made
by the respective licensees over the term of the licenses. Pursuant to the terms
of our DMT(R) license agreements, once executed, the Acacia Technologies group
has no further obligations with respect to the grant of the licenses. License
fees paid to and recognized as revenue by the Acacia Technologies group are
non-refundable.

                                       5
<PAGE>

         Revenue generated from license agreements are generally accrued and
recognized as revenue in the period earned, provided that amounts are fixed or
determinable and collectibility is reasonably assured.

         Certain license agreements provide for the calculation of license fees
based on a licensee's actual quarterly sales or actual per unit activity,
applied to a contractual royalty rate. Licensees that pay license fees on a
quarterly basis generally report actual quarterly sales or actual per unit
activity information and related quarterly license fees due to the Acacia
Technologies group within 30 to 45 days after the end of the quarter in which
such sales or activity takes place. Consequently, the Acacia Technologies group
recognizes revenue from these licensing agreements on a three-month lag basis,
in the quarter following the quarter of sales or per unit activity, provided
amounts are fixed or determinable and collectibility is reasonably assured. The
lag method described above allows for the receipt of licensee royalty reports
prior to the recognition of revenue.

         Certain license agreements provide for the payment of a minimum upfront
annual license fee at the inception of each annual license term. Minimum upfront
annual license fees are generally determined based on a licensees estimated
annual sales or a licensees base level of per unit activity. These minimum
upfront annual license fee payments are deferred and amortized to revenue on a
straight-line basis over the annual license term. To the extent actual annual
royalties, determined and reported in accordance with the terms of the
respective agreements, exceed the minimum upfront annual license fees paid, the
additional royalties are recognized in revenue in the quarter following the
quarter in which the base per unit activity was exceeded or the quarter
following the annual license term, depending on the terms of the respective
agreement, provided that amounts are fixed or determinable and collectibility is
reasonably assured.

         License fee payments received by the Acacia Technologies group that do
not meet the revenue recognition criteria described above are deferred until the
revenue recognition criteria are met. The Acacia Technologies group assesses
collection of accrued license fees based on a number of factors, including past
transaction history and credit-worthiness. If it is determined that collection
is not reasonably assured, the fee is recognized when collectibility becomes
reasonably assured, assuming all other revenue recognition criteria have been
met, which is generally upon receipt of cash.

         As a result of our licensing and any related intellectual property
enforcement activities that we choose to conduct, we may recognize royalty
revenues that relate to prior period infringements by licensees. Differences
between amounts initially recognized and amounts subsequently audited or
reported as an adjustment to those amounts will be recognized in the period the
adjustment is determined as a change in accounting estimate.

         INVENTORY. Inventory, which consists primarily of raw materials to be
used in the production of the CombiMatrix group's array products, is stated at
the lower of cost or market using the first-in, first-out method.

         STOCK-BASED COMPENSATION. Acacia Research Corporation has two
stock-based employee compensation plans, the 2002 CombiMatrix Stock Incentive
Plan and the 2002 Acacia Technologies Stock Incentive Plan. Compensation cost of
stock options issued to employees is accounted for in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations. Compensation cost
attributable to such options is recognized based on the difference, if any,
between the closing market price of the stock on the date of grant and the
exercise price of the option. Compensation cost is generally deferred and
amortized on an accelerated basis over the vesting period of the individual
option awards using the amortization method prescribed in Financial Accounting
Standards Board ("FASB") Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28"). We have adopted the disclosure only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS No. 123" ("SFAS No. 148"), with respect to options issued to
employees. Compensation cost of stock options and warrants issued to
non-employee service providers is accounted for under the fair value method
required by SFAS No. 123 and related interpretations.


                                       6
<PAGE>

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

<TABLE>
                                                                     AR-ACACIA TECHNOLOGIES STOCK         AR-COMBIMATRIX STOCK
                                                                     -----------------------------     ----------------------------
                                                                          THREE MONTHS ENDED               THREE MONTHS ENDED
                                                                     -----------------------------     ----------------------------
                                                                     SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,   SEPTEMBER 30,
                                                                         2004             2003             2004            2003
                                                                     ------------     ------------     ------------    ------------
<S>                                                                  <C>              <C>              <C>             <C>
Loss from operations as reported .................................   $    (1,842)     $    (1,296)     $    (3,548)    $    (4,536)
Add: Stock-based compensation, intrinsic value method
   reported in net loss, net of tax ..............................            --               --              180             612
Deduct: Pro forma stock-based compensation fair value
   method, net of tax ............................................          (411)            (662)          (1,575)         (2,157)
                                                                     ------------     ------------     ------------    ------------
Loss from operations, pro forma ..................................   $    (2,253)     $    (1,958)     $    (4,943)    $    (6,081)
                                                                     ============     ============     ============    ============
Basic loss per share from operations as reported .................   $     (0.09)     $     (0.07)     $     (0.11)    $     (0.18)
Basic loss per share from operations, pro forma ..................         (0.11)           (0.10)           (0.16)          (0.23)
Diluted loss per share from operations as reported ...............         (0.09)           (0.07)           (0.11)          (0.18)
Diluted loss per share from operations, pro forma ................         (0.11)           (0.10)           (0.16)          (0.23)


                                                                     AR-ACACIA TECHNOLOGIES STOCK         AR-COMBIMATRIX STOCK
                                                                     -----------------------------     ----------------------------
                                                                           NINE MONTHS ENDED                NINE MONTHS ENDED
                                                                     -----------------------------     ----------------------------
                                                                     SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,   SEPTEMBER 30,
                                                                         2004             2003             2004            2003
                                                                     ------------     ------------     ------------    ------------

Income (loss) from operations as reported ........................   $    (3,984)     $    (4,368)     $     4,828     $   (14,905)
Add: Stock-based compensation, intrinsic value method
   reported in net income (loss), net of tax .....................            --               --              606           1,433
Deduct:  Pro forma stock-based compensation fair value
   method, net of tax ............................................        (1,524)          (2,685)          (5,192)         (7,302)
                                                                     ------------     ------------     ------------    ------------
Income (loss) from operations, pro forma .........................   $    (5,508)     $    (7,053)     $       242     $   (20,774)
                                                                     ============     ============     ============    ============
Basic earnings (loss) per share from operations as reported ......   $     (0.20)     $     (0.22)     $      0.16     $     (0.64)
Basic earnings (loss) per share from operations, pro forma .......         (0.28)           (0.36)            0.01           (0.90)
Diluted earnings (loss) per share from operations as reported ....         (0.20)           (0.22)            0.16           (0.64)
Diluted earnings (loss) per share from operations, pro forma .....         (0.28)           (0.36)            0.01           (0.90)
</TABLE>

         The fair value of AR-Acacia Technologies stock options and
AR-CombiMatrix stock options was determined using the Black-Scholes
option-pricing model, assuming volatility of approximately 100%, with expected
lives of approximately five years and no expected dividends.

         IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. We review long-lived
assets and intangible assets for potential impairment annually and when events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. In the event the sum of the expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. If an asset is determined to be impaired, the loss
is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows.

         Goodwill is subject to a periodic review for potential impairment at a
reporting unit level. Reviews for potential impairment must occur at least
annually and may be performed earlier, if circumstances indicate that an
impairment may have occurred. Acacia Research Corporation has elected to perform
its annual tests for indications of goodwill impairment as of December 31 of
each year. Our two reporting units as of September 30, 2004 are: 1) the Acacia
Technologies group and 2) the CombiMatrix group. The fair values of our
reporting units are estimated using a discounted cash flow analysis. There can
be no assurance that future goodwill impairment tests will not result in a
charge to earnings.

         As a result of the August 2004 adverse ruling in Soundview
Technologies' V-chip related litigation described at Notes 4 and 9, as of
September 30, 2004, Soundview Technologies is no longer considered a reporting
unit.


                                       7
<PAGE>

3.       EARNINGS PER SHARE

         EARNINGS PER SHARE. Earnings per share for each class of common stock
is computed by dividing the earnings 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 earnings or
loss 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 common stock equivalents. Potentially dilutive common stock equivalents
primarily consist of employee stock options and warrants.

         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, consistently applied. 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. Management currently has no plans to change allocation
methods.

         The following table presents a reconciliation of basic and diluted
income (loss) per share:

<TABLE>
                                                                      FOR THE THREE MONTHS ENDED        FOR THE NINE MONTHS ENDED
                                                                   -------------------------------   -------------------------------
                                                                    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                                                        2004             2003             2004             2003
                                                                   --------------   --------------   --------------   --------------
<S>                                                                   <C>              <C>              <C>              <C>
ACACIA RESEARCH - ACACIA TECHNOLOGIES STOCK
-------------------------------------------

Basic and diluted weighted average number of common
  shares outstanding ..........................................       19,793,487       19,645,949       19,777,820       19,642,541
                                                                   ==============   ==============   ==============   ==============
Potential AR-Acacia Technologies stock common shares
  excluded from the per share calculation because the
  effect of their inclusion would be anti-dilutive ............          649,498          317,000        1,202,948            3,173
                                                                   ==============   ==============   ==============   ==============


ACACIA RESEARCH - COMBIMATRIX STOCK
-----------------------------------

Basic weighted average number of common shares outstanding ....       30,962,190       25,890,408       29,570,562       23,129,476

Dilutive effect of outstanding stock options and warrants .....               --               --        1,218,667               --
                                                                   --------------   --------------   --------------   --------------
Diluted weighted average number of common and
  potential common shares outstanding .........................       30,962,190       25,890,408       30,789,229       23,129,476
                                                                   ==============   ==============   ==============   ==============
Potential AR-CombiMatrix stock common shares excluded from
  the per share calculation because the effect of their
  inclusion would be anti-dilutive ............................          725,906        1,167,778               --          587,180
                                                                   ==============   ==============   ==============   ==============
</TABLE>


4.       GOODWILL AND INTANGIBLES

         The Acacia Technologies group had $160,000 of goodwill at September 30,
2004 and $1,776,000 at December 31, 2003. In August 2004, as a result of the
adverse ruling in Acacia Technologies group's V-chip patent infringement lawsuit
described at Note 9, the Acacia Technologies group recorded an impairment charge
totaling $1,616,000 associated with the write-down of goodwill related to the
V-chip.

         The CombiMatrix group had $19,424,000 of goodwill at September 30, 2004
and December 31, 2003.

         Acacia Research Corporation's only identifiable intangible assets at
September 30, 2004 and December 31, 2003 are patents. The gross carrying amounts
and accumulated amortization as of September 30, 2004 and December 31, 2003,
related to patents, by segment, are as follows (in thousands):

<TABLE>
                                             ACACIA TECHNOLOGIES GROUP                COMBIMATRIX GROUP
                                         ---------------------------------     ---------------------------------
                                          SEPTEMBER 30,      DECEMBER 31,       SEPTEMBER 30,      DECEMBER 31,
                                              2004               2003               2004               2003
                                         --------------     --------------     --------------     --------------
<S>                                      <C>                <C>                <C>                <C>
Gross carrying amount - patents ....     $       4,726      $       4,753      $      12,095      $      12,095
Accumulated amortization ...........            (1,559)            (1,187)            (2,799)            (1,978)
                                         --------------     --------------     --------------     --------------
Patents, net .......................     $       3,167      $       3,566      $       9,296      $      10,117
                                         ==============     ==============     ==============     ==============
</TABLE>

          As of September 30, 2004 and December 31, 2003, all V-chip patent
related intangibles were fully amortized. As a result, the gross carrying
amounts and accumulated amortization related to the V-chip patent intangibles
have been excluded from the table above. See Note 12 for patent amortization
expense by segment for the three and nine months ended September 30, 2004 and
2003.


                                       8
<PAGE>

         Annual aggregate amortization expense for each of the next five years
through December 31, 2008 is estimated to be $1,595,000 per year ($500,000 for
the Acacia Technologies group and $1,095,000 for the CombiMatrix group).

         At September 30, 2004 and December 31, 2003, all of our acquired
intangible assets other than goodwill were subject to amortization.


5.       EQUITY FINANCING

         In April 2004, Acacia Research Corporation raised gross proceeds of
$15,000,000 through the sale of 3,000,000 shares of Acacia Research -
CombiMatrix common stock at a price of $5.00 per share in a registered direct
offering. Net proceeds raised of approximately $13,715,000, which are net of
related issuance costs, were attributed to the CombiMatrix group.


6.       RESEARCH AND DEVELOPMENT CONTRACTS

         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.

         In August 2004, the CombiMatrix group received a $1,000,000 upfront
payment from Furuno Electric Co., LTD ("Furuno") as part of a multi-year
collaboration agreement to develop a bench-top microarray synthesizer for
commercial applications. In 2003, the CombiMatrix group received upfront and
milestone payments from Toppan Printing Co., LTD. ("Toppan") totaling
$2,400,000, pursuant to a multi-year collaboration and supply agreement to
develop and manufacture microarrays using the CombiMatrix group's proprietary
electrochemical detection approach. The payments received from Furuno and Toppan
are included in deferred revenues at September 30, 2004 in accordance with the
CombiMatrix group's revenue recognition policies for multiple-element
arrangements.


7.        INCOME TAXES

          We estimate that there will be sufficient losses from operations in
the current fiscal year to offset any taxable income related to the Roche
deferred contract revenues totaling $17,302,000 recognized during the three
months ended March 31, 2004, resulting in no significant tax liability or
expense in the current period or for the year ending December 31, 2004.
Additionally, there was a deferred tax asset that was previously recognized for
income tax purposes that was offset by a valuation allowance; as a result of the
deferred revenue recognition, the associated deferred tax asset and related
valuation allowance were reduced during the first quarter of 2004 by
approximately $3.5 million.


8.       RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2004, the FASB issued EITF Issue No. 02-14, "Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock." EITF 02-14 addresses whether the equity method of accounting
applies when an investor does not have an investment in voting common stock of
an investee but exercises significant influence through other means. EITF 02-14
states that an investor should only apply the equity method of accounting when
it has investments in either common stock or in-substance common stock of a
corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. The
accounting provisions of EITF 02-14 are effective for reporting periods
beginning after September 15, 2004. We do not expect the adoption of EITF 02-14
to have a material impact on Acacia Research Corporation's, the CombiMatrix
group's or the Acacia Technologies group's financial position, results of
operations or cash flows.

         On March 31, 2004, the FASB issued an Exposure Draft, SHARE-BASED
PAYMENT, that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB No. 25
and generally would require instead that such transactions be accounted for
using a fair-value-based method. Disclosure of the effect of expensing the fair


                                       9
<PAGE>

value of equity compensation is currently required under existing literature
(see Note 2). While the final statement is subject to change, it is currently
anticipated it will become effective for periods beginning after June 15, 2005,
which would be Acacia Research Corporation's third fiscal quarter in 2005.
Acacia Research Corporation is in the process of evaluating the impact of this
proposal.

         In March 2004, the FASB issued EITF Issue No. 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per
Share," ("EITF 03-6") which addresses questions regarding the computation of
earnings per share ("EPS") by companies that have issued securities other than
common stock that contractually entitle the holder to participate in dividends
and earnings of the company when, and if, it declares dividends on its common
stock. The issue also provides further guidance in applying the two-class method
of calculating EPS and clarifies what constitutes a participating security and
how to apply the two-class method of computing EPS once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-6 defines participation rights based solely on whether
the holder would be entitled to receive any dividends if the entity declared
them during the period, requires the use of the two-class method for computing
basic EPS when participating convertible securities exist and expands the use of
the two-class method to encompass other forms of participating securities,
including options, warrants, forwards, and other contracts to issue an entity's
common stock. The provisions of EITF 03-6 are effective for fiscal periods
beginning after March 31, 2004. The adoption of EITF 03-6 did not have a
material impact on the Acacia Research Corporation's, the CombiMatrix group's or
the Acacia Technologies group's financial position, results of operations or
cash flows.


9.       COMMITMENTS AND CONTINGENCIES

         COMBIMATRIX GROUP

         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 nine months ended September
30, 2004, we recorded a net non-cash charge totaling $776,000 in connection with
certain anti-dilution provisions of that agreement. The non-cash charge reflects
management's estimate of the fair value of AR-CombiMatrix stock issued to
Nanogen, Inc. as a result of certain options and warrants exercised during the
nine months ended September 30, 2004 and the fair value of AR-CombiMatrix stock
potentially issuable to Nanogen, Inc. as of the balance sheet date. The
liability is 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 expire in
September 2005.

         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 will be $37,500 per
quarter for the period from October 1, 2003 through October 1, 2004, and $25,000
per quarter thereafter until the patents expire in 2018.

         In July 2004, the CombiMatrix group and collaborator irsiCaixa
Foundation ("IRSI") entered into a three-year research, development, and
licensing agreement and selected two siRNA candidates for downstream
pre-clinical development against HIV. Pursuant to the terms of the agreement,
the CombiMatrix group will make research and development funding payments to
IRSI totaling $450,000 over a period of three years, beginning in July 2004. In
addition, the CombiMatrix group may make future contingent milestone payments
for compounds that are developed, in accordance with the terms of the agreement.
In consideration for receiving rights to commercialize the compounds under
development, the CombiMatrix group will pay royalties to IRSI based on
commercial sales of related products, in accordance with the agreement.

         ACACIA TECHNOLOGIES GROUP

         In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies in November 2001, Acacia Media Technologies also
executed related assignment agreements which granted to the former owners of
Acacia Media Technologies' current patent portfolio the right to receive a
royalty of 15% of future net revenues, as defined in the agreements, generated
by Acacia Media Technologies' current patent portfolio, which includes its
DMT(R) patents. No royalty obligation has been incurred as of September 30,
2004. Any royalties paid pursuant to the agreements will be expensed in the
consolidated statement of operations.


                                       10
<PAGE>

LITIGATION

         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.

SOUNDVIEW TECHNOLOGIES

         In September 2002, the United States District Court for the District of
Connecticut granted a motion for summary judgment filed by the defendants in
Soundview Technologies pending patent infringement and antitrust lawsuit against
Sony Corporation of America, the Consumer Electronics Manufacturers Association
and the Electronics Industries Alliance d/b/a Consumer Electronics Association
in the United States District Court for the Eastern District of Virginia (filed
on April 5, 2000), alleging that television sets utilizing certain content
blocking technology (commonly known as the "V-chip") and sold in the United
States infringe Soundview Technologies' U.S. Patent No. 4,554,584. In granting
the motion, the court ruled that the defendants have not infringed on Soundview
Technologies' patent.

         In September 2003, a motion for summary judgment filed by the remaining
defendants was granted by the United States District Court for the District of
Connecticut on Soundview Technologies' anti-trust claims due to the Court's
previous ruling of non-infringement as described above.

         In August 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the September 2002 U.S. District Court for the District of Connecticut
ruling that the remaining television manufacturers named in the Acacia
Technologies group's V-chip patent infringement lawsuit do not infringe the
Acacia Technologies group's V-chip patent. As a result of the ruling, the Acacia
Technologies group recorded an impairment charge of $1,616,000 associated with
the write-off of goodwill related to the V-chip. In addition, as a result of the
conclusion of the V-chip patent litigation, the Acacia Technologies group
recognized $1,500,000 of V-chip related deferred license fee revenues and
$668,000 of V-chip related deferred legal costs in the third quarter of 2004.

         The final ruling in the V-chip litigation, as described above, has no
impact on the revenues that we have recognized to date from licensees of our
patented V-chip technology.

ACACIA MEDIA TECHNOLOGIES CORPORATION

INTERNET WEBSITES

          In February 2003, Acacia Media Technologies initiated DMT(R) patent
infringement litigation in the Federal District Court for the Central District
of California (the "Court") against approximately 39 defendants who provide
adult oriented digital content over the Internet. All of the defendants were
previously notified of our belief that their conduct infringes on our patent
rights. As of September 30, 2004, nine of the original 39 defendants remain in
the initial litigation.

         In December 2003, Acacia Media Technologies added an additional eight
defendants to its pending patent infringement litigation described above. The
new complaints, filed with the Court, seek to create a defendant class for all
adult entertainment companies that infringe Acacia Media Technologies' DMT(R)
patents by transmitting pre-recorded, digital audio and audio/video adult
content via any electronic communication channel into or from the Central
District of California, or that operate at least one interactive website where a
user located in Central District of California can exchange information with a
host computer. Defendant class action status, which must be approved by the
Court, would permit the Court's rulings on certain key issues to legally bind
all members of the class, whether or not they have been specifically named as
defendants in the litigation.

         On July 12, 2004, the United States District Court for the Central
District of California issued a Markman Order giving the Court's construction of
some of the disputed patent terms and phrases contained in two of the five U.S.
DMT(R) patents.

HOTEL ON-DEMAND TV INDUSTRY

         In November 2003, Acacia Media Technologies initiated a patent
infringement lawsuit in the Federal District Court for the Central District of
California against On Command Corporation, provider of interactive in-room
entertainment, information and business services to the lodging industry,
regarding Acacia Media Technologies' DMT(R) technology. In June 2004 Acacia


                                       11
<PAGE>

Media Technologies entered into a license agreement for its DMT(R) technology
with On Command Corporation settling all outstanding litigation between the
parties.

CABLE AND SATELLITE TV

         In June 2004, Acacia Media Technologies filed a Complaint in the
District Court for the Northern District of California alleging infringement of
Acacia Media Technologies' DMT(R) patents against 9 cable and satellite
companies. Companies named as defendants in the lawsuit include Comcast
Corporation, Charter Communications, Inc., The DirectTV Group, Inc., Echostar
Communications Corporation, Boulder Ridge Cable TV, Central Valley Cable TV,
LLC, Seren Innovations, Inc., Cox Communications, Inc., and Hospitality Network,
Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand TV
services). In September 2004, Acacia Media Technologies added Mediacom LLC to
this complaint. As of September 2004, Acacia Media Technologies has executed
license and settlement agreements with Boulder Ridge Cable TV, Central Valley
Cable TV, and Seren Innovations.

         In September 2004, Acacia Media Technologies filed complaints in the
U.S. District Court for the District of Arizona, U.S. District Court for the
District of Minnesota and the U.S. District Court for the Northern District of
Ohio - Eastern Division, alleging infringement of Acacia Media Technologies'
DMT(R) patents against certain cable and satellite companies located in Arizona,
Minnesota, and Ohio. Companies named in the lawsuits include Armstrong Group,
Arvig Communication Systems, Block Communications, Inc., Cable America
Corporation, Cable One, Inc., Cable System Services, Inc., Cannon Valley
Communications, Inc., East Cleveland Cable TV and Communications, LLC, Loretel
Cablevision, Massillon Cable TV, Inc., Mid-Continent Media, Inc., Nelsonville TV
Cable, Inc., NPG Cable, Inc., Precis Communications, Inc. San Carlos
Cablevision, LLC, Savage Communications, Inc., Sjoberg's Cablevision, Inc., US
Cable, and Wide Open West, LLC.


10.      DISCOUNTINUED OPERATIONS

         Results for the nine months ended September 30, 2004 include a $104,000
charge, net of minority interests, related to estimated additional costs to be
incurred in connection with the discontinued operations of Soundbreak.com,
related primarily to certain noncancellable lease obligations and the inability
to sublease the related office space at rates commensurate with existing
obligations or negotiate more favorable terms.


11.      SUBSEQUENT EVENT

         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 next two
years. In accordance with the terms of the purchase agreement, CombiMatrix
Corporation's CEO was named a director of Leuchemix.


12.      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.


                                       12
<PAGE>

<TABLE>
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)

                                                        AT SEPTEMBER 30, 2004                        AT DECEMBER 31, 2003
                                            -------------------------------------------  -------------------------------------------
                                             ACACIA                                       ACACIA
                                              TECH-      COMBI-                            TECH-      COMBI-
                                             NOLOGIES    MATRIX     ELIMIN-    CONSOL-    NOLOGIES    MATRIX     ELIMIN-    CONSOL-
                                              GROUP      GROUP      ATIONS     IDATED      GROUP      GROUP      ATIONS     IDATED
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
<S>                                         <C>        <C>        <C>         <C>        <C>        <C>        <C>         <C>
                   ASSETS

Current assets:
    Cash and cash equivalents ............  $ 29,366   $  2,956   $      --   $ 32,322   $ 28,142   $  3,807   $      --   $ 31,949
    Short-term investments ...............       998     23,723          --     24,721      5,059     13,492          --     18,551
    Accounts receivable ..................       175        321          --        496        124        199          --        323
    Prepaid expenses, inventory and
      other assets .......................       758        372          --      1,130        903        277          --      1,180
    Receivable from CombiMatrix group ....       115         --        (115)        --         99         --         (99)        --
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total current assets .............    31,412     27,372        (115)    58,669     34,327     17,775         (99)    52,003

Property and equipment, net of
  accumulated depreciation and
  amortization ...........................       103      2,553          --      2,656         71      2,752          --      2,823
Patents, net of accumulated
  amortization ...........................     3,167      9,296          --     12,463      3,566     10,117          --     13,683
Goodwill .................................       160     19,424          --     19,584      1,776     19,424          --     21,200
Other assets .............................        84         90          --        174        238         93          --        331
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
                                            $ 34,926   $ 58,735   $    (115)  $ 93,546   $ 39,978   $ 50,161   $     (99)  $ 90,040
                                            =========  =========  ==========  =========  =========  =========  ==========  =========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued
      expenses and other .................  $  2,209   $  1,798   $      --   $  4,007   $  1,572   $  1,672   $      --   $  3,244
    Current portion of deferred
      revenues ...........................       593        499          --      1,092        104     18,004          --     18,108
    Payable to Acacia Technologies
      group ..............................        --        115        (115)        --         --         99         (99)        --
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total current liabilities ........     2,802      2,412        (115)     5,099      1,676     19,775         (99)    21,352

Deferred income taxes ....................       905      2,146          --      3,051      1,012      2,248          --      3,260
Deferred revenues, net of current
  portion ................................        --      3,352          --      3,352      1,500      2,401          --      3,901
Other liabilities ........................        --        370          --        370         --         --          --         --
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
         Total liabilities ...............     3,707      8,280        (115)    11,872      4,188     24,424         (99)    28,513
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Minority interests .......................       780         --          --        780      1,127         --          --      1,127
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
Redeemable Stockholders' equity:
    AR - Acacia Technologies stock .......    30,439         --          --     30,439     34,663         --          --     34,663
    AR - CombiMatrix stock ...............        --     50,455          --     50,455         --     25,737          --     25,737
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total stockholders' equity .......    30,439     50,455          --     80,894     34,663     25,737          --     60,400
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
                                            $ 34,926   $ 58,735   $    (115)  $ 93,546   $ 39,978   $ 50,161   $     (99)  $ 90,040
                                            =========  =========  ==========  =========  =========  =========  ==========  =========

---------------------------
NOTE: Segment information for the Acacia Technologies group includes discontinued operations related to Soundbreak.com. Total assets
related to discontinued operations totaled $1,464,000 and $2,150,000 at September 30, 2004 and December 31, 2003, respectively.
Total liabilities related to discontinued operations totaled $296,000 and $395,000 at September 30, 2004 and December 31, 2003,
respectively.


                                                                 13
</TABLE>
<PAGE>

<TABLE>
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)

                                                    FOR THE THREE MONTHS ENDED                   FOR THE NINE MONTHS ENDED
                                                         SEPTEMBER 30, 2004                         SEPTEMBER 30, 2004
                                            -------------------------------------------  -------------------------------------------
                                             ACACIA                ELIMIN-                 ACACIA               ELIMIN-
                                              TECH-      COMBI-    ATIONS/                  TECH-     COMBI-    ATIONS/
                                             NOLOGIES    MATRIX    RECLASS-    CONSOL-    NOLOGIES    MATRIX    RECLASS-    CONSOL-
                                              GROUP      GROUP    IFICATIONS   IDATED      GROUP      GROUP    IFICATIONS   IDATED
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
<S>                                         <C>        <C>        <C>         <C>        <C>        <C>        <C>         <C>
Revenues:
    Research and development,
      government and service
      contracts ..........................  $     --   $    701   $      --   $    701   $     --   $ 19,007   $      --   $ 19,007
   License fees ..........................     2,240         --          --      2,240      3,505         --          --      3,505
   Products ..............................        --         52          --         52         --        112          --        112
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total revenues ...................     2,240        753          --      2,993      3,505     19,119          --     22,624
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Operating expenses:
    Cost of government contract
      revenues ...........................        --        647          --        647         --      1,505          --      1,505
    Cost of product sales ................        --         41          --         41         --         81          --         81
    Research and development expenses ....        --      1,140          --      1,140         --      3,932          --      3,932
    Non-cash stock compensation
      amortization - research
      and development ....................        --        (10)         --        (10)        --         91          --         91
    Marketing, general and
      administrative expenses ............     1,323      2,274       1,174      4,771      3,489      6,780       2,352     12,621
    Non-cash stock compensation
      amortization - marketing,
      general and administrative .........        --        157          --        157         --        634          --        634
    Legal expenses - patents .............     1,174         --      (1,174)        --      2,352         --      (2,352)        --
    Goodwill impairment charge ...........     1,616         --          --      1,616      1,616         --          --      1,616
    Amortization of patents ..............       125        274          --        399        375        822          --      1,197
    Legal settlement charges
      (credits) ..........................        --        (90)         --        (90)        --        776          --        776
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total operating expenses .........     4,238      4,433          --      8,671      7,832     14,621          --     22,453
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Operating income (loss) ..........    (1,998)    (3,680)         --     (5,678)    (4,327)     4,498          --        171
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Other income:
    Interest income ......................       120         98          --        218        340        228          --        568
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total other income ...............       120         98          --        218        340        228          --        568
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Income (loss) from continuing
  operations before income taxes
  and minority interests .................    (1,878)    (3,582)         --     (5,460)    (3,987)     4,726          --        739

Benefit for income taxes .................        36         34          --         70        104        102          --        206
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Income (loss) from continuing
  operations before minority
  interests ..............................    (1,842)    (3,548)         --     (5,390)    (3,883)     4,828          --        945

Minority interests .......................        --         --          --         --          3         --          --          3
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Loss from continuing operations ..........    (1,842)    (3,548)         --     (5,390)    (3,880)     4,828          --        948

Discontinued operations:
    Estimated loss on disposal of
      discontinued operations ............        --         --          --         --       (104)        --          --       (104)
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
Net income (loss) ........................  $ (1,842)  $ (3,548)  $      --   $ (5,390)  $ (3,984)  $  4,828   $      --   $    844
                                            =========  =========  ==========  =========  =========  =========  ==========  =========


                                                                 14
</TABLE>
<PAGE>

<TABLE>
CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)

                                                    FOR THE THREE MONTHS ENDED                   FOR THE NINE MONTHS ENDED
                                                         SEPTEMBER 30, 2003                         SEPTEMBER 30, 2003
                                            -------------------------------------------  -------------------------------------------
                                             ACACIA                ELIMIN-                 ACACIA               ELIMIN-
                                              TECH-      COMBI-    ATIONS/                  TECH-     COMBI-    ATIONS/
                                             NOLOGIES    MATRIX    RECLASS-    CONSOL-    NOLOGIES    MATRIX    RECLASS-    CONSOL-
                                              GROUP      GROUP    IFICATIONS   IDATED      GROUP      GROUP    IFICATIONS   IDATED
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
<S>                                         <C>        <C>        <C>         <C>        <C>        <C>        <C>         <C>
Revenues:
    Research and development,
      government and service
      contracts ..........................  $     --   $     10   $      --   $     10   $     --   $     23   $      --   $     23
    License fees .........................       186         --          --        186        211         --          --        211
    Products .............................        --        171          --        171         --        380          --        380
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total revenues ...................       186        181          --        367        211        403          --        614
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Operating expenses:
    Cost of product sales ................        --         17          --         17         --         94          --         94
    Research and development expenses ....        --      1,726          --      1,726         --      6,219          --      6,219
    Non-cash stock compensation
      amortization - research
      and development ....................        --        243          --        243         --        525          --        525
    Marketing, general and
      administrative expenses ............       955      2,122          --      3,077      3,157      6,890          --     10,047
    Non-cash stock compensation
      amortization - marketing,
      general and administrative .........        --        421          --        421         --      1,055          --      1,055
    Legal expenses - patents .............       598         --          --        598      1,435         --          --      1,435
    Amortization of patents ..............       125        274          --        399        377        821          --      1,198
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total operating expenses .........     1,678      4,803          --      6,481      4,969     15,604          --     20,573
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Operating income (loss) ..........    (1,492)    (4,622)         --     (6,114)    (4,758)   (15,201)         --    (19,959)
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Other income:
    Impairment charges ...................        --         --          --         --       (207)        --          --       (207)
    Interest income ......................       128         52          --        180        408        164          --        572
    Realized gains on short-term
      investments ........................        32         --          --         32         94         --          --         94
    Other income .........................        --         --          --         --          1         --          --          1
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
        Total other (expenses) income ....       160         52          --        212        296        164          --        460
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Income (loss) from continuing
  operations before income taxes and
  minority interests .....................    (1,332)    (4,570)         --     (5,902)    (4,462)   (15,037)         --    (19,499)

Benefit for income taxes .................        36         34          --         70         94        102          --        196
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------

Income (loss) from continuing
  operations before minority interests ...    (1,296)    (4,536)         --     (5,832)    (4,368)   (14,935)         --    (19,303)

Minority interests .......................        --         --          --         --         --         30          --         30
                                            ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------
Net income (loss) ........................  $ (1,296)  $ (4,536)  $      --  $ (5,832)  $ (4,368)   $(14,905)  $      --   $(19,273)
                                            =========  =========  ==========  =========  =========  =========  ==========  =========


                                                                 15
</TABLE>
<PAGE>

<TABLE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

                                       FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004    FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
                                      ----------------------------------------------  ----------------------------------------------
                                        ACACIA                                         ACACIA
                                        TECH-       COMBI-                              TECH-       COMBI-
                                       NOLOGIES     MATRIX     ELIMIN-     CONSOL-     NOLOGIES     MATRIX     ELIMIN-     CONSOL-
                                        GROUP       GROUP      ATIONS      IDATED       GROUP       GROUP      ATIONS      IDATED
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Cash flows from operating
 activities:
   Net income (loss) from
     continuing operations .......... $  (3,880)  $   4,828   $      --   $     948   $  (4,368)  $ (14,905)  $      --   $ (19,273)
   Adjustments to reconcile net
     income (loss) from continuing
     operations to net cash used
     in operating activities:
   Depreciation and amortization ....       413       1,667          --       2,080         471       1,822          --       2,293
   Minority interests ...............        --          --          --          --          --         (30)         --         (30)
   Non-cash stock compensation
     amortization ...................        --         725          --         725          --       1,580          --       1,580
   Deferred tax benefit .............      (107)       (102)         --        (209)       (108)       (102)         --        (210)
   Non-cash legal settlement
     charges ........................        --         776          --         776          --          --          --          --
   Non-cash impairment charges ......     1,616          --          --       1,616         207          --          --         207
   Other ............................        22         (75)         --         (53)         (6)         75          --          69
Changes in assets and liabilities:
   Accounts receivable ..............       (51)       (127)         --        (178)       (115)        249          --         134
   Prepaid expenses, inventory,
     other receivables and other
     assets .........................       573          (5)         16         584         (98)        (75)         45        (128)
   Accounts payable, accrued
     expenses and other .............       733         213         (16)        930        (126)       (492)        (45)       (663)
   Deferred revenues ................    (1,011)    (16,554)         --     (17,565)         57      10,050          --      10,107
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

   Net cash used in operating
     activities from continuing
     operations .....................    (1,692)     (8,654)         --     (10,346)     (4,086)     (1,828)         --      (5,914)
   Net cash used in operating
     activities from discontinued
     operations .....................      (636)         --          --        (636)       (350)         --          --        (350)
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Net cash used in operating
     activities .....................    (2,328)     (8,654)         --     (10,982)     (4,436)     (1,828)         --      (6,264)
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

Cash flows from investing
  activities:
    Purchase of property and
      equipment, net ................       (67)       (654)         --        (721)         (4)        (73)         --         (77)
    Purchase of available-for-sale
      investments ...................      (948)    (44,001)         --     (44,949)     (5,100)    (21,461)         --     (26,561)
    Sale of available-for-sale
      investments ...................     5,004      33,717          --      38,721          --      18,887          --      18,887
    Other ...........................        (5)         --          --          (5)         --          --          --          --
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

    Net cash provided by (used in)
      investing activities from
      continuing operations .........     3,984     (10,938)         --      (6,954)     (5,104)     (2,647)         --      (7,751)
    Net cash used in investing
      activities from discontinued
      operations ....................      (198)         --          --        (198)       (356)         --          --        (356)
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
    Net cash provided by (used in)
      investing activities ..........     3,786     (10,938)         --      (7,152)     (5,460)     (2,647)         --      (8,107)
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

Cash flows from financing
  activities:
    Net cash attributed to the
      Acacia Technologies group .....      (234)         --          --        (234)       (471)         --          --        (471)
    Net cash attributed to the
      CombiMatrix group .............        --      18,746          --      18,746          --       6,074          --       6,074
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

    Net cash provided by (used in)
      financing activities ..........      (234)     18,746          --      18,512        (471)      6,074          --       5,603
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

  Effect of exchange rate on cash ...        --          (5)         --          (5)         --         (13)         --         (13)
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

  Increase (decrease) in cash and
    cash equivalents ................     1,224        (851)         --         373     (10,367)      1,586          --      (8,781)

  Cash and cash equivalents,
    beginning .......................    28,142       3,807          --      31,949      39,792       3,291          --      43,083
                                      ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

