acacia_10k-123107.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
o   TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM  _________  TO _________.

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 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

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

Title of Each Class
 Name of Each Exchange on Which Registered
Acacia Research - Acacia Technologies Common Stock, $0.001 par value
 
The NASDAQ Global Market

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

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨  No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No  þ

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  
Large accelerated filer    ¨
  
      Accelerated filer                      þ
Non-accelerated filer      ¨ (Do not check if a smaller reporting company)
 
      Smaller reporting company    ¨
 
         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ¨  No  þ

The aggregate market value of the registrant’s Acacia Research - Acacia Technologies common stock held by non-affiliates of the registrant, computed by reference to the last sales prices of such stocks reported on The Nasdaq Stock Market, as of June 29, 2007, was approximately $458,295,628.  (All executive officers and directors of the registrant are considered affiliates.)

As of February 25, 2008, 30,132,922 shares of Acacia Research-Acacia Technologies common stock were issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of its fiscal year are incorporated by reference into Part III.
 


 
ACACIA RESEARCH CORPORATION
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
 
 
Item
 
Page
PART I
     
1.
Business
1
1A.
Risk Factors
6
1B.
Unresolved Staff Comments
13
2.
Properties
13
3.
Legal Proceedings
13
4.
Submission of Matters to a Vote of Security Holders
13
     
     
PART II
     
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
 
 
Purchases of Equity Securities
14
6.
Selected Financial Data
17
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
7A.
Quantitative and Qualitative Disclosures About Market Risk
29
8.
Financial Statements and Supplementary Data
29
9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
29
9A.
Controls and Procedures
29
9B.
Other Information
29
     
     
     
PART III
     
10.
Directors, Executive Officers and Corporate Governance
30
11.
Executive Compensation
30
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
30
13.
Certain Relationships and Related Transactions, and Director Independence
30
14.
Principal Accounting Fees and Services
30
     
     
PART IV
     
15.
Exhibits, Financial Statement Schedules
31
 

 
PART I

CAUTIONARY STATEMENT

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, and other circumstances affecting anticipated revenues and costs, as more fully disclosed in our discussion of risk factors incorporated by reference in Item 1A. of Part I of this report. 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.

As used in this Form 10-K, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly owned operating subsidiaries.  All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly owned operating subsidiaries.
 
Item 1.    BUSINESS
 
OVERVIEW

Acacia Research Corporation’s operating subsidiaries acquire, develop, license and enforce patented technologies.  Our operating subsidiaries generate license fee revenues and related cash flows from the granting of licenses for the use of patented technologies that our operating subsidiaries own or control.  Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, if necessary, with the enforcement against unauthorized users of their patented technologies. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to 91 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

CombiMatrix Group Split-off Transaction and Related Discontinued Operations. In January 2006, Acacia Research Corporation’s board of directors approved a plan for its wholly owned subsidiary, CombiMatrix Corporation, the primary component of Acacia Research Corporation’s CombiMatrix group, to become an independent public company.  CombiMatrix Corporation’s registration statement on Form S-1 was declared effective by the Securities and Exchange Commission (“SEC”) on June 8, 2007.  Following the redemption period required by Acacia Research Corporation’s Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia Research Corporation through the redemption of all outstanding shares of Acacia Research-CombiMatrix common stock in exchange for  the distribution of new shares of CombiMatrix Corporation common stock, on a pro-rata basis, to the holders of Acacia Research-CombiMatrix common stock on the Redemption Date (the “Split-off Transaction”). On the Redemption Date, every ten (10) shares of Acacia Research-CombiMatrix common stock outstanding on August 15, 2007, was redeemed for one (1) share of common stock of CombiMatrix Corporation.  Subsequent to the Redemption Date, Acacia Research Corporation no longer owns any equity interests in CombiMatrix Corporation and the two companies operate independently of each other.

As a result of the Split-off Transaction, we have disposed of our investment in CombiMatrix Corporation.  Refer to Note 10A to the Acacia Research Corporation consolidated financial statements, included elsewhere herein, for information regarding presentation of the assets, liabilities, results of operations and cash flows for the CombiMatrix group as “Discontinued Operations,” for all periods presented, in accordance with guidance set forth in SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).
 