  Cash and cash equivalents,
    ending .......................... $  29,366   $   2,956   $      --   $  32,322   $  29,425   $   4,877   $      --   $  34,302
                                      ==========  ==========  ==========  ==========  ==========  ==========  ==========  ==========


                                                                 16
</TABLE>
<PAGE>

<TABLE>
                                                     COMBIMATRIX GROUP
                                        (A Division of Acacia Research Corporation)
                                                      BALANCE SHEETS
                                                      (In thousands)
                                                       (UNAUDITED)


                                                                                       SEPTEMBER 30,        DECEMBER 31,
                                                                                           2004                 2003
                                                                                     ----------------     ----------------
<S>                                                                                  <C>                  <C>
                                   ASSETS

Current assets:
    Cash and cash equivalents ..................................................     $         2,956      $         3,807
    Available-for-sale investments .............................................              23,723               13,492
    Accounts receivable, net of allowance for doubtful accounts of
      $0 (2004) and $145 (2003) ................................................                 321                  199
    Inventory, prepaid expenses and other assets ...............................                 372                  277
                                                                                     ----------------     ----------------
        Total current assets ...................................................              27,372               17,775

Property and equipment, net of accumulated depreciation and amortization .......               2,553                2,752
Patents, net of accumulated amortization of $2,799 (2004) and $1,978 (2003) ....               9,296               10,117
Goodwill .......................................................................              19,424               19,424
Other assets ...................................................................                  90                   93
                                                                                     ----------------     ----------------
                                                                                     $        58,735      $        50,161
                                                                                     ================     ================

                     LIABILITIES AND ALLOCATED NET WORTH

Current liabilities:
    Accounts payable, accrued expenses and other ...............................     $         1,798      $         1,672
    Current portion of deferred revenues .......................................                 499               18,004
    Payable to Acacia Technologies Group .......................................                 115                   99
                                                                                     ----------------     ----------------
        Total current liabilities ..............................................               2,412               19,775

Deferred income taxes ..........................................................               2,146                2,248
Deferred revenues, net of current portion ......................................               3,352                2,401
Other liabilities ..............................................................                 370                   --
                                                                                     ----------------     ----------------
        Total liabilities ......................................................               8,280               24,424
                                                                                     ----------------     ----------------

Commitments and contingencies (Note 8)

Allocated net worth:
    Funds allocated by Acacia Research Corporation .............................             158,565              138,675
    Accumulated net losses .....................................................            (108,110)            (112,938)
                                                                                     ----------------     ----------------
        Total allocated net worth ..............................................              50,455               25,737
                                                                                     ----------------     ----------------
                                                                                     $        58,735      $        50,161
                                                                                     ================     ================


                        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                            17
</TABLE>
<PAGE>

<TABLE>
                                                          COMBIMATRIX GROUP
                                             (A Division of Acacia Research Corporation)
                                                      STATEMENTS OF OPERATIONS
                                                           (In thousands)
                                                             (UNAUDITED)


                                                                    FOR THE THREE MONTHS ENDED          FOR THE NINE MONTHS ENDED
                                                                 --------------------------------    -------------------------------
                                                                  SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,    SEPTEMBER 30,
                                                                      2004              2003              2004             2003
                                                                 --------------    --------------    --------------   --------------
<S>                                                              <C>               <C>               <C>              <C>
Revenues:
    Research and development contract ........................   $          --     $          --     $      17,302    $          --
    Government contract ......................................             685                --             1,603               --
    Service contracts ........................................              16                10               102               23
    Products .................................................              52               171               112              380
                                                                 --------------    --------------    --------------   --------------
        Total revenues .......................................             753               181            19,119              403
                                                                 --------------    --------------    --------------   --------------
Operating expenses:
    Cost of government contract revenues .....................             647                --             1,505               --
    Cost of product sales ....................................              41                17                81               94
    Research and development expenses ........................           1,140             1,726             3,932            6,219
    Non-cash stock compensation amortization - research
      and development ........................................             (10)              243                91              525
    Marketing, general and administrative expenses ...........           2,274             2,122             6,780            6,890
    Non-cash stock compensation amortization - marketing,
      general and administrative .............................             157               421               634            1,055
    Amortization of patents ..................................             274               274               822              821
    Legal settlement charges (credits) .......................             (90)               --               776               --
                                                                 --------------    --------------    --------------   --------------
        Total operating expenses .............................           4,433             4,803            14,621           15,604
                                                                 --------------    --------------    --------------   --------------
        Operating income (loss) ..............................          (3,680)           (4,622)            4,498          (15,201)
                                                                 --------------    --------------    --------------   --------------
Other income:
    Interest income ..........................................              98                52               228              164
                                                                 --------------    --------------    --------------   --------------
        Total other income ...................................              98                52               228              164
                                                                 --------------    --------------    --------------   --------------
Income (loss) from operations before income taxes
  and minority interests .....................................          (3,582)           (4,570)            4,726          (15,037)

Benefit for income taxes .....................................              34                34               102              102
                                                                 --------------    --------------    --------------   --------------
Income (loss) from operations before minority interests ......          (3,548)           (4,536)            4,828          (14,935)

Minority interests ...........................................              --                --                --               30
                                                                 --------------    --------------    --------------   --------------
Division net income (loss) ...................................   $      (3,548)    $      (4,536)    $       4,828    $     (14,905)
                                                                 ==============    ==============    ==============   ==============


                             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                 18
</TABLE>
<PAGE>

<TABLE>
                                                COMBIMATRIX GROUP
                                   (A Division of Acacia Research Corporation)
                                            STATEMENTS OF CASH FLOWS
                                                 (In thousands)
                                                   (UNAUDITED)


                                                                                   FOR THE NINE MONTHS ENDED
                                                                               ---------------------------------
                                                                                SEPTEMBER 30,      SEPTEMBER 30,
                                                                                    2004               2003
                                                                               --------------     --------------
<S>                                                                            <C>                <C>
Cash flows from operating activities:
  Division net income (loss) from operations .............................     $       4,828      $     (14,905)
  Adjustments to reconcile division net income (loss) from operations
    to net cash used in operating activities:
      Depreciation and amortization ......................................             1,667              1,822
      Minority interests .................................................                --                (30)
      Non-cash stock compensation amortization ...........................               725              1,580
      Deferred tax benefit ...............................................              (102)              (102)
      Non-cash legal settlement charges ..................................               776                 --
      Other ..............................................................               (75)                75
Changes in assets and liabilities:
      Accounts receivable ................................................              (127)               249
      Inventory, prepaid expenses and other assets .......................                (5)               (75)
      Accounts payable, accrued expenses and other .......................               213               (492)
      Deferred revenues ..................................................           (16,554)            10,050
                                                                               --------------     --------------

      Net cash used in operating activities ..............................            (8,654)            (1,828)
                                                                               --------------     --------------

Cash flows from investing activities:
      Purchase of property and equipment, net ............................              (654)               (73)
      Purchase of available-for-sale investments .........................           (44,001)           (21,461)
      Sale of available-for-sale investments .............................            33,717             18,887
                                                                               --------------     --------------

      Net cash used in investing activities ..............................           (10,938)            (2,647)
                                                                               --------------     --------------

Cash flows from financing activities:
      Net cash flows attributed to the CombiMatrix Group .................            18,746              6,074
                                                                               --------------     --------------
  Effect of exchange rate on cash ........................................                (5)               (13)
                                                                               --------------     --------------
  (Decrease) increase in cash and cash equivalents .......................              (851)             1,586

  Cash and cash equivalents, beginning ...................................             3,807              3,291
                                                                               --------------     --------------


  Cash and cash equivalents, ending ......................................     $       2,956      $       4,877
                                                                               ==============     ==============


                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                       19
</TABLE>
<PAGE>

                                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," is
primarily comprised of our wholly owned subsidiary, CombiMatrix Corporation and
CombiMatrix Corporation's wholly owned subsidiary, CombiMatrix K.K. CombiMatrix
Corporation is a life sciences technology company with a proprietary system for
rapid, cost competitive creation of DNA and other compounds on a programmable
semiconductor chip, also referred to as an array. This proprietary technology
has applications in the areas of genomics, proteomics, biosensors, drug
discovery, drug development, diagnostics, combinatorial chemistry, material
sciences and nanotechnology. CombiMatrix K.K., a Japanese corporation located in
Tokyo, is exploring opportunities for CombiMatrix Corporation's active array
system with pharmaceutical and biotechnology companies in the Asian market.

         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 stock ("AR-CombiMatrix stock") and
Acacia Research-Acacia Technologies 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.

         BASIS OF PRESENTATION. The unaudited interim CombiMatrix group
financial statements as of September 30, 2004, 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, 2003. 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 presentation of its financial position as of September 30, 2004, and the
results of its operations and its cash flows for the interim periods presented.
The results of operations for the three and nine months ended September 30, 2004
are not necessarily indicative of the results to be expected for the entire
year.

         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 the accounts
included in the corresponding consolidated financial statements of Acacia
Research Corporation. The financial statements of the CombiMatrix group reflect
the financial condition, 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.


                                       20
<PAGE>

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         REVENUE RECOGNITION. The CombiMatrix group recognizes revenue in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB
No. 104") and related authoritative pronouncements. Revenue is recognized when
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the fees are fixed or determinable, and (iv)
collectibility is reasonably assured.

         Revenues from multiple-element arrangements are accounted for in
accordance with Emerging Issues Task Force ("EITF") Issue 00-21, "Revenue
Arrangements with Multiple Deliverables." Multiple-element arrangements
typically include license fees, up-front payments and milestone payments that
are received and/or billable by the CombiMatrix group in connection with other
rights and services that represent continuing obligations of the CombiMatrix
group. Payments received or billable by the CombiMatrix group are deferred until
all of the elements have been delivered or until the CombiMatrix group has
established objective and verifiable evidence of the fair value of the
undelivered elements.

         Revenues from government grants and contracts are recognized in
accordance with Accounting Research Bulletin ("ARB") No. 43, "Government
Contracts," and related pronouncements. Accordingly, revenues are recognized
under the percentage-of-completion method of accounting, using the cost-to-cost
approach to measure completeness at each reporting period. Under the
percentage-of-completion method of accounting, contract revenues and expenses
are recognized in the period that work is performed based on the percentage of
actual incurred costs to estimated total contract costs. Actual contract costs
and cost estimates include direct charges for labor and materials and indirect
charges for labor, overhead and certain general and administrative charges.
Contract change orders and claims are included when they can be reliably
estimated and are considered probable. For contracts that extend over a one-year
period, revisions in contract cost estimates, if they occur, have the effect of
adjusting current period earnings applicable to performance in prior periods.
Should current contract estimates indicate an overall future loss to be
incurred, a provision is made for the total anticipated loss in the current
period.

         Revenue from the sale of products and services is recognized when
delivery has occurred or services have been rendered.

         Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as current. Deferred revenues will
be recognized as revenue in future periods when the applicable revenue
recognition criteria as described above are met.

         INVENTORY. Inventory, which consists primarily of raw materials to be
used in the production of the CombiMatrix group's array products, is stated at
the lower of cost or market using the first-in, first-out method.

         STOCK-BASED COMPENSATION. Refer to Note 2 to the Acacia Research
Corporation consolidated financial statements included elsewhere herein.

         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.

         IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. Refer to Note 2 to the
Acacia Research Corporation consolidated financial statements included elsewhere
herein.


3.       RECENT ACCOUNTING PRONOUNCEMENTS

         Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements included elsewhere herein.


                                       21
<PAGE>

4.        GOODWILL AND INTANGIBLES

          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 next five years through December 31, 2008
is estimated to be $1,095,000 per year. At September 30, 2004 and December 31,
2003, all of the CombiMatrix group's acquired intangible assets other than
goodwill were subject to amortization.


5.       EQUITY FINANCING

         In April 2004, Acacia Research Corporation raised gross proceeds of
$15,000,000 through the sale of 3,000,000 shares of Acacia Research -
CombiMatrix common stock at a price of $5.00 per share in a registered direct
offering. Net proceeds raised of approximately $13,715,000, which are net of
related issuance costs, were attributed to the CombiMatrix group.


6.       RESEARCH AND DEVELOPMENT CONTRACT REVENUES

         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.

         In August 2004, the CombiMatrix group received a $1,000,000 upfront
payment from Furuno Electric Co., LTD ("Furuno") as part of a multi-year
collaboration agreement to develop a bench-top microarray synthesizer for
commercial applications. In 2003, the CombiMatrix group received upfront and
milestone payments from Toppan Printing Co., LTD. ("Toppan") totaling
$2,400,000, pursuant to a multi-year collaboration and supply agreement to
develop and manufacture microarrays using the CombiMatrix group's proprietary
electrochemical detection approach. The payments received from Furuno and Toppan
are included in deferred revenues at September 30, 2004 in accordance with the
CombiMatrix group's revenue recognition policies for multiple-element
arrangements.


7.        INCOME TAXES

          The CombiMatrix group estimates that there will be sufficient losses
from operations in the current fiscal year to offset any taxable income related
to the Roche deferred contract revenues totaling $17,302,000 recognized during
the three months ended March 31, 2004, resulting in no significant tax liability
or expense in the current period or for the year ending December 31, 2004.
Additionally, there was a deferred tax asset that was previously recognized for
income tax purposes that was offset by a valuation allowance; as a result of the
deferred revenue recognition, the associated deferred tax asset and related
valuation allowance were reduced during the first quarter of 2004 by
approximately $3.5 million.


8.       COMMITMENTS AND CONTINGENCIES

         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 nine months ended September
30, 2004, the CombiMatrix group recorded a net non-cash charge totaling $776,000
in connection with certain anti-dilution provisions of that agreement. The
non-cash charge reflects management's estimate of the fair value of
AR-CombiMatrix stock issued to Nanogen, Inc. as a result of certain options and
warrants exercised during the nine months ended September 30, 2004 and the fair
value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc. as of the
balance sheet date. The liability is 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 expire in September 2005.

         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 will be $37,500 per
quarter for the period from October 1, 2003 through October 1, 2004, and $25,000
per quarter thereafter until the patents expire in 2018.


                                       22
<PAGE>

         In July 2004, the CombiMatrix group and collaborator irsiCaixa
Foundation ("IRSI") entered into a three-year research, development, and
licensing agreement and selected two siRNA candidates for downstream
pre-clinical development against HIV. Pursuant to the terms of the agreement,
the CombiMatrix group will make research and development funding payments to
IRSI totaling $450,000 over a period of three years, beginning in July 2004. In
addition, the CombiMatrix group may make future contingent milestone payments
for compounds that are developed, in accordance with the terms of the agreement.
In consideration for receiving rights to commercialize the compounds under
development, the CombiMatrix group will pay royalties to IRSI based on
commercial sales of related products, in accordance with the agreement.

         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.


9.       SUBSQUENT EVENT

         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 next two
years. In accordance with the terms of the purchase agreement, CombiMatrix
Corporation's CEO was named a director of Leuchemix


                                       23
<PAGE>

<TABLE>
                                      ACACIA TECHNOLOGIES GROUP
                             (A Division of Acacia Research Corporation)
                                           BALANCE SHEETS
                                           (In thousands)
                                             (UNAUDITED)


                                                                    SEPTEMBER 30,      DECEMBER 31,
                                                                        2004               2003
                                                                   --------------     --------------
<S>                                                                <C>                <C>
                              ASSETS

Current assets:
    Cash and cash equivalents ................................     $      29,366      $      28,142
    Short-term investments ...................................               998              5,059
    Accounts receivable ......................................               175                124
    Prepaid expenses and other assets ........................               758                903
    Receivable from CombiMatrix group ........................               115                 99
                                                                   --------------     --------------

        Total current assets .................................            31,412             34,327

Property and equipment, net of accumulated depreciation ......               103                 71
Patents, net of accumulated amortization of $1,559 (2004)
  and $1,187 (2003) ..........................................             3,167              3,566
Goodwill .....................................................               160              1,776
Other assets .................................................                84                238
                                                                   --------------     --------------

                                                                   $      34,926      $      39,978
                                                                   ==============     ==============

             LIABILITIES AND ALLOCATED NET WORTH

Current liabilities:
    Accounts payable and accrued expenses ....................     $       2,209      $       1,572
    Current portion of deferred revenues .....................               593                104
                                                                   --------------     --------------

        Total current liabilities ............................             2,802              1,676

Deferred income taxes ........................................               905              1,012
Deferred revenues, net of current portion ....................                --              1,500
                                                                   --------------     --------------

        Total liabilities ....................................             3,707              4,188
                                                                   --------------     --------------

Minority interests ...........................................               780              1,127
                                                                   --------------     --------------

Commitments and contingencies (Note 5)

Allocated net worth:

    Funds allocated by Acacia Research Corporation ...........           104,889            105,129

    Accumulated net losses ...................................           (74,450)           (70,466)
                                                                   --------------     --------------

        Total allocated net worth ............................            30,439             34,663
                                                                   --------------     --------------

                                                                   $      34,926      $      39,978
                                                                   ==============     ==============


             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                 24
</TABLE>
<PAGE>

<TABLE>
                                                      ACACIA TECHNOLOGIES GROUP
                                             (A Division of Acacia Research Corporation)
                                                      STATEMENTS OF OPERATIONS
                                                           (In thousands)
                                                             (UNAUDITED)


                                                                     FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                                   -------------------------------   -------------------------------
                                                                    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                                                        2004             2003             2004             2003
                                                                   --------------   --------------   --------------   --------------
<S>                                                                <C>              <C>              <C>              <C>
Revenues:
    License fees ...............................................   $       2,240    $         186    $       3,505    $         211
                                                                   --------------   --------------   --------------   --------------

        Total revenues .........................................           2,240              186            3,505              211
                                                                   --------------   --------------   --------------   --------------

Operating expenses:
    Marketing, general and administrative expenses .............           1,323              955            3,489            3,157
    Legal expenses - patents ...................................           1,174              598            2,352            1,435
    Goodwill impairment charge .................................           1,616               --            1,616               --
    Amortization of patents ....................................             125              125              375              377
                                                                   --------------   --------------   --------------   --------------

        Total operating expenses ...............................           4,238            1,678            7,832            4,969
                                                                   --------------   --------------   --------------   --------------

        Operating loss .........................................          (1,998)          (1,492)          (4,327)          (4,758)
                                                                   --------------   --------------   --------------   --------------

Other income:
    Impairment charge ..........................................              --               --               --             (207)
    Interest income ............................................             120              128              340              408
    Realized gains on short-term investments ...................              --               32               --               94
    Other income ...............................................              --               --               --                1
                                                                   --------------   --------------   --------------   --------------

        Total other income (expense) ...........................             120              160              340              296
                                                                   --------------   --------------   --------------   --------------

Loss from continuing operations before
  income taxes and minority interests ..........................          (1,878)          (1,332)          (3,987)          (4,462)

Benefit for income taxes .......................................              36               36              104               94
                                                                   --------------   --------------   --------------   --------------

Loss from continuing operations before
  minority interests ...........................................          (1,842)          (1,296)          (3,883)          (4,368)

Minority interests .............................................              --               --                3               --
                                                                   --------------   --------------   --------------   --------------

Loss from continuing operations ................................          (1,842)          (1,296)          (3,880)          (4,368)

Discontinued operations:

    Estimated loss on disposal of discontinued operations ......              --               --             (104)              --
                                                                   --------------   --------------   --------------   --------------

Division net loss ..............................................   $      (1,842)   $      (1,296)   $      (3,984)   $      (4,368)
                                                                   ==============   ==============   ==============   ==============


                             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                 25
</TABLE>
<PAGE>

<TABLE>
                                                      ACACIA TECHNOLOGIES GROUP
                                             (A Division of Acacia Research Corporation)
                                                      STATEMENTS OF CASH FLOWS
                                                           (In thousands)
                                                             (UNAUDITED)


                                                                                                   FOR THE NINE MONTHS ENDED
                                                                                           -----------------------------------------
                                                                                           SEPTEMBER 30, 2004     SEPTEMBER 30, 2003
                                                                                           ------------------     ------------------
<S>                                                                                        <C>                    <C>
Cash flows from operating activities:
  Division net loss from continuing operations ........................................    $          (3,880)     $          (4,368)

  Adjustments to reconcile division net loss from continuing operations
    to net cash used in operating activities:
      Depreciation and amortization ...................................................                  413                    471
      Deferred tax benefit ............................................................                 (107)                  (108)
      Non-cash impairment charges .....................................................                1,616                    207
      Other ...........................................................................                   22                     (6)

Changes in assets and liabilities:
      Accounts receivable .............................................................                  (51)                  (115)
      Prepaid expenses, other receivables and other assets ............................                  573                    (98)
      Accounts payable and accrued expenses ...........................................                  733                   (126)
      Deferred revenues ...............................................................               (1,011)                    57
                                                                                           ------------------     ------------------
      Net cash used in operating activities from continuing operations ................               (1,692)                (4,086)
      Net cash used in operating activities from discontinued operations ..............                 (636)                  (350)
                                                                                           ------------------     ------------------
      Net cash used in operating activities ...........................................               (2,328)                (4,436)
                                                                                           ------------------     ------------------

Cash flows from investing activities:
      Purchase of property and equipment, net .........................................                  (67)                    (4)
      Purchase of available-for-sale investments ......................................                 (948)                (5,100)
      Sale of available-for-sale investments ..........................................                5,004                     --
      Other ...........................................................................                   (5)                    --
                                                                                           ------------------     ------------------

    Net cash provided by (used in) investing activities from continuing operations ....                3,984                 (5,104)
    Net cash used in investing activities from discontinued operations ................                 (198)                  (356)
                                                                                           ------------------     ------------------
    Net cash provided by (used in) investing activities ...............................                3,786                 (5,460)
                                                                                           ------------------     ------------------

Cash flows from financing activities:
    Net cash flows attributed to the Acacia Technologies group ........................                 (234)                  (471)
                                                                                           ------------------     ------------------

    Increase (decrease) in cash and cash equivalents ..................................                1,224                (10,367)

    Cash and cash equivalents, beginning ..............................................               28,142                 39,792
                                                                                           ------------------     ------------------

    Cash and cash equivalents, ending .................................................    $          29,366      $          29,425
                                                                                           ==================     ==================


                             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                 26
</TABLE>
<PAGE>

                            ACACIA TECHNOLOGIES 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's continuing
operations are comprised of two separate divisions: the Acacia Technologies
group and the CombiMatrix group.

         The Acacia Technologies group, a division of Acacia Research
Corporation, is primarily comprised of Acacia Research Corporation's interests
in three wholly owned subsidiaries: (1) Acacia Media Technologies Corporation,
("Acacia Media Technologies") a Delaware corporation, (2) Soundview
Technologies, Inc., ("Soundview Technologies") a Delaware corporation, and (3)
Acacia Internet Access Corporation, a Delaware corporation, and also includes
all corporate assets, liabilities, and related transactions of Acacia Research
Corporation attributed to the Acacia Research Corporation's intellectual
property licensing business.

         The Acacia Technologies group is responsible for the development,
acquisition, licensing and protection of intellectual property and proprietary
technologies and is pursuing additional licensing and strategic business
alliances with companies in the intellectual property licensing industry.

         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 stock ("AR-CombiMatrix stock") and
Acacia Research-Acacia Technologies 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.

         BASIS OF PRESENTATION. The unaudited interim Acacia Technologies group
financial statements as of September 30, 2004, 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, 2003. 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 Acacia Technologies group financial statements include all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary for a fair presentation of its financial position as of September
30, 2004, and the results of its operations and its cash flows for the interim
periods presented. The results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the entire year.

         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 the accounts included
in the corresponding consolidated financial statements of Acacia Research
Corporation. The financial statements of Acacia Technologies group reflect the
financial condition, 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


                                       27
<PAGE>

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

         REVENUE RECOGNITION. The Acacia Technologies group recognizes revenue
in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition"
("SAB No. 104") and related authoritative pronouncements. License fee income is
recognized as revenue when (i) persuasive evidence of an arrangement exists,
(ii) all obligations have been performed pursuant to the terms of the license
agreement, (iii) amounts are fixed or determinable and (iv) collectibility of
amounts is reasonably assured.

         Under the terms of the Acacia Technologies group's digital media
transmission ("DMT(R)") license agreements, the Acacia Technologies group grants
non-exclusive licenses for the use of its patented DMT(R) technology. All of the
Acacia Technologies group's material DMT(R) license agreements provide for
license fee payments to be made by the respective licensees over the term of the
licenses. Pursuant to the terms of the DMT(R) license agreements, once executed,
the Acacia Technologies group has no further obligations with respect to the
grant of the licenses. License fees paid to and recognized as revenue by the
Acacia Technologies group are non-refundable.

         Revenue generated from license agreements are generally accrued and
recognized as revenue in the period earned, provided that amounts are fixed or
determinable and collectibility is reasonably assured.

         Certain license agreements provide for the calculation of license fees
based on a licensee's actual quarterly sales or actual per unit activity,
applied to a contractual royalty rate. Licensees that pay license fees on a
quarterly basis generally report actual quarterly sales or actual per unit
activity information and related quarterly license fees due to the Acacia
Technologies group within 30 to 45 days after the end of the quarter in which
such sales or activity takes place. Consequently, the Acacia Technologies group
recognizes revenue from these licensing agreements on a three-month lag basis,
in the quarter following the quarter of sales or per unit activity, provided
amounts are fixed or determinable and collectibility is reasonably assured. The
lag method described above allows for the receipt of licensee royalty reports
prior to the recognition of revenue.

         Certain license agreements provide for the payment of a minimum upfront
annual license fee at the inception of each annual license term. Minimum upfront
annual license fees are generally determined based on a licensees estimated
annual sales or a licensees base level of per unit activity. These minimum
upfront annual license fee payments are deferred and amortized to revenue on a
straight-line basis over the annual license term. To the extent actual annual
royalties, determined and reported in accordance with the terms of the
respective agreements, exceed the minimum upfront annual license fees paid, the
additional royalties are recognized in revenue in the quarter following the
quarter in which the base per unit activity was exceeded or the quarter
following the annual license term, depending on the terms of the respective
agreement, provided that amounts are fixed or determinable and collectibility is
reasonably assured.

         License fee payments received by the Acacia Technologies group that do
not meet the revenue recognition criteria described above are deferred until the
revenue recognition criteria are met. The Acacia Technologies group assesses
collection of accrued license fees based on a number of factors, including past
transaction history and credit-worthiness. If it is determined that collection
is not reasonably assured, the fee is recognized when collectibility becomes
reasonably assured, assuming all other revenue recognition criteria have been
met, which is generally upon receipt of cash.

         As a result of the Acacia Technologies group's licensing and any
related intellectual property enforcement activities that the Acacia
Technologies group may conduct, the Acacia Technologies group may recognize
royalty revenues that relate to prior period infringements by licensees.
Differences between amounts initially recognized and amounts subsequently
audited or reported as an adjustment to those amounts will be recognized in the
period the adjustment is determined as a change in accounting estimate.

         Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as current. At December 31, 2003 and
2002, the Acacia Technologies group balance sheets include deferred revenues
related to payments received in advance of the culmination of the earnings
process, which will be recognized as revenue in future periods when the
applicable revenue recognition criteria, as described above, are met.


                                       28
<PAGE>

         STOCK-BASED COMPENSATION. Refer to Note 2 to the Acacia Research
Corporation consolidated financial statements included elsewhere herein.

         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.

         IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. Refer to Note 2 to the
Acacia Research Corporation consolidated financial statements included elsewhere
herein.


3.       RECENT ACCOUNTING PRONOUNCEMENTS

         Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements included elsewhere herein.


4.       GOODWILL AND INTANGIBLES

         The Acacia Technologies group's only identifiable intangible assets are
patents. Annual aggregate amortization expense for each of the next five years
through December 31, 2008 is estimated to be $500,000 per year. At September 30,
2004 and December 31, 2003, all of the Acacia Technologies group's acquired
intangible assets other than goodwill were subject to amortization.

         In August 2004, as a result of the adverse ruling in Acacia
Technologies group's V-chip patent infringement lawsuit described at Note 5, the
Acacia Technologies group recorded an impairment charge totaling $1,616,000
associated with the write-down of goodwill related to the V-chip.

         As of September 30, 2004 and December 31, 2003, all V-chip patent
related intangibles were fully amortized. As a result, the gross carrying
amounts and accumulated amortization related to the V-chip patent intangibles
have been excluded from the accompanying balance sheets.


5.       COMMITMENTS AND CONTINGENCIES

         In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies in November 2001, Acacia Media Technologies also
executed related assignment agreements which granted to the former owners of
Acacia Media Technologies' current patent portfolio the right to receive a
royalty of 15% of future net revenues, as defined in the agreements, generated
by Acacia Media Technologies' current patent portfolio, which includes its
DMT(R) patents. No royalty obligation has been incurred as of September 30,
2004. Any royalties paid pursuant to the agreements will be expensed in the
statement of operations.

LITIGATION

         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. However, the Acacia Technologies
group could be subject to claims and legal actions relating to the CombiMatrix
group.

SOUNDVIEW TECHNOLOGIES

         In September 2002, the United States District Court for the District of
Connecticut granted a motion for summary judgment filed by the defendants in
Soundview Technologies pending patent infringement and antitrust lawsuit against


                                       29
<PAGE>

Sony Corporation of America, the Consumer Electronics Manufacturers Association
and the Electronics Industries Alliance d/b/a Consumer Electronics Association
in the United States District Court for the Eastern District of Virginia (filed
on April 5, 2000), alleging that television sets utilizing certain content
blocking technology (commonly known as the "V-chip") and sold in the United
States infringe Soundview Technologies' U.S. Patent No. 4,554,584. In granting
the motion, the court ruled that the defendants have not infringed on Soundview
Technologies' patent.

         In September 2003, a motion for summary judgment filed by the remaining
defendants was granted by the United States District Court for the District of
Connecticut on Soundview Technologies' anti-trust claims due to the Court's
previous ruling of non-infringement as described above.

         In August 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the September 2002 U.S. District Court for the District of Connecticut
ruling that the remaining television manufacturers named in the Acacia
Technologies group's V-chip patent infringement lawsuit do not infringe the
Acacia Technologies group's V-chip patent. As a result of the ruling, the Acacia
Technologies group recorded an impairment charge of $1,616,000 associated with
the write-off of goodwill related to the V-chip. In addition, as a result of the
conclusion of the V-chip patent litigation, the Acacia Technologies group
recognized $1,500,000 of V-chip related deferred license fee revenues and
$668,000 of V-chip related deferred legal costs in the third quarter of 2004.

         The final ruling in the V-chip litigation, as described above, has no
impact on the revenues that the Acacia Technologies group has recognized to date
from licensees of our patented V-chip technology.

ACACIA MEDIA TECHNOLOGIES

INTERNET WEBSITES

          In February 2003, Acacia Media Technologies initiated DMT(R) patent
infringement litigation in the Federal District Court for the Central District
of California against approximately 39 defendants who provide adult oriented
digital content over the Internet. All of the defendants were previously
notified of our belief that their conduct infringes on our patent rights. As of
September 30, 2004, nine of the original 39 defendants remain in the initial
litigation.

         In December 2003, Acacia Media Technologies added an additional eight
defendants to its pending patent infringement litigation described above. The
new complaints, filed with the Court, seek to create a defendant class for all
adult entertainment companies that infringe Acacia Media Technologies' DMT(R)
patents by transmitting pre-recorded, digital audio and audio/video adult
content via any electronic communication channel into or from the Central
District of California, or that operate at least one interactive website where a
user located in Central District of California can exchange information with a
host computer. Defendant class action status, which must be approved by the
Court, would permit the Court's rulings on certain key issues to legally bind
all members of the class, whether or not they have been specifically named as
defendants in the litigation.

         On July 12, 2004, the United States District Court for the Central
District of California issued a Markman Order giving the Court's construction of
some of the disputed patent terms and phrases contained in two of the five U.S.
DMT(R) patents.

HOTEL ON-DEMAND TV INDUSTRY

         In November 2003, Acacia Media Technologies initiated a patent
infringement lawsuit in the Federal District Court for the Central District of
California against On Command Corporation, provider of interactive in-room
entertainment, information and business services to the lodging industry,
regarding Acacia Media Technologies' DMT(R) technology. In June 2004, Acacia
Media Technologies entered into a license agreement for its DMT(R) technology
with On Command Corporation settling all outstanding litigation between the
parties.

CABLE AND SATELLITE TV

         In June 2004, Acacia Media Technologies filed a Complaint in the
District Court for the Northern District of California alleging infringement of
Acacia Media Technologies' DMT(R) patents against 9 cable and satellite
companies. Companies named as defendants in the lawsuit include Comcast
Corporation, Charter Communications, Inc., The DirectTV Group, Inc., Echostar
Communications Corporation, Boulder Ridge Cable TV, Central Valley Cable TV,
LLC, Seren Innovations, Inc., Cox Communications, Inc., and Hospitality Network,
Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand TV
services). In September 2004, Acacia Media Technologies added Mediacom LLC to


                                       30
<PAGE>

this complaint. As of September 2004, Acacia Media Technologies has executed
license and settlement agreements with Boulder Ridge Cable TV, Central Valley
Cable TV, and Seren Innovations.

         In September 2004, Acacia Media Technologies filed complaints in the
U.S. District Court for the District of Arizona, U.S. District Court for the
District of Minnesota and the U.S. District Court for the Northern District of
Ohio - Eastern Division, alleging infringement of Acacia Media Technologies'
DMT(R) patents against certain cable and satellite companies located in Arizona,
Minnesota, and Ohio. Companies named in the lawsuits include Armstrong Group,
Arvig Communication Systems, Block Communications, Inc., Cable America
Corporation, Cable One, Inc., Cable System Services, Inc., Cannon Valley
Communications, Inc., East Cleveland Cable TV and Communications, LLC, Loretel
Cablevision, Massillon Cable TV, Inc., Mid-Continent Media, Inc., Nelsonville TV
Cable, Inc., NPG Cable, Inc., Precis Communications, Inc. San Carlos
Cablevision, LLC, Savage Communications, Inc., Sjoberg's Cablevision, Inc., US
Cable, and Wide Open West, LLC.


6.       DISCOUNTINUED OPERATIONS

         Results for the nine months ended September 30, 2004 include a $104,000
charge, net of minority interests, related to estimated additional costs to be
incurred in connection with the discontinued operations of Soundbreak.com,
related primarily to certain noncancellable lease obligations and the inability
to sublease the related office space at rates commensurate with existing
obligations or negotiate more favorable terms.


                                       31
<PAGE>

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
elsewhere in 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, including our
Annual Report on Form 10-K for the year ended December 31, 2003 and our
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on February 17, 2004, as amended, 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 the section titled "Risk Factors" below.

OVERVIEW

         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 September 30, 2004 and on our unaudited
consolidated statement of operations for the period from January 1, 2004 to
September 30, 2004. The discussion compares the activities for the three and
nine months ended September 30, 2004 to the activities for the three and nine
months ended September 30, 2003. 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" included elsewhere in this section.

         Acacia Research Corporation is comprised of two operating groups, the
CombiMatrix group and the Acacia Technologies group.

         COMBIMATRIX GROUP. The CombiMatrix group's core technology opportunity
in the life sciences sector has been developed through our wholly owned
subsidiary, CombiMatrix Corporation, which is developing a platform technology
to rapidly produce customizable arrays, which are semiconductor-based tools for
use in identifying and determining the roles of genes, gene mutations and
proteins. The CombiMatrix group's technology has a wide range of potential
applications in the areas of genomics, proteomics, biosensors, drug discovery,
drug development, diagnostics, combinatorial chemistry, material sciences and
nanotechnology.

         ACACIA TECHNOLOGIES GROUP. The Acacia Technologies group is responsible
for the development, acquisition, licensing and protection of intellectual
property and proprietary technologies and is pursuing additional licensing and
strategic business alliances with companies in the intellectual property
licensing industry. The Acacia Technologies group owns and out-licenses a
portfolio of pioneering U.S. and foreign patents covering digital audio and
video transmission and receiving systems, commonly known as audio-on-demand,


                                       32
<PAGE>

video-on-demand, and audio/video streaming. The Acacia Technologies group's
patented proprietary digital media transmission, or DMT(R) technology, enables
the digitization, encryption, storage, transmission, receipt and playback of
digital content via several means including the Internet, cable, satellite and
wireless systems. The Acacia Technologies group also owns and has out-licensed
to consumer electronics manufacturers, patented technology known as the V-chip.
The V-chip technology was protected by U.S. Patent No. 4,554,584, which expired
in July 2003. In July 2004, the Acacia Technologies group acquired U.S. Patent
No. 6,226,677 from LodgeNet Entertainment Corporation. The patent covers
technology and methods for redirecting users to a login page when accessing the
Internet. The acquired patent has several potential licensing opportunities,
including DSL registrations, wireless "hotspots," and hotel high-speed Internet
access.

Business and operating activities for the three months ended September 30, 2004
and recent developments include:

COMBIMATRIX GROUP:

         Business collaborations:

         o        In July 2004, the CombiMatrix group entered into a
                  co-marketing agreement with Strand Genomics to market Strand
                  Genomics' product "avadis," a data analysis software tool for
                  microarray gene expression that combines scalable analytical
                  algorithms with interactive visualization to derive valuable
                  insights from gene expression data.

         o        In July 2004, the CombiMatrix group and collaborator irsiCaixa
                  Foundation entered into a three-year research, development,
                  and licensing agreement and selected two siRNA candidates for
                  downstream pre-clinical development against HIV. Refer to
                  "Contractual Obligations" table below for financial
                  commitments associated with the agreement.

         o        In August 2004, the CombiMatrix group entered into a
                  multi-year collaborative strategic alliance with Furuno
                  Electric Company, Ltd. ("Furuno") to design, engineer and
                  build CombiMatrix Corporation's Bench-Top DNA Microarray
                  Synthesizer for CustomArray(TM) formatted arrays. Under the
                  terms of the agreement, Furuno paid CombiMatrix Corporation an
                  upfront fee of $1.0 million and will make additional
                  development and milestone payments in the future, in
                  accordance with the agreement.

         o        In September 2004, the CombiMatrix group and Intel Corporation
                  entered into an agreement to work together on the feasibility
                  of various projects utilizing the CombiMatrix group's core
                  technology.

         o        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 $4.0 million, to be paid quarterly
                  over the next two years. In accordance with the terms of the
                  purchase agreement, CombiMatrix Corporation's CEO was named a
                  director of Leuchemix. Additional information about the
                  agreement and Leuchemix is set forth in our Current Reports on
                  Form 8-K, filed with the Commission on October 4, 2004 and
                  October 7,2004, which are hereby incorporated by reference.

         Other activities include:

         o        In July 2004, the CombiMatrix group made available to
                  researchers a new CustomArray(TM) Human Drug Metabolism Array.
                  This array enables researchers to screen a panel of genes and
                  "splice variants" known to be critical for the pharmokinetics
                  and metabolism for both established and new drugs.

         o        In July 2004, the CombiMatrix group launched a new
                  CustomArray(TM) Human Toxicology Array. This array provides
                  researchers a powerful tool for detecting changes in gene
                  expression indicative of a toxic or stress-related response.

         o        In July 2004, the CombiMatrix group announced that it will
                  receive $2.3 million from a Department of Defense spending
                  bill passed by Congress, which will be used to further its
                  biowarfare detector system currently under development under
                  its existing $5.9 million contract with the Department of
                  Defense.


                                       33
<PAGE>

         o        In July 2004, the CombiMatrix group launched a new
                  CustomArray(TM) Core 67 Cancer Array. This array enables
                  researchers to screen and monitor the 67 genes that were
                  recently identified as markers of multiple types of cancer.

         o        In August 2004, the CombiMatrix group's strategic partner,
                  Nanomaterials Discovery Corporation ("NDC"), was awarded $2.5
                  million from the Department of Defense for the development of
                  its fuel cell technology. NDC will utilize the CombiMatrix
                  group's NanoArrays(TM) for the further discovery and
                  optimization of a new class of fuel cells powered by
                  high-energy materials such as propellants and explosives.

ACACIA TECHNOLOGIES GROUP:

         o        As of October 2004, the Acacia Technologies group has entered
                  into 188 DMT(R) technology licensing agreements, including
                  agreements with companies in the cable television, hotel
                  on-demand TV services, online music, movie, adult
                  entertainment, e-learning, corporate and sports, news and
                  information industries. We have executed license agreements
                  with companies including Bloomberg L.P., Capella Education
                  Company, Callaway Golf Company, B&C Cablevision, Central
                  Valley Cable TV, LLC, CinemaNow, Inc., Disney Enterprises,
                  Inc., General Dynamics Interactive Corporation, Grupo Pegaso,
                  Harley-Davidson, Inc., LodgeNet Entertainment Corporation,
                  NXTV, Inc., On Command Corporation, Oral Roberts University,
                  Revlon Consumer Products Corporation, Seren Innovations,
                  Sonoco Products Company, The Travelers Indemnity Company, T.
                  Rowe Price Associates, Inc., 24/7 University, Inc., Wachovia
                  Corporation, Wendy's International, Inc., World Wrestling
                  Entertainment, Inc. and Xerox Corporation.

         o        On July 12, 2004, the United States District Court for the
                  Central District of California issued a Markman Order giving
                  the Court's construction of some of the disputed patent terms
                  and phrases contained in two of the five U.S. DMT(R) patents.
                  Additional information about the Markman Order is set forth in
                  our Current Reports on Form 8-K, filed with the Commission on
                  July 13, 2004 and July 14, 2004, which are hereby incorporated
                  by reference.

         o        In July 2004, the Acacia Technologies group acquired U.S.
                  Patent No. 6,226,677 from LodgeNet Entertainment Corporation.
                  The newly acquired patent has several potential licensing
                  opportunities, including DSL registrations, wireless
                  "hotspots," and hotel high-speed Internet access. The patent
                  covers technology and methods for redirecting users to a login
                  page when accessing the Internet.

         o        In August 2004, the U.S. Court of Appeals for the Federal
                  Circuit affirmed the September 2002 U.S. District Court for
                  the District of Connecticut ruling that television
                  manufacturers named in the Acacia Technologies group's V-chip
                  patent infringement lawsuit do not infringe the Acacia
                  Technologies group's V-chip patent. Details of the financial
                  statement impact of the ruling are provided below and at Part
                  II Item 1. "Legal Proceedings."

         o        In September 2004, Acacia Media Technologies Corporation, or
                  Acacia Media Technologies, added Mediacom LLC to its complaint
                  filed in the District Court for the Northern District of
                  California alleging infringement of Acacia Media Technologies'
                  DMT(R) patents against certain cable and satellite companies,
                  increasing the number of defendants in the complaint to ten.
                  As of October 2004, Acacia Media Technologies has executed
                  license and settlement agreements with three of nine cable and
                  satellite companies originally named in the complaint.

         o        In September 2004, Acacia Media Technologies filed complaints
                  in the U.S. District Court for the District of Arizona, U.S.
                  District Court for the District of Minnesota and the U.S.
                  District Court for the Northern District of Ohio - Eastern
                  Division, alleging infringement of Acacia Media Technologies'
                  DMT(R) patents against certain cable and satellite companies
                  located in Arizona, Minnesota, and Ohio. Companies named in
                  the lawsuits include Armstrong Group, Arvig Communication
                  Systems, Block Communications, Inc., Cable America
                  Corporation, Cable One, Inc., Cable System Services, Inc.,
                  Cannon Valley Communications, Inc., East Cleveland Cable TV
                  and Communications, LLC, Loretel Cablevision, Massillon Cable
                  TV, Inc., Mid-Continent Media, Inc., Nelsonville TV Cable,
                  Inc., NPG Cable, Inc., Precis Communications, Inc. San Carlos
                  Cablevision, LLC, Savage Communications, Inc., Sjoberg's
                  Cablevision, Inc., US Cable, and Wide Open West, LLC.


                                       34
<PAGE>

CRITICAL ACCOUNTING POLICIES

         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 2003 Annual Report on Form 10-K, filed on March 3, 2004, in
the Notes to the Consolidated Financial Statements and the Critical Accounting
Policies section. In addition, refer to Note 2 to the consolidated interim
financial statements included elsewhere herein.



ACACIA RESEARCH CORPORATION CONSOLIDATED
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003

<TABLE>
NET INCOME (LOSS) (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Net income (loss) .................................     $      (5,390)     $      (5,832)     $         844      $     (19,273)
</TABLE>

         The change in net income (loss) was primarily due to an increase in
revenues recognized by both operating groups, a decrease in CombiMatrix group
related research and development costs and non-cash stock compensation charges,
partially offset by an increase in marketing, general and administrative costs
for both operating groups and patent related legal costs for the Acacia
Technologies group. The change also reflects the net impact of the adverse
V-chip litigation ruling in the third quarter of 2004, as described below. We
estimate that there will be sufficient losses from operations in the current
fiscal year to offset any taxable income related to the deferred contract
revenues recognized during the three months ended March 31, 2004, resulting in
no significant tax liability or expense in the three or nine months ended
September 30, 2004 or for the year ended December 31, 2004.

<TABLE>
REVENUES AND COST OF REVENUES (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Research and development contract .................     $          --      $          --      $      17,302      $          --
License fees ......................................             2,240                186              3,505                211
Government contract ...............................               685                 --              1,603                 --
Cost of government contract revenues ..............              (647)                --             (1,505)                --
Service contracts .................................                16                 10                102                 23
Products ..........................................                52                171                112                380
Cost of product sales .............................               (41)               (17)               (81)               (94)
</TABLE>

         RESEARCH AND DEVELOPMENT CONTRACT. In March 2004, the CombiMatrix group
completed all phases of its research and development agreement with Roche
Diagnostics, GmbH, or Roche. As a result of completing all 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 during the
first quarter of 2004. The majority of research and development expense under
the Roche agreement were incurred prior to 2004.

         LICENSE FEES. License fee revenues are comprised of DMT(R) technology
license fees and previously deferred V-chip technology license fees recognized
by the Acacia Technologies group. DMT(R) technology license fees increased
primarily due to the significant growth in the number of DMT(R) technology
license agreements executed since March 31, 2003. License fee revenues will
fluctuate from period to period based on the increase in license 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 from licensees, and other factors.
Periodic license fee revenues may include amounts that relate to prior license
periods or prior periods of infringement, which are recognized as revenues in
the period received. Costs incurred in connection with the Acacia Technologies
group's ongoing licensing activities are included in marketing, general and
administrative expenses.


                                       35
<PAGE>

         Revenues for the three and nine months ended September 30, 2004 include
$1.5 million in deferred V-chip license fees recognized as a result of the
conclusion of V-chip related litigation as described at Part II Item 1. "Legal
Proceedings."

         GOVERNMENT CONTRACT AND COST OF GOVERNMENT CONTRACT REVENUES. In March
2004, the CombiMatrix group executed a two-year $5.9 million research and
development contract with the Department of Defense to further the development
of the CombiMatrix group's microarray technology for the detection of biological
threat agents. Under the terms of the contract, 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 biowarfare
detection contract with the Department of Defense which is approximately 27%
complete as of September 30, 2004.

         SERVICE CONTRACTS. The change was due primarily to $102,000 of
maintenance and service contract revenues recognized during the nine months
ended September 30, 2004 by CombiMatrix K.K. from existing microarray customers
in Japan.

         PRODUCT REVENUES AND COST OF PRODUCT SALES. Product revenues and costs
of product sales during the three and nine months ended September 30, 2004
relate to domestic and international sales of the CombiMatrix group's microarray
products. Product revenues and costs of product sales during the three and nine
months ended September 30, 2003 were recognized exclusively by CombiMatrix K.K.
from sales of genomics microarray synthesizer and related microarray products
and services to Japanese research institutions in the first and third quarters
of 2003.

<TABLE>
RESEARCH AND DEVELOPMENT EXPENSES (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Research and development expenses .................     $       1,140      $       1,726      $       3,932      $       6,219
</TABLE>

         RESEARCH AND DEVELOPMENT EXPENSES. The decrease in research and
development expenses was primarily due to the CombiMatrix group's completion of
several Roche related research and development projects during the third and
fourth quarters of 2003, and final completion of the research and development
agreement with Roche in the first quarter of 2004. With the completion of the
research and development agreement with Roche, year-to-date and future research
and development expenses were and will continue to be incurred in connection
with the CombiMatrix group's commitments under its collaboration and supply
agreement with Toppan and ongoing internal research and development efforts in
the areas of genomics, drug discovery and development and material sciences. The
CombiMatrix group expects its research and development expenses to continue to
be volatile and such expenses could increase in future periods as additional
contract and/or internal research and development agreements are undertaken.

<TABLE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES AND LEGAL SETTLEMENT CHARGES
(CREDITS) (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Marketing, general and administrative expenses ....     $       4,771      $       3,675      $      12,621      $      11,482
Legal settlement charges (credits) ................               (90)                --                776                 --
</TABLE>

         MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The increase was due
primarily to the addition of licensing and business development personnel for
the Acacia Technologies group, an increase in corporate professional fees
related to ongoing Sarbanes-Oxley compliance projects at both operating groups,
an increase in marketing and sales costs related to the launch of the
CombiMatrix group's CustomArray(TM) DNA microarray platform beginning in March
2004 and an increase in general and administrative overhead costs in connection
with the Acacia Technologies group's ongoing operations. The increase also
includes $668,000 in deferred V-chip related legal fees recognized as a result
of the conclusion of V-chip related litigation as described at Part II Item 1.
"Legal Proceedings." The Acacia Technologies group's patent related legal
expenses, excluding V-chip related legal fees, increased to $1.7 million during
the nine months ended September 30, 2004, as compared to $1.4 million in the
comparable 2003 period, due to an increase in costs incurred in connection with
the Acacia Technologies group's ongoing DMT(R) patent commercialization and
enforcement programs, including increased legal costs related to new patent
claims and the identification of additional potential licensees of our DMT(R)


                                       36
<PAGE>

technology and increased patent enforcement costs related to ongoing DMT(R)
patent related litigation. We expect patent related legal expenses to continue
to fluctuate based on actual outside patent counsel fees incurred in connection
with the Acacia Technologies group's ongoing DMT(R) and other patent
commercialization and enforcement programs.

         LEGAL SETTLEMENT CHARGES. In connection with the September 2002
settlement agreement between CombiMatrix Corporation, Dr. Donald Montgomery, and
Nanogen, Inc., we recorded a net non-cash charge totaling $776,000 during the
nine months ended September 30, 2004, which reflects the fair value of
AR-CombiMatrix common stock issued and potentially issuable to Nanogen, Inc.
during the period in connection with certain anti-dilution provisions of the
settlement agreement. Periodic charges and the related liability are estimated
based on the number of shares issuable and or potentially issuable and the
AR-CombiMatrix stock price at the end of the respective reporting period. The
credit during the three months ended September 30, 2004 was due to the decrease
in the AR-CombiMatrix stock price as of September 30, 2004, as compared to the
end of the previous quarter. The anti-dilution provisions of the settlement
agreement expire in September 2005.

<TABLE>
NON-CASH STOCK COMPENSATION AMORTIZATION (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Non-cash stock compensation amortization:
    Research and development ......................     $         (10)     $         243      $          91      $         525
    Marketing, general and administrative .........               157                421                634              1,055
</TABLE>

         The decrease was primarily due to the accelerated method of stock
compensation amortization utilized which results in higher amounts of
amortization in the earlier vesting periods. Non-cash stock compensation expense
reversals related to the forfeiture of certain unvested stock options during the
three and nine months ended September 30, 2004 were $83,000 and $185,000,
respectively. Non-cash stock compensation expense reversals during the three and
nine months ended September 30, 2003 were $123,000 and $881,000, respectively.

<TABLE>
IMPAIRMENT CHARGES (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Goodwill impairment charge ........................     $       1,616      $          --      $       1,616      $          --
Impairment charge .................................                --                 --                 --               (207)
</TABLE>

         In August 2004, as a result of the adverse ruling in the Soundview
Technologies litigation described at Part II Item 1. "Legal Proceedings," the
Acacia Technologies group recorded a non-cash impairment charge totaling
$1,616,000 associated with the write-down of goodwill related to the V-chip. In
the second quarter of 2003, we recorded a non-cash impairment charge of $207,000
for an other-than-temporary decline in the fair value of our cost method
investment.

INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES

          Acacia Research Corporation's consolidated cash and cash equivalents
and short-term investments totaled $57.0 million at September 30, 2004 compared
to $50.5 million at December 31, 2003. Working capital at September 30, 2004 was
$53.6 million, compared to $30.7 million at December 31, 2003. Working capital
increased due primarily to the recognition of $17.3 million in deferred Roche
related contract revenues in the first quarter of 2004 and the impact of net
cash flow activities as discussed below.


                                       37
<PAGE>

         The net increase (decrease) in cash and cash equivalents for the nine
months ended September 30, 2004 and 2003 was comprised of the following (in
thousands):

<TABLE>
                                                      FOR THE NINE MONTHS ENDED                  FOR THE NINE MONTHS ENDED
                                                          SEPTEMBER 30, 2004                         SEPTEMBER 30, 2003
                                               ----------------------------------------     ----------------------------------------
                                                 ACACIA                                       ACACIA
                                                  TECH-         COMBI-                        TECH-          COMBI-
                                                NOLOGIES        MATRIX        CONSOL-        NOLOGIES        MATRIX         CONSOL-
                                                  GROUP         GROUP         IDATED          GROUP          GROUP          IDATED
                                               ----------     ----------     ----------     ----------     ----------     ----------
<S>                                            <C>            <C>            <C>            <C>            <C>            <C>
Net cash provided by (used in)
  continuing operations:
    Operating activities .................     $  (1,692)     $  (8,654)     $ (10,346)     $  (4,086)     $  (1,828)     $  (5,914)
    Investing activities .................         3,984        (10,938)        (6,954)        (5,104)        (2,647)        (7,751)
    Financing activities .................          (234)        18,746         18,512           (471)         6,074          5,603
Effect of exchange rate on cash ..........            --             (5)            (5)            --            (13)           (13)
Net cash used in discontinued
  operations .............................          (834)            --           (834)          (706)            --           (706)
                                               ----------     ----------     ----------     ----------     ----------     ----------
Increase (decrease) in cash and
  cash equivalents .......................     $   1,224      $    (851)     $     373      $ (10,367)     $   1,586      $  (8,781)
                                               ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>

         The increase in net cash outflows from operations for the CombiMatrix
group was primarily due to a decrease in cash payments received from customers,
which totaled $2.5 million during the nine months ended September 30, 2004,
comprised of $1.3 million from the Department of Defense, $1.0 million from
Furuno, and $182,000 from the sale of microarray products and related services,
compared to $11.2 million in the comparable 2003 period, consisting of $9.7
million of milestone and prototype products and services payments from Roche,
$1.0 million from Toppan, and $495,000 from contract research and development,
synthesizer and other product sales by CombiMatrix K.K. The increase in net cash
outflows for the CombiMatrix group was offset by a decrease in research and
development expenses and the impact of the timing of vendor payments and related
accruals. The change in net cash outflows from operations for the Acacia
Technologies group was primarily due to an increase in DMT(R) license fee
payments received from licensees which totaled $2.5 million during the nine
months ended September 30, 2004, compared to $157,000, in the comparable 2003
period, which was partially offset by an increase in marketing, general and
administrative and patent related legal expenses and the impact of the timing of
vendor payments and related accruals.

         The change in net cash flows used in continuing investing activities
was due primarily to Acacia Research Corporation's ongoing short term cash
management activities and an increase in short term investments purchased by the
CombiMatrix group related to the receipt of net proceeds from financing
activities as described below.

         The change in net cash flows provided by financing activities was due
to the completion of an equity financing raising net proceeds of approximately
$13.7 million through the sale of Acacia Research - CombiMatrix common stock
during the nine months ended September 30, 2004, compared to equity financing
net proceeds of $4.9 million during the comparable 2003 period. Financing
activities for the nine months ended September 30, 2004 also included proceeds,
primarily from the exercise of Acacia Research -CombiMatrix common stock
warrants and stock options, totaling $4.8 million, compared to $741,000 in the
comparable 2003 period. Net proceeds from the sale of Acacia
Research-CombiMatrix common stock, or AR-CombiMatrix stock, were attributed to
the CombiMatrix group.

         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 the
next twelve months. There can be no assurances that we will not encounter
unforeseen difficulties that may deplete our capital resources more rapidly than
anticipated. 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. See the CombiMatrix group and the
Acacia Technologies group discussion and analysis for additional factors
impacting the adequacy of our available funds.

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 2004. 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 Acacia Research Corporation's material known future cash commitments as of
September 30, 2004:


                                       38
<PAGE>

<TABLE>
                                                               PAYMENTS DUE BY PERIOD (IN THOUSANDS)
                                            -----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS                       REMAINING                                                   2008 AND
                                                2004           2005           2006           2007        THEREAFTER
                                            -----------    -----------    -----------    -----------    -----------

<S>                                         <C>            <C>            <C>            <C>            <C>
Operating leases ......................     $      519     $    2,297     $    2,226     $    1,986     $    1,615
Minimum royalty payments (1) ..........             25            100            100            100          1,100
 irsiCaixa Foundation research,
   development, and licensing
   agreement(3) .......................             25            125            175            100             --
 Leuchemix equity purchases(2) ........            250          1,600          2,150             --             --
                                            -----------    -----------    -----------    -----------    -----------
Total contractual cash obligations.....     $      819     $    4,122     $    4,651     $    2,186     $    2,715
                                            ===========    ===========    ===========    ===========    ===========
</TABLE>
----------
         (1)      In accordance with the September 30, 2002 settlement agreement
                  entered into between CombiMatrix Corporation, Dr. Don
                  Montgomery and Nanogen, Inc., CombiMatrix Corporation is
                  required to pay 12.5% of certain revenues, subject to minimum
                  and maximum amounts not to exceed $1.5 million per year,
                  beginning in the fourth quarter of 2003, for the remaining
                  life of the CombiMatrix group's core patents.
         (2)      The Leuchemix transaction was executed in October 2004.
         (3)      Excludes any potential future payments contingent upon the
                  completion of certain milestones in accordance with the
                  agreement.

         In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies in November 2001, Acacia Media Technologies also
executed related assignment agreements which granted to the former owners of
Acacia Media Technologies' current patent portfolio the right to receive a
royalty of 15% of future net revenues, as defined in the agreements, generated
by Acacia Media Technologies' current patent portfolio, which includes its
DMT(R) patents. No royalty obligation has been incurred as of September 30,
2004. Any royalties paid pursuant to the agreements will be expensed in the
consolidated statement of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

         Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements included elsewhere herein.

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.


                                       39
<PAGE>

      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 ELSEWHERE
HEREIN. HISTORICAL RESULTS AND PERCENTAGE RELATIONSHIPS ARE NOT NECESSARILY
INDICATIVE OF OPERATING RESULTS FOR ANY FUTURE PERIODS.

GENERAL

         The CombiMatrix group, a division of Acacia Research Corporation, is
primarily comprised of CombiMatrix Corporation and its wholly owned subsidiary,
CombiMatrix K.K. and includes all corporate assets, liabilities and transactions
related to Acacia Research Corporation's life sciences businesses. The
CombiMatrix group's core technology opportunity in the life sciences sector has
been developed primarily through CombiMatrix Corporation, which was formed in
October 1995. The CombiMatrix group is a life sciences technology business that
is developing a platform technology to rapidly produce customizable arrays,
which are semiconductor-based tools for use in identifying and determining the
roles of genes, gene mutations and proteins. The CombiMatrix group's technology
has a wide range of potential applications in the areas of genomics, proteomics,
biosensors, drug discovery, drug development, diagnostics, combinatorial
chemistry, material sciences and nanotechnology.

         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.


COMBIMATRIX GROUP
(A DIVISION OF ACACIA RESEARCH CORPORATION)
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003

<TABLE>
DIVISION NET INCOME (LOSS) (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
Division net income (loss) ..........................     $      (3,548)     $      (4,536)     $       4,828       $    (14,905)
</TABLE>

         The change in net income (loss) for the three and nine months ended
September 30, 2004 was primarily due to the recognition of $17.3 million in
Roche deferred contract revenue in the first quarter of 2004, an increase in
government contract revenues (net of related cost of government contract
amounts) and a decrease in research and development expenses and non-cash stock
compensation charges, which were partially offset by an increase in marketing,
general and administrative expenses and the impact of net non-cash legal
settlement charges. The CombiMatrix group estimates that there will be
sufficient losses from operations in the current fiscal year to offset any
taxable income related to the Roche deferred contract revenues recognized during
the three months ended March 31, 2004, resulting in no significant tax liability
or expense in the current period or for the year ended December 31, 2004.

<TABLE>
REVENUES AND COST OF REVENUES (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
Research and development contract ...................     $          --      $          --      $      17,302      $          --
Government contract .................................               685                 --              1,603                 --
Cost of government contract revenues ................              (647)                --             (1,505)                --
Service contracts ...................................                16                 10                102                 23
Products ............................................                52                171                112                380
Cost of product sales ...............................               (41)               (17)               (81)               (94)
</TABLE>


                                       40
<PAGE>

         RESEARCH AND DEVELOPMENT CONTRACT. In March 2004, the CombiMatrix group
completed all phases of its research and development agreement with 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 $17.3 million during the first
quarter of 2004.

         GOVERNMENT CONTRACT AND COST OF GOVERNMENT CONTRACT REVENUES. In March
2004, the CombiMatrix group executed a two-year $5.9 million research and
development contract with the Department of Defense to further the development
of the CombiMatrix group's microarray technology for the detection of biological
threat agents. Under the terms of the contract, 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 biowarfare
detection contract with the Department of Defense which is approximately 27%
complete as of September 30, 2004.

         SERVICE CONTRACTS. The increase was due to $102,000 in maintenance and
service contract revenues recognized during the nine months ended September 30,
2004 by CombiMatrix K.K. from existing microarray customers in Japan.

         PRODUCTS AND COST OF PRODUCT SALES. Product revenues and costs of
product sales during the three and nine months ended September 30, 2004 relate
to domestic and international sales of the CombiMatrix group's microarray
products. Product revenues and costs of product sales during the three and nine
months ended September 30, 2003 were recognized exclusively by CombiMatrix K.K.
from sales of genomics microarray synthesizer and related microarray products
and services to Japanese research institutions in the first and third quarters
of 2003.

<TABLE>
RESEARCH AND DEVELOPMENT EXPENSES (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Research and development expenses .................     $       1,140      $       1,726      $       3,932      $       6,219
</TABLE>

         RESEARCH AND DEVELOPMENT EXPENSES. The decrease in research and
development expenses was primarily due to the CombiMatrix group's completion of
several Roche related research and development projects during the third and
fourth quarters of 2003, and final completion of the research and development
agreement with Roche in the first quarter of 2004. With the completion of the
research and development agreement with Roche, year-to-date and future research
and development expenses were and will continue to be incurred in connection
with the CombiMatrix group's commitments under its collaboration and supply
agreement with Toppan and ongoing internal research and development efforts in
the areas of genomics, drug discovery and development and material sciences. The
CombiMatrix group expects its research and development expenses to continue to
be volatile and such expenses could increase in future periods as additional
contract research and development agreements are undertaken.

<TABLE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES AND LEGAL SETTLEMENT CHARGES
(CREDITS) (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Marketing, general and administrative expenses ....     $       2,274      $       2,112      $       6,780      $       6,890
Legal settlement charges (credits) ................               (90)                --                776                 --
</TABLE>

          MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The increase for the
three months ended September 30, 2004 was due primarily to an increase in
corporate professional fees related to ongoing Sarbanes-Oxley compliance
projects and an increase in marketing and sales costs related to the launch of
the CombiMatrix group's CustomArray(TM) DNA microarray platform beginning in
March 2004. The decrease for the nine months ended September 30, 2004 was due to
a decrease in severance related costs as compared to the 2003 period, partially
offset by an increase in costs related to ongoing Sarbanes-Oxley compliance
projects and an increase in marketing and sales costs related to the launch of
the CombiMatrix group's CustomArray(TM) DNA microarray platform beginning in
March 2004.

         LEGAL SETTLEMENT CHARGES. In connection with the September 2002
settlement agreement between CombiMatrix Corporation, Dr. Donald Montgomery, and
Nanogen, Inc., we recorded a net non-cash charge totaling $776,000 during the


                                       41
<PAGE>

nine months ended September 30, 2004, which reflects the fair value of
AR-CombiMatrix common stock issued and potentially issuable to Nanogen, Inc.
during the period in connection with certain anti-dilution provisions of the
settlement agreement. Periodic charges and the related liability are estimated
based on the number of shares issuable and or potentially issuable and the
AR-CombiMatrix stock price at the end of the respective reporting period. The
credit during the three months ended September 30, 2004 was due to the decrease
in the AR-CombiMatrix stock price as of September 30, 2004, as compared to the
end of the previous quarter. The anti-dilution provisions of the settlement
agreement expire in September 2005.

<TABLE>
NON-CASH STOCK COMPENSATION AMORTIZATION (IN THOUSANDS)

                                                            FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                        ---------------------------------     ---------------------------------
                                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                             2004               2003               2004               2003
                                                        --------------     --------------     --------------     --------------
<S>                                                     <C>                <C>                <C>                <C>
Non-cash stock compensation amortization:
    Research and development ......................     $         (10)     $         243      $          91      $         525
    Marketing, general and administrative .........               157                421                634              1,055
</TABLE>

          The decrease was primarily due to the accelerated method of stock
compensation amortization utilized which results in higher amounts of
amortization in the early vesting periods. Non-cash stock compensation expense
reversals related to the forfeiture of certain unvested stock options during the
three and nine months ended September 30, 2004 were $83,000 and $185,000,
respectively. Non-cash stock compensation expense reversals during the three and
nine months ended September 30, 2003 were $123,000 and $881,000, respectively.

INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 2004, cash and cash equivalents and short-term
investments totaled $26.7 million, compared to $17.3 million at December 31,
2003. Working capital at September 30, 2004 was $25.0 million, compared to a
working capital deficit of $2.0 million at December 31, 2003. Working capital
increased due primarily to the recognition of $17.3 million in deferred contract
revenues during the three months ended March 31, 2004 and the impact of net cash
flow activities as discussed below.

         The net (decrease) increase in cash and cash equivalents for the nine
months ended September 30, 2004 and 2003 was comprised of the following (in
thousands):

<TABLE>
                                                                     FOR THE NINE MONTHS ENDED
                                                               -------------------------------------
                                                                 SEPTEMBER 30,        SEPTEMBER 30,
                                                                     2004                 2003
                                                               ----------------     ----------------
<S>                                                            <C>                  <C>
Net cash provided by (used in) continuing operations:
    Operating activities .................................     $        (8,654)     $        (1,828)
    Investing activities .................................             (10,938)              (2,647)
    Financing activities .................................              18,746                6,074
  Effect of exchange rate on cash ........................                  (5)                 (13)
                                                               ----------------     ----------------
  (Decrease) increase in cash and cash equivalents .......     $          (851)     $         1,586
                                                               ================     ================
</TABLE>

         The increase in net cash outflows from operations for the CombiMatrix
group was primarily due to a decrease in cash payments received from customers,
which totaled $2.5 million during the nine months ended September 30, 2004,
comprised of $1.3 million from the Department of Defense, $1.0 million from
Furuno, and $182,000 from the sale of microarray products and related services,
compared to $11.2 million in the comparable 2003 period, consisting of $9.7
million of milestone and prototype products and services payments from Roche,
$1.0 million from Toppan, and $495,000 from contract research and development,
synthesizer and other product sales by CombiMatrix K.K. The increase in net cash
outflows for the CombiMatrix group was offset by a decrease in research and
development expenses and the impact of the timing of vendor payments and related
accruals.

         The change in net cash flows used in continuing investing activities
was due primarily to the CombiMatrix group's ongoing short term cash management
activities and an increase in short term investments purchased related to the
receipt of net proceeds from financing activities as described below.


                                       42
<PAGE>


         The change in net cash inflows attributed to the CombiMatrix group from
financing activities was due to Acacia Research Corporation's completion of an
equity financing raising net proceeds of approximately $13.7 million through the
sale of Acacia Research - CombiMatrix common stock during the nine months ended
September 30, 2004, compared to equity financing net proceeds of $4.9 million
during the comparable 2003 period. Financing activities for the nine months
ended September 30, 2004 also include proceeds from the exercise of Acacia
Research -CombiMatrix common stock warrants and stock options totaling $4.7
million, compared to $653,000 in the comparable 2003 period.

         The CombiMatrix group believes that its cash and cash equivalents and
short-term investment balances, anticipated cash flow from operations and other
external sources of available credit will be sufficient to meet its cash
requirements through at least the next twelve months.

         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 may encounter unforeseen difficulties that may
deplete capital resources more rapidly than anticipated. Any efforts to seek
additional funds could be made through equity, debt or other external
financings; however, the CombiMatrix group 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, the CombiMatrix group may not be able
to execute its business strategies and its business may suffer.

         The CombiMatrix group's long-term capital requirements will be
substantial and the adequacy of our available funds will depend upon many
factors, including:

         o        the costs associated with marketing, selling and producing its
                  microarray products and services;
         o        the CombiMatrix group's continued progress in research and
                  development programs;
         o        the costs involved in filing, prosecuting, enforcing and
                  defending any patents claims, should they arise;
         o        the CombiMatrix group's ability to license technology;
         o        competing technological developments;
         o        the creation and formation of strategic partnerships;
         o        the costs associated with leasing and improving our
                  headquarters in Mukilteo, Washington;
         o        the costs of commercialization activities, including
                  acquisition of additional inventories and capital equipment;
                  and
         o        other factors that may not be within the CombiMatrix group's
                  control.

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 2004. 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 September 30, 2004:


<TABLE>
                                                            PAYMENTS DUE BY PERIOD (IN THOUSANDS)
                                            -----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS                       REMAINING                                                   2008 AND
                                                2004           2005           2006           2007        THEREAFTER
                                            -----------    -----------    -----------    -----------    -----------
<S>                                         <C>            <C>            <C>            <C>            <C>
Operating leases(2) ...................     $      466     $    1,918     $    1,836     $    1,937     $    1,615
Minimum royalty payments (1) ..........             25            100            100            100          1,100
 irsiCaixa Foundation research,
   development, and licensing
   agreement(4) .......................             25            125            175            100             --
 Leuchemix equity purchases(3) ........            250          1,600          2,150             --             --
                                            -----------    -----------    -----------    -----------    -----------
Total contractual cash obligations.....     $      766     $    3,743     $    4,261     $    2,137     $    2,715
                                            ===========    ===========    ===========    ===========    ===========
</TABLE>
----------
         (1)      In accordance with the September 30, 2002 settlement agreement
                  entered into between CombiMatrix Corporation, Dr. Don
                  Montgomery and Nanogen, Inc., CombiMatrix Corporation is
                  required to pay 12.5% of certain revenues, subject to minimum
                  and maximum amounts not to exceed $1.5 million per year,
                  beginning in the fourth quarter of 2003, for the remaining
                  life of the CombiMatrix group's core patents.
         (2)      Excludes any allocated rent expense in connection with Acacia
                  Research Corporation's management allocation policies.
         (3)      The Leuchemix transaction was executed in October 2004.
         (4)      Excludes any potential future payments contingent upon the
                  completion of certain milestones in accordance with the
                  agreement.


                                       43
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

         Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements included elsewhere herein.

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, the CombiMatrix group believes that it is not subject to any
material market risk exposure.

         At September 30, 2004, the CombiMatrix group had certain assets and
liabilities denominated in Japanese Yen as a result of forming CombiMatrix K.K.
However, due to the relative insignificance of those amounts, the CombiMatrix
group does not believe that it has significant exposure to foreign currency
exchange rate risks. The CombiMatrix group currently does not use derivative
financial instruments to mitigate this exposure. The CombiMatrix group continues
to review this and may begin hedging certain foreign exchange risks through the
use of currency forwards or options in future periods.


                                       44
<PAGE>

         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 ELSEWHERE HEREIN. HISTORICAL RESULTS AND PERCENTAGE RELATIONSHIPS ARE
NOT NECESSARILY INDICATIVE OF OPERATING RESULTS FOR ANY FUTURE PERIODS.

GENERAL

         The Acacia Technologies group, a division of Acacia Research
Corporation, is comprised primarily of Acacia Research Corporation's wholly
owned media technology subsidiaries, Acacia Media Technologies, Soundview
Technologies, Inc., or Soundview Technologies, and Acacia Internet Access
Corporation, and also includes all other related corporate assets and
liabilities and related transactions of Acacia Research Corporation that are
attributed to its media technology businesses.

         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.

         The Acacia Technologies group is responsible for the development,
acquisition, licensing and protection of intellectual property and proprietary
technologies and is pursuing additional licensing and strategic business
alliances with companies in the intellectual property licensing industry.

         The Acacia Technologies group owns and out-licenses a portfolio of
pioneering U.S. and foreign patents covering digital audio and video
transmission and receiving systems, commonly known as audio-on-demand,
video-on-demand, and audio/video streaming. The Acacia Technologies group's
patented proprietary digital media transmission, or DMT(R) technology, enables
the digitization, encryption, storage, transmission, receipt and playback of
digital content via several means including the Internet, cable, satellite and
wireless systems.

         The Acacia Technologies group also owns and has out-licensed to
consumer electronics manufacturers, patented technology known as the V-chip. The
V-chip technology was protected by U.S. Patent No. 4,554,584, which expired in
July 2003. In August 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the September 2002 U.S. District Court for the District of Connecticut
ruling that television manufacturers named in the Acacia Technologies group's
V-chip patent infringement lawsuit do not infringe the Acacia Technologies
group's V-chip patent. See below and Part II Item 1. "Legal Proceedings" for
details of the impact of the ruling.

         In July 2004, the Acacia Technologies group acquired U.S. Patent No.
6,226,677 from LodgeNet Entertainment Corporation. The patent covers technology
and methods for redirecting users to a login page when accessing the Internet.
The acquired patent has several potential licensing opportunities, including DSL
registrations, wireless "hotspots" and hotel high-speed Internet access.

          The Acacia Technologies group is marketing its DMT(R) and Internet
Access Redirection technologies and is looking to acquire other technologies.
Acacia Technologies group's DMT(R) patent portfolio expires in 2011 in the U.S.
and in 2012 in international markets. Acacia Technologies group's Internet
Access Redirection Technology patent portfolio expires in 2018 in the U.S. If we
do not succeed in acquiring additional technologies or are unable to
successfully commercially license our existing and future technologies, our
financial condition may be adversely impacted.


                                       45
<PAGE>

ACACIA TECHNOLOGIES GROUP
(A DIVISION OF ACACIA RESEARCH CORPORATION)
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003

<TABLE>
DIVISION NET LOSS (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
Division net loss ...................................     $      (1,842)     $      (1,296)     $      (3,984)     $      (4,368)
</TABLE>

         The change in net loss was due primarily to an increase in DMT(R)
technology license fee revenues recognized, partially offset by an increase in
operating expenses during the three and nine months ended September 30, 2004, as
compared to the same periods in 2003. The change also reflects the net impact of
the adverse V-chip litigation ruling as described below.