1


Capital Structure

As a result of the Split-off Transaction, Acacia Research Corporation no longer owns any equity interests in CombiMatrix Corporation and the CombiMatrix group is no longer a business group of Acacia Research Corporation.  Pursuant to the terms of the Split-off Transaction, all outstanding shares of Acacia Research-CombiMatrix common stock were redeemed, and hence, all rights of holders of Acacia Research-CombiMatrix common stock ceased as of the Redemption Date, except for the right, upon the surrender to the exchange agent of shares of Acacia Research-CombiMatrix common stock, to receive new shares of CombiMatrix Corporation stock pursuant to the exchange ratio described above.  Subsequent to the consummation of the Split-off Transaction, Acacia Research Corporation’s only class of common stock outstanding is its Acacia Research-Acacia Technologies common stock.

Prior to the Split-off Transaction, Acacia Research Corporation had two classes of common stock outstanding, its Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”) and its Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”).  AR-Acacia Technologies stock was intended to reflect separately the performance of Acacia Research Corporation’s Acacia Technologies group.  AR-CombiMatrix stock was intended to reflect separately the performance of Acacia Research Corporation’s CombiMatrix group.  Although the AR-Acacia Technologies stock and the AR-CombiMatrix stock were intended to reflect the performance of our different business groups, they were both classes of common stock of Acacia Research Corporation and were not stock issued by the respective groups.

Our Board of Directors has approved an amendment and restatement of our certificate of incorporation to remove reference to AR-CombiMatrix stock which was cancelled as a result of the redemption, to rename AR-Acacia Technologies stock as the only class of common stock, and to provide that all 100,000,000 shares of AR-Acacia Technologies stock currently authorized may be issued as a single class of common stock.  The amendment and restatement of our certificate of incorporation is subject to approval by the stockholders at the next annual meeting of stockholders, as further described in our proxy statement to be filed.  If adopted, each share of common stock will be entitled to one vote and the relative voting strength of the common stock will be equal notwithstanding the trading price of the common stock.

Other
 
Acacia Research Corporation, a Delaware corporation, was originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999.  Our website address is www.acaciaresearch.com.  We make our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge on our website as soon as reasonably practicable after we file these reports.  In addition, we post the following information on our website:
 
·  
our corporate code of conduct, our board of directors – code of conduct and our fraud policy;
 
·  
charters for our audit committee, nominating and corporate governance committee, disclosure committee and compensation committee;
 
The public may read and copy any materials that Acacia Research Corporation files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Acacia Research Corporation, that file electronically with the SEC.  The public can obtain any documents that Acacia Research Corporation files with the SEC at http://www.sec.gov.
 
2

 
BUSINESS

Intellectual Property Licensing Business

Acacia Research Corporation’s operating subsidiaries acquire, develop, license and enforce patented technologies.  Our operating subsidiaries generate license fee revenues and related cash flows from the granting of licenses for the use of patented technologies that our operating subsidiaries own or control.  Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, if necessary, with the enforcement against unauthorized users of their patented technologies. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to 91 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.  Our operating subsidiaries have established a track record of licensing success with more than 540 license agreements executed to date.  Our professional staff includes in-house patent attorneys, licensing executives, engineers and business development executives.

Our clients are primarily individual inventors and small companies who have limited resources and/or expertise to effectively address the unauthorized use of their patented technologies, and also include large companies seeking to effectively and efficiently monetize their portfolio of patented technologies. In a typical client arrangement, our operating subsidiary will acquire a patent portfolio, or acquire rights to a patent portfolio, with our clients receiving an upfront payment for the purchase of the patent portfolio or patent portfolio rights, or receiving a percentage of our operating subsidiaries net recoveries from the licensing and enforcement of the patent portfolio, or a combination of the two.

In January 2005, our wholly owned subsidiary, Acacia Global Acquisition Corporation, acquired substantially all of the assets of Global Patent Holdings, LLC, a privately held patent holding company, which owned 11 patent licensing companies (“GPH Acquisition”).  In connection with the acquisition we acquired ownership of companies that own or control the rights to 27 patent portfolios, which included 120 U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.  Refer to Note 7 to our consolidated financial statements included in this report for additional information regarding the GPH Acquisition.  Subsequent to the GPH Acquisition, we have continued to execute our business strategy in the area of patent portfolio acquisitions, including the acquisition of, or the rights to, a total of 59 additional patent portfolios covering a wide variety of technologies and with applications across several additional industries.  These and future patent portfolio acquisitions will continue to expand and diversify our operating subsidiaries' revenue generating opportunities and accelerate the execution of our overall business strategy, as we continue to build our leadership position in patent licensing.