<TABLE>
REVENUES (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
License fees ........................................     $       2,240      $         186      $       3,505      $         211
</TABLE>

         License fee revenues are comprised of DMT(R) technology license fees
and previously deferred V-chip technology license fees recognized by the Acacia
Technologies group. DMT(R) technology license fees increased primarily due to
the significant growth in the number of DMT(R) technology license agreements
executed since March 31, 2003. License fee revenues will fluctuate from period
to period based on the increase in license 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 from licensees, and other factors. Periodic
license fee revenues may include amounts that relate to prior license periods or
prior periods of infringement, which are recognized as revenues in the period
received.

         Revenues for the three months ended September 30, 2004 include $1.5
million in deferred V-chip license fees recognized as a result of the conclusion
of V-chip related litigation as described at Part II Item 1. "Legal
Proceedings."

<TABLE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
Marketing, general and administrative expenses ......     $       1,323      $         955      $       3,489      $       3,157
Legal expenses - patents ............................             1,174                598              2,352              1,435
</TABLE>

          MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The increase was due
primarily to the addition of licensing and business development personnel, an
increase in corporate professional fees related to ongoing Sarbanes-Oxley
compliance projects and an increase in general and administrative overhead costs
in connection with ongoing operations.

          LEGAL EXPENSES - PATENTS. The increase includes $668,000 in deferred
V-chip related legal fees recognized as a result of the conclusion of V-chip
related litigation as described at Part II Item 1. "Legal Proceedings." The
Acacia Technologies group's patent related legal expenses, excluding V-chip
related legal fees, increased to $1.7 million during the nine months ended
September 30, 2004, as compared to $1.4 million in the comparable 2003 period,
due to an increase in costs incurred in connection with the Acacia Technologies
group's ongoing DMT(R) patent commercialization and enforcement programs,
including increased legal costs related to new patent claims and the
identification of additional potential licensees of our DMT(R) technology and
increased patent enforcement costs related to ongoing DMT(R) patent related
litigation. We expect patent related legal expenses to continue to fluctuate
based on actual outside patent counsel fees incurred in connection with the
Acacia Technologies group's ongoing DMT(R) and other patent commercialization
and enforcement programs.


                                       46
<PAGE>

<TABLE>
IMPAIRMENT CHARGES (IN THOUSANDS)

                                                              FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                          ---------------------------------     ---------------------------------
                                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                               2004               2003               2004               2003
                                                          --------------     --------------     --------------     --------------
<S>                                                       <C>                <C>                <C>                <C>
Goodwill impairment charges .........................     $       1,616      $          --      $       1,616      $          --

Impairment charges ..................................                --                 --                 --               (207)
</TABLE>

          In August 2004, as a result of the adverse ruling in the Soundview
Technologies litigation described at Part II Item 1. "Legal Proceedings," the
Acacia Technologies group recorded a non-cash impairment charge totaling
$1,616,000 associated with the write-down of goodwill related to the V-chip. In
the second quarter of 2003, we recorded a non-cash impairment charge of $207,000
for an other-than-temporary decline in the fair value of our cost method
investment.

OTHER

          Results for the nine months ended September 30, 2004 include a
$104,000 charge, net of minority interests, related to estimated additional
costs to be incurred in connection with the discontinued operations of
Soundbreak.com, related primarily to certain noncancellable lease obligations
and the inability to sublease the related office space at rates commensurate
with existing obligations or negotiate more favorable terms.

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 $30.4 million at September 30, 2004, compared to
$33.2 million at December 31, 2003. Working capital at September 30, 2004 was
$28.6 million, compared to $32.7 million at December 31, 2003.

         The net increase (decrease) in cash and cash equivalents for the nine
months ended September 30, 2004 and 2003 was comprised of the following (in
thousands):

<TABLE>
                                                                  FOR THE NINE MONTHS ENDED
                                                              ---------------------------------
                                                               SEPTEMBER 30,      SEPTEMBER 30,
                                                                   2004               2003
                                                              --------------     --------------
<S>                                                           <C>                <C>
Net cash provided by (used in) continuing operations:
    Operating activities ................................     $      (1,692)     $      (4,086)
    Investing activities ................................             3,984             (5,104)
    Financing activities ................................              (234)              (471)
Net cash used in discontinued operations ................              (834)              (706)
                                                              --------------     --------------
Increase (decrease) in cash and cash equivalents ........     $       1,224      $     (10,367)
                                                              ==============     ==============
</TABLE>

         The change in net cash outflows from operations for the Acacia
Technologies group was primarily due to an increase in DMT(R) license fee
payments received from licensees which totaled $2.5 million during the nine
months ended September 30, 2004, compared to $157,000, in the comparable 2003
period, which was partially offset by an increase in marketing, general and
administrative and patent related legal expenses and the impact of the timing of
vendor payments and related accruals.

         The change in net cash flows provided by investing activities was due
to a decrease in short term investments in connection with the Acacia
Technologies group's ongoing short term cash management activities.

         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 at least the next twelve months.

         To date, the Acacia Technologies group has relied primarily upon
selling of Acacia Research Corporation equity securities and payments from our
V-chip licensees (primarily in 2001) and DMT(R) licensees (2003 to current) to


                                       47
<PAGE>

generate the funds needed to finance the operations of the Acacia Technologies
group. As discussed earlier, the V-chip patent expired in July 2003, and the
Judge affirmed the ruling of non-infringement as discussed above. In 2003, the
Acacia Technologies group began to commercially license its DMT(R) technology
recognizing approximately $2.7 million in DMT(R) license fee revenues to date,
and intends to acquire and develop additional intellectual property. In July
2004, the Acacia Technologies group acquired U.S. Patent No. 6,226,677 from
LodgeNet Entertainment Corporation, which covers technology and methods for
redirecting users to a login page when accessing the Internet, and launched its
licensing and enforcement program for this patent in the third quarter of 2004.
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:

         o        market acceptance of our technologies and services;
         o        business activities and financial results of our licensees;
         o        technological advances that may make our technologies obsolete
                  or less competitive;
         o        increases in operating costs, including costs for legal
                  services, engineering and research and personnel;
         o        the availability and cost of capital;
         o        general economic conditions; and
         o        governmental regulation that may restrict the Acacia
                  Technologies group's business.

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 2004. 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
September 30, 2004:

<TABLE>
                                                            PAYMENTS DUE BY PERIOD (IN THOUSANDS)
                                            -----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS                       REMAINING                                                   2008 AND
                                                2004           2005           2006           2007        THEREAFTER
                                            -----------    -----------    -----------    -----------    -----------
<S>                                           <C>            <C>            <C>            <C>             <C>
Operating Leases(1).......................    $   53         $  379         $   390        $   49          $  --

                                            -----------    -----------    -----------    -----------    -----------
Total Contractual Cash Obligations........    $   53         $  379         $   390        $   49          $  --
                                            ===========    ===========    ===========    ===========    ===========
</TABLE>
----------------

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

         In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies in November 2001, Acacia Media Technologies also
executed related assignment agreements which granted to the former owners of
Acacia Media Technologies' current patent portfolio the right to receive a
royalty of 15% of future net revenues, as defined in the agreements, generated
by Acacia Media Technologies' current patent portfolio, which includes its
DMT(R) patents. No royalty obligation has been incurred as of December 31, 2003.
Any royalties paid pursuant to the agreements will be expensed in the statement
of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

         Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements included elsewhere herein.


                                       48
<PAGE>

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.


                                       49
<PAGE>

                                  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. IF ANY OF THE RISKS DISCUSSED IN THIS
QUARTERLY 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.

                                  GENERAL RISKS

THE CONTINUING WORLDWIDE ECONOMIC SLOWDOWN AND RELATED UNCERTAINTIES MAY
CONTINUE TO ADVERSELY IMPACT OUR REVENUES AND OPERATING RESULTS.

         Slower economic activity, concerns about inflation, decreased consumer
confidence, reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns in the technology and biotechnology and
related industries, the lingering effects of the war in Iraq, recent
international conflicts and the events of September 11, 2001 and other terrorist
and military activity have resulted in a continuing downturn in worldwide
economic conditions. We cannot predict the timing, strength and duration of any
economic recovery in our industries. These conditions make it extremely
difficult for us to accurately forecast and plan future business activities. We
cannot predict the timing, strength and duration of any economic recovery,
worldwide or in our markets. If such conditions continue or worsen, our
business, financial condition and results of operations will likely be
materially and adversely affected.

BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY INHERENT AND UNCONTROLLABLE
RISKS, WE MAY NOT SUCCEED.

         We have significant economic interests in our subsidiary companies. Our
business operations are subject to numerous risks, challenges, expenses and
uncertainties inherent in the establishment of new business enterprises. Many of
these risks and challenges are subject to outside influences over which we have
no control, including:

         o        our subsidiary companies' products and services face uncertain
                  market acceptance;

         o        technological advances may make our subsidiary companies'
                  products and services obsolete or less competitive;

         o        competition is intense in the industries in which our
                  subsidiaries do business;

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

         o        the availability and cost of capital;

         o        general economic conditions; and

         o        governmental regulation that excessively restricts our
                  subsidiary companies' businesses.

         We cannot assure you that our subsidiary companies will be able to
market any product or service on a large commercial scale, that our subsidiary
companies will ever achieve or maintain profitable operations or that they, or
we, will be able to remain in business.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.

         We have sustained substantial losses since our inception resulting in
an accumulated deficit, as of September 30, 2004, of $182.6 million on a
consolidated basis. We may never become profitable or if we do, we may never be
able to sustain profitability. We expect to incur significant research and
development, marketing, general and administrative expenses. As a result, we
expect to incur significant losses for the foreseeable future.


                                       50
<PAGE>

OUR STOCK PRICES MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS IN OUR SECURITIES.

         The stock markets in general, and the markets for technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading prices of our two classes of
common stock.

         The market prices of our securities may also fluctuate significantly in
response to the following factors, some of which are beyond our control:

         o        variations in our quarterly operating results;

         o        changes in management's or securities analysts' estimates of
                  our financial performance;

         o        changes in market valuations of similar companies;

         o        announcements by us or our competitors of significant
                  contracts, acquisitions, strategic partnerships, joint
                  ventures, capital commitments, new products or product
                  enhancements;

         o        failure to complete significant transactions; and

         o        additions or departures of key personnel.

BECAUSE CERTAIN OF OUR SUBSIDIARY COMPANIES MAY NOT GENERATE ANY SIGNIFICANT
REVENUES, AND OPERATING RESULTS FROM OUR SUBSIDIARY COMPANIES MAY FLUCTUATE
SIGNIFICANTLY, OUR OWN OPERATING RESULTS MAY BE NEGATIVELY AFFECTED.

         Our operating results may be materially impacted by the operating
results of our subsidiary companies. We cannot assure that these companies will
be able to meet their anticipated working capital needs to develop their
products and services. If they fail to properly develop these products and
services, they will be unable to generate meaningful product sales. We
anticipate that our operating results are likely to vary significantly as a
result of a number of factors, including:

         o        the timing of new product introductions by each subsidiary
                  company;

         o        the stage of development of the business of each subsidiary
                  company;

         o        the technical feasibility of each subsidiary company's
                  technologies and techniques;

         o        the novelty of the technology owned by our subsidiary
                  companies;

         o        the accuracy, effectiveness and reliability of products
                  developed by our subsidiary companies;

         o        the level of product acceptance;

         o        the strength of each subsidiary company's intellectual
                  property rights;

         o        the ability of each subsidiary company to avoid infringing the
                  intellectual property rights of others;

         o        each subsidiary company's ability to exploit and commercialize
                  its technology;

         o        the volume and timing of orders received and product line
                  maturation;

         o        the impact of price competition; and

         o        each subsidiary company's ability to access distribution
                  channels.

         Many of these factors are beyond our subsidiary companies' control. We
cannot provide any assurance that any subsidiary company will experience growth
in the future or be profitable on an operating basis in any future period.


                                       51
<PAGE>


IF WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.

         As of September 30, 2004, we had cash and short-term investments of
$57.0 million on our consolidated financial statements.

         To date, our subsidiary companies have relied primarily upon selling
equity securities, including sales to and loans from us, to generate the funds
needed to finance implementing their plans of operations. 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.

         We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. 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. 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.

         Despite net operating income of $171,000 and net income of $844,000 for
the nine months ended September 30, 2004, we have sustained substantial losses
since our inception resulting in an accumulated deficit as of September 30,
2004, of $182.6 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.

OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
EXECUTIVES, AND THE LOSS OF ANY OF THESE KEY EXECUTIVES COULD ADVERSELY AFFECT
OUR BUSINESS AND OPERATING RESULTS.

         Our success depends in part upon the continued service of our executive
officers, particularly Paul R. Ryan, our Chairman and Chief Executive Officer,
Robert L. Harris, II, our President, and Dr. Amit Kumar, President and Chief
Executive Officer of CombiMatrix Corporation. Neither Messrs. Ryan or Harris nor
Dr. Kumar has an employment or non-competition agreement with us. The loss of
any of these key individuals would be detrimental to our ongoing operations and
prospects.

OUR FUTURE SUCCESS AND THE SUCCESS OF OUR SUBSIDIARY COMPANIES DEPENDS ON OUR
AND THEIR ABILITIES TO ATTRACT AND RETAIN QUALIFIED TECHNICAL PERSONNEL AND
QUALIFIED MANAGEMENT AND MARKETING TEAMS. FAILURE TO DO SO WOULD HARM OUR
ONGOING OPERATIONS AND BUSINESS PROSPECTS.

         We believe that our success will depend on continued employment by us
and our subsidiary companies of senior management and key technical personnel.
Our subsidiary companies will need to attract, retain and motivate qualified
management personnel to execute their current business plans and to successfully
develop commercially viable products and services. Competition for qualified
personnel is intense, and we cannot assure you that we will successfully retain
our existing key employees or attract and retain any additional personnel we may
require.

         Each of our subsidiary companies has key executives upon whom we
significantly depend, and the success of those subsidiary companies depends on
their ability to retain and motivate those individuals.

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


                                       52
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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. In addition, our future success depends on our ability to
expand our organization to match the growth of our subsidiaries.

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 us 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 more difficult the acquisition of Acacia Research Corporation
by means of a tender offer, proxy contest or otherwise, and the removal of
incumbent officers and directors. These provisions include:

         o        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;

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

         o        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;

         o        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

         o        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.

FUTURE CHANGES IN ACCOUNTING STANDARDS OR PRACTICES MAY CAUSE ADVERSE OR
UNEXPECTED FLUCTUATIONS IN OUR REPORTED RESULTS OF OPERATIONS.

         For example, any changes requiring that we record compensation expense
in the statement of operations for employee stock options using the fair value
method or changes in existing taxation rules related to stock options could have
a significant negative impact on our reported results. Several agencies and
entities are considering, and the Financial Accounting Standards Board (the
"FASB") has announced, proposals to change generally accepted accounting
principals in the United States that, if implemented, would require us to record
charges to earnings for employee stock option grants. This pending requirement
would negatively impact our earnings. In addition the FASB has proposed a choice
of valuation models to estimate the fair value of employee stock options. These
models, including the Black-Scholes option pricing model, use varying methods
and inputs and may yield significantly different results. If another party
asserts that the fair values of our employee stock options are misstated,
securities class action litigation could be brought against us and/or the market
price of our common stock could decline.


                                       53
<PAGE>


UNDER NEW REGULATIONS REQUIRED BY THE SARBANES-OXLEY ACT OF 2002, AN ADVERSE
OPINION ON INTERNAL CONTROLS COULD BE ISSUED BY OUR AUDITORS, AND THIS COULD
HAVE A NEGATIVE IMPACT ON OUR STOCK PRICE.

         If Acacia Research Corporation is unable to complete its assessment as
to the adequacy of its internal control over financial reporting as of December
31, 2004 and future year-ends as required by Section 404 of the Sarbanes-Oxley
Act of 2002, or if such assessment is completed and material weaknesses are
identified and reported, investors could lose confidence in the reliability of
Acacia Research Corporation's financial statements, which could result in a
decrease in the value of Acacia Research Corporation's common stock. As directed
by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission adopted rules requiring public companies to include a report of
management on Acacia Research Corporation's internal control over financial
reporting in their annual reports on Form 10-K. This report is required to
contain an assessment by management of the effectiveness of such company's
internal controls over financial reporting. In addition, the public accounting
firm auditing a public company's financial statements must also attest to and
report on management's assessment of the effectiveness of Acacia Research
Corporation's internal controls over financial reporting as well as the
operating effectiveness of Acacia Research Corporation's internal controls.
While Acacia Research Corporation is expending significant resources in
developing the necessary documentation and testing procedures required by
Section 404, there is a significant risk that Acacia Research Corporation will
not comply with all of the requirements imposed by Section 404. If Acacia
Research Corporation fails to have an effectively designed and operating system
of internal control, it will be unable to comply with the requirements of SEC
404 in a timely manner. If Acacia Research Corporation does not effectively
complete its assessment or if its internal controls are not designed or
operating effectively, its external auditors may either disclaim an opinion as
it relates to management's assessment of the effectiveness of its internal
control or may issue a qualified opinion on the effectiveness of Acacia Research
Corporation's internal controls. This could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of Acacia
Research Corporation's financial statements, which could cause the market price
of Acacia Research Corporation's common stock to decline and make it more
difficult for Acacia Research Corporation to finance its operations.


                     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.

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
significant losses for the foreseeable future.

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:

         o        its unpredictable revenue sources, as described below;

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

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

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


                                       54
<PAGE>


         o        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:

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

         o        its sales cycles may be lengthy; and

         o        it cannot be sure as to the timing of receipt of payment for
                  its products.

         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. We believe that various
factors may cause the market price of our AR-CombiMatrix stock to fluctuate,
perhaps substantially, including, among others, announcements of:

         o        its or its competitors' technological innovations;

         o        developments or disputes concerning patents or proprietary
                  rights;

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

         o        proposed laws regulating participants in the biotechnology
                  industry;

         o        developments in relationships with collaborative partners or
                  customers;

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

         o        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


                                       55
<PAGE>


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 COMBIMATRIX GROUP 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.

         The current business of the CombiMatrix group is substantially
dependent on its existing arrangement with Roche. The CombiMatrix group
currently relies upon payments by Roche for a majority of its future revenues
and expends a majority of its resources toward fulfilling its contractual
obligations to Roche. Roche's primary service to the CombiMatrix group is to
distribute and proliferate its technology platform. If the CombiMatrix group
were to lose its relationship with Roche, the CombiMatrix group would be
required to establish a distribution agreement with another partner or
distribute its technology platform itself. 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


                                       56
<PAGE>

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:

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

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

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

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

         o        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

         o        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 SNP genotyping
and 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.


                                       57
<PAGE>

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, one patent issued in Europe and 59 patent
applications pending in the United States, Europe and elsewhere. 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


                                       58
<PAGE>

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.

                 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 Acacia Research-Acacia
Technologies stock, or AR-Acacia Technologies stock, is a holder of the common
stock of one company, Acacia Research Corporation, the risks associated with the
CombiMatrix group could affect the AR-Acacia Technologies stock. As such, we
also urge you to read carefully the section "Risks Relating to the CombiMatrix
Group" 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 research and
development, marketing, general and administrative expenses. As a result, we
expect the Acacia Technologies group to incur significant losses for the
foreseeable future.


                                       59
<PAGE>

THE V-CHIP TECHNOLOGY PATENT HELD BY THE ACACIA TECHNOLOGIES GROUP EXPIRED IN
JULY 2003, AND IF THE GROUP DOES NOT DEVELOP OTHER RECURRING SOURCES OF REVENUE,
ITS FINANCIAL CONDITION WILL BE ADVERSELY IMPACTED.

         The Acacia Technologies group, and Acacia Research Corporation as a
whole, has generated substantially all of its revenues from licensing the V-chip
technology to television manufacturers. The Acacia Technologies group's patent
on the V-chip technology expired in July 2003. In August 2004, the U.S. Court of
Appeals for the Federal Circuit affirmed the September 2002 U.S. District Court
for the District of Connecticut ruling that television manufacturers named in
the Acacia Technologies group's V-chip patent infringement lawsuit do not
infringe the Acacia Technologies group's V-chip patent. The Acacia Technologies
group is beginning to market its digital media transmission technology and its
Internet Access Redirection technology and is developing other technologies and
products. If the Acacia Technologies group does not succeed in developing such
technologies or is unable to commercially license its existing and future
technologies, its financial condition will be adversely impacted.

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:

         o        its unpredictable revenue sources, as described below;

         o        costs related to acquisitions, alliances, licenses and other
                  efforts to expand its operations;

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

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

THE ACACIA TECHNOLOGIES GROUP'S REVENUES WILL BE UNPREDICTABLE, AND THIS MAY
HARM ITS FINANCIAL CONDITION.

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

         o        whether the Acacia Technologies group generates revenues
                  depends, in part, on the success of its licensing efforts;

         o        its cycle of obtaining licensees may be lengthy; and

         o        it cannot be sure as to the timing of receipt of payment.

         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, announcements of:

         o        its or its competitors' technological innovations;

         o        developments or disputes concerning patents or proprietary
                  rights;

         o        developments in relationships with licensees;


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

         o        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-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 ACACIA TECHNOLOGIES GROUP FACES INTENSE COMPETITION, AND WE CANNOT ASSURE
YOU THAT IT WILL BE SUCCESSFUL.

         Although the Acacia Technologies group believes that Acacia Media
Technologies has marketing and licensing rights to enforceable patents and other
intellectual property, the Acacia Technologies group cannot assure you that
other companies will not develop competing technologies that offer better or
less expensive alternatives to those offered by Acacia Media Technologies. In
the event a competing technology emerges, Acacia Media Technologies would expect
substantial additional competition.

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 INTRODUCE NEW PRODUCTS, ITS REVENUES COULD STOP GROWING OR COULD DECLINE.

         The markets served by the 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,
as well as for high-speed computing applications, are based on continually
evolving industry standards. A significant portion of the Acacia Technologies
group's revenues in recent periods has been, and is expected to continue to be,
derived from licensing of technologies based on existing transmission 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.

THE ACACIA TECHNOLOGIES GROUP'S SUCCESS IS BASED ON ITS ABILITY TO PROTECT ITS
PROPRIETARY TECHNOLOGY AND ITS ABILITY TO DEFEND ITSELF AGAINST INFRINGEMENT
CLAIMS.

         The success of the Acacia Technologies group relies, to varying
degrees, on its proprietary rights and their protection or exclusivity. 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 products and services to market, create risk that
these efforts will prove inadequate. Accordingly, if we are unsuccessful with
litigation to protect our intellectual property rights, the future revenues of
the Acacia Technologies group could be adversely affected.

         From time to time, the Acacia Technologies group may be subject to
third-party claims in the ordinary course of business, including claims of
alleged infringement of proprietary rights. Any such claims may harm the Acacia
Technologies group by subjecting it to significant liability for damage and
invalidating its proprietary rights. These types of claims, with or without
merit, could subject the Acacia Technologies group to costly litigation and
diversion of its technical and management personnel. The Acacia Technologies
group depends largely on the protection of enforceable patent rights. The Acacia
Technologies group has applications on file with the U.S. Patent and Trademark
Office seeking patents on its core technologies and has patents or rights to
patents that have been issued. We cannot assure you that the pending patent
applications of the Acacia Technologies group will be issued, that third parties
will not violate, or attempt to invalidate these intellectual property rights,
or that certain aspects of those intellectual property will not be
reverse-engineered by third parties without violating the patent rights of the
Acacia Technologies group.

          For Acacia Media Technologies and Soundview Technologies, proprietary
rights constitute their only significant assets. The Acacia Technologies group
also owns licenses from third parties and it is possible that it could become
subject to infringement actions based upon such licenses. The Acacia
Technologies group generally obtains representations as to the origin and
ownership of such licensed content. However, this may not adequately protect the
Acacia Technologies group. The Acacia Technologies group enters into
confidentiality agreements with third parties and generally limits access to
information relating to its proprietary rights. Despite these precautions, third
parties may be able to gain access to and use the Acacia Technologies group's
proprietary rights to develop competing technologies and products with similar
or better features and prices. Any substantial unauthorized use of the Acacia
Technologies group's proprietary rights could materially and adversely affect
its business and operational results.


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                     RISKS RELATING TO OUR CAPITAL STRUCTURE

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 one group could be subject
to the liabilities of the other 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.

         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.

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-COMBIMATRIX STOCK OR 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 HELD
         AS A SEPARATE LEGAL ENTITY.

         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.


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         THE MARKET PRICE OF OUR AR-COMBIMATRIX STOCK OR AR-ACACIA TECHNOLOGIES
         STOCK MAY BE ADVERSELY AFFECTED BY EVENTS INVOLVING THE GROUP RELATING
         TO THE OTHER CLASS OF COMMON STOCK OR THE PERFORMANCE OF THE CLASS OF
         COMMON STOCK RELATING TO THAT GROUP.

         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:

         o        certain rights with regard to dividends and liquidation;

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

         o        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).

         o        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.

         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.


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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:

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

         o        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;

         o        convert one class of common stock into shares of the other;

         o        approve certain dispositions of the assets of either group;

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

         o        allocate corporate opportunities between the groups; and

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


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         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.


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         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:

         o        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

         o        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


                                       66
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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-CombiMatrix 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-CombiMatrix 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-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
ANTITAKEOVER 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


                                       67
<PAGE>

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.


                                       68
<PAGE>

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.

         The primary objective of our investment activities is to preserve
principal while concurrently maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we may invest in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the current value of the principal amount of our investment will decline.
To minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, high-grade corporate bonds, government and
non-government debt securities and certificates of deposit. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of September 30, 2004,
all of our investments were in money market funds, high-grade corporate bonds,
and U.S. government debt securities. A hypothetical 100 basis point increase in
interest rates would not have a material impact on the fair value of our
available-for-sale securities as of September 30, 2004.


ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         (a) As of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934) was evaluated by our management, with the participation of
our Chief Executive Officer and our Chief Financial Officer. We have concluded
that our disclosure controls and procedures were effective, as of the end of the
period covered by this Report, to help ensure that information we are required
to disclose in reports that we file with the SEC is accumulated and communicated
to management and 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
September 30, 2004) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

SARBANES-OXLEY SECTION 404 COMPLIANCE

         Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require
Acacia Research Corporation to include an internal control report from
management in its Annual Report on Form 10-K for the year ended December 31,
2004 and in subsequent Annual Reports thereafter. The internal control report
must include the following: (1) a statement of management's responsibility for
establishing and maintaining adequate internal control over financial reporting,
(2) a statement identifying the framework used by management to conduct the
required evaluation of the effectiveness of Acacia Research Corporation's
internal control over financial reporting, (3) management's assessment of the
effectiveness of Acacia Research Corporation's internal control over financial
reporting as of December 31, 2004, including a statement as to whether or not
internal control over financial reporting is effective, and (4) a statement that
Acacia Research Corporation's independent auditors have issued an attestation
report on management's assessment of internal control over financial reporting.

         Management acknowledges its responsibility for establishing and
maintaining internal controls over financial reporting and seeks to continually
improve those controls. In addition, in order to achieve compliance with Section
404 of the Act within the required timeframe, Acacia Research Corporation has
been conducting a process to document and evaluate its internal controls over
financial reporting since 2003. In this regard, Acacia Research Corporation has
dedicated internal resources, engaged outside consultants and adopted a detailed
work plan to: (i) assess and document the adequacy of internal control over
financial reporting; (ii) take steps to improve control processes where
required; (iii) validate through testing that controls are functioning as
documented; and (iv) implement a continuous reporting and improvement process


                                       69
<PAGE>

for internal control over financial reporting. Acacia Research Corporation
believes its process for documenting, evaluating and monitoring its internal
control over financial reporting is consistent with the objectives of Section
404 of the Act.

         During the second quarter of 2004, Acacia Research Corporation
commenced testing of its internal controls. Acacia Research Corporation's
documentation and testing to date have identified certain gaps in the
documentation, design and effectiveness of internal controls over financial
reporting that Acacia Research Corporation is in the process of remediating.
Given the risks inherent in the design and operation of internal controls over
financial reporting, Acacia Research Corporation can provide no assurance as to
its, or its independent auditor's conclusions at December 31, 2004 with respect
to the effectiveness of its internal controls over financial reporting.

         It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the control system are met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.


                                       70
<PAGE>

                           PART II--OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

SOUNDVIEW TECHNOLOGIES

         In September 2002, the United States District Court for the District of
Connecticut granted a motion for summary judgment filed by the defendants in
Soundview Technologies pending patent infringement and antitrust lawsuit against
Sony Corporation of America, the Consumer Electronics Manufacturers Association
and the Electronics Industries Alliance d/b/a Consumer Electronics Association
in the United States District Court for the Eastern District of Virginia (filed
on April 5, 2000), alleging that television sets utilizing certain content
blocking technology (commonly known as the "V-chip") and sold in the United
States infringe Soundview Technologies' U.S. Patent No. 4,554,584. In granting
the motion, the court ruled that the defendants have not infringed on Soundview
Technologies' patent.

         In September 2003, a motion for summary judgment filed by the remaining
defendants was granted by the United States District Court for the District of
Connecticut on Soundview Technologies' anti-trust claims due to the Court's
previous ruling of non-infringement as described above.

         In August 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the September 2002 U.S. District Court for the District of Connecticut
ruling that the remaining television manufacturers named in the Acacia
Technologies group's V-chip patent infringement lawsuit do not infringe the
Acacia Technologies group's V-chip patent. As a result of the ruling, the Acacia
Technologies group recorded an impairment charge of $1,616,000 associated with
the write-off of goodwill related to the V-chip. In addition, as a result of the
conclusion of the V-chip patent litigation, the Acacia Technologies group
recognized $1,500,000 of V-chip related deferred license fee revenues and
$668,000 of V-chip related deferred legal costs in the third quarter of 2004.

         The final ruling in the V-chip litigation as described above has no
impact on the revenues that we have recognized to date from licensees of our
patented V-chip technology.

ACACIA MEDIA TECHNOLOGIES CORPORATION

INTERNET WEBSITES

         In February 2003, Acacia Media Technologies initiated DMT(R) patent
infringement litigation in the Federal District Court for the Central District
of California (the "Court") against approximately 39 defendants who provide
adult oriented digital content over the Internet. All of the defendants were
previously notified of our belief that their conduct infringes on our patent
rights. As of September 30, 2004, nine of the original 39 defendants remain in
the initial litigation.

         In December 2003, Acacia Media Technologies added an additional eight
defendants to its pending patent infringement litigation described above. The
new complaints, filed with the Court, seek to create a defendant class for all
adult entertainment companies that infringe Acacia Media Technologies' DMT(R)
patents by transmitting pre-recorded, digital audio and audio/video adult
content via any electronic communication channel into or from the Central
District of California, or that operate at least one interactive website where a
user located in Central District of California can exchange information with a
host computer. Defendant class action status, which must be approved by the
Court, would permit the Court's rulings on certain key issues to legally bind
all members of the class, whether or not they have been specifically named as
defendants in the litigation.

         On July 12, 2004, the United States District Court for the Central
District of California issued a Markman Order giving the Court's construction of
some of the disputed patent terms and phrases contained in two of the five U.S.
DMT(R) patents.

HOTEL ON-DEMAND TV INDUSTRY

         In November 2003, Acacia Media Technologies initiated a patent
infringement lawsuit in the Federal District Court for the Central District of
California against On Command Corporation, provider of interactive in-room
entertainment, information and business services to the lodging industry,
regarding Acacia Media Technologies' DMT(R) technology. In June 2004, Acacia


                                       71
<PAGE>

Media Technologies entered into a license agreement for its DMT(R) technology
with On Command Corporation settling all outstanding litigation between the
parties.

CABLE AND SATELLITE TV

         In June 2004, Acacia Media Technologies filed a Complaint in the
District Court for the Northern District of California alleging infringement of
Acacia Media Technologies' DMT(R) patents against 9 cable and satellite
companies. Companies named as defendants in the lawsuit include Comcast
Corporation, Charter Communications, Inc., The DirectTV Group, Inc., Echostar
Communications Corporation, Boulder Ridge Cable TV, Central Valley Cable TV,
LLC, Seren Innovations, Inc., Cox Communications, Inc., and Hospitality Network,
Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand TV
services). In September 2004, Acacia Media Technologies added Mediacom LLC to
this complaint. As of September 2004, Acacia Media Technologies has executed
license and settlement agreements with Boulder Ridge Cable TV, Central Valley
Cable TV, and Seren Innovations.

         In September 2004, Acacia Media Technologies filed complaints in the
U.S. District Court for the District of Arizona, U.S. District Court for the
District of Minnesota and the U.S. District Court for the Northern District of
Ohio - Eastern Division, alleging infringement of Acacia Media Technologies'
DMT(R) patents against certain cable and satellite companies located in Arizona,
Minnesota, and Ohio. Companies named in the lawsuits include Armstrong Group,
Arvig Communication Systems, Block Communications, Inc., Cable America
Corporation, Cable One, Inc., Cable System Services, Inc., Cannon Valley
Communications, Inc., East Cleveland Cable TV and Communications, LLC, Loretel
Cablevision, Massillon Cable TV, Inc., Mid-Continent Media, Inc., Nelsonville TV
Cable, Inc., NPG Cable, Inc., Precis Communications, Inc. San Carlos
Cablevision, LLC, Savage Communications, Inc., Sjoberg's Cablevision, Inc., US
Cable, and Wide Open West, LLC.


ITEM 6.  EXHIBITS

10.1     Series A Preferred Stock Purchase Agreement dated as of October 1,
         2004, between Combimatrix Corporation and Leuchemix, Inc.

10.2     Right of First Refusal and Co-Sale Agreement dated as of October 1,
         2004, between Leuchemix, Inc., Combimatrix Corporation and Shareholders
         of Leuchemix, Inc.

10.3     Voting Agreement dated as of October 1, 2004, between Leuchemix, Inc.,
         Combimatrix Corporation and Shareholders of Leuchemix, Inc.

10.4     Investor Rights Agreement dated as of October 1, 2004, between
         Leuchemix, Inc., Combimatrix Corporation and Shareholders of Leuchemix,
         Inc.

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


                                       72
<PAGE>

                                   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: November 5, 2004


                                       73
<PAGE>

                                  EXHIBIT INDEX


EXHIBIT
NUMBER                    EXHIBIT
------                    -------

10.1     Series A Preferred Stock Purchase Agreement dated as of October 1,
         2004, between Combimatrix Corporation and Leuchemix, Inc.

10.2     Right of First Refusal and Co-Sale Agreement dated as of October 1,
         2004, between Leuchemix, Inc., Combimatrix Corporation and Shareholders
         of Leuchemix, Inc.

10.3     Voting Agreement dated as of October 1, 2004, between Leuchemix, Inc.,
         Combimatrix Corporation and Shareholders of Leuchemix, Inc.

10.4     Investor Rights Agreement dated as of October 1, 2004, between
         Leuchemix, Inc., Combimatrix Corporation and Shareholders of Leuchemix,
         Inc.

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


                                       74

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>acacia_10qex10-1.txt
<TEXT>

<PAGE>

                                                                    EXHIBIT 10.1

                                 LEUCHEMIX, INC.

                   SERIES A PREFERRED STOCK PURCHASE AGREEMENT

         This Series A Preferred Stock Purchase Agreement (this "AGREEMENT") is
made as of the 1st day of October, 2004, by and between Leuchemix, Inc., a
California corporation (the "COMPANY"), and Combimatrix Corporation, a Delaware
corporation (the "INVESTOR").

         Whereas, the Company desires to sell to the Investor, and the Investor
desires to purchase from the Company, shares of the Company's Series A Preferred
Stock on the terms and conditions set forth in this Agreement;

         Now, therefore, the parties hereby agree as follows:

1.       AGREEMENT TO PURCHASE AND SELL STOCK.

1.1      SALE AND ISSUANCE OF SERIES A PREFERRED STOCK.

         Subject to the terms and conditions of this Agreement, Investor agrees
to purchase and the Company agrees to sell to Investor at the Initial Closing
(as defined below) and each Subsequent Closing (as defined below) the number of
shares (the "INITIAL SHARES" and the "SUBSEQUENT SHARES," respectively, and
collectively, the "SHARES") of Series A Preferred Stock (the "SERIES A PREFERRED
STOCK"), set forth on SCHEDULE 1 hereto for a purchase price of US$1.2749 per
share. The Series A Preferred Stock shall contain the terms set forth in the
Amended and Restated Articles of Incorporation of the Company (the "AMENDED
ARTICLES"), being filed on or before the Initial Closing in the form attached
hereto as EXHIBIT A. Each Share will be convertible into one share of Common
Stock (the "COMMON STOCK") of the Company, as further set out in the Amended
Articles (subject to adjustment pursuant to the provisions of the Amended
Articles).

1.2      CLOSING DATES.

         The purchase and sale of the Initial Shares (the "INITIAL CLOSING")
shall be held at the offices of Davis Wright Tremaine LLP, 1501 Fourth Avenue,
Suite 2600, Seattle, Washington 98101, at 10:00 a.m., Pacific Standard Time, on
October 1st, 2004, or at such other time and place as the Company and Investor
shall mutually agree, either orally or in writing. The purchases and sales of
the Subsequent Shares (the "SUBSEQUENT CLOSING") shall be held at the offices of
Davis Wright Tremaine LLP, 1501 Fourth Avenue, Suite 2600, Seattle, Washington
98101, at 10:00 a.m., Pacific Standard Time, on a mutually agreeable date that
is within the first five business days of the applicable period indicated on
SCHEDULE 1 hereto, or at such other time and place as the Company and Investor
shall mutually agree, either orally or in writing. The Initial Closing and each
Subsequent Closing are referred to herein as a "Closing" and the date on which a
Closing occurs is referred to herein as a "CLOSING DATE."