Business Model and Strategy

The business model associated with the licensing and enforcement activities conducted by our operating subsidiaries is summarized in the following diagram:

Business model
 
3

 
Our intellectual property acquisition, development, licensing and enforcement business strategy, conducted solely by our operating subsidiaries, includes the following key elements:

·    
Identify Emerging Growth Areas where Patented Technologies will Play a Vital Role

The patent process breeds innovation and invention by granting a limited monopoly to the inventor in exchange for sharing the invention with the public. Certain technologies, including several of the technologies controlled by our operating subsidiaries, some of which are summarized below, become core technologies in the way products and services are manufactured, sold and delivered.  Our operating subsidiaries identify core, patented technologies that have been or are anticipated to be widely adopted by third parties in connection with the manufacture or sale of products and services.

·  
Contact and Form Alliances with Owners of Core, Patented Technologies

 
Often individual inventors and small companies have limited resources and/or expertise and are unable to effectively address the unauthorized use of their patented technologies.  Individual inventors and small companies may lack sufficient capital resources and may also lack in-house personnel with patent licensing expertise and/or experience, which may make it difficult to effectively out-license and/or enforce their patented technologies.

 
For years, many large companies have earned substantial revenue licensing patented technologies to third parties.  Other companies that do not have internal licensing resources and expertise have continued to record the capitalized carrying value of their intellectual property in their financial statements, without deriving income from their intellectual property or realizing the potential value of their intellectual property assets.  Securities and financial reporting regulations require these companies to periodically evaluate and potentially reduce or write-off these intellectual property assets if they are unable to substantiate these reported carrying values.

Acacia Research Corporation’s subsidiaries seek to enter into business agreements with owners of intellectual property that do not have experience or expertise in the areas of intellectual property licensing and enforcement or that do not possess the in-house resources to devote to licensing and enforcement activities.

·  
Effectively and Efficiently Evaluate Patented Technologies for Acquisition, Licensing and Enforcement

 
Subtleties in the language of a patent, recorded interactions with the patent office, and the evaluation of prior art and literature can make a significant difference in the potential licensing and enforcement revenue derived from a patent or patent portfolio.  Our specialists are trained and skilled in these areas.  It is important to identify potential problem areas prior to acquisition and commercialization and determine whether potential problem areas can be overcome, before acquiring a patent portfolio or launching a licensing program.  We have developed processes and procedures for identifying problem areas and evaluating the strength of a patent portfolio before the decision is made to allocate resources to an acquisition or a licensing and enforcement effort.

·  
Purchase or Acquire the Rights to Patented Technologies

 
After evaluation, our operating subsidiaries may elect to purchase the patented technology, or become the exclusive licensing agent for the patented technology in all or in specific fields of use.  In either case, the owner of the patent generally retains the rights to a portion of the net revenues generated from a patent’s licensing and enforcement program.  Our operating subsidiaries generally control the licensing and enforcement process and utilize their experienced in-house personnel to reduce outside costs and to ensure that the necessary capital is allocated and deployed in an efficient and cost effective manner.

·  
Successfully License and Enforce Patents with Significant Royalty Potential

 
As part of the patent evaluation process employed by our operating subsidiaries, significant consideration is also given to the identification of potential infringers, industries within which the potential infringers exist, longevity of the patented technology, and a variety of other factors that directly impact the magnitude and potential success of a licensing and enforcement program.  Our specialists are trained in evaluating potentially infringing technologies and in presenting the claims of our patents and demonstrating how they apply to companies we believe are using our technologies in their products or services.  These presentations generally take place in a non-adversarial business setting, but can also occur through the litigation process, if necessary.
 
4

 
Patented Technologies

Currently, on a consolidated basis, our operating subsidiaries own or control the rights to 91 patent portfolios, with patent expiration dates ranging from 2008 to 2027, and covering technologies used in a wide variety of industries, including the following:
 