         Notwithstanding any provision herein or in any other Transaction
Document (defined below) to the contrary, from and after the Initial Closing the
obligation for Investor to participate in each Subsequent Closing as
contemplated by this Section 1.2 and SCHEDULE 1 hereto shall be absolute and


                                       1
<PAGE>

unconditional. Without limiting the foregoing, the Company shall have no
obligation whatsoever to update its disclosure with respect to any sale of
securities to the Investor contemplated hereby inasmuch as (x) the Investor's
investment decision with respect to the purchase of all Shares is being made as
of the Initial Closing and (y) the delay represented by Subsequent Closings
reflects solely an accommodation by the Company with respect to the timing for
payment by the Investor for the Shares at issue.

1.3      NOTICE OF DEFAULT; OPPORTUNITY TO CURE.

         If Investor fails to fund the purchase of Subsequent Shares at any
Subsequent Closing, the Company agrees to provide written notice of such failure
to Investor. Investor shall have ten (10) days following the receipt of such
notice to cure any such default.

1.4      DELIVERY.

         At each Closing, the Company shall deliver to Investor a certificate
(in definitive form) registered in Investor's name, representing the Shares of
Series A Preferred Stock to be purchased by Investor from the Company at such
Closing against payment of the applicable purchase price as set forth on
SCHEDULE 1 hereto by wire transfer. If Investor does not have a representative
at a Closing, the Company shall deliver such certificate by overnight courier
service to the address as provided on the signature page herein.

1.4      NO OBLIGATION OF INVESTOR AFFILIATES.

         Notwithstanding anything to the contrary that may be set forth in this
Agreement, the parties expressly acknowledge and agree that no affiliate of
Investor, including, without limitation, Investor's parent corporation, Acacia
Research Corporation, a Delaware corporation, and Investor's affiliate, Acacia
Media Technologies Corporation, a Delaware corporation, shall have or otherwise
incur any liability or obligation to the Company under this Agreement,
including, without limitation, as a result of any failure by Investor to deliver
the applicable purchase price with respect to any Closing.

2.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         Except as set forth on a SCHEDULE OF EXCEPTIONS delivered by the
Company to Investor at the Initial Closing, the Company hereby represents and
warrants to Investor, as of the Initial Closing, as set forth below in this
Section 2:

2.1      ORGANIZATION; GOOD STANDING; QUALIFICATION.

         The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and as presently proposed to be
conducted, to execute and deliver this Agreement, that certain Investor Rights
Agreement dated as of even date herewith, by and between the Company, Investor,
and the holders of Common Stock named therein (the "FOUNDERS"), the form of
which is attached hereto as EXHIBIT B (the "INVESTOR RIGHTS AGREEMENT"), that


                                       2
<PAGE>

certain Right of First Refusal and Co-Sale Agreement dated as of even date
herewith, by and among the Company, Investor and the Founders, the form of which
is attached hereto as EXHIBIT C (the "CO-SALE AGREEMENT"), that certain Voting
Agreement dated as of even date herewith, by and among the Company, Investor and
the Founders, the form of which is attached hereto as EXHIBIT D (the "VOTING
AGREEMENT"), and any other agreements to which the Company is a party the
execution and delivery of which is contemplated hereby (the "ANCILLARY
AGREEMENTS"), to issue and sell the Series A Preferred Stock and the Common
Stock issuable upon conversion thereof, and to carry out the provisions of this
Agreement, the Investor Rights Agreement, the Co-Sale Agreement, the Voting
Agreement, the Amended Articles and any Ancillary Agreement (collectively, the
"TRANSACTION DOCUMENTS"). The Company is duly qualified and is authorized to
transact business and is in good standing as a foreign corporation in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business, properties, prospects, or financial condition.

2.2      AUTHORIZATION.

         All corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization, execution and
delivery of the Transaction Documents, the performance of all obligations of the
Company hereunder and thereunder at the Initial Closing and each Subsequent
Closing and the authorization, issuance (or reservation for issuance), sale, and
delivery of the Series A Preferred Stock being sold hereunder and the Common
Stock issuable upon conversion thereof has been taken or will be taken prior to
the Initial Closing, and the Transaction Documents, when executed and delivered,
will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent that the
indemnification provisions contained in the Investor Rights Agreement may be
limited by applicable laws.

2.3      VALID ISSUANCE OF PREFERRED AND COMMON STOCK.

         The Series A Preferred Stock that is being purchased by Investor
hereunder, when issued, sold, and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and the
Investor Rights Agreement and under applicable state and federal securities
laws. The Common Stock issuable upon conversion of the Series A Preferred Stock
being purchased under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Amended
Articles, will be duly and validly issued, fully paid, and nonassessable and
will be free of restrictions on transfer other than restrictions on transfer
under this Agreement and the Investor Rights Agreement and under applicable
state and federal securities laws.

2.4      GOVERNMENTAL CONSENTS.

         No consent, approval, qualification, order or authorization of, or
filing with, any local, state, or federal governmental authority is required on
the part of the Company in connection with the Company's valid execution,
delivery, or performance of this Agreement, the offer, sale or issuance of the
Series A Preferred Stock by the Company or the issuance of Common Stock upon


                                       3
<PAGE>

conversion of the Series A Preferred Stock, except (i) the filing of the Amended
Articles with the Secretary of State of the State of California, and (ii) such
filings as have been made prior to the Initial Closing, (except any notices of
sale required to be filed with the Securities and Exchange Commission under
Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
or such post-closing filings as may be required under applicable state
securities laws, which will be timely filed within the applicable periods
therefor).

2.5      CAPITALIZATION AND VOTING RIGHTS.

         The authorized capital of the Company consists, or will consist
immediately prior to the Initial Closing, of:

         (a) PREFERRED STOCK. Ten Million (10,000,000) shares of Preferred
Stock, of which Three Million One Hundred Thirty-Seven Thousand Five Hundred
(3,137,500) shares have been designated Series A Preferred Stock, and up to all
of which will be sold pursuant to this Agreement. The rights, privileges and
preferences of the Series A Preferred Stock are as stated in the Amended
Articles.

         (b) COMMON STOCK. One Hundred Million (100,000,000) shares of common
stock ("COMMON STOCK"), of which Six Million Two Hundred Seventy-Five Thousand
(6,275,000) shares are issued and outstanding.

         (c) The outstanding shares of Common Stock are owned by the
shareholders and in the numbers specified in SCHEDULE 2 hereto.

         (d) The outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act and any relevant state securities laws or pursuant to valid exemptions
therefrom.

         (e) Except for (i) the conversion privileges of the Series A Preferred
Stock to be issued under this Agreement, (ii) the Investor Rights Agreement, and
(iii) the Voting Agreement, there are no other outstanding options, warrants,
rights (including conversion or preemptive rights and rights of first refusal),
proxy or shareholder agreements or agreements of any kind for the purchase or
acquisition from the Company of any of its securities. The Company is not a
party or subject to any agreement or understanding, and, to the Company's
knowledge, immediately prior to the Initial Closing, there is no agreement or
understanding between any persons that affects or relates to the voting or
giving of written consents with respect to any security or the voting by a
director of the Company.

2.6      SUBSIDIARIES.

         The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.

                                       4
<PAGE>

2.7      CONTRACTS AND OTHER COMMITMENTS.

         There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that may involve (i) obligations (contingent
or otherwise) of, or payments to the Company in excess of, $10,000, or (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company (other than the license of the Company's software and products
in the ordinary course of business), or (iii) provisions restricting or
affecting the development, manufacture or distribution of the Company's products
or service, or (iv) indemnification by the Company with respect to infringement
of proprietary rights.

2.8      RELATED-PARTY TRANSACTIONS.

         No employee, officer, shareholder or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
them, other than (i) for payment of salary for services rendered, (ii)
reimbursement for reasonable expenses incurred on behalf of the Company, and
(iii) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the Board of Directors of the Company). To the Company's
knowledge, none of such persons has any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company, except that employees, shareholders, officers, or directors of
the Company and members of their immediate families may own stock in publicly
traded companies that may compete with the Company. To the Company's knowledge,
no officer, director, or shareholder or any member of their immediate families
is, directly or indirectly, interested in any material contract with the Company
(other than such contracts as relate to any such person's ownership of capital
stock or other securities of the Company).

2.9      REGISTRATION RIGHTS.

         Except as provided in the Investor Rights Agreement, the Company is
presently not under any obligation and has not granted any rights to register
under the Securities Act any of its presently outstanding securities or any of
its securities that may subsequently be issued.

2.10     PERMITS.

         The Company has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as presently planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.

                                       5
<PAGE>

2.11     COMPLIANCE WITH OTHER INSTRUMENTS.

         The Company is not in violation or default in any material respect of
any provision of its Amended Articles or Bylaws or in any material respect of
any provision of any mortgage, indenture, agreement, instrument, or contract to
which it is a party or by which it is bound or, to its knowledge, of any federal
or state judgment, order, writ, decree, statute, rule, regulation or restriction
applicable to the Company. The execution, delivery, and performance by the
Company of the Transaction Documents, and the consummation of the transactions
contemplated thereby, will not result in any such violation or be in material
conflict with or constitute, with or without the passage of time or giving of
notice, either a material default under any such provision or an event that
results in the creation of any material lien, charge, or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations, or any of its assets or
properties.

2.12     LITIGATION.

         There is no action, suit, proceeding, or investigation pending or, to
the knowledge of the Company, currently threatened against the Company that
questions the validity of the Transaction Documents or the right of the Company
to enter into such agreements, or to consummate the transactions contemplated
thereby, or that might result, either individually or in the aggregate, in any
material adverse change in the assets, business, properties, prospects, or
financial condition of the Company, or in any material change in the current
equity ownership of the Company. The foregoing includes, without limitation, any
action, suit, proceeding, or investigation pending or, to the knowledge of the
Company, currently threatened involving the prior employment of any of the
Company's employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, their obligations under any agreements with prior employers, or
negotiations by the Company with potential backers of, or investors in, the
Company. The Company is not a party to or, to its knowledge, named in or subject
to any order, writ, injunction, judgment, or decree of any court, government
agency, or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company currently
intends to initiate.

2.13     DISCLOSURE.

         The Company has made available to Investor all the information
reasonably available to it without undue expense that Investor has requested for
deciding whether to purchase the Series A Preferred Stock and all information
that the Company believes is reasonably necessary to enable Investor to make
such decision. To the Company's knowledge, neither this Agreement nor any other
agreements, written statements or certificates made or delivered in connection
herewith contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not misleading.

2.14     OFFERING.

         Subject in part to the truth and accuracy of Investor's representations
set forth in this Agreement, the offer, sale and issuance of the Series A
Preferred Stock as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.

                                       6
<PAGE>

2.15     TITLE TO PROPERTY AND ASSETS; LEASES.

         The Company owns its property and assets free and clear of all
mortgages, liens, loans and encumbrances, except such encumbrances and liens
that arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases
and, to its knowledge, holds a valid leasehold interest free of any liens,
claims, or encumbrances.

2.16     MATERIAL LIABILITIES.

         The Company has no material liability or obligation, absolute or
contingent (individually or in the aggregate), except (i) obligations and
liabilities incurred after the date of incorporation in the ordinary course of
business that are not material, individually or in the aggregate, and (ii)
obligations under contracts made in the ordinary course of business that would
not be required to be reflected in financial statements prepared in accordance
with generally accepted accounting principles.

2.17     CHANGES.

         To the Company's knowledge, since the date of incorporation, there has
not been any event or condition of any type that has materially and adversely
affected the business, properties, prospects, or financial condition of the
Company.

2.18     PATENTS AND TRADEMARKS.

         To its knowledge, the Company owns or possesses sufficient legal rights
to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, and proprietary rights and processes necessary
for its business as now conducted without any conflict with, or infringement of
the rights of, others. The Schedule of Exceptions contains a complete list of
patents and pending patent applications of the Company.

         Except for agreements with its own employees or consultants, in the
case of employees substantially in the form referenced in Section 2.21 below,
and standard end-user license agreements, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses, or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, and proprietary rights and processes of
any other person or entity. The Company has not received any written notice
alleging that the Company has violated or does violate any of the patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights or processes of any other person or entity. The Company is
not aware that any of its employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative agency,
that would interfere with the use of such employee's best efforts to promote the
interests of the Company or that would conflict with the Company's business as


                                       7
<PAGE>

proposed to be conducted. Neither the execution nor delivery of this Agreement,
nor the carrying on of the Company's business by the employees of the Company,
nor the conduct of the Company's business as proposed, will, to the Company's
knowledge, conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant, or
instrument under which any of such employees is now obligated. The Company does
not believe it is or will be necessary to use any inventions of any of its
employees (or persons it currently intends to hire) made prior to their
employment by the Company.

2.19     MANUFACTURING AND MARKETING RIGHTS.

         The Company has not granted rights to manufacture, produce, assemble,
license, market, or sell its products to any other person and is not bound by
any agreement that affects the Company's exclusive right to develop,
manufacture, assemble, distribute, market, or sell its products.

2.20     EMPLOYEES; EMPLOYEE COMPENSATION.

         To its knowledge, the Company has complied in all material respects
with all applicable state and federal equal opportunity and other laws related
to employment. To the Company's knowledge, no employee of the Company is or will
be in violation of any judgment, decree, or order, or any term of any employment
contract, patent disclosure agreement, or other contract or agreement relating
to the relationship of any such employee with the Company, or any other party
because of the nature of the business conducted or presently proposed to be
conducted by the Company or to the use by the employee of his or her best
efforts with respect to such business. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation agreement. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.

2.21     CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENTS.

         Each employee and officer of the Company has executed a Confidential
Information and Inventions Assignment Agreement substantially in the form or
forms, which have been made available to Investor.

2.22     TAX RETURNS, PAYMENTS, AND ELECTIONS.

         The Company has not filed any tax returns and reports (federal, state
and local). The Company has paid all taxes and other assessments due, except
those contested by it in good faith. The Company has not elected pursuant to the
Internal Revenue Code of 1986, as amended ("CODE"), to be treated as an S
corporation or a collapsible corporation pursuant to Section 1362(a) or Section
341(f) of the Code, nor has it made any other elections pursuant to the Code
(other than elections that relate solely to methods of accounting, depreciation,
or amortization) that would have a material effect on the business, properties,
prospects, or financial condition of the Company. The Company has never had any
tax deficiency proposed or assessed against it and has not executed any waiver
of any statute of limitations on the assessment or collection of any tax or
governmental charge. The Company has made adequate provisions on its books of


                                       8
<PAGE>

account for all taxes, assessments, and governmental charges with respect to its
business, properties, and operations for such period. The Company has withheld
or collected from each payment made to each of its employees, the amount of all
taxes, including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositaries.

2.23     ENVIRONMENTAL AND SAFETY LAWS.

         To its knowledge, the Company is not in violation of any applicable
statute, law, or regulation relating to the environment or occupational health
and safety, and to its knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law, or regulation.

2.24     SECTION 83(B) ELECTIONS.

         To the Company's knowledge, all individuals who have purchased shares
of the Company's Common Stock under agreements that provide for the vesting of
such shares have filed timely elections under Section 83(b) of the Internal
Revenue Code and any analogous provisions of applicable state tax laws.

2.25     MINUTE BOOKS.

         The copy of the minute book of the Company made available to Investor
contains minutes of all meetings of directors and shareholders and all actions
by written consent without a meeting by the directors and shareholders since the
date of incorporation and accurately reflects all actions by the directors (and
any committee of directors) and shareholders with respect to all transactions
referred to in such minutes in all material respects.

2.26     CERTAIN ACTIONS.

         The Company has not: (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to its common stock; (ii) incurred
any indebtedness for money borrowed or incurred any other liabilities or entered
into any contracts with obligations individually in excess of $10,000 or in
excess of $50,000 in the aggregate; (iii) made any loans or advances to any
person, other than advances for travel expenses in the ordinary course of
business; (iv) sold, exchanged or otherwise disposed of any materials assets or
rights other than the sale of inventory on the ordinary course of business; or
(v) entered into any material transactions with any if its officers, directors
or employees or any entity controlled by any of such individuals, or made any
loans or guarantees for the benefit of its officers, directors or employees, or
any members of their immediate families, other than travel advances and other
advances made in the ordinary course of business.

3.       REPRESENTATIONS AND WARRANTIES OF INVESTOR.

         Investor hereby represents and warrants to the Company that:

                                       9
<PAGE>

3.1      AUTHORIZATION.

         All corporate action on the part of Investor, its officers, directors
and stockholders necessary for the authorization, execution and delivery of the
Transaction Documents and the performance of all obligations of Investor
thereunder at the Initial Closing and each Subsequent Closing has been taken or
will be taken prior to the Initial Closing, and each Transaction Document, when
executed and delivered, will constitute valid and legally binding obligations of
Investor, enforceable in accordance with their respective terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent that the indemnification provisions contained in the Investor Rights
Agreement may be limited by applicable laws.

3.2      PURCHASE ENTIRELY FOR OWN ACCOUNT.

         This Agreement is made with Investor in reliance upon Investor's
representation to the Company, which by Investor's execution of this Agreement
Investor hereby confirms, that the Series A Preferred Stock to be purchased by
Investor and the Common Stock issuable upon conversion thereof (collectively,
the "SECURITIES") will be acquired for investment for Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, Investor further represents that Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities.

3.3      RECEIPT OF INFORMATION.

         Investor believes it has received all the information it considers
necessary or appropriate for deciding whether to purchase the Series A Preferred
Stock. Investor further represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series A Preferred Stock and the business,
properties, prospects, and financial condition of the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to Investor or to which it had access. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of Investor to rely
thereon.

3.4      INVESTMENT EXPERIENCE.

         Investor represents that it is experienced in evaluating and investing
in private placement transactions of securities of companies in a similar stage
of development and acknowledges that Investor is able to fend for itself, can
bear the economic risk of Investor's investment, and has such knowledge and
experience in financial and business matters that Investor is capable of
evaluating the merits and risks of the investment in the Series A Preferred
Stock. Investor has not been organized for the purpose of acquiring the Series A
Preferred Stock.

                                       10
<PAGE>

3.5      ACCREDITED INVESTOR.

         Investor is an "accredited investor" within the meaning of Securities
and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in
effect.

3.6      RESTRICTED SECURITIES.

         Investor understands that the Series A Preferred Stock (and any Common
Stock issued on conversion thereof) may not be sold, transferred, or otherwise
disposed of without registration under the Securities Act or an exemption
therefrom, and that in the absence of an effective registration statement
covering the Stock (or the Common Stock issued on conversion thereof) or an
available exemption from registration under the Securities Act, the Series A
Preferred Stock (and any Common Stock issued on conversion thereof) must be held
indefinitely. In particular, Investor is aware that the Series A Preferred Stock
(and any Common Stock issued upon conversion thereof) may not be sold pursuant
to Rule 144 promulgated under the Securities Act unless all of the conditions of
that Rule are met. Among the conditions for use of Rule 144 may be the
availability of current information to the public about the Company. Such
information is not now available and the Company has no present plans to make
such information available.

3.7      LEGENDS.

         To the extent applicable, each certificate or other document evidencing
any of the Series A Preferred Stock or any Common Stock issued upon conversion
thereof shall be endorsed with the legends substantially in the Form set forth
below:

         (a) The following legend under the Securities Act:

         "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
         ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
         SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR
         OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
         REGISTRATION IS NOT REQUIRED."

         (b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the California Corporations Code.

3.8      FURTHER LIMITATIONS ON DISPOSITION.

         Without in any way limiting the representations set forth above,
Investor further agrees not to make any disposition of all or any portion of the
Shares unless and until the transferee has agreed in writing for the benefit of
the Company to be bound by this Section 3 and the Investor Rights Agreement and
the Voting Agreement provided and to the extent this Section and such agreements
are then applicable, and:

                                       11
<PAGE>

         (a) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such Registration Statement; or

         (b) (i) Such Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Securities Act. It is
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.

3.9      OBLIGATION TO FUND.

         Investor acknowledges and agrees that the purchase of the Initial
Shares at the Initial Closing shall obligate Investor, absolutely and
unconditionally, to purchase all of the Subsequent Shares at each Subsequent
Closing as set forth on SCHEDULE 1 hereto.

4.       CONDITIONS OF INVESTOR'S OBLIGATIONS AT INITIAL CLOSING.

         The obligations of Investor under paragraph 1.1 of this Agreement at
the Initial Closing are subject to the fulfillment on or before the Initial
Closing of each of the following conditions, unless otherwise waived in writing
(it being understood and agreed that, from and after the Initial Closing, the
Investor's obligations at each Subsequent Closing shall be absolute and
unconditional):

4.1      REPRESENTATIONS AND WARRANTIES.

         The representations and warranties of the Company contained in Section
2 shall be true on and as of the Initial Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Initial Closing.

4.2      PERFORMANCE.

         The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Initial Closing.

4.3      COMPLIANCE CERTIFICATE.

         The President of the Company shall deliver to Investor at the Initial
Closing a certificate certifying that the conditions specified in paragraphs
4.1, 4.2, 4.4, and 4.7 have been fulfilled.

4.4      QUALIFICATIONS.

         All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Series A
Preferred Stock pursuant to this Agreement shall be duly obtained and effective
as of the Initial Closing.

                                       12
<PAGE>

4.5      PROCEEDINGS AND DOCUMENTS.

         All corporate and other proceedings in connection with the transactions
contemplated at the Initial Closing and all documents incident thereto shall be
reasonably satisfactory in form and substance to Investor, which shall have
received all such counterpart original and certified or other copies of such
documents as it may reasonably request.

4.6      OPINION OF COMPANY COUNSEL.

         Investor shall have received from Pillsbury Winthrop LLP, counsel for
the company, an opinion, dated as of the Initial Closing, in the form attached
hereto as EXHIBIT E.

4.7      TRANSACTION AGREEMENTS.

         The Company shall have entered into the Investor Rights Agreement, the
Co-Sale Agreement, and the Voting Agreement.

5.       CONDITIONS OF THE COMPANY'S OBLIGATIONS.

         The obligations of the Company to Investor under this Agreement are
subject to the fulfillment on or before each Closing of each of the following
conditions, unless otherwise waived in writing:

5.1      REPRESENTATIONS AND WARRANTIES.

         The representations and warranties of Investor contained in Section 3
shall be true on and as of such Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.

5.2      QUALIFICATIONS.

         All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Shares pursuant
to this Agreement shall be duly obtained and effective as of such Closing.

5.3      TRANSACTION AGREEMENTS.

         The Investor shall have entered into the Investor Rights Agreement, the
Co-Sale Agreement, and the Voting Agreement.

5.4      PAYMENT OF PURCHASE PRICE.

         The Investor shall have delivered the applicable purchase price as set
forth on SCHEDULE 1 hereto.

                                       13
<PAGE>

6.       MISCELLANEOUS.

6.1      ENTIRE AGREEMENT.

         This Agreement and the documents referred to herein constitute the
entire agreement among the parties and no party shall be liable or bound to any
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein or therein.

6.2      SURVIVAL OF WARRANTIES.

         The warranties, representations and covenants of the Company and
Investor contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Initial Closing.

6.3      SUCCESSORS AND ASSIGNS.

         Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Series A Preferred Stock sold hereunder or any Common Stock issued
upon conversion thereof). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

6.4      GOVERNING LAW.

         This Agreement shall be governed by and construed under the laws of the
State of California as applied to agreements among California residents entered
into and to be performed entirely within California.

6.5      COUNTERPARTS.

         This Agreement may be executed in counterparts, each of which shall be
deemed an original, but both of which together shall constitute one and the same
instrument.

6.6      TITLES AND SUBTITLES.

         The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.

6.7      NOTICES.

         Any notice required or permitted to be given to a party pursuant to the
provisions of this Agreement will be in writing and will be effective and deemed
given to such party under this Agreement on the earliest of the following:

         (a) the date of personal delivery;

                                       14
<PAGE>

         (b) one (1) business day after transmission by facsimile or telecopier,
addressed to the other party at its facsimile number or telecopier address
specified herein (or hereafter noticed to the parties hereto), with confirmation
of transmission;

         (c) one (1) business day after deposit with a return receipt express
courier for United States deliveries, or three (3) business days after such
deposit for deliveries outside of the United States; or

         (d) three (3) business days after deposit in the United States mail by
registered or certified mail (return receipt requested) for United States
deliveries.

         All notices not delivered personally or by facsimile will be sent with
postage and/or other charges prepaid and properly addressed to the party to be
notified at the address set forth below such party's signature on this
Agreement, or at such other address as such other party may designate by ten
(10) days advance written notice to the other parties hereto. All notices for
delivery outside the United States will be sent by facsimile or by express
courier. Any notice given hereunder to more than one person will be deemed to
have been given, for purposes of counting time periods hereunder, on the date
effectively given to the last party required to be given such notice. Notices to
the Company will be marked "Attention: President."

6.8      FINDER'S FEES.

         Each party represents that it neither is nor will be obligated for any
finder's fee or commission in connection with this transaction. Investor agrees
to indemnify and to hold harmless the Company from any liability for any
commission or compensation in the nature of a finder's fee (and the cost and
expenses of defending against such liability or asserted liability) for which
the Investor or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless Investor from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.

6.9      ATTORNEYS' FEES.

         If any action at law or in equity is necessary to enforce or interpret
the terms of any of the Transaction Documents or the Amended Articles, the
prevailing party shall be entitled to reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which such party may be
entitled.

6.10     AMENDMENTS AND WAIVERS.

         Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and Investor. Any amendment or waiver effected in
accordance with this Paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder
of all such securities, and the Company.

                                       15
<PAGE>

6.11     SEVERABILITY.

         If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision was so excluded and shall be enforceable in accordance with its terms.




                                       16
<PAGE>


         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

                                       LEUCHEMIX, INC.


                                       By:  /S/ WILLIAM MATTHEWS
                                            -----------------------------------

                                       Title:  PRESIDENT
                                             ----------------------------------

                                       Address: 1600 CANADA LANE
                                                WOODSIDE, CA  94062



                                       COMBIMATRIX CORPORATION


                                       /S/ AMIT KUMAR
                                       ----------------------------------------
                                       By:  Amit Kumar, CEO

                                       CombiMatrix Corporation
                                       6500 Harbour Heights Parkway, Ste. 110
                                       Mukilteo, WA  98275




         [SIGNATURE PAGE TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT]


                                       17
<PAGE>

                                   SCHEDULE 1



------------------------- -------------------- -----------------------
Date                      Amount               Shares
------------------------- -------------------- -----------------------

------------------------- -------------------- -----------------------
Q4-2004 (Initial
Closing)                  $250,000.24          196,094
------------------------- -------------------- -----------------------
Q1-2005                   $250,000.24          196,094
------------------------- -------------------- -----------------------

------------------------- -------------------- -----------------------
Q2-2005                   $350,000.85          274,532
------------------------- -------------------- -----------------------
Q3-2005                   $500,000.48          392,188
------------------------- -------------------- -----------------------
Q4-2005                   $500,000.48          392,188
------------------------- -------------------- -----------------------
Q1-2006                   $650,000.12          509,844
------------------------- -------------------- -----------------------

------------------------- -------------------- -----------------------
Q2-2006                   $750,000.72          588,282
------------------------- -------------------- -----------------------
Q3-2006                   $749,995.62          588,278
------------------------- -------------------- -----------------------

------------------------- -------------------- -----------------------
Total                     $3,999,998.75        3,137,500
------------------------- -------------------- -----------------------

                                       18
<PAGE>

                                   SCHEDULE 2

                               COMMON STOCK OWNERS

NAME                                             SHARES OF COMMON STOCK
----                                             ----------------------


John Burke                                                   25,000

Peter Crooks                                              1,000,000

Cindy Hawkins                                                25,000

Christopher Henney                                          100,000

Mike Hird                                                    25,000

Craig Jordan                                              1,000,000

William Matthews                                          2,000,000

Harikrishna Nakshatri                                     1,000,000

Christopher Sweeney                                       1,000,000

Roger Whiting                                               100,000


                                  TOTAL:                  6,275,000


                                       19
<PAGE>


                                    EXHIBIT A

                 AMENDED AND RESTATED ARTICLES OF INCORPORATION
                                       OF
                                 LEUCHEMIX, INC.

         William Matthews certifies that:

         1. He is the President and Secretary of Leuchemix, Inc., a California
corporation (the "CORPORATION").

         2. The date of filing of the original Articles of Incorporation of this
Corporation with the Secretary of State of California was September 12, 2003.

         3. The Articles of Incorporation of the Corporation are amended and
restated to read as follows:

                                   ARTICLE I.

         The name of the Corporation is Leuchemix, Inc.

                                   ARTICLE II.

         The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.

                                  ARTICLE III.

         A. The Corporation is authorized to issue two classes of stock
designated "PREFERRED STOCK" and "COMMON STOCK," respectively. The number of
shares of Preferred Stock authorized to be issued is TEN MILLION (10,000,000)
and the number of shares of Common Stock authorized to be issued is ONE HUNDRED
MILLION (100,000,000).

         B. THREE MILLION ONE HUNDRED THIRTY-SEVEN THOUSAND FIVE HUNDRED
(3,137,500) shares of Preferred Stock are designated "SERIES A PREFERRED STOCK."
The remaining shares of Preferred Stock may be issued from time to time in one
or more series. The Board of Directors of the Corporation (the "BOARD") is
expressly authorized to provide for the issue of all or any wholly unissued
shares of the Preferred Stock in one or more series, and to fix the designation
and number of shares and to determine or alter for each such series such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other rights and such qualifications,
limitations or restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board providing for the issue of such
shares and as may be permitted by the General Corporation Law of California. The
Board is also expressly authorized to increase or decrease (but not below the
number of shares of such series then outstanding) the number of shares of any
series (subject to the provisions of Section 5(d) of Article III.C. below, if
applicable) subsequent to the issue of shares of that series.


                                      A-1
<PAGE>

If the number of shares of any such series shall be so decreased, the shares
constituting such decrease shall resume the status of authorized but unissued
shares of Preferred Stock

         C. Subject to the powers, preferences, rights, restrictions,
limitations and other matters relating to one or more additional series of
Preferred Stock as may be designated from time to time, the powers, preferences,
rights, restrictions, limitations and other matters relating to Series A
Preferred Stock are as follows (NOTE: Section references within this ARTICLE
III.C. are to other Sections within this ARTICLE III.C. unless otherwise
expressly provided):

         1. LIQUIDATION PREFERENCE.

         (a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary (in any event, a "LIQUIDATION"),
the holders of Series A Preferred Stock shall be entitled to receive by reason
of their ownership thereof, prior and in preference to any distribution of any
of the assets of the Corporation to the holders of Common Stock, an amount per
outstanding share of Series A Preferred Stock equal to the sum of (i) $1.2749
(such amount being hereinafter referred to as the "ORIGINAL SERIES A PURCHASE
PRICE"), as adjusted for any stock dividends, combinations, splits or similar
events affecting or with respect to the Series A Preferred Stock after the
Original Issue Date (as defined in SECTION 3(F)(I)(2) below), and (ii) an amount
equal to the sum of all declared but unpaid dividends on each such share (the
sum of clauses (i) and (ii) being hereinafter referred to as the "SERIES A
LIQUIDATION PREFERENCE"). If, upon the occurrence of a Liquidation, the assets
and funds thus distributed among the holders of Series A Preferred Stock shall
be insufficient to permit the payment to such holders of the full Series A
Liquidation Preference, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably, on a per share
basis, among the holders of Series A Preferred Stock.

         (b) Upon completion of the distribution in full of the Series A
Liquidation Preference as contemplated by SECTION 1(a) above, the remaining
assets of the Corporation available for distribution to shareholders, if any,
shall be distributed ratably among the holders of Common Stock in proportion to
the number of shares of Common Stock held by each such holder.

         (c) For purposes of this SECTION 1, any acquisition of the Corporation
by means of a merger or other form of corporate reorganization in which the
shareholders of the Corporation do not own, following such transaction, a
majority of the outstanding shares of the surviving or acquiring corporation
(measured on an as-converted to common stock basis), or a sale of all or
substantially all of the assets of the Corporation (any such acquisition or sale
being hereinafter referred to as an "ACQUISITION"), shall be treated as a
Liquidation. Upon the closing of any Acquisition, the holders of Series A
Preferred Stock and Common Stock shall be entitled to receive the amounts of
cash, securities or other property as specified in SECTIONS 1(a) and 1(b) above,
respectively.

         (d) Any securities to be delivered to the holders of Series A Preferred
Stock and Common Stock pursuant to SECTION 1(c) above shall be valued as
follows:


                                      A-2
<PAGE>

                  (i) For securities not subject to investment letter or other
similar restrictions on free marketability:

                           (1) If traded on a securities exchange, the value
                  shall be deemed to be the average of the closing prices of the
                  securities on such exchange over the thirty (30) day period
                  ending three (3) days prior to the closing;

                           (2) If actively traded over-the-counter, the value
                  shall be deemed to be the average of the closing bid and asked
                  prices over the thirty (30) day period ending three (3) days
                  prior to the closing; and

                           (3) If there is no active public market, the value
                  shall be the fair market value thereof as determined in good
                  faith by the Board; and

                  (ii) The value of securities subject to investment letter or
other restrictions on free marketability shall be appropriately discounted as
determined in good faith by the Board.

         (e) The provisions of this SECTION 1 are in addition to the protective
provisions of SECTION 5 below.

         (f) Without limiting the provisions of SECTION 5 below, Sections 502
and 503 of the California Corporations Code shall not apply to any redemption,
repurchase or other acquisition for value by the Corporation of any shares of
Preferred Stock or Common Stock.

         2. DIVIDENDS AND DISTRIBUTIONS.

         (a) The holders of the Series A Preferred Stock shall be entitled to
receive dividends at the rate of $0.0765 per share (as adjusted for any stock
dividends, combinations, splits or similar events affecting or with respect to
such shares after the Original Issue Date) per annum, payable out of funds
legally available therefor; PROVIDED, HOWEVER, that (i) any such dividend shall
be payable only when, as and if declared by the Board and (ii) any rights of the
holders of Series A Preferred Stock to any such dividend shall be noncumulative.

         (b) No dividend or other distribution (other than any dividend or
distribution payable solely in shares of Common Stock or any right to acquire
shares of Common Stock) shall be paid or declared on the Common Stock during any
12-month period, and the Corporation shall not repurchase, redeem or otherwise
acquire for value any shares of Common Stock, unless and until, during that
12-month period, a dividend as set forth in SECTION 2(a) above on the Series A
Preferred Stock shall have been paid or declared and set apart, except the
Corporation may do the following (collectively, "EXEMPT COMMON STOCK
TRANSACTIONS"):

                  (i) repurchase shares of Common Stock from any former
employee, director or consultant pursuant to agreements which permit the
Corporation to repurchase such shares upon the termination of such employee's,
director's or consultant's service to the Corporation; and


                                      A-3
<PAGE>

                  (ii) acquire shares of Common Stock in exercise of the
Corporation's right of first refusal pursuant to any contractual arrangements to
which such shares are subject.

         (c) In addition to the provisions of Section 2(b) above, no dividend or
distribution (other than any dividend or distribution payable solely in shares
of Common Stock or any right to acquire shares of Common Stock) shall be paid or
declared on any shares of Common Stock unless an equivalent dividend or
distribution (measured on an as-if-converted to Common Stock basis) shall have
been paid or declared and set apart on the Series A Preferred Stock.

         (d) In the event of a conversion of any of the shares of Series A
Preferred Stock pursuant to Section 3 below, any declared and unpaid dividends
on such shares shall be paid in cash upon such conversion.

         3. CONVERSION. The holders of Series A Preferred Stock shall have
conversion rights as follows (the "CONVERSION RIGHTS"):

         (a) CONVERSION PRICES. As used herein, the "SERIES A CONVERSION PRICE"
initially shall be the Original Series A Purchase Price, but shall be subject to
adjustment as set forth in Sections 3(f), 3(g) and 3(h) below.

         (b) DIVIDENDS. Upon any conversion of any shares of Series A Preferred
Stock as provided in this Section 3, any declared and unpaid dividends with
respect to such shares shall be paid to the holder thereof as provided in
Section 2(d) above.

         (c) RIGHT TO CONVERT. Subject to the provisions of Section 3(e)(i)
below, each share of Series A Preferred Stock shall be convertible, at the
option of the holder thereof at any time after the date of issuance of such
share, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing the Original Series A Purchase Price by the Series
A Conversion Price then in effect.

         (d) AUTOMATIC CONVERSION OF SERIES A. Each share of Series A Preferred
Stock shall automatically be converted into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Original
Series A Purchase Price by the Series A Conversion Price then in effect upon the
earlier of the following:

                  (i) the date specified by the vote, written consent or
agreement of the holders of at least a majority of the shares of Series A
Preferred Stock then outstanding; or

                  (ii) the closing of a sale of Common Stock in a firm
commitment, underwritten public offering registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), other than a registration relating
solely to a transaction under Rule 145 of the Securities Act or to an employee
benefit plan of the Corporation, at a public offering price per share (before
underwriters' discounts and expenses) of at least $5.10 (as adjusted for any
stock dividends, combinations, splits or similar events affecting or with
respect to the Common Stock after the Original Issue Date) with aggregate
proceeds to the Corporation and any selling shareholders (before underwriters'
discounts and expenses) of at least $10,000,000.00 (a "QUALIFIED INITIAL PUBLIC
OFFERING").


                                      A-4
<PAGE>

         (e) MECHANICS OF CONVERSION.

                  (i) Before any holder of shares of Series A Preferred Stock
shall be entitled to convert such shares pursuant to the provisions of Section
3(c) above and receive a certificate or certificates evidencing the shares of
Common Stock into which such holder's shares of Series A Preferred Stock are
convertible, such holder shall give written notice of the same to the
Corporation at its principal executive offices and shall surrender the
certificate or certificates evidencing such shares, duly endorsed, at such
offices of the Corporation. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such offices to such holder (A) a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled and (B) payment for any declared but unpaid dividends on the
shares of Series A Preferred Stock converted (as provided in Section 2(d)
above). Any such conversion shall be deemed to have been made immediately prior
to the close of business on the date of the holder's surrender of the
certificate or certificates evidencing such holder's shares of Series A
Preferred Stock to be converted, and such holder shall be treated for all
purposes as the holder of the shares of Common Stock issuable upon such
conversion as of such date.

                  (ii) Upon the occurrence of any of the events specified in
Section 3(d) above, the outstanding shares of Series A Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; provided, however, that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless the certificates evidencing such
shares of Series A Preferred Stock are either delivered to the Corporation or
its transfer agent as provided below, or the holder notifies the Corporation or
its transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
Upon the occurrence of such automatic conversion of the Series A Preferred
Stock, the holders of Series A Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or any transfer agent
for the Series A Preferred Stock. Thereupon, there shall be issued and delivered
to each such holder promptly at such office and in his, her or its name as shown
on such surrendered certificate or certificates, a certificate or certificates
for the number of shares of Common Stock into which the shares of Series A
Preferred Stock surrendered were convertible on the date on which such automatic
conversion occurred, and any declared and unpaid dividends shall be paid in
accordance with the provisions of Section 2(d) above. If an automatic conversion
is effected by reason of a Qualified Initial Public Offering, such conversion
may, at the option of any holder tendering Series A Preferred Stock for
conversion, be conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive the Common Stock upon conversion of the Series A Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock until immediately
prior to the closing of such sale of securities.

         (f) ADJUSTMENTS TO SERIES A CONVERSION PRICE.

                  (i) SPECIAL DEFINITIONS. For purposes of this Section 3(f),
the following definitions apply:


                                      A-5
<PAGE>

                  (1) "OPTIONS" mean rights, options or warrants to subscribe
         for, purchase or otherwise acquire any shares of Common Stock or any
         Convertible Securities (as hereinafter defined).

                  (2) "ORIGINAL ISSUE DATE" means the date on which the first
         share of Series A Preferred Stock is issued by the Corporation.

                  (3) "CONVERTIBLE SECURITIES" mean any evidences of
         indebtedness, shares (other than shares of Series A Preferred Stock) or
         other securities convertible into or exchangeable for Common Stock.

                  (4) "RELATED PARTY" means any holder of more than five percent
         (5%) of the Corporation's capital stock (including capital stock that
         would be received upon the exercise of any Options) and (i) if such
         holder is an individual, such holder's spouse, lineal descendents or
         antecedents, siblings or the spouse of any of the foregoing, and (ii)
         if such holder is an entity, then any person or entity that directly,
         or indirectly through one or more intermediaries, controls, or is
         controlled by, or is under common control with such holder.

                  (5) "ADDITIONAL SHARES OF COMMON STOCK" mean all shares of
         Common Stock issued (or, pursuant to Section 3(f)(iii), deemed to be
         issued) by the Corporation after the Original Issue Date, other than
         shares of Common Stock issued or issuable:

                           a. Upon conversion of shares of Series A Preferred
                  Stock;

                           b. To employees, directors or consultants of the
                  Corporation who are not Related Parties under or pursuant to
                  stock option, stock bonus or stock purchase plans or
                  agreements or similar plans or agreements approved by a
                  majority of the Board so long as, for purposes of this clause
                  b (and without limiting the provisions of clause c below), the
                  number of shares of Common Stock so issuable or issued (and
                  not repurchased at cost or a lesser repurchase price by the
                  Corporation in connection with any termination of service)
                  does not exceed 1,882,500 shares;

                           c. To employees, directors or consultants of the
                  Corporation (including to any Related Party) under or pursuant
                  to stock option, stock bonus or stock purchase plans or
                  agreements or similar plans or agreements approved unanimously
                  by the Board after the Original Issue Date;

                           d. Pursuant to any bona fide joint venture,
                  partnership or collaboration or any research, product
                  development or marketing or intellectual property licensing
                  arrangement, or any arrangement similar to any of the
                  foregoing, if approved by the Board; provided, however, that


                                      A-6
<PAGE>

                  any such arrangement with a Related Party shall be approved
                  unanimously by the Board;

                           e. Pursuant to any leasing or credit arrangements if
                  approved by the Board; PROVIDED, HOWEVER, that any such
                  arrangement with a Related Party shall be approved unanimously
                  by the Board;

                           f. Pursuant to any merger, consolidation, acquisition
                  or similar business transaction if approved by the Board;
                  PROVIDED, HOWEVER, that any such transaction with a Related
                  Party shall be approved unanimously by the Board;

                           g. In connection with any underwritten public
                  offering of the Corporation's securities;

                           h. As a dividend or distribution on shares of Series
                  A Preferred Stock;

                           i. Upon any exercise or conversion of Options or
                  Convertible Securities (or Options exercisable for Convertible
                  Securities) which are outstanding as of the Original Issue
                  Date;

                           j. In any instance for which an appropriate
                  adjustment of the Series A Conversion Price is made pursuant
                  to the provisions of SECTION 3(g) below;

                           k. In a recapitalization or reorganization affecting
                  shares of Common Stock for which an appropriate adjustment of
                  the Series A Conversion Price is made, or pursuant to which
                  appropriate provisions are made for the holders of the
                  outstanding shares of Series A Preferred Stock, pursuant to
                  the provisions of SECTION 3(h) below; or

                           1. In any transaction or circumstance with respect to
                  which the holders of more than fifty percent (50%) of the then
                  outstanding shares of Series A Preferred Stock consent to such
                  shares of Common Stock being excluded from the definition of
                  "Additional Shares of Common Stock."

                  (ii) NO ADJUSTMENT OF SERIES A CONVERSION PRICE. Any provision
herein to the contrary notwithstanding, no adjustment in the Series A Conversion
Price shall be made in respect of the issuance (or, pursuant to SECTION
3(f)(iii) below, the deemed issuance) of Additional Shares of Common Stock
unless the consideration per share (determined pursuant to SECTION 3 (f)(v)
below) for an Additional Share of Common Stock issued (or, pursuant to SECTION 3
(f)(iii) below, deemed to be issued) by the Corporation is less than the Series
A Conversion Price in effect on the date of, and immediately prior to, such
issue.

                  (iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In
the event the Corporation, at any time or from time to time after the Original
Issue Date, shall issue


                                      A-7
<PAGE>

any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the close
of business on such record date; PROVIDED, HOWEVER, that in any such case in
which Additional Shares of Common Stock are deemed to be issued:

                           (1) No further adjustments in the Series A Conversion
                  Price shall be made upon the subsequent issue of Convertible
                  Securities or shares of Common Stock upon the exercise of such
                  Options or conversion or exchange of such Convertible
                  Securities;

                           (2) If such Options or Convertible Securities by
                  their terms provide, with the passage of time or otherwise,
                  for any increase or decrease in the consideration payable to
                  the Corporation, or decrease or increase in the number of
                  shares of Common Stock issuable, upon the exercise, conversion
                  or exchange thereof, the Series A Conversion Price computed
                  upon the original issue thereof (or upon the occurrence of a
                  record date with respect thereto), and any subsequent
                  adjustments based thereon, shall, upon any such increase or
                  decrease becoming effective, be recomputed to reflect such
                  increase or decrease insofar as it affects such Options or the
                  rights of conversion or exchange under such Convertible
                  Securities; and PROVIDED, FURTHER, that no such adjustment of
                  the Series A Conversion Price shall affect shares of Common
                  Stock previously issued upon conversion of shares of Series A
                  Preferred Stock;

                           (3) Upon the expiration of any such Options or any
                  rights of conversion or exchange under such Convertible
                  Securities which shall not have been exercised, the Series A
                  Conversion Price computed upon the original issue thereof (or
                  upon the occurrence of a record date with respect thereto),
                  and any subsequent adjustments based thereon, shall, upon such
                  expiration, be recomputed as if:

                                    a. In the case of Convertible Securities or
                           Options for Common Stock, the only Additional Shares
                           of Common Stock issued were the shares of Common
                           Stock, if any, actually issued upon the exercise of
                           such Options or the conversion or exchange of such
                           Convertible Securities and the consideration received
                           therefor was the consideration actually received by
                           the Corporation for the issue of all such Options,
                           whether or not exercised, plus the consideration
                           actually received by the Corporation upon such
                           exercise, or for the issue of all such Convertible
                           Securities, plus the additional consideration, if
                           any, actually received by the Corporation upon such
                           conversion or exchange; and


                                      A-8
<PAGE>

                                            b. In the case of Options for
                          Convertible Securities, the only Additional Shares of
                          Common Stock issued were the shares of Common Stock,
                          if any, actually issued upon the exercise of such
                          Options and the conversion or exchange of such
                          Convertible Securities and the consideration received
                          therefor was the consideration actually received by
                          the Corporation for the issue of all such Options,
                          whether or not exercised, plus the consideration
                          actually received by the Corporation upon such
                          exercise, plus the additional consideration, if any,
                          actually received by the Corporation upon conversion
                          or exchange of such Convertible Securities;

                  (4) No readjustment pursuant to CLAUSES (2) or Q) above shall
         have the effect of increasing the Series A Conversion Price to an
         amount which exceeds the lower of the Series A Conversion Price on the
         original adjustment date or the Series A Conversion Price that would
         have resulted from any issuance of Additional Shares of Common Stock
         between the original adjustment date and such readjustment date;

                  (5) In the case of any Options which expire by their terms not
         more than sixty (60) days after the date of issue thereof, no
         adjustment of the Series A Conversion Price shall be made until the
         expiration or exercise of all such Options, whereupon such adjustment
         shall be made in the same manner provided in CLAUSE 3 above; and

                  (6) If any record date shall have been fixed and Options or
         Convertible Securities are not issued on the date fixed therefor, the
         adjustment previously made in the Series A Conversion Price which
         became effective on such record date shall be canceled as of the close
         of business on such record date, and shall instead be made on the
         actual date of issuance, if any.

                  (iv) ADJUSTMENT OF SERIES A CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event that this Corporation, at any
time after the Original Issue Date, shall issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued pursuant
to SECTION 3(f)(iii)) without consideration or for an amount of consideration
per share which is less than the Series A Conversion Price in effect on the date
of, and immediately prior to, such issue, then and in such event, the Series A
Conversion Price shall be reduced, concurrently with such issue, as of the
opening of business on the date of such issue, to a price determined by
multiplying such then applicable Series A Conversion Price in effect immediately
prior to such issuance or sale by a fraction:

                  (1) the numerator of which shall be (A) the number of shares
         of Common Stock deemed outstanding (as provided below) immediately
         prior to such issue or sale plus (B) the number of shares of Common
         Stock which the aggregate consideration received (as determined in
         SECTION 3(f)(v) below) by the Corporation for the total number of
         Additional Shares of Common Stock so issued would purchase at such then
         applicable Series A Conversion Price, and


                                      A-9
<PAGE>


                  (2) the denominator of which shall be the number of shares of
         Common Stock deemed outstanding (as provided below) immediately prior
         to such issue or sale plus the total number of Additional Shares of
         Common Stock so issued.

For the purposes of the preceding sentence, the number of shares of Common Stock
deemed outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock outstanding, (B) the number of shares of Common Stock
into which the then outstanding shares of Series A Preferred Stock could be
converted if fully converted on the day immediately preceding the given date and
(C) the number of shares of Common Stock which could be obtained through the
exercise and conversion or exchange for Common Stock of all Options and
Convertible Securities outstanding on the date immediately preceding the given
date.

                  (v) DETERMINATION OF CONSIDERATION. For purposes of this
SECTION 3(f), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:

                           (1) CASH AND PROPERTY. Such consideration shall:

                           a. Insofar as it consists of cash, be computed at the
                  aggregate amount of cash received by the Corporation
                  (excluding amounts paid or payable for accrued interest or
                  accrued dividends);

                           b. Insofar as it consists of property other than
                  cash, be computed at the fair value thereof at the time of
                  such issue, as determined in good faith by the Board; and

                           c. In the event Additional Shares of Common Stock are
                  issued together with other shares or securities or other
                  assets of the Corporation for consideration which covers both,
                  be the proportion of such consideration so received, computed
                  as provided in CLAUSES (1) and Q above, as determined in good
                  faith by the Board.

                  (2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
         share received by the Corporation for Additional Shares of Common Stock
         deemed to have been issued pursuant to the provisions of SECTION
         3(f)(iii) above, relating to Options and Convertible Securities, shall
         be determined by dividing:

                           a. The total amount, if any, received or receivable
                  by the Corporation as consideration for the issue of such
                  Options or Convertible Securities, plus the minimum aggregate
                  amount of additional consideration (as set forth in the
                  instruments relating thereto, without regard to any provision
                  contained therein designed to protect against dilution)
                  payable to the Corporation upon the exercise of such Options
                  or the conversion or exchange of such Convertible Securities,
                  or in the case of Options for Convertible Securities, the
                  exercise of such Options for Convertible Securities and the
                  conversion or exchange of such Convertible Securities, by


                                      A-10
<PAGE>


                           b. The maximum number of shares of Common Stock (as
                  set forth in the instruments relating thereto, without regard
                  to any provision contained therein designed to protect against
                  dilution) issuable upon the exercise of such Options and
                  conversion or exchange of such Convertible Securities.

                  (g) ADJUSTMENTS TO SERIES A CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event
that the Corporation, at any time or from time to time after the Original Issue
Date, shall declare or pay, without consideration, any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock for no
consideration, or shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Series A
Conversion Price in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately decreased or increased,
as appropriate.

                  (h) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If
the Common Stock issuable upon conversion of shares of Series A Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares provided for in
SECTION 3(g) above or an Acquisition provided for in SECTION 1(c) above), the
Series A Conversion Price then in effect (and the Conversion Rights, as
applicable) shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that Series A Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders of Series A Preferred Stock would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders of Series A Preferred Stock upon the conversion of Series A
Preferred Stock immediately before such change. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 3
with respect to the rights of the holders of the outstanding shares of Series A
Preferred Stock after the reorganization or reclassification to the end that the
provisions of this SECTION 3 (including the provisions regarding adjustment of
the Series A Conversion Price then in effect and the number of shares of Common
Stock issuable upon conversion of the outstanding shares of Series A Preferred
Stock) shall be applicable after that event as nearly equivalent as may be
practicable.

                  (i) NO IMPAIRMENT. Except with the requisite vote of the
Corporation's shareholders (as set forth herein or required by applicable law),
the Corporation will not, by amendment of its Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this SECTION 3 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights against impairment.


                                      A-11
<PAGE>

                  (j) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Series A Conversion Price pursuant to the
provisions of this SECTION 3, the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms of this
Section 3 and prepare and furnish to each holder of shares of Series A Preferred
Stock a certificate executed by the Corporation's President or Chief Financial
Officer setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of shares of Series A
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of such shares of Series A Preferred
Stock.

                  (k) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series A Preferred Stock
pursuant hereto; PROVIDED, HOWEVER, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder
(whether in connection with any such conversion or otherwise).

                  (1) RESERVATION OF STOCK. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the outstanding
shares of Series A Preferred Stock, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose
(including engaging in best efforts to obtain the requisite shareholder approval
to effect any such action).

                  (m) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share of Series A Preferred Stock. Rather, all shares
of Common Stock (including fractions thereof) issuable upon conversion of more
than one share of Series A Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board).

         4. VOTING RIGHTS; ELECTION OF DIRECTORS.

                  (a) VOTING RIGHTS. Except as otherwise expressly provided
herein (including in SECTION 5 below) or as required by law, (i) each holder of
shares of Series A Preferred Stock shall (A) be entitled to that number of votes
equal to the number of shares of Common Stock into which such shares of Series A
Preferred Stock could then be converted (pursuant to the provisions of SECTION
3(c) above) and (B) have voting rights and powers with respect thereto


                                      A-12
<PAGE>

which are equal to the voting rights and powers of the holders of shares of
Common Stock, and (ii) holders of shares of Series A Preferred Stock shall vote
together with the holders of shares of Common Stock as a single class and shall
be entitled to notice of any shareholders' meeting in accordance with the Bylaws
of the Corporation; PROVIDED, HOWEVER, that fractional votes shall not be
permitted (and any fractional voting rights resulting from the above formula,
after aggregating all shares of Common Stock into which shares of Series A
Preferred Stock held by each holder could then be converted, shall be rounded to
the nearest whole number (with one-half being rounded upward)).

                  (b) ELECTION OF SERIES A DIRECTOR. For so long as the
outstanding number of shares of Series A Preferred Stock (assuming, for this
purpose, the exercise of all outstanding rights to acquire shares of Series A
Preferred Stock (except where any default by the holder of any such right has
not been cured within the applicable cure period)) represent at least FIVE
PERCENT (5%) of the total number of shares of Common Stock outstanding
(assuming, for this purpose, the conversion into Common Stock of all shares of
Series A Preferred Stock outstanding and the exercise and conversion or exchange
for Common Stock of all Options and Convertible Securities outstanding), the
holders of Series A Preferred Stock, voting as a separate class, shall be
entitled to (i) elect one (1) member of the Board (the "SERIES A DIRECTOR") at
each meeting or pursuant to each consent of the Corporation's shareholders for
the election of directors, (ii) remove from office such director and (iii) fill
any vacancy caused by the resignation, death or removal of such director.

         5. SERIES A PROTECTIONS. For so long as at least FIFTY PERCENT (50%) of
the total number of shares of Series A Preferred Stock issued by the Corporation
remain outstanding, the Corporation shall not, without the vote, written consent
or agreement of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, voting or taking action as a class;

                  (a) Redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose) any shares of Series A Preferred
Stock or Common Stock; PROVIDED, HOWEVER, that the provisions of this SECTION
5(a) shall not apply to (i) any Exempt Common Stock Transactions or (ii) any
transactions approved unanimously by the Board;

                  (b) Pay or declare any dividend or distribution on any shares
of Common Stock; PROVIDED, HOWEVER, that the provisions of this SECTION 5(b)
shall not apply to (i) any dividend or distribution payable solely in shares of
Common Stock or any right to acquire shares of Common Stock or (ii) any dividend
or distribution approved unanimously by the Board;

                  (c) Amend, alter or waive the rights, preferences or
privileges of the shares of Series A Preferred Stock as set forth herein
including, but not limited to, reducing the amount payable to the holders of the
Series A Preferred Stock upon a Liquidation, reducing the dividend rate of the
Series A Preferred Stock provided for herein, making the Series A Preferred
Stock redeemable at the option of the Corporation, canceling or modifying the
conversion rights of the Series A Preferred Stock as provided for herein, or
adversely affecting the voting powers and rights of the Series A Preferred Stock
provided for herein;


                                      A-13
<PAGE>

                  (d) Increase or decrease the total number of authorized shares
of Series A Preferred Stock;

                  (e) Modify any existing stock option, stock bonus or stock
purchase plans or agreements or similar plans or agreements in effect as of the
Original Issue Date, or adopt any new stock option, stock bonus or stock
purchase plans or agreements or similar plans or agreements following the
Original Issue Date, such that the total number of shares of Common Stock issued
or issuable pursuant thereto (and not repurchased at cost or a lesser repurchase
price by the Corporation in connection with any termination of service) exceeds
1,882,500 shares; PROVIDED, HOWEVER, that the provisions of this SECTION 5(e)
shall not apply to any stock option, stock bonus or stock purchase plans or
agreements or similar plans or agreements approved unanimously by the Board; or

                  (f) Enter into any material transaction including, without
limitation, any Acquisition, with a Related Party if such transaction has not
been unanimously approved by the Board.

         6. STATUS OF CONVERTED STOCK. In the event that any shares of Series A
Preferred Stock shall be converted pursuant to the provisions of Section 3
above, the shares so converted shall thereupon be restored to the status of
authorized but unissued shares of Preferred Stock.

                                  ARTICLE IV.

         A. The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.

         B. The Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through Bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the Corporation and its shareholders.

         C. Any repeal or modification of the provisions of this Article IV
shall only be prospective and shall not adversely affect any right or protection
of any director or agent of the Corporation existing or in effect at the time of
such repeal or modification.

                                     * * *

         4. The foregoing amendment and restatement of the Corporation's
Articles of Incorporation has been duly approved by the Corporation's Board of
Directors.

         5. The foregoing amendment and restatement of the Corporation's
Articles of Incorporation has been duly approved by the required vote of
shareholders in accordance with Sections 902 and 903 of the California
Corporations Code. The total number of outstanding shares of the Corporation is
6,275,000 shares of Common Stock and no shares of Preferred Stock. The number of
shares voting in favor of the amendment and restatement equaled or


                                      A-14
<PAGE>

exceeded the vote required. The percentage vote required was more than 50% of
the outstanding shares of Common Stock.

         I further declare raider penalty of perjury under the laws of the State
of California that the matters set forth herein are true and correct of my own
knowledge.

         Executed in Woodside, California, on September 24, 2004.



                                              /s/ William Matthews
                                              ------------------------------
                                              William Matthews
                                              President and Secretary




                                         [OFFICE OF THE SECRETARY OF STATE SEAL]


                                      A-15
<PAGE>

                                    EXHIBIT B

                            INVESTOR RIGHTS AGREEMENT

                      [SEE EXHIBIT 10.4 TO THIS FORM 10-Q]











                                       B-1
<PAGE>

                                    EXHIBIT C

                                CO-SALE AGREEMENT

                      [SEE EXHIBIT 10.2 TO THIS FORM 10-Q]














                                       C-1
<PAGE>

                                    EXHIBIT D

                                VOTING AGREEMENT

                      [SEE EXHIBIT 10.3 TO THIS FORM 10-Q]















                                       D-1
<PAGE>

                                    EXHIBIT E

                                  LEGAL OPINION

                                     [LOGO]
                             PILLSBURY WINTHROP LLP

            11682 EL CAMINO REAL SUITE 200 SAN DIEGO, CA 92130-2092
                          619-234-5000 F: 858-509-4010


October 1, 2004


Combimatrix Corporation
6500 Harbour Heights Parkway, Ste. 110
Mukilteo, WA 98275

         Re:      Leuchemix Inc. - Sale of Series A Preferred Stock
                  -------------------------------------------------
Ladies and Gentlemen:

We have acted as counsel to Leuchemix, Inc., a California corporation
("LEUCHEMIX"), with respect to the negotiation and execution of that certain
Series A Preferred Stock Purchase Agreement entered into as of October 1, 2004
(the "PURCHASE AGREEMENT"), between you and Leuchemix. Unless otherwise defined
herein, terms with initial letters capitalized shall have their respective
meanings as set forth in the Purchase Agreement. This opinion is rendered
pursuant to Section 4.6 of the Purchase Agreement.

We have examined executed originals, counterparts or copies of each of the
following:

         (a)      the Purchase Agreement;

         (b)      the Investor Rights Agreement;

         (c)      the Co-Sale Agreement; and

         (d)      the Voting Agreement (referred to herein with the Purchase
                  Agreement, the Investor Rights Agreement and the Co-Sale
                  Agreement, collectively, as the "TRANSACTION DOCUMENTS").

We have also examined such corporate records of Leuchemix and such other
documents and certificates of public officials and representatives of Leuchemix
as we have deemed necessary as a basis for the opinions expressed herein.

We have assumed, without any independent investigation or verification of any
kind: (i) the genuineness of all signatures; (ii) the authenticity and
completeness of all documents submitted to us as originals; (iii) the conformity
to the originals of all documents submitted to us as copies; (iv) that there are
no agreements or understandings among any of the parties to the Transaction
Documents, written or oral, or usage of trade or course of prior dealing among
such parties, that would, in any case, define, supplement or qualify


                                      E-1
<PAGE>

                                     [LOGO]
                             PILLSBURY WINTHROP LLP


Combimatrix Corporation
October 1, 2004
Page 2


any of the terms of the Transaction Documents; (v) the legal capacity of all
natural persons; and (vi) as to documents executed by parties other than
Leuchemix, that each such party had the power to enter into and perform its
obligations thereunder, and that such documents have been duly and validly
authorized, executed and delivered by, and are binding upon and enforceable
against, such entities.

We express no opinion as to the laws of any jurisdiction other than California
and the United States, nor as to the effect on the transactions contemplated by
the Transaction Documents of any antitrust or tax laws or regulations or, except
as expressly set forth in paragraph 6 below, any securities laws or regulations.

Based on the foregoing and subject to the qualifications set forth below, it is
our opinion that:

         1. Leuchemix has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California and has
all requisite corporate power and corporate authority to own and operate its
properties and to carry on its business as presently conducted.

         2. Leuchemix's authorized capitalization is as set forth in the Amended
Articles. To our knowledge, Six Million Two Hundred Seventy-Five Thousand
(6,275,000) shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable. The shares of the Company's Series A
Preferred Stock to be sold to the Investor (the "SHARES"), when issued and paid
for pursuant to the terms of the Purchase Agreement, will be duly authorized,
validly issued, fully paid and nonassessable. The Common Stock issuable upon
conversion of the Shares has been reserved for issuance and, when and if issued
upon such conversion in accordance with the Amended Articles, will be duly
authorized, validly issued, fully paid and nonassessable. The issuance of the
Shares and the Common Stock issuable upon conversion of the Shares is, to our
knowledge, not subject to any preemptive rights or rights of first refusal or
other similar rights created by Leuchemix. Other than as set forth in the
Transaction Documents, the Amended Articles or the Schedule of Exceptions
referenced in the Purchase Agreement, there are, to our knowledge, no options,
warrants, conversion privileges or other rights outstanding to purchase or
otherwise obtain from Leuchemix any securities of Leuchemix.

         3. Leuchemix has all requisite corporate power and corporate authority
to issue the Shares, and all corporate action required to be taken for the due
and proper authorization and valid issuance of the Shares has been taken.


                                      E-2
<PAGE>

                                     [LOGO]
                             PILLSBURY WINTHROP LLP


Combimatrix Corporation
October 1, 2004
Page 3

         4. Leuchemix has all requisite corporate power and corporate authority
to execute and deliver the Transaction Documents and to perform its obligations
thereunder. All corporate action required to be taken for the due and proper
authorization, execution and delivery of the Transaction Documents by Leuchemix
and the performance by Leuchemix of the covenants of Leuchemix set forth in the
Transaction Documents has been taken, and the Transaction Documents have been
executed and delivered by Leuchemix.

         5. Each of the Transaction Documents constitutes a valid and legally
binding agreement of Leuchemix, enforceable against Leuchemix in accordance with
its respective terms.

         6. Subject to the accuracy of your representations in Section 3 of the
Purchase Agreement, the offer, sale and issuance of the Shares to you in
conformity with the terms of the Purchase Agreement constitute transactions
exempt from the registration requirements of Section 5 of the Securities Act of
1933, as amended, and the qualification requirements of Section 25110 of the
California Corporate Securities Law of 1968, as amended.

Our opinion set forth above in paragraph 5 above is subject to and limited by
the following:

                  (i) the effect of bankruptcy, insolvency, fraudulent
         conveyance, reorganization, receivership, conservatorship, arrangement,
         moratorium and other laws affecting or relating to the rights of
         creditors generally;

                  (ii) the rules governing the availability of specific
         performance, injunctive relief or other equitable remedies and general
         principles of equity, regardless of whether considered in a proceeding
         in equity or at law;

                  (iii) the effect of applicable court decisions, invoking
         statutes or principles of equity, which have held that certain
         covenants and provisions of agreements are unenforceable where the
         breach of such covenants or provisions imposes restrictions or burdens
         upon a party, and it cannot be demonstrated that the enforcement of
         such restrictions or burdens is necessary for the protection of the
         other party, or which have held that the other party's enforcement of
         such covenants or provisions under the circumstances would violate such
         other party's covenants of good faith and fair dealing implied under
         California law; and


                                      E-3
<PAGE>

                                     [LOGO]
                             PILLSBURY WINTHROP LLP


Combimatrix Corporation
October 1, 2004
Page 4


                  (iv) the enforceability of provisions regarding indemnity or
         contribution (to the extent contrary to public policy), non-waiver of
         remedies by a failure or delay of exercise, severability, parol
         evidence, voting arrangements or rights, attorneys' fees, choice of
         venue, consent to jurisdiction and choice of law.

The opinions set forth herein are as of the date of this letter and we do not
render any opinion as to the effect of any matter which may occur or be
effective subsequent to the date hereof. This opinion is rendered solely for
your information in connection with the transactions contemplated by the
Purchase Agreement to which Leuchemix is a party and may not be relied upon by
any other person or for any other purpose without our prior express written
consent.

Very truly yours,



/s/ Pillsbury Winthrop LLP
--------------------------
Pillsbury Winthrop, LLP


                                      E-4

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>acacia_10qex10-2.txt
<TEXT>
<PAGE>

                                                                    EXHIBIT 10.2

                                 LEUCHEMIX, INC.

                                 RIGHT OF FIRST
                          REFUSAL AND CO-SALE AGREEMENT

         This RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT (this "AGREEMENT") is
made and entered into as of October 1, 2004 by and among Leuchemix, Inc., a
California corporation (the "COMPANY"), the holders of Common Stock set forth on
EXHIBIT A attached hereto (collectively, the "FOUNDERS"), and the undersigned
purchaser (the "INVESTOR") of Series A Preferred Stock. For purposes of this
Agreement, the Founders and the Investor may be referred to herein collectively
as the "SHAREHOLDERS" and individually as a "SHAREHOLDER."

         WHEREAS, the Investor has agreed to purchase shares of the Company's
Series A Preferred Stock ("SERIES A STOCK") pursuant to a Series A Preferred
Stock Purchase Agreement of even date herewith by and among the Company and the
Investor, as amended from time to time (the "SERIES A AGREEMENT"); and

         WHEREAS, the obligations of the Company and the Investor under the
Series A Agreement are conditioned on, among other things, the execution and
delivery of this Agreement by the parties hereto; and

         WHEREAS, the Company, the Founders and the Investor desire to enter
into this Agreement to grant each other the rights set forth in this Agreement.

         NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises herein contained, and for other consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:

         1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms have the following meanings:

                  1.1 "IPO" means the first underwritten sale of the Company's
Common Stock to the general public pursuant to a registration statement under
the Securities Act of 1933, as amended.

                  1.2 "OFFERED STOCK" means all Stock proposed to be Transferred
by a Shareholder.

                  1.3 "QUALIFIED EQUITY FINANCING" shall mean a bona fide equity
financing in a single transaction or series of related transactions involving
sales by the Company of its capital stock that result in gross proceeds to the
Company of at least Four Million Dollars ($4,000,000).

                  1.4 "STOCK" means and includes all shares of Common Stock and
Preferred Stock issued and outstanding at the relevant time plus (a) all shares
of Common Stock that may be issued upon exercise of any options, warrants and
other rights of any kind that are then exercisable, and (b) all shares of Common
Stock that may be issued upon conversion of (i) any convertible securities,
including, without limitation, Preferred Stock and debt securities then
outstanding that are by their terms then convertible into or exchangeable for
Common Stock or (ii) any such convertible securities issuable upon exercise of
outstanding options, warrants or other rights that are then exercisable.

<PAGE>

                  1.5 "TRANSFER" and "TRANSFERRED" mean and include any sale,
assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift,
transfer by bequest, devise or descent, or other transfer or disposition of any
kind, including but not limited to transfers to receivers, levying creditors,
trustees or receivers in bankruptcy proceedings or general assignees for the
benefit of creditors, whether voluntary or by operation of law, directly or
indirectly, EXCEPT FOR:

                           (a) any bona fide pledge of up to ten percent (10%)
         of such Shareholder's stock if the pledgee executes a counterpart copy
         of this Agreement and becomes bound thereby as if such pledgee were a
         Shareholder;

                           (b) any transfers of Stock by (i) gift during a
         Shareholder's lifetime of up to ten percent (10%) of such Shareholder's
         stock, (ii) on a Shareholder's death by will or intestacy to such
         Shareholder's "immediate family" (as defined below) or (iii) to a trust
         for the benefit of Shareholder or Shareholder's immediate family,
         provided that each transferee or other recipient executes a counterpart
         copy of this Agreement and becomes bound thereby as a Shareholder. For
         purposes of this Agreement, the term "IMMEDIATE FAMILY" means
         Shareholder's spouse, lineal descendant or antecedent (whether natural
         or adopted), brother or sister, or the spouse of any of the foregoing;

                           (c) any transfer of Stock by a Shareholder made: (i)
         pursuant to a statutory merger or statutory consolidation of the
         Company with or into another corporation or corporations; (ii) pursuant
         to the winding up and dissolution of the Company; or (iii) at, or
         following, the IPO;

                           (d) any transfers of Stock to a Remaining Shareholder
         (as defined below) pursuant to such Remaining Shareholder's exercise of
         such Remaining Shareholder's right of first refusal hereunder; or

                           (e) any transfer of Stock by a Founder to the
         Company.

         2. NOTICE OF PROPOSED TRANSFER. Before any Shareholder may effect any
Transfer of any Stock, such Shareholder (the "SELLING SHAREHOLDER") must give at
the same time to the Company and the Shareholders other than the Selling
Shareholder (the "REMAINING SHAREHOLDERS") a written notice signed by the
Selling Shareholder (the "SELLING SHAREHOLDER'S NOTICE") stating: (a) the
Selling Shareholder's bona fide intention to transfer such Offered Stock; (b)
the number of shares of Offered Stock proposed to be transferred to each
proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (c) the name,
address and relationship, if any, to the Selling Shareholder of each Proposed
Transferee; and (d) the bona fide cash price or, in reasonable detail, other
consideration, per share for which the Selling Shareholder proposes to transfer


                                       2
<PAGE>

such Offered Stock to each Proposed Transferee (the "OFFERED PRICE") and the
proposed time of payment and other relevant terms of the proposed sale. Upon the
request of the Company or any Remaining Shareholder, the Shareholder will
promptly furnish to the Company and to the Remaining Shareholders such other
information as may be reasonably requested to establish that the offer and
Proposed Transferee(s) are bona fide.

         3. RIGHT OF FIRST REFUSAL.

                  3.1 COMPANY'S RIGHT OF FIRST REFUSAL. The Company and its
assignees shall have a right of first refusal (the "COMPANY'S RIGHT OF FIRST
REFUSAL") to purchase, all or a portion of the Offered Stock, if the Company
gives written notice of the exercise of such right to the Selling Shareholder
within thirty (30) days (the "COMPANY'S REFUSAL PERIOD") after the date of the
Selling Shareholder's Notice to the Company. If the Company does not intend to
exercise the Company's Right of First Refusal in full or if the Company is not
lawfully able to repurchase the Offered Stock, the Company will send written
notice thereof (the "COMPANY'S EXPIRATION NOTICE") to the Selling Shareholder
and to the Remaining Shareholders at least fifteen (15) days before the
expiration of the Company's Refusal Period. The Company's Expiration Notice will
specify the Offered Stock subject to the Shareholders' Right of First Refusal
described below.

                  3.2 SHAREHOLDERS' RIGHT OF FIRST REFUSAL. If the Company does
not exercise its right of first refusal in full, the Remaining Shareholders will
have a right of first refusal (the "SHAREHOLDERS' RIGHT OF FIRST REFUSAL") to
purchase all or a portion of the Offered Stock not purchased by the Company. The
Shareholders' Right of First Refusal may be exercised as follows:

                           (a) Each Remaining Shareholder desiring to purchase
any or all of the Offered Stock must, within the fifteen (15) day period
commencing on the date of the Company's Expiration Notice (the "SHAREHOLDER
REFUSAL PERIOD"), give written notice to the Selling Shareholder and to the
Company of such Remaining Shareholder's election to purchase Offered Stock, and
the number of shares and type of Offered Stock that such Remaining Shareholder
desires to purchase.

If the total number of shares specified in the elections of Remaining
Shareholders exceeds the number of shares of Offered Stock available for
purchase, then (unless the Remaining Shareholders agree otherwise in writing)
each Remaining Shareholder electing to purchase will have the right to purchase
that number of shares of Offered Stock that is obtained by multiplying the
number of shares of Offered Stock available for purchase by the Remaining
Shareholders by a fraction (i) the numerator of which will be the number of
shares of Stock then held (or deemed to be held) by such Remaining Shareholder,
and (ii) the denominator of which will be the sum of the total number of shares
of Stock then held (or deemed to be held) by all Remaining Shareholders electing
to purchase the Offered Stock.

                           (b) Within ten (10) days after expiration of the
Shareholder Refusal Period, the Company will give written notice (the
"SHAREHOLDERS' EXPIRATION Notice") to the Selling Shareholder and the Remaining
Shareholders specifying either (i) that all of the Offered Stock was subscribed
by the Company and/or the Remaining Shareholders exercising their respective
Rights of First Refusal or (ii) that a portion of the Offered Stock was not so
acquired and that each Remaining Shareholder will have the right to participate
in the sale of any Offered Stock not sold to the Company or to the Remaining
Shareholders (the "REMAINING OFFERED STOCK") pursuant to Section 4 herein.

                                       3
<PAGE>

                  3.3 PURCHASE PRICE. The purchase price for the Offered Stock
to be purchased by the Company or by a Remaining Shareholder exercising its
respective Right of First Refusal under this Agreement will be the Offered
Price, and will be payable as set forth in Section 3.4 hereof. If the Offered
Price includes consideration other than cash, the cash equivalent value of the
non-cash consideration will be determined by the Board of Directors of the
Company in good faith, which determination will be binding upon the Company, the
Remaining Shareholders and the Selling Shareholder absent fraud or error.

                  3.4 PAYMENT. Payment of the purchase price for Offered Stock
purchased by the Company or by a Remaining Shareholder exercising its respective
Right of First Refusal will be made within ten (10) days after the date of the
Shareholders' Expiration Notice. Payment of the purchase price will be made, at
the option of the Company or, as the case may be, by a Remaining Shareholder,
(a) in cash (by check), (b) by cancellation of all or a portion of any
outstanding indebtedness of the Selling Shareholder to the Company or such
Remaining Shareholder, as the case may be, or (c) by any combination of the
foregoing.

                  3.5 RIGHTS OF SELLING SHAREHOLDER. Upon the date that payment
is made for the Offered Stock purchased by the Company and/or the Remaining
Shareholders pursuant to their respective Rights of First Refusal hereunder, the
Selling Shareholder will have no further rights as a holder of such Offered
Stock and the Selling Shareholder will forthwith cause all certificate(s)
evidencing such Offered Stock to be surrendered to the Company for cancellation,
and, as to purchase by Remaining Shareholder(s), for transfer to the purchasing
Remaining Shareholder(s).

                  3.6 SELLING SHAREHOLDER'S RIGHT TO TRANSFER. If the Remaining
Shareholders have not elected pursuant to their Shareholders' Right of First
Refusal to purchase all of the Offered Stock not purchased by the Company, then,
subject to the Right of Co-Sale, the Selling Shareholder may transfer that
portion of the Offered Stock permitted to be sold by the Selling Shareholder to
any person named as a Proposed Transferee in the Selling Shareholder's Notice,
at the Offered Price or at a higher price, provided that such transfer (a) is
consummated within sixty (60) days after the date of the Selling Shareholder's
Notice and (b) is in accordance with the terms and conditions of this Agreement.
If the Offered Stock is transferred in accordance with the terms and conditions
of this Agreement, then the transferee(s) of the Offered Stock will (other than
as provided as to certain transferees required to become parties hereto as
provided in Section 1.6 hereof) thereafter hold such Offered Stock free of the
Shareholders' Right of First Refusal, the Right of Co-Sale and all other
restrictions imposed by this Agreement; PROVIDED THAT nothing herein will
release any such transferee from any obligations or restrictions that may be
imposed on such transferee under any stock purchase agreement. If the Offered
Stock is not so transferred during such sixty (60) day period, then the Selling
Shareholder will not transfer any of such Offered Stock without complying again
in full with the provisions of this Agreement.

                                       4
<PAGE>

         4. RIGHT OF CO-SALE.

                  4.1 RIGHT OF CO-SALE. If the Company and Remaining
Shareholders have waived or failed to timely exercise their Rights of First
Refusal to purchase all of the Offered Stock, each Remaining Shareholder will
have the right to participate in the sale of any Remaining Offered Stock in the
manner set forth herein (the "RIGHT OF CO-SALE"). Pursuant to this Section 4,
each Remaining Shareholder may transfer to the Proposed Transferee(s) identified
in the Selling Shareholder's Notice such Remaining Shareholder's Pro Rata Share
of the Remaining Offered Stock by giving written notice to the Selling
Shareholder within ten (10) days after the date of the Shareholders' Expiration
Notice; specifying the number of shares and type of Stock that such Remaining
Shareholder desires to transfer to each Proposed Transferee by exercising the
Right of Co-Sale. For purposes of this Section 4, a Remaining Shareholder's "Pro
Rata Share" will be defined as a fraction, the numerator of which is the number
of shares of Stock then owned (or deemed to be held) by such Remaining
Shareholder, and the denominator of which is the number of shares of Stock then
owned (or deemed to be held) by all Remaining Shareholders having a Right of
Co-Sale hereunder plus the number of shares of Stock held by the Selling
Shareholder who proposes the Transfer.

                  4.2 CONSUMMATION OF CO-SALE. Each Remaining Shareholder, in
exercising the Right of Co-Sale, may effect such Remaining Shareholder's
participation in such Transfer by delivering to the Selling Shareholder at the
closing of the transfer of Offered Stock to such transferee (the "CLOSING") one
or more certificates, properly endorsed for Transfer, representing such Stock to
be Transferred by such Remaining Shareholder. At the Closing, such certificates
or other instruments will be transferred and delivered to the Proposed
Transferee(s) set forth in the Selling Shareholder's Notice in consummation of
the transfer of the Offered Stock pursuant to the terms and conditions specified
in the Selling Shareholder's Notice, and the Selling Shareholder will remit, or
will cause to be remitted, to each Remaining Shareholder within seven (7) days
after such Closing that portion of the proceeds of the Transfer to which such
Remaining Shareholder is entitled by reason of such Remaining Shareholder's
participation in such transfer pursuant to the Right of Co-Sale.

         5. MULTIPLE SERIES, CLASSES OR TYPES OF STOCK. If the Remaining Offered
Stock consists of more than one series or class or type of Stock, each Remaining
Shareholder has the right to purchase or transfer hereunder, as the case may be,
such Remaining Shareholder's Pro Rata Share of each such series, class or type
of Stock; provided, however, that as to the Right of Co-Sale, (a) if such
Remaining Shareholder does not hold any of such series, class, or type of Stock,
and the Proposed Transferee is not willing, at the Closing, to purchase some
other series, class or type of Stock from such Remaining Shareholder as part of
such Remaining Shareholder's Pro Rata Share, or (b) if the Proposed Transferee
is unwilling to purchase any Stock from such Remaining Shareholder at the
Closing (each such circumstance being referred to herein as an "INCOMPLETE
CO-SALE"), then such Remaining Shareholder will have the put right (the "PUT
RIGHT") set forth in Section 6.2 hereof.

         6. REFUSAL TO TRANSFER; PUT RIGHT.

                                       5
<PAGE>

                  6.1 REFUSAL TO TRANSFER. Any attempt by any Selling
Shareholder to transfer any Stock in violation of any provision of this
Agreement will be void. The Company will not (a) transfer on its books any Stock
that has been sold, gifted or otherwise transferred in violation of this
Agreement, or (b) treat as owner of such Stock, or accord the right to vote to
or pay dividends to any purchaser, donee or other transferee to whom such Stock
may have been so transferred.

                  6.2 PUT RIGHT. If a Selling Shareholder transfers any Stock in
contravention of a Remaining Shareholder's Right of Co-Sale under this Agreement
(a "PROHIBITED TRANSFER"), or if an Incomplete Co-Sale occurs and the provisions
of Section 5 hereof apply, the relevant Remaining Shareholder may require such
Selling Shareholder to purchase from such Remaining Shareholder, for cash or
such other consideration as the Selling Shareholder received in the Prohibited
Transfer or Incomplete Co-Sale, that number of shares of Stock (of the same
class, series or type as transferred in the Prohibited Transfer or Incomplete
Co-Sale, if such Remaining Shareholder then owns Stock of such class, series or
type, and otherwise of Common Stock) having a purchase price equal to the
aggregate purchase price such Remaining Shareholder would have received in the
closing of such Prohibited Transfer or Incomplete Co-Sale if such Remaining
Shareholder had exercised and been able to consummate such Remaining
Shareholder's Right of Co-Sale with respect thereto (the Shareholder's "PUT
RIGHT"). A Remaining Shareholder may exercise such Remaining Shareholder's Put
Right by delivery of written notice to the Selling Shareholder and the Company
(a "PUT NOTICE") within ten (10) days after such Remaining Shareholder becomes
aware of the Prohibited Transfer or Incomplete Co-Sale. The closing of such sale
to the Selling Shareholder under such Remaining Shareholder's Put Right will
occur within seven (7) days after the date of such Remaining Shareholder's Put
Notice.

         7. RESTRICTIVE LEGEND AND STOP-TRANSFER ORDERS.

                  7.1 LEGEND. Each Shareholder understands and agrees that the
Company will cause the legend set forth below, or a legend substantially
equivalent thereto, to be placed upon any certificate(s) or other documents or
instruments evidencing ownership of Stock by the Shareholder:

         THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
         RIGHTS OF FIRST REFUSAL AND RIGHTS OF CO-SALE AS SET FORTH IN A RIGHT
         OF FIRST REFUSAL AND CO-SALE AGREEMENT ENTERED INTO BY THE HOLDER OF
         THESE SHARES, THE COMPANY AND CERTAIN SHAREHOLDERS OF THE COMPANY. A
         COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
         COMPANY. SUCH RIGHTS OF FIRST REFUSAL AND RIGHTS OF CO-SALE ARE BINDING
         ON TRANSFEREES OF THESE SHARES.

                  7.2 STOP TRANSFER INSTRUCTIONS. Each Shareholder agrees, to
ensure compliance with the restrictions referred to herein, that the Company may
issue appropriate "stop transfer" certificates or instructions and that, if the
Company transfers its own securities, it may make appropriate notations to the
same effect in its records.

         8. TERMINATION. This Agreement will terminate upon the earliest to
occur of the following: (a) immediately prior to the closing of the IPO; (b) the
date on which this Agreement is terminated by a writing executed by the Company,
the holders of a majority of the shares of Series A Stock then subject to this


                                       6
<PAGE>

Agreement and the holders of a majority of the Common Stock then subject to this
Agreement; (c) the dissolution of the Company; or (d) the closing of an
Acquisition (as defined in the Company's Amended and Restated Articles of
Incorporation as amended from time to time).

         9. MISCELLANEOUS PROVISIONS.

                  9.1 NOTICES. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement will be in writing and will
be effective and deemed given to such party under this Agreement on the earliest
of the following:

                           (a) the date of personal delivery;

                           (b) one (1) business day after transmission by
         facsimile or telecopier, addressed to the other party at its facsimile
         number or telecopier address specified herein (or hereafter noticed to
         the parties hereto), with confirmation of transmission;

                           (c) one (1) business day after deposit with a return
         receipt express courier for United States deliveries, or three (3)
         business days after such deposit for deliveries outside of the United
         States; or

                           (d) three (3) business days after deposit in the
         United States mail by registered or certified mail (return receipt
         requested) for United States deliveries.

All notices not delivered personally or by facsimile will be sent with postage
and/or other charges prepaid and properly addressed to the party to be notified
at the address set forth below such party's signature on this Agreement, or at
such other address as such other party may designate by ten (10) days advance
written notice to the other parties hereto. All notices for delivery outside the
United States will be sent by facsimile or by express courier. Any notice given
hereunder to more than one person will be deemed to have been given, for
purposes of counting time periods hereunder, on the date effectively given to
the last party required to be given such notice. Notices to the Company will be
marked "Attention: President."

                  9.2 BINDING ON SUCCESSORS AND ASSIGNS; INCLUSION WITHIN
CERTAIN DEFINITIONS. This Agreement, and the rights and obligations of the
parties hereunder, will inure to the benefit of, and be binding upon, their
respective successors, assigns, heirs, executors, administrators and legal
representatives and, except as provided in Section 3.6 hereof, any transferee of
Stock. Any permitted transferee of a Shareholder who is required to become a
party hereto will be considered a "Shareholder" for purposes of this Agreement
without the need for any consent, approval or signature of any party hereto.

                  9.3 SEVERABILITY. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, such provision will be
enforced to the maximum extent possible and such invalidity, illegality or
unenforceability will not affect any other provision of this Agreement, and this
Agreement will be construed as if such invalid, illegal or unenforceable
provision had (to the extent not enforceable) never been contained herein.

                                       7
<PAGE>

                  9.4 AMENDMENT AND WAIVER.

                           (a) Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company, the holders of a majority of the Series A Stock
then subject to this Agreement voting as a separate class and the holders of a
majority of the Common Stock then subject to this Agreement voting as a separate
class; PROVIDED, HOWEVER, that the consent of the holders of the Series A Stock
or Common Stock shall not be required for (i) any amendment (other than an
amendment (A) to Section 4 or Section 6.2 which provides the holders of the
Series A Stock with rights thereunder (I.E., as to a right of co-sale) which are
not substantially the same as, and are inferior to, rights which are being
provided to any purchaser of the Company's capital stock in a Qualified Equity
Financing or (B) to this Section 9.4 (except insofar as additional consent
requirements - such as for holders of a majority of shares of the Company's
capital stock sold in a Qualified Equity Financing - are being added)) that (x)
is deemed by a resolution of the majority of the Board of Directors of the
Company to be necessary and appropriate in connection with a future Qualified
Equity Financing and (y) is effective only upon the closing of such Qualified
Equity Financing, or (ii) any amendment that occurs as of or following any
failure by the Investor to purchase any shares of the Series A Stock as and when
contemplated by the Series A Agreement, if such failure is not cured within the
period provided in Section 1.3 of the Series A Agreement. Any amendment or
waiver effected in accordance with this Section 9.4(a) shall be binding upon
each holder of any securities subject to this Agreement at the time outstanding
(including securities into which such securities have been converted), each
future holder of all such securities, and the Company.

                           (b) If a Shareholder sells or transfers some or all
of such Shareholder's Stock, and such Stock remains subject to this Agreement,
then such Shareholder's transferee shall be subject to all of the rights and
obligations under this Agreement as the Shareholder from whom such Stock was
acquired would have been if such Shareholder owned the Stock so transferred.

                  9.5 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the internal laws of the State of California,
excluding that body of law pertaining to conflict of laws.

                  9.6 OBLIGATION OF COMPANY; BINDING NATURE OF EXERCISE. The
Company agrees to use its best efforts to enforce the terms of this Agreement,
to inform each Shareholder of any breach hereof (to the extent the Company has
knowledge thereof) and to assist each Shareholder in the exercise of such
Shareholder's rights and performance of such Shareholder's obligations
hereunder.

                  9.7 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered will be deemed an
original, and all such counterparts together will constitute one and the same
agreement.

                  9.8 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the specific subject matter hereof and
supersedes in their entirety all other agreements or understandings between or
among the parties hereto with respect to such specific subject matter.

                                       8
<PAGE>

                  9.9 CONFLICT. In the event of any conflict between the terms
of this Agreement and the Company's Articles of Incorporation or its Bylaws, the
terms of the Company's Articles of Incorporation or its Bylaws, as the case may
be, will control. In the event of any conflict between the terms of this
Agreement and any other agreement to which a Remaining Shareholder is a party or
by which the Selling Shareholder is bound, the terms of this Agreement will
control. In the event of any conflict between the Company's books and records
and this Agreement or any notice delivered hereunder, the Company's books and
records will control absent fraud or error.

                  9.10 CALCULATION; BINDING EFFECT OF COMPANY NOTICES. All
calculations of a Remaining Shareholder's Pro Rata Share will be made by the
Company as of the date of the Company's notice in which such Pro Rata Share
appears. The Pro Rata Share of a Remaining Shareholder as shown on any notice
required hereunder to be delivered by the Company will be binding upon the
parties hereto absent fraud or error.

                  9.11 HEADINGS. The captions and headings of this Agreement are
included for ease of reference only and will be disregarded in interpreting or
construing this Agreement. Unless otherwise stated, all references herein to
Sections will refer to Sections of this Agreement.

                  9.12 CONTINUITY OF OTHER RESTRICTIONS. Any Stock not purchased
by the Company or a Remaining Shareholder under its respective Right of First
Refusal hereunder will continue to be subject to all other restrictions,
including rights of first refusal, imposed upon such Stock by law, including any
restrictions imposed under the Company's Articles of Incorporation or Bylaws, or
by agreement.

                                       9
<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.

                       COMPANY:          LEUCHEMIX, INC.


                                         /S/ WILLIAM MATTHEWS
                                         ---------------------------------------
                                         By:  WILLIAM MATTHEWS
                                              ----------------------------------
                                         Title:  PRESIDENT
                                              ----------------------------------

                                         Address:    1600 CANADA LANE
                                              ----------------------------------
                                                     WOODSIDE, CA  94062
                                              ----------------------------------
                                              ----------------------------------

                                         COMBIMATRIX CORPORATION


                       INVESTOR:         /S/ AMIT KUMAR
                                         ---------------------------------------
                                         By:  Amit Kumar, CEO

                                         CombiMatrix Corporation
                                         6500 Harbour Heights Parkway, Ste. 110
                                         Mukilteo, WA  98275
                       FOUNDERS:

                                         /S/ JOHN BURKE
                                         ---------------------------------------
                                         John Burke

                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ PETER CROOKS
                                         ---------------------------------------
                                         Peter Crooks

                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------


        [SIGNATURE PAGE TO RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT]

                                       10
<PAGE>


                                         /S/ CINDY HAWKINS
                                         ---------------------------------------
                                         Cindy Hawkins

                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ CHRISTOPHER HENNEY
                                         ---------------------------------------
                                         Christopher Henney


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ MIKE HIRD
                                         ---------------------------------------
                                         Mike Hird


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ CRAIG JORDAN
                                         ---------------------------------------
                                         Craig Jordan


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ WILLIAM MATTHEWS
                                         ---------------------------------------
                                         William Matthews


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------

        [SIGNATURE PAGE TO RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT]

                                       11
<PAGE>


                                         /S/ HARIKRISHNA NAKSHATRI
                                         ---------------------------------------
                                         Harikrishna Nakshatri


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------



                                         /S/ CHRISTOPHER SWEENEY
                                         ---------------------------------------
                                         Christopher Sweeney


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------


                                         /S/ ROGER WHITING
                                         ---------------------------------------
                                         Roger Whiting


                                         Address:    ADDRESS OMITTED
                                              ----------------------------------
                                              ----------------------------------
                                              ----------------------------------

        [SIGNATURE PAGE TO RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT]



                                       12
<PAGE>


                                    EXHIBIT A
                                    ---------

                                    FOUNDERS




NAME                                                  SHARES OF COMMON STOCK
----                                                  ----------------------

John Burke                                                      25,000

Peter Crooks                                                 1,000,000

Cindy Hawkins                                                   25,000

Christopher Henney                                             100,000

Mike Hird                                                       25,000

Craig Jordan                                                 1,000,000

William Matthews                                             2,000,000

Harikrishna Nakshatri                                        1,000,000

Christopher Sweeney                                          1,000,000

Roger Whiting                                                  100,000

                                   TOTAL:                    6,275,000




                                      A-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<FILENAME>acacia_10qex10-3.txt
<TEXT>
<PAGE>

                                                                    EXHIBIT 10.3

                                 LEUCHEMIX, INC.

                                VOTING AGREEMENT

         THIS VOTING AGREEMENT (the "AGREEMENT") is made and entered into as of
October 1, 2004, by and among Leuchemix, Inc., a California corporation (the
"COMPANY"), the undersigned purchaser of the Company's Series A Preferred Stock
(the "INVESTOR"), and the holders of the Common Stock set forth on EXHIBIT A
attached hereto (the "FOUNDERS," and together with the Investor, the "PRINCIPAL
SHAREHOLDERS"). The Company, the Founders and the Investor are individually each
referred to herein as a "PARTY" and are collectively referred to herein as the
"PARTIES."

         WHEREAS, the Company and the Investor have entered into a Series A
Preferred Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE
AGREEMENT"), which provides for, among other things, the purchase by the
Investor of shares of the Company's Series A Preferred Stock (the "SERIES A
STOCK"); and

         WHEREAS, the Founders and the Investor desire to enter into certain
agreements relating to the voting of their shares of capital stock of the
Company.

         NOW, THEREFORE, in consideration of the foregoing premises and certain
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:

         1. AGREEMENT TO VOTE. Each Party hereby agrees, on behalf of itself,
himself or herself and any transferee or assignee of any shares of capital stock
of the Company held by it, him or her as of the date of this Agreement or
subsequently acquired by it, him or her after the date of this Agreement (and
any securities of the Company issued with respect to, upon conversion of, or in
exchange or substitution for such capital stock) (hereinafter collectively
referred to as the "COMPANY SHARES") to vote the Company Shares at any regular
or special meeting of shareholders (or by written consent in lieu of such a
meeting), or as part of any other vote or action of shareholders of the Company
taken in their capacities as such, in accordance with the provisions of this
Agreement.

         2. MAJORITY-IN-INTEREST VOTING. The Parties agree that at each regular
or special meeting of the shareholders (or any subset of such holders), or in
connection with any written consent in lieu of such a meeting, or as part of any
other vote or action of shareholders of the Company taken in their capacities as
such, and relative to any matter which is presented to the shareholders of the
Company (or any subset of such holders) for any vote, consent or other action (a
"PROPOSED MATTER"), the Parties will vote, consent or take action relative to
the Company Shares held by them on such Proposed Matter in the same manner as
the holders of a majority of the outstanding shares of the Company's Common
Stock and Series A Stock (voting, consenting or acting together as a single
class on an as-converted to Common Stock basis) or, where all such holders would
not otherwise be voting, consenting or taking action (such as, for example and
without limitation, any instance of a series or class vote), as directed by such
holders (also considered together for this purpose as a single class on an
as-converted to Common Stock basis) - i.e., such guidance will be solicited
whether a vote or consent of or action by all such holders would otherwise be
required by applicable law or not; PROVIDED, HOWEVER, that such agreement to

<PAGE>

vote Company Shares shall not apply to any action that would, by amendment of
the Company's Amended and Restated Articles of Incorporation (as amended from
time to time - the "CHARTER") or any Transaction Document (as defined in the
Stock Purchase Agreement), (a) alter, change or impair in any way the rights,
preferences or privileges of the Series A Stock (it being specifically
understood, for the avoidance of doubt, that the creation of a pari passu or
senior series of preferred stock, or the approval or occurrence of any
Acquisition (as defined in the Charter), shall not invoke this clause), or (b)
increase or decrease the number of authorized shares of the Series A Stock;
PROVIDED, FURTHER, that such agreement to vote Company shares shall not apply to
any election or removal of the Series A Director (as defined in the Charter) or
to any protective voting rights of the Series A Stock set forth in the Charter;
and PROVIDED, FINALLY, that the two foregoing provisos shall not apply following
any failure by the Investor to purchase any shares of the Series A Stock as and
when contemplated by the Stock Purchase Agreement, if such failure is not cured
after receipt of written notice within the period provided in Section 1.3 of the
Stock Purchase Agreement.

         3. VOTE OF SERIES A STOCK TO CONVERT. If the conversion of the Series A
Stock into shares of the Company's Common Stock shall have been determined by a
unanimous resolution of the Company's Board of Directors (the "BOARD") to be in
the best interests of the shareholders of the Corporation (including a specific
determination by a unanimous Board resolution that such conversion is also in
the best interests of the holders of Series A Stock considered as a separate
class) (any such conversion being an "APPROVED CONVERSION"), then the Parties
hereto, with respect to all Series A Stock held by them, agree to vote in favor
of (or consent to) such conversion such that all shares of Series A Stock shall
be converted into shares of the Company's Common Stock (which conversion shall
be treated as if a conversion had occurred pursuant to Article III, Section
B.3.(d) of the Charter as in effect on the date hereof).

         4. LEGEND ON SHARE CERTIFICATES. Each certificate representing any
Company Shares shall be endorsed by the Company with a legend reading
substantially as follows:

         "THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A COPY
         OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER) AND BY
         ACCEPTING ANY INTEREST IN SUCH SHARES, THE PERSON ACCEPTING SUCH
         INTEREST SHALL BE DEEMED TO AGREE TO, AND SHALL BECOME BOUND BY, ALL OF
         THE PROVISIONS OF SAID VOTING AGREEMENT."

         5. GRANT OF PROXY

                  (a) Solely with respect to effecting the intent of Sections 2
and 3 above in connection with a Proposed Matter or an Approved Conversion, as
applicable, each Principal Shareholder hereby irrevocably (to the full extent
permitted by law) appoints and constitutes the Company's Chief Executive Officer
or Chairman of the Board of Directors, and each of them acting alone, as the
attorney and proxy of such Principal Shareholder with full power of substitution
and resubstitution, to the full extent of the Principal Shareholder's rights


                                       2
<PAGE>

with respect to all shares of capital stock or other voting securities owned of
record by such Principal Shareholder as of the date of this Agreement or that
the Principal Shareholder may acquire on or after the date hereof (collectively,
the "VOTING SECURITIES"), for the sole purpose of voting or taking action with
respect to such Principal Shareholder's Voting Securities with regards to any
Proposed Matters or Approved Conversion. Upon the execution hereof, all prior
proxies given by the Principal Shareholder with respect to any Voting Securities
are hereby revoked, but only to the extent that any such proxies conflict with
the foregoing sentence (E.G., because such proxies otherwise address a Proposed
Matter), and the Principal Shareholder agrees that no subsequent proxies shall
be given with respect to any Voting Securities held by such Principal
Shareholder to the extent that any such proxies would conflict with the
foregoing sentence. With regards solely to a Proposed Matter or an Approved
Conversion, the attorney and proxy named above will be empowered, and may
exercise this proxy, to vote each Principal Shareholder's Voting Securities at
any time at any meeting of the shareholders of the Company, however called, or
in connection with any solicitation of written consents from shareholders of the
Company, or to otherwise take action with respect to such Voting Securities: (i)
in the instance of a Proposed Matter, in such like manner as the holders of a
majority of the outstanding shares of the Company's Common Stock and Series A
Stock voting, consenting or acting together as a single class on an as-converted
to Common Stock basis (I.E., the vote, consent or action of a majority of the
outstanding shares of the Company's Common Stock and Series A Stock voting,
consenting or acting together as a single class on an as-converted to Common
Stock basis will direct the vote of each Principal Shareholder as to its Voting
Securities in regards to any Proposed Matters); and (ii) in the instance of an
Approved Conversion, in favor of conversion of all Series A Stock into shares of
the Company's Common Stock (or as otherwise necessary or appropriate to effect
such conversion). This proxy shall be binding upon the heirs, estate, executors,
personal representatives, successors and assigns of each Principal Shareholder
(including any transferee of any Principal Shareholder's Voting Securities).

                  (b) In accordance with the provisions of Section 706 of the
California Corporations Code, the powers granted in this Section 5 are
irrevocable during the term of this Agreement.

                  (c) Without limiting the foregoing provisions of this Section
5, each Principal Shareholder and the Company hereby agree that each Principal
Shareholder and the Company shall exercise their respective best efforts to
support the intents and purposes of this Agreement (including, without
limitation and at its own expense, performing such further acts and executing
such further documents and instruments as may reasonably be required to vest in
the Company's Chief Executive Officer or Chairman of the Board of Directors, and
each of them, (in the case of a proxy pursuant to Section 5(a) above) the power
to carry out and give effect to the provisions of this Agreement), and neither
the Company nor any Principal Shareholder shall take any action which, directly
or indirectly, could have the effect of frustrating the intents and purposes of
this Agreement.

         6. SPECIFIC ENFORCEMENT. It is agreed and understood that monetary
damages would not adequately compensate an injured Party for the breach of this
Agreement by any Party, that this Agreement shall be specifically enforceable,
and that any breach or threatened breach of this Agreement shall be the proper
subject of a temporary or permanent injunction or restraining order or an order
for specific performance (as applicable). Further, each Party hereto waives any
claim or defense that there is an adequate remedy at law for such breach or
threatened breach.



                                       3
<PAGE>

         7. TERM. This Agreement shall terminate and be of no further force or
effect upon the earlier of (a) the closing of a firm commitment underwritten
public offering by the Company of shares of its Common Stock in connection with
which all the then-outstanding shares of Series A Stock are converted into
shares of Common Stock (whether pursuant to the Charter or otherwise), or (b)
the consummation of an Acquisition.

         8. MANNER OF VOTING. The voting of, or consenting or taking action with
respect to, shares pursuant to this Agreement may be effected in person, by
proxy, by written consent, or in any other manner permitted by applicable law.

         9. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any issuance of
shares of the Company's voting securities hereafter to any of the Parties hereto
(including, without limitation, in connection with any stock split, stock
dividend, recapitalization, reorganization, or the like), such shares shall
become subject to this Agreement and shall be endorsed with the legend set forth
in Section 4.

         10. VOTING AGREEMENT. This Agreement is intended to be a "voting
agreement" for purposes of Section 706 of the California Corporations Code.
Without limitation, each Principal Shareholder hereby agrees that the Company's
Chief Executive Officer or Chairman of the Board of Directors, and each of them,
shall have the authority to vote or consent or take action with respect to (in
accordance with SECTION 5(A)) any and all shares of the Company's capital stock
held by such Principal Shareholder in order to achieve the intents and purposes
of this Agreement.

         11. AMENDMENTS AND WAIVERS.

                  (a) Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company, the holders of a majority of the Series A Stock
then subject to this Agreement voting as a separate class and the holders of a
majority of the Common Stock then subject to this Agreement voting as a separate
class; PROVIDED, HOWEVER, that the consent of the holders of the Series A Stock
or Common Stock shall not be required for (i) any amendment (other than an
amendment to Sections 1, 2, 3 or this Section 11, except where holders of shares
of the Company's capital stock sold in a Qualified Equity Financing are added to
this Agreement and rights and obligations for such holders are thus incorporated
herein) that (x) is deemed by a resolution of the majority of the Board of
Directors of the Company to be necessary and appropriate in connection with a
future Qualified Equity Financing and (y) is effective only upon the closing of
such Qualified Equity Financing, or (ii) any amendment that occurs following any
failure by the Investor to purchase any shares of the Series A Stock as and when
contemplated by the Stock Purchase Agreement, which failure has not been cured
within the period provided in Section 1.3 of the Stock Purchase Agreement. For
purposes of this Agreement, "QUALIFIED EQUITY FINANCING" shall mean a bona fide
equity financing in a single transaction or series of related transactions
involving sales by the Company of its capital stock that result in gross
proceeds to the Company of at least Four Million Dollars ($4,000,000).


                                       4
<PAGE>

                  (b) Any amendment or waiver effected in accordance with this
Section 11 shall be binding upon each holder of any securities subject to this
Agreement at the time outstanding (including securities into which such
securities have been converted), each future holder of all such securities, and
the Company.

         12. CAPTIONS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way limit or amplify the
terms and provisions hereof.

         13. NOTICES. Any notice required or permitted to be given to a Party
pursuant to the provisions of this Agreement will be in writing and will be
effective and deemed given to such Party under this Agreement on the earliest of
the following:

                  (a) the date of personal delivery;

                  (b) one (1) business day after transmission by facsimile or
telecopier, addressed to the other Party at its facsimile number or telecopier
address specified herein (or hereafter noticed to the parties hereto), with
confirmation of transmission;

                  (c) one (1) business day after deposit with a return receipt
express courier for United States deliveries, or three (3) business days after
such deposit for deliveries outside of the United States; or

                  (d) three (3) business days after deposit in the United States
mail by registered or certified mail (return receipt requested) for United
States deliveries.

         All notices not delivered personally or by facsimile will be sent with
postage and/or other charges prepaid and properly addressed to the Party to be
notified at the address set forth below such Party's signature on this
Agreement, or at such other address as such other Party may designate by ten
(10) days advance written notice to the other parties hereto. All notices for
delivery outside the United States will be sent by facsimile or by express
courier. Any notice given hereunder to more than one person will be deemed to
have been given, for purposes of counting time periods hereunder, on the date
effectively given to the last Party required to be given such notice. Notices to
the Company will be marked "Attention: President."

         14. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by, or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.

         15. BINDING EFFECT. In addition to any restriction or transfer that may
be imposed by any other agreement by which any Party hereto may be bound, this
Agreement shall be binding upon the Parties, their respective heirs, successors
and assigns.

         16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to conflicts
of law principles thereof.

                                       5
<PAGE>

         17. ENTIRE AGREEMENT. This Agreement is intended to be the sole
agreement of the Parties as it relates to this subject matter and does hereby
supersede all other agreements of the Parties relating to the subject matter
hereof.

         18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.

                            COMPANY:    LEUCHEMIX, INC.


                                         /S/ WILLIAM MATTHEWS
                                         ---------------------------------------
                                         By:  WILLIAM MATTHEWS
                                             -----------------------------------
                                         Title:  PRESIDENT
                                             -----------------------------------

                                         Address: 1600 CANADA LANE
                                             -----------------------------------
                                                  WOODSIDE, CA  94062
                                             -----------------------------------


                            INVESTOR:    COMBIMATRIX CORPORATION


                                         /S/ AMIT KUMAR
                                         ---------------------------------------
                                         By:  Amit Kumar, CEO

                                         CombiMatrix Corporation
                                         6500 Harbour Heights Parkway, Ste. 110
                                         Mukilteo, WA  98275


                            FOUNDERS:
                                         /S/ JOHN BURKE
                                         ---------------------------------------
                                         John Burke

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                                         /S/ PETER CROOKS
                                         ---------------------------------------
                                         Peter Crooks

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------



                                       6
<PAGE>


                                         /S/ CINDY HAWKINS
                                         ---------------------------------------
                                         Cindy Hawkins


                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                                         /S/ CHRISTOPHER HENNEY
                                         ---------------------------------------
                                         Christopher Henney


                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                                         /S/ MIKE HIRD
                                         ---------------------------------------
                                         Mike Hird

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------

                                         /S/ CRAIG JORDAN
                                         ---------------------------------------
                                         Craig Jordan

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                                         /S/ WILLIAM MATTHEWS
                                         ---------------------------------------
                                         William Matthews

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                      [SIGNATURE PAGE TO VOTING AGREEMENT]

                                       7
<PAGE>


                                         /S/ HARIKRISHNA NAKSHATRI
                                         ---------------------------------------
                                         Harikrishna Nakshatri

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------



                                         /S/ CHRISTOPHER SWEENEY
                                         ---------------------------------------
                                         Christopher Sweeney

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------


                                         /S/ ROGER WHITING
                                         ---------------------------------------
                                         Roger Whiting

                                         Address:    ADDRESS OMITTED
                                         ---------------------------------------
                                         ---------------------------------------
                                         ---------------------------------------



                      [SIGNATURE PAGE TO VOTING AGREEMENT]



                                       8
<PAGE>


                                    EXHIBIT A

                                    FOUNDERS




NAME                                                 SHARES OF COMMON STOCK
----                                                 ----------------------

John Burke                                                     25,000

Peter Crooks                                                1,000,000

Cindy Hawkins                                                  25,000

Christopher Henney                                            100,000

Mike Hird                                                      25,000

Craig Jordan                                                1,000,000

William Matthews                                            2,000,000

Harikrishna Nakshatri                                       1,000,000

Christopher Sweeney                                         1,000,000

Roger Whiting                                                 100,000

                                   TOTAL:                   6,275,000


                                      A-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>5
<FILENAME>acacia_10qex10-4.txt
<TEXT>

<PAGE>

                                                                    EXHIBIT 10.4


                                 LEUCHEMIX, INC.


                            INVESTOR RIGHTS AGREEMENT

         This Investor Rights Agreement (this "AGREEMENT") is made and entered
into as of October 1, 2004 (the "EFFECTIVE DATE"), by and among Leuchemix, Inc.,
a California corporation (the "COMPANY"), the holders of Common Stock set forth
on EXHIBIT A attached hereto (collectively, the "FOUNDERS"), and the undersigned
purchaser (the "INVESTOR") of Series A Preferred Stock (the "SECURITIES").


                                    RECITALS

         WHEREAS, in order to induce the Investor to invest in the Company
pursuant to that certain Series A Preferred Stock Purchase Agreement (the
"PURCHASE AGREEMENT"), the parties hereto desire to enter into this Agreement to
provide registration and other rights to the Investor.

         NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises and covenants set forth herein, the parties hereby agree as
follows:


                                    AGREEMENT

         1. REGISTRATION RIGHTS.

                  1.1 DEFINITIONS. As used in this Agreement:

                           (a) "COMMISSION" shall mean the United States
Securities and Exchange Commission.

                           (b) "COMMON STOCK" shall mean the Company's Common
Stock.

                           (c) "EQUITY SECURITIES" shall mean (i) Common Stock,
rights, options or warrants to purchase Common Stock, (ii) any security other
than Common Stock having voting rights in the election of the Board of
Directors, not contingent upon a failure to pay dividends, (iii) any security
convertible into or exchangeable for any of the foregoing except that Equity
Securities shall not include the Series A Preferred Stock, and (iv) any
agreement or commitment to issue any of the foregoing.

                           (d) The term "FORM S-3" means such form under the
Securities Act as is in effect on the date hereof or any successor registration
form under the Securities Act subsequently adopted by the Commission (as defined
below) which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the Commission.

                           (e) The terms "HOLDER" or "HOLDERS" shall mean the
Investor so long as it holds Registrable Securities and any other person or
persons owning of record Registrable Securities to whom the registration rights
conferred by this Agreement have been duly assigned in accordance with this
Agreement; PROVIDED, HOWEVER, that for purposes of this Agreement, a record
holder of Securities convertible into such Registrable Securities shall be
deemed to be the Holder of such Registrable Securities; and PROVIDED, FURTHER,

<PAGE>

that Holders of Registrable Securities will not be required to convert their
Securities into Common Stock in order to exercise the registration rights
granted hereunder, until immediately before the closing of the offering to which
the registration relates.

                           (f) "INITIAL PUBLIC OFFERING"shall mean the first
underwritten sale of the Company's Common Stock to the general public pursuant
to a registration statement under the Securities Act.

                           (g) "QUALIFIED EQUITY FINANCING" shall mean a bona
fide equity financing in a single transaction or series of related transactions
involving sales by the Company of its capital stock that result in gross
proceeds to the Company of at least Four Million Dollars ($4,000,000).

                           (h) The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.

                           (i) "REGISTRABLE SECURITIES" shall mean: (i) any and
all shares of the Common Stock issued or issuable upon the conversion of the
Securities and (ii) any shares of Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, in exchange for or in
replacement of, all such shares of Common Stock described in clause (i) of this
subsection (b); provided, however, that Registrable Securities shall not include
any shares of Common Stock which have previously been registered or which have
been sold to the public either pursuant to a registration statement or Rule 144,
or which have been sold in a private transaction in which the transferor's
rights under this Agreement were not assigned.

                           (j) "REGISTRABLE SECURITIES THEN OUTSTANDING" shall
mean the number of shares of Common Stock which are Registrable Securities and
(1) are then issued and outstanding or (2) are then issuable pursuant to the
exercise or conversion of then outstanding and then exercisable options,
warrants or convertible securities.

                           (k) "RULE 144" shall mean Rule 144 as promulgated by
the Commission under the Securities Act, as such Rule may be amended from time
to time, or any similar successor rule that may be promulgated by the
Commission.

                           (l) "SECURITIES" shall mean the Company's Series A
Preferred Stock.

                           (m) "SECURITIES ACT" shall mean the Securities Act of
1933, as amended.

                  1.2 DEMAND REGISTRATION.

                                       2
<PAGE>

                           (a) REQUEST BY HOLDERS. If the Company shall receive
from Holders (the "INITIATING HOLDERS") at any time or times not earlier than
one hundred and eighty (180) days after the effective date of the first
registration statement filed by the Company covering an underwritten offering of
any of its securities to the general public, a written request that the Company
effect any registration with respect to at least twenty-five percent (25%) of
the Registrable Securities Then Outstanding (or any lesser percentage if the
aggregate offering price exceeds Twenty-five Million Dollars ($25,000,000)),
then the Company shall, within ten (10) business days of the receipt thereof,
give written notice of such request to all Holders, and subject to the
limitations of this Section 1.2, effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that the
Holders request be registered and included in such registration by written
notice given by such Holders to the Company within twenty (20) days after
receipt of the Request Notice, subject only to the limitations of this Section
1.2.

                           (b) EXCEPTIONS. Notwithstanding the foregoing,
Company shall not be obligated to effect, or to take any action to effect, any
such registration pursuant to this Section 1.2:

                                    (i) during the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred eighty (180) days after the effective date
of a Company-initiated registration; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;

                                    (ii) after the Company has initiated two (2)
such registrations pursuant to this Section 1.2 (counting for these purposes
only registrations which have been declared or ordered effective);

                                    (iii) in any particular jurisdiction in
which the Company would be required to execute a general consent to service of
process in effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act;

                                    (iv) if the Initiating Holders propose to
dispose of Registrable Securities which may be immediately registered on Form
S-3 pursuant to a request made under Section 1.4 hereof;

                                    (v) if the Initiating Holders do not request
that such offering be firmly underwritten by underwriters selected by the
Initiating Holders (subject to the consent of the Company, which consent will
not be unreasonably withheld); or

                                    (vi) if the Company and the Initiating
Holders are unable to obtain the commitment of the underwriter described in
clause (v) above to firmly underwrite the offer.

                           (c) UNDERWRITING. The right of any Holder to include
his Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form


                                       3
<PAGE>

with the managing underwriter or underwriters selected for such underwriting by
the Company. Notwithstanding any other provision of this Section 1.2, if the
underwriter(s) advise(s) the Company in writing that marketing factors require a
limitation of the number of securities to be underwritten then the Company shall
so advise all Holders of Registrable Securities which would otherwise be
registered and underwritten pursuant hereto, and the number of Registrable
Securities that may be included in the underwriting shall be reduced as required
by the underwriter(s) and allocated among the Holders of Registrable Securities
on a pro rata basis according to the number of Registrable Securities then
outstanding held by each Holder requesting registration (including the
Initiating Holders); provided, however, that the number of shares of Registrable
Securities to be included in such underwriting and registration shall not be
reduced unless all other securities of the Company are first entirely excluded
from the underwriting and registration. Any Registrable Securities excluded and
withdrawn from such underwriting shall be withdrawn from the registration.

                           (d) DEFERRAL. Notwithstanding the foregoing, if the
Company shall furnish to Holders requesting the filing of a registration
statement pursuant to this Section 1.2, a certificate signed by the President or
Chief Executive Officer of the Company stating that, in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such registration statement to be filed and
it is therefore essential to defer the filing of such registration statement,
then the Company shall have the right to defer such filing for a period of not
more than one hundred twenty (120) days after receipt of the request of the
Initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this
right more than once in any twelve (12) month period.

                           (e) EXPENSES. All expenses incurred in connection
with a registration pursuant to this Section 1.2, including without limitation
all registration and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company and the reasonable fees and
disbursements of one (1) counsel for the selling Holder or Holders (but
excluding underwriters' and brokers' discounts and commissions), shall be borne
by the Company. Each Holder participating in a registration pursuant to this
Section 1.2 shall bear such Holder's proportionate share (based on the total
number of shares sold in such registration other than for the account of the
Company) of all discounts, commissions or other amounts payable to underwriters
or brokers in connection with such offering. Notwithstanding the foregoing, the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to this Section 1.2 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered; PROVIDED, FURTHER, HOWEVER, that if at
the time of such withdrawal, the Holders have learned of a material adverse
change in the condition, business or prospects of the Company not known to the
Holders at the time of their request for such registration and have withdrawn
their request for registration with reasonable promptness after learning of such
material adverse change, then the Holders shall not be required to pay any of
such expenses and shall retain their rights pursuant to this Section 1.2.

                  1.3 PIGGYBACK REGISTRATIONS. The Company shall notify all
Holders of Registrable Securities in writing at least fifteen (15) days prior to
filing any registration statement under the Securities Act for purposes of
effecting a public offering of securities of the Company (including, but not
limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding registration statements relating to any
registration under Section 1.2 or Section 1.4 of this Agreement or to any


                                       4
<PAGE>

employee benefit plan or a corporate reorganization) and will afford each such
Holder an opportunity to include in such registration statement all or any part
of the Registrable Securities then held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by such Holder shall, within twenty (20) days after receipt of
the above-described notice from the Company, so notify the Company in writing,
and in such notice shall inform the Company of the number of Registrable
Securities such Holder wishes to include in such registration statement. If a
Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.

                           (a) UNDERWRITING. If a registration statement under
which the Company gives notice under this Section 1.3 is for an underwritten
offering, then the Company shall so advise the Holders of Registrable
Securities. In such event, the right of any such Holder's Registrable Securities
to be included in a registration pursuant to this Section 1.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the managing underwriter or underwriter(s) selected for
such underwriting. Notwithstanding any other provision of this Agreement, if the
managing underwriter(s) determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude shares (including Registrable Securities)
from the registration and the underwriting, and the number of shares that may be
included in the registration and the underwriting shall be allocated, FIRST, to
the Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder. If
any Holder disapproves of the terms of any such underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company and the
underwriter, delivered at least ten (10) business days prior to the effective
date of the registration statement. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn from the
registration. For any Holder which is a partnership or corporation, the
partners, retired partners and shareholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "Holder,"
and any pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.

                           (b) EXPENSES. All expenses incurred in connection
with a registration pursuant to this Section 1.3 (excluding underwriters' and
brokers' discounts and commissions), including, without limitation all federal
and "blue sky" registration and qualification fees, printers' and accounting
fees, fees and disbursements of counsel for the Company and the reasonable fees
and disbursements of one (1) counsel for the selling Holder or Holders shall be
borne by the Company. The Company and each Holder participating in a
registration pursuant to this Section 1.3 shall bear such Holder's proportionate
share (based on the total number of shares sold in such registration other than
for the account of the Company) of all discounts, commissions or other amounts
payable to underwriters or brokers in connection with such offering.

                                       5
<PAGE>

                           (c) RIGHT TO TERMINATE REGISTRATION. The Company
shall have the right to terminate or withdraw any registration initiated by it
under this Section prior to the effectiveness of such registration whether or
not any Holder has elected to include securities in such registration. The
registration expenses of such withdrawn registration shall be borne by the
Company as defined above.

                  1.4 FORM S-3 REGISTRATION. In case the Company shall receive
from any Holder or Holders of Registrable Securities, a written request or
requests that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, then the Company will:

                           (a) promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and

                           (b) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within twenty (20) days after receipt of such written notice from the
Company; PROVIDED, HOWEVER, that the Company shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section 1.4:

                                    (i) if Form S-3 is not available for such
offering by the Holders;

                                    (ii) if the Holders, together with the
holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public of less than One Million Dollars
($1,000,000);

                                    (iii) if the Company shall furnish to the
Holders a certificate signed by the President or Chief Executive Officer of the
Company stating that, in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement no more than once during any twelve (12) month period for
a period of not more than one hundred twenty (120) days following receipt of the
request of the Holder or Holders under this Section 1.4;

                                    (iv) if the Company has, within the six (6)
month period preceding the date of such request, already effected one (1)
registration on Form S-3 for Holders pursuant to this Section 1.4; or

                                       6
<PAGE>

                                    (v) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.

                           (c) EXPENSES. Subject to the foregoing, the Company
shall file a Form S-3 registration statement covering the Registrable Securities
so requested to be registered pursuant to this Section 1.4 as soon as
practicable after receipt of the request(s) of the Holder(s) for such
registration. Except for the first registration pursuant to this Section 1.4,
the Holders who wish to participate in an S-3 registration shall pay all
expenses incurred in connection with each registration requested pursuant to
this Section 1.4, including without limitation all filing, registration and
qualification, printers' and accounting fees, fees and disbursements of counsel
for the Company and the reasonable fees and disbursements of one (1) counsel for
the selling Holder or Holders (the "FORM S-3 REGISTRATION EXPENSES"). For the
first such registration pursuant to this Section 1.4, the Company shall pay the
Form S-3 Registration Expenses (excluding underwriters' or brokers' discounts
and commissions).

                           (d) NOT DEMAND REGISTRATION. Form S-3 registrations
shall not be deemed to be demand registrations as described in Section 1.2
above.

                  1.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect
the registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:

                           (a) prepare and file with the Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective, and, upon
the request of the Holders of a majority of the Registrable Securities
registered thereunder with respect to a Form S-3 registration, keep such
registration statement effective for up to ninety (90) days;

                           (b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement;

                           (c) furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration;

                           (d) use its reasonable commercial efforts to register
and qualify the securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions;

                           (e) in the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering (it being
understood and agreed that, as a condition to the Company's obligations under
this clause (e), each Holder participating in such underwriting shall also enter
into and perform its obligations under such an agreement);

                                       7
<PAGE>

                           (f) notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing; and

                           (g) furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated as of such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.

                  1.6 FURNISH INFORMATION. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to Sections 1.2, 1.3
or 1.4 hereof that the selling Holders shall furnish to the Company such
information regarding themselves, the Registrable Securities held by them and
the intended method of disposition of such securities as shall be required to
timely effect the registration of their Registrable Securities.

                  1.7 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.

                  1.8 INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under Sections 1.2, 1.3 or 1.4 hereof:

                           (a) BY THE COMPANY. To the extent permitted by law,
the Company will indemnify and hold harmless each Holder, the partners, officers
and directors of each Holder, any underwriter (as defined in the Securities Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended, (the "EXCHANGE ACT"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"):

                                       8
<PAGE>

                                    (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto;

                                    (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading; or

                                    (iii) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any federal or state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any federal or state securities law in connection with the
offering covered by such registration statement;

and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection 1.8(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any Holder, partner, officer, director, underwriter or
controlling person of any Holder.

                           (b) BY SELLING HOLDERS. To the extent permitted by
law, each selling Holder will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the registration statement,
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, partner or
director, officer or controlling person of such other Holder may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling person, underwriter or other Holder, partner,
officer, director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection
1.8(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; and PROVIDED
FURTHER, that the total amounts payable in indemnity by a Holder under this
Section 1.8(b) in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which such Violation
arises.

                                       9
<PAGE>

                           (c) NOTICE. Promptly after receipt by an indemnified
party under this Section 1.8 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
1.8, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or potential conflict of interests between such indemnified party
and any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.8, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.8.

                           (d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The
foregoing indemnity agreements of the Company and Holders are subject to the
condition that, insofar as they relate to any Violation made in a preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement in question becomes effective
or the amended prospectus filed with the Commission pursuant to Commission Rule
424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus (i) was furnished to the
indemnified party and (ii) was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.

                           (e) CONTRIBUTION. In order to provide for just and
equitable contribution to joint liability under the Securities Act in any case
in which either (i) any Holder exercising rights under this Agreement, or any
controlling person of any such Holder, makes a claim for indemnification
pursuant to this Section 1.8 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 1.8 provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such selling Holder
or any such controlling person in circumstances for which indemnification is
provided under this Section 1.8; then, and in each such case, the Company and
such Holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that such Holder is responsible for the portion represented
by the percentage that the public offering price of its Registrable Securities
offered by and sold under the registration statement bears to the public
offering price of all securities offered by and sold under such registration
statement, and the Company and other selling Holders are responsible for the
remaining portion; PROVIDED, HOWEVER, that, in any such case, (A) no such Holder
will be required to contribute any amount in excess of the public offering price
of all such Registrable Securities offered and sold by such Holder pursuant to
such registration statement and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.

                                       10
<PAGE>

                           (f) SURVIVAL. The obligations of the Company and
Holders under this Section 1.8 shall survive the completion of any offering of
Registrable Securities in a registration statement, and otherwise.

                  1.9 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees
that it shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of or engage in
any other transaction regarding any Registrable Securities or other shares of
stock of the Company then owned by such Holder (other than to donees or partners
of the Holder who agree to be similarly bound) for up to one hundred eighty
(180) days following the effective date of a registration statement of the
Company filed under the Securities Act; provided, however, that all executive
officers, directors and five percent (5%) shareholders of the Company then
holding Common Stock of the Company enter into similar agreements.

         In order to enforce the foregoing covenant, the Holder agrees to
execute the form of agreement requested by the Company and/or underwriter.

                  1.10 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to:

                           (a) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to the
general public;

                           (b) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements); and

                           (c) as long as a Holder owns any Registrable
Securities, to furnish to the Holder forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of said Rule
144 (at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to the reporting requirements of the Exchange Act),
a copy of the most recent annual or quarterly report of the Company and such
other reports and documents of the Company as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration (at any time after the Company has
become subject to the reporting requirements of the Exchange Act).

                  1.11 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company
shall have no obligations pursuant to Sections 1.2, 1.3 and 1.4 with respect to:
(i) any request or requests for registration made by any Holder on a date more
than five (5) years after the closing date of the Initial Public Offering or
(ii) any Registrable Securities proposed to be sold by a Holder in a


                                       11
<PAGE>

registration pursuant to Section 1.2, 1.3 or 1.4 if, in the opinion of counsel
to the Company, all such Registrable Securities proposed to be sold by a Holder
may be sold in a three-month period without registration under the Securities
Act pursuant to Rule 144 under the Securities Act.

         2. ASSIGNMENT.

                  2.1 ASSIGNMENT. Notwithstanding anything herein to the
contrary, the registration rights of a Holder under Section 1, the Right of
First Refusal under Section 3 and the information rights under Section 4 may be
assigned only to (i) a party who acquires at least five percent (5%) of the
total number of shares of Registrable Securities or (ii)(A) a shareholder,
partner, member, or beneficiary of such Holder; (B) a spouse, child, parent or
beneficiary of the estate of such Holder or (C) a trust for the benefit of the
persons set forth in (A) or (B); provided, however, that no party may assign any
of the foregoing rights unless the Company is given written notice by the
assigning party at the time of such assignment stating the name, address and tax
identification number of the assignee and identifying the securities of the
Company as to which the rights in question are being assigned; and provided
further that any such assignee shall receive such assigned rights subject to all
the terms and conditions of this Agreement, including without limitation the
provisions of this Section 2.

                  2.2 (a) CERTIFICATE. Each certificate representing Securities
or Registrable Securities shall (unless otherwise permitted by the provisions of
the agreement) be stamped or otherwise imprinted with a legend substantially
similar to the following (in addition to any legend required under applicable
state securities laws):

                  THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
                  UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
                  OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
                  HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR
                  UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
                  SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
                  REGISTRATION IS NOT REQUIRED.

                           (b) REISSUANCE OF STOCK CERTIFICATE. The Company
shall be obligated to reissue promptly unlegended certificates at the request of
any Holder thereof if the Holder shall have obtained an opinion of counsel
(which counsel may be counsel to the Company) reasonably acceptable to the
Company to the effect that the Securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend.

                           (c) REMOVAL OF LEGEND. Any legend endorsed on an
instrument pursuant to applicable state securities laws and the stop-transfer
instructions with respect to such securities shall be removed upon receipt by
the Company of an order of the appropriate blue sky authority authorizing such
removal.

                                       12
<PAGE>

         3. INVESTOR'S RIGHT OF FIRST REFUSAL.

                  3.1 If, at any time prior to the termination of this right of
first refusal pursuant to subsection 3.6, the Company should desire to issue in
a transaction not registered under the Securities Act in reliance upon a claimed
exemption thereunder, any Equity Securities (as hereinafter defined), it shall
give Investor the right to purchase Investor's pro rata share (or any part
thereof) of all of such privately offered Equity Securities on the same terms as
the Company is willing to sell such Equity Securities to any other person.
Investor's pro rata share of the Equity Securities shall be equal to that
percentage of the outstanding Common Stock of the Company held by Investor on
the date immediately prior to the transaction at issue. For purposes of
determining such pro rata share, the outstanding Common Stock of the Company
shall include (i) outstanding shares of Common Stock, and (ii) shares of Common
Stock issued or issuable upon exercise and/or conversion of any then outstanding
options, warrants and Preferred Stock of the Company and (iii) shares reserved
for employees pursuant to any stock grant, stock purchase and/or stock option
plans or any other stock incentive program, agreement or arrangement as
described in subsection 3.5 below less any outstanding options or shares issued
from such reserve.

                  3.2 Prior to any sale or issuance by the Company of any Equity
Securities, the Company shall notify Investor in writing of its intention to
sell and issue such securities, setting forth the terms under which it proposes
to make such sale. Within thirty (30) days after receipt of such notice,
Investor shall notify the Company whether Investor desires to purchase
Investor's pro rata share, or any part thereof, of the Equity Securities so
offered.

                  3.3 After termination of the thirty (30) day period specified
in subsection 3.2 above, the Company may, during a period of sixty (60) days
following the end of such thirty (30) day period, sell and issue such Equity
Securities as to which Investor does not indicate a desire to purchase to
another person as well as those additional shares of Equity Securities it
originally intended to issue to other persons, upon the same terms and
conditions as those set forth in the notice to the Investor. In the event the
Company has not sold the Equity Securities, or has not entered into an agreement
to sell the Equity Securities, within said sixty (60) day period, the Company
shall not thereafter issue or sell any Equity Securities without first offering
such securities to the Investor in the manner provided above.

                  3.4 If Investor gives the Company notice that Investor desires
to purchase any of the Equity Securities offered by the Company, payment for the
Equity Securities shall be by check or wire transfer, against delivery of the
Equity Securities at the executive offices of the Company within twenty (20)
days after giving the Company such notice, or, if later, the closing date for
the proposed sale of such Equity Securities. The Company shall take all such
action as may be required by any regulatory authority in connection with the
exercise by Investor of the right to purchase Equity Securities as set forth in
this Section 3.

                  3.5 The right of first refusal contained in this Section 3
shall not apply to the issuance by the Company of Equity Securities (i) to
employees, consultants, directors or officers of the Company pursuant to stock
grant, stock purchase and/or stock option plans or any other stock incentive
program, agreement or arrangement approved by the Board of Directors, (ii)


                                       13
<PAGE>

pursuant to the acquisition of another business entity or other business segment
of any such entity by the Company by merger, purchase of substantially all the
assets or other reorganization whereby the Company will own more than fifty
percent (50%) of the voting power of such business entity or business segment of
any such entity, (iii) in connection with a strategic investment or acquisition
of technology or intellectual property that is approved by the Board of
Directors, (iv) in connection with equipment financing or leasing arrangements
or in connection with strategic partnering transactions approved by the Board of
Directors, (v) issued upon conversion of shares of any Preferred Stock, or any
notes convertible into shares of the Company's capital stock, (vi) issued in
connection with any stock split, stock dividend, recapitalization or similar
event, (vii) issued in connection with an Initial Public Offering or (viii)
otherwise constituting securities which are not Additional Shares of Common
Stock (as defined in the Company's Amended and Restated Articles of
Incorporation as amended from time to time) or, if exercisable or convertible,
securities which are not exercisable or convertible for Additional Shares of
Common Stock.

                  3.6 The right of first refusal contained in this Section 3
shall terminate upon the closing of an Initial Public Offering. If Investor
fails to purchase all the Subsequent Shares at any Subsequent Closing (such
terms being defined in the Purchase Agreement), after having received written
notice and the opportunity to cure as set forth in Section 1.3 of the Purchase
Agreement, then the right of first refusal contained in this Section 3 shall
become null and void.

         4. COVENANTS OF THE COMPANY.

                  4.1 FINANCIAL STATEMENTS AND REPORTS. So long as Investor
continues to hold any of the Securities or Registrable Securities, the Company
shall establish and maintain internal control policies and procedures that will
permit Investor to comply with the Sarbanes Oxley Act of 2002 (and related
authoritative pronouncements and guidelines) in all material respects, and that
will allow the Company to produce and report financial information in accordance
with GAAP, and Company agrees as follows:

                           (a) To deliver to Investor as soon as practicable
after the end of each fiscal year of the Company, and in any event within sixty
(60) days thereafter, an audited consolidated balance sheet of the Company and
its subsidiaries, if any, as of the end of such year and audited consolidated
statements of income, shareholders' equity and cash flows for such year, which
year-end financial reports shall be in reasonable detail prepared in accordance
with generally accepted accounting principles ("GAAP") and by an accounting firm
to be approved by Investor, which approval shall not be unreasonably withheld or
delayed;

                           (b) To deliver to Investor as soon as practicable
after the end of the first, second and third quarterly accounting periods in
each fiscal year of the Company and in any event within twenty (20) days
thereafter, an unaudited consolidated balance sheet of the Company and its
subsidiaries, if any, as of the end of each such quarterly period and unaudited
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such period and for the current fiscal year to date,
all prepared in accordance with GAAP, all in reasonable detail, subject to
changes resulting from year-end audit adjustments, and signed by the principal
financial or accounting officer of the Company;

                                       14
<PAGE>

                           (c) To deliver to Investor within thirty (30) days
prior to the end of each fiscal year, a budget and business plan for the next
fiscal year, prepared on a monthly basis, including a balance sheet and
statement of operations for such months and, as soon as prepared, any other
budgets or revised budgets prepared by the Company;

                           (d) Upon the reasonable request of Investor to submit
to any reasonable financial audit or inquiries requested by Investor in order to
enable Investor to reasonably comply with its regulatory financial reporting
obligations; and

                           (e) The Company's fiscal year shall correspond to the
calendar year.

         Investor agrees to reimburse the Company for expenses in excess of
Forty Thousand Dollars ($40,000) incurred by the Company with respect to the
2005 and 2006 fiscal years in complying with its obligations under this Section
4.1. Thereafter and on an annual basis, Investor and the Company agree to
negotiate in good faith regarding the appropriate level of reimbursement, if
any, of such expenses by Investor, PROVIDED, HOWEVER, that Investor's
obligations described in the preceding sentence shall exist for each fiscal year
that Investor requests the Company to comply with the information requirements
of this Section 4.1.

         Investor agrees that any information obtained by the Investor pursuant
to this Section 4 which is reasonably perceived to be proprietary to the Company
or otherwise confidential will not, unless Investor shall otherwise be required
by law or the rules of any national securities exchange or association, be
disclosed without the prior written consent of the Company. Investor further
acknowledges and understands that any information will not be utilized by the
Investor in connection with purchases and sales of the Company's securities
except in compliance with applicable state and federal antifraud statutes.

         For so long as Investor is eligible to receive reports under this
Section 4, Investor shall have the right to visit and inspect the Company's
properties, to examine its books of account and records and to discuss the
affairs, finances and accounts of the Company with the Company's officers, all
at such reasonable times and as often as may be reasonably requested; provided,
however, that the Company shall not be obligated to provide any information that
it reasonably considers to be a trade secret or to contain confidential
information. Investor shall pay any expenses incurred by them in connection with
their discussions of the affairs, finances and accounts of the Company.

         In the event of amendments or additions to the reporting requirements
under the Exchange Act (and related rules and regulations) or other similar
federal or state laws, the Company agrees to consent to reasonable amendments to
this Section 4.1 as to enable Investor to comply with such requirements.

                  4.2 BOARD OF DIRECTORS. At each election of directors of the
Company, the Investor and Founders hereby consent and agree to vote (in person,
by proxy or by written consent, as appropriate) in favor of the following
persons all shares of outstanding voting capital stock of the Company now held
or subsequently acquired by the Investors or Founders to elect: (i) one (1)
nominee by the holders of Series A Preferred Stock, voting as a separate class,
and (ii) up to four (4) nominees chosen by the holders of Common Stock and
Series A Preferred Stock, voting together as a single class. If any vacancy
shall occur on the Board of Directors, all parities hereto shall take all


                                       15
<PAGE>

necessary actions, including the holding of a meeting of the shareholders if
required, to insure that the composition of the Board of Directors remains as
set forth herein. Should the provisions of this Section 4.2 be construed to
constitute the granting of proxies, such proxies shall be deemed coupled with an
interest and are irrevocable for the term of the Agreement. The obligations set
forth in this Section 4.2 shall terminate upon the closing of an Initial Public
Offering.

                  4.3 STOCK VESTING. Unless otherwise approved by the Board of
Directors, all stock options and other stock equivalents issued after the date
of this Agreement to employees, directors, consultants and other service
providers shall be subject to vesting as follows: (a) twenty-five percent (25%)
of such stock shall vest at the end of the first year following such person's
services commencement date with the Company, and (b) seventy-five percent (75%)
of such stock shall vest on a monthly pro rata basis over the remaining three
(3) years. With respect to any shares of stock purchased by any such person, the
Company's repurchase option shall provide that upon such person's termination of
employment or service with the Company, with or without cause, the Company or
its assignee (to the extent permissible under applicable securities laws and
other laws) shall have the option to purchase at cost any unvested shares of
stock held by such person.

                  4.4 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. The
Company shall require all employees and officers to execute and deliver a
Proprietary Information and Inventions Assignment Agreement substantially in the
form or forms, which have been delivered to Investor.

                  4.5 TERMINATION OF COVENANTS. All covenants of the Company
contained in Section 4 of this Agreement shall expire and terminate upon the
earlier of (i) the effective date of the registration statement pertaining to
the Initial Public Offering; (ii) when the Company first becomes subject to the
periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act;
(iii) the date on which this Agreement is terminated by a writing executed by
the Company, the holders of a majority of the shares of Series A Stock then
subject to this Agreement and the holders of a majority of the Common Stock then
subject to this Agreement; (iv) the dissolution of the Company; or (v) the
closing of an Acquisition (as defined in the Company's Amended and Restated
Articles of Incorporation as amended from time to time).

         5. GENERAL PROVISIONS.

                  5.1 NOTICES. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement will be in writing and will
be effective and deemed given to such party under this Agreement on the earliest
of the following:

                           (i) the date of personal delivery;

                           (ii) one (1) business day after transmission by
facsimile or telecopier, addressed to the other party at its facsimile number or
telecopier address specified herein (or hereafter noticed to the parties
hereto), with confirmation of transmission;

                                       16
<PAGE>

                           (iii) one (1) business day after deposit with a
return receipt express courier for United States deliveries, or three (3)
business days after such deposit for deliveries outside of the United States; or

                           (iv) three (3) business days after deposit in the
United States mail by registered or certified mail (return receipt requested)
for United States deliveries.

All notices not delivered personally or by facsimile will be sent with postage
and/or other charges prepaid and properly addressed to the party to be notified
at the address set forth below such party's signature on this Agreement, or at
such other address as such other party may designate by ten (10) days advance
written notice to the other parties hereto. All notices for delivery outside the
United States will be sent by facsimile or by express courier. Any notice given
hereunder to more than one person will be deemed to have been given, for
purposes of counting time periods hereunder, on the date effectively given to
the last party required to be given such notice. Notices to the Company will be
marked "Attention: President."

                  5.2 ENTIRE AGREEMENT. This Agreement, together with all the
exhibits hereto, constitutes and contains the entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof.

                  5.3 GOVERNING LAW. This Agreement shall be governed by and
construed exclusively in accordance with the internal laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within California, excluding that body of law relating
to conflict of laws and choice of law.

                  5.4 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, then such provision(s) shall
be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.

                  5.5 THIRD PARTIES. Nothing in this Agreement, express or
implied, is intended to confer upon any person, other than the parties hereto
and their successors and assigns, any rights or remedies under or by reason of
this Agreement.

                  5.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Section 2.1, the provisions of this Agreement shall inure to the benefit of, and
shall be binding upon, the successors and permitted assigns of the parties
hereto.

                  5.7 CAPTIONS. The captions to sections of this Agreement have
been inserted for identification and reference purposes only and shall not be
used to construe or interpret this Agreement.

                  5.8 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                                       17
<PAGE>

                  5.9 COSTS AND ATTORNEYS' FEES. In the event that any action,
suit or other proceeding is instituted concerning or arising out of this
Agreement or any transaction contemplated hereunder, the prevailing party shall
recover all of such party's costs and attorneys' fees incurred in each such
action, suit or other proceeding, including any and all appeals or petitions
therefrom.

                  5.10 ADJUSTMENTS FOR STOCK SPLITS AND CERTAIN OTHER CHANGES.
Wherever in this Agreement there is a reference to a specific number of shares
of Common Stock or Preferred Stock of the Company of any class or series, then,
upon the occurrence of any subdivision, combination or stock dividend of such
class or series of stock, the specific number of shares so referenced in this
Agreement shall automatically be proportionally adjusted to reflect the affect
on the outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.

                  5.11 AGGREGATION OF STOCK. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.

                  5.12 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

                  5.13 AMENDMENT AND WAIVER. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the holders of a
majority of the Series A Stock then subject to this Agreement voting as a
separate class and the holders of a majority of the Common Stock then subject to
this Agreement voting as a separate class; PROVIDED, HOWEVER, that the consent
of the holders of the Series A Stock or Common Stock shall not be required for
(i) any amendment (other than an amendment (A) to Section 3 which provides the
holders of the Series A Stock with rights thereunder (I.E., as to a right of
first refusal) which are not substantially the same as, and are inferior to,
rights which are being provided to any purchaser of the Company's capital stock
in a Qualified Equity Financing or, if no such rights are granted to such
purchasers, which eliminates such rights of such holders, or (B) to this Section
5.13 (except where additional consent requirements - such as for holders of a
majority of shares of the Company's capital stock sold in a Qualified Equity
Financing - are being added)) that (x) is deemed by a resolution of the majority
of the Board of Directors of the Company to be necessary and appropriate in
connection with a future Qualified Equity Financing and (y) is effective only
upon the closing of such Qualified Equity Financing, or (ii) any amendment that
occurs following any failure by the Investor to purchase any shares of the
Series A Stock as and when contemplated by the Purchase Agreement, which failure
has not been cured within the period provided in Section 1.3 of the Purchase
Agreement. Any amendment or waiver effected in accordance with this Section 5.13
shall be binding upon each holder of any securities subject to this Agreement at
the time outstanding (including securities into which such securities have been
converted), each future holder of all such securities, and the Company.

                                       18
<PAGE>

                  5.14 DELAYS OR OMISSIONS. It is agreed that no delay or
omission to exercise any right, power, or remedy accruing to any Holder, upon
any breach, default or noncompliance of the Company under this Agreement shall
impair any such right, power, or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent, or approval of
any kind or character on any Holder's part of any breach, default or
noncompliance under the Agreement or any waiver on such Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only the extent specifically set forth in such writing. All remedies,
either under this Agreement, by law, or otherwise afforded to Holders, shall be
cumulative and not alternative.

         IN WITNESS WHEREOF, the parties hereto have executed this Investor
Rights Agreement as of the date and year first above written.





                             COMPANY:     LEUCHEMIX, INC.


                                          By: /S/ WILLIAM MATTHEWS
                                              ------------------------
                                          Title: PRESIDENT
                                                ----------------------

                                          Address: 1600 CANADA LANE
                                              ------------------------
                                                   WOODSIDE, CA  94062
                                              ------------------------

                              INVESTOR:  COMBIMATRIX CORPORATION

                                          /S/ AMIT KUMAR
                                          ----------------------------
                                          By: Amit Kumar, CEO

                                          CombiMatrix Corporation
                                          6500 Harbour Heights Parkway, Ste. 110
                                          Mukilteo, WA  98275


                                       19
<PAGE>



                                     FOUNDERS:


                                                  /S/ JOHN BURKE
                                                  ------------------------------
                                                  John Burke


                                                  Address: ADDRESS OMITTED
                                                       -------------------------
                                                       -------------------------
                                                       -------------------------



                                                  /S/ PETER CROOKS
                                                  ------------------------------
                                                  Peter Crooks


                                                  Address: ADDRESS OMITTED
                                                       -------------------------
                                                       -------------------------
                                                       -------------------------


                                                  /S/ CINDY HAWKINS
                                                  ------------------------------
                                                  Cindy Hawkins


                                                  Address: ADDRESS OMITTED
                                                       -------------------------
                                                       -------------------------
                                                       -------------------------




                                                  /S/ CHRISTOPHER HENNEY
                                                  ------------------------------
                                                  Christopher Henney


                                                  Address: ADDRESS OMITTED
                                                       -------------------------
                                                       -------------------------
                                                       -------------------------




                                                  /S/ MIKE HIRD
                                                  ------------------------------
                                                  Mike Hird


                                                  Address: ADDRESS OMITTED
                                                       -------------------------
                                                       -------------------------
                                                       -------------------------


                  [SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT]

                                       20
<PAGE>

                                              /S/ CRAIG JORDAN
                                              ----------------------------------
                                              Craig Jordan


                                              Address: ADDRESS OMITTED
                                                     ---------------------------
                                                     ---------------------------
                                                     ---------------------------


                                              /S/ WILLIAM MATTHEWS
                                              ----------------------------------
                                              William Matthews


                                              Address: ADDRESS OMITTED
                                                     ---------------------------
                                                     ---------------------------
                                                     ---------------------------


                                              /S/ HARIKRISHNA NAKSHATRI
                                              ----------------------------------
                                              Harikrishna Nakshatri


                                              Address: ADDRESS OMITTED
                                                     ---------------------------
                                                     ---------------------------
                                                     ---------------------------


                                              /S/ CHRISTOPHER SWEENEY
                                              ----------------------------------
                                              Christopher Sweeney


                                              Address: ADDRESS OMITTED
                                                     ---------------------------
                                                     ---------------------------
                                                     ---------------------------



                                              /S/ ROGER WHITING
                                              ----------------------------------
                                              Roger Whiting


                                              Address: ADDRESS OMITTED
                                                     ---------------------------
                                                     ---------------------------
                                                     ---------------------------




                  [SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT]


                                       21
<PAGE>

                                    EXHIBIT A
                                    ---------

                                    FOUNDERS




NAME                                                     SHARES OF COMMON STOCK
----                                                     ----------------------

John Burke                                                           25,000

Peter Crooks                                                      1,000,000

Cindy Hawkins                                                        25,000

Christopher Henney                                                  100,000

Mike Hird                                                            25,000

Craig Jordan                                                      1,000,000

William Matthews                                                  2,000,000

Harikrishna Nakshatri                                             1,000,000

Christopher Sweeney                                               1,000,000

Roger Whiting                                                       100,000

                                        TOTAL:                    6,275,000


                                      A-1




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>6
<FILENAME>acacia_10qex31-1.txt
<TEXT>
<PAGE>

                                                                   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 periods 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)) 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 quarterly report is
being prepared;

                  (b) 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

                  (c) 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 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: November 5, 2004                           /s/ Paul R. Ryan
                                        ------------------------------------
                                                    PAUL R. RYAN
                                        CHAIRMAN AND CHIEF EXECUTIVE OFFICER
                                            (PRINCIPAL EXECUTIVE OFFICER)


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>7
<FILENAME>acacia_10qex31-2.txt
<TEXT>
<PAGE>

                                                                   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 periods 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)) 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 quarterly report is
being prepared;

                  (b) 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

                  (c) 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 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: November 5, 2004                       /s/ Clayton J. Haynes
                                           ----------------------------
                                                CLAYTON J. HAYNES
                                             CHIEF FINANCIAL OFFICER
                                          (PRINCIPAL FINANCIAL OFFICER)


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>8
<FILENAME>acacia_10qex32-1.txt
<TEXT>
<PAGE>

                                                                   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 September 30, 2004,
as filed with the Securities and Exchange Commission on November 5, 2004 (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)
                                        November 5, 2004


         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.


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>9
<FILENAME>acacia_10qex32-2.txt
<TEXT>
<PAGE>

                                                                   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 September 30, 2004,
as filed with the Securities and Exchange Commission on November 5, 2004 (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)
                                                  November 5, 2004


         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.

</TEXT>
</DOCUMENT>
</SUBMISSION>