· Aligned Wafer Bonding
· Embedded Broadcast Data
· Portable Storage Devices With Links
· Audio Communications Fraud Detection
· Encrypted Media & Playback Devices
· Product Activation
· Audio Storage and Retrieval System
· Enhanced Internet Navigation
· Projector
· Audio Video Enhancement & Synchronization
· Facilities Operation Management System
· Purifying Nucleic Acid
· Authorized Spending Accounts
· File Locking In Shared Storage Networks
· Radio Communication With Graphics
· Automated Notification of Tax Return Status
· Flash Memory
· Relational Database Access
· Broadcast Data Retrieval
· Fluid Flow Control And Monitoring
· Remote Management Of Imaging Devices
· Color Correction For Video Graphics Systems
· Graphics Data Processing
· Remote Video Camera
· Compact Disk
· Hearing Aid ECS
· Resource Scheduling
· Compiler
· Heated Surgical Blades
· Rule Based Monitoring
· Computer Graphics
· High Quality Image Processing
· Software Feature Enablement
· Computer Memory Cache Coherency
· High Resolution Optics
· Software License Management
· Computer Simulations
· Image Resolution Enhancement
· Spreadsheet Automation
· Computing Device Performance
· Interactive Content In A Cable Distribution System
· Storage Technology
· Continuous TV Viewer Measuring
· Interstitial Internet Advertising
· Surgical Catheter
· Copy Protection
· Laptop Connectivity
· Telematics
· Credit Card Fraud Protection
· Location Based Services
· Television Data Display
· Database Access
· Medical Image Stabilization
· Television Signal Scrambling
· Database Management
· Medical Monitoring
· Text Auto-Completion
· Data Encryption
· Micromirror Digital Display
· Vehicle Anti-Theft Parking Systems
· Digital Newspaper Delivery
· Microprocessor Enhancement
· Vehicle Location
· Digital Video Production
· Multi-Dimensional Bar Codes
· Vehicle Maintenance
· DMT®
· Multi-Dimensional Database Compression
· Video Editing
· Document Generation
· Online Ad Tracking
· Virtual Computer Workspaces
· Document Retrieval Using Global Word Co-Occurrence Patterns
· Parallel Processing With Shared Memory
· Virtual Server
· DRAM (Dynamic Random Access Memory)
· Peer To Peer Communications
· Web Personalization
· Dynamic Manufacturing Modeling
· Physical Access Control
· Wireless Digital Messaging
· Ecommerce Pricing
· Picture Archiving & Communication Systems
· Wireless Traffic Information
· Electronic Address List Management
· Pointing Device
· Workspace With Moving Viewpoint
· Electronic Message Advertising
· Pop-Up Internet Advertising
 
 
Patent Enforcement Litigation

Our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights.  Certain of our operating subsidiaries are parties to ongoing patent enforcement related litigation, alleging infringement by third parties of certain of the patented technologies owned or controlled by our operating subsidiaries.
 
Competition

We expect to encounter increased competition in the area of patent acquisition and enforcement.  This includes an increase in the number of competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Companies such as British Technology Group, Rembrandt Management Group, and Intellectual Ventures LLC are already in the business of acquiring the rights to patents for the purpose of licensing and enforcement, and we expect more companies to enter the market.  See, Risk Factors on page 6.
 
We also compete with venture capital firms and various industry leaders for technology licensing opportunities.  Many of these competitors may have more financial and human resources than our operating subsidiaries.  As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
 
5

 
Other companies may develop competing technologies that offer better or less expensive alternatives to our patented technologies that we may acquire and/or out-license.  Many potential competitors may have significantly greater resources than the resources that our operating subsidiaries possess.  Technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or uneconomical.
 
Employees
 
As of December 31, 2007, on a consolidated basis, Acacia Research Corporation had 45 full-time employees.  None of our subsidiaries are a party to any collective bargaining agreement.  We consider our employee relations to be good.
 
 
Item 1A.    RISK FACTORS

An investment in our stock involves a number of risks.  Before making a decision to purchase our securities, you should carefully consider all of the risks described in this annual report.  If any of the risks discussed in this annual report actually occur, our business, financial condition and results of operations could be materially adversely affected.  If this were to occur, the trading price of our securities could decline significantly and you may lose all or part of your investment.  As used in this Form 10-K, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly owned operating subsidiaries.  All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly owned operating subsidiaries.
 
GENERAL RISKS

WE HAVE A HISTORY OF LOSSES AND WILL PROBABLY INCUR ADDITIONAL LOSSES IN THE FUTURE.
 
We have sustained substantial losses since our inception resulting in a consolidated net accumulated deficit, as disclosed in the accompanying consolidated financial statements of Acacia Research Corporation included in Part IV Item 15 of this report.  We may never become profitable, or if we do, we may never be able to sustain profitability. We expect to incur significant legal, marketing, general and administrative expenses. As a result, it is more likely than not that we will incur losses for the foreseeable future.
 
BECAUSE WE HAVE SUSTAINED LOSSES SINCE OUR INCEPTION, WE CANNOT ASSURE THAT OUR OPERATIONS WILL BE PROFITABLE.
 
We commenced operations in 1993 and, we have sustained substantial losses since our inception resulting in a net consolidated accumulated deficit, as disclosed in the accompanying consolidated financial statements of Acacia Research Corporation included in Part IV Item 15 of this report. If we continue to incur operating losses in future periods, we may not have enough capital to expand our business and our operating subsidiary companies’ businesses in the future.
 
IF WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
 
Acacia Research Corporation's consolidated cash and cash equivalents along with short-term investments totaled $51.4 million and $45.0 million at December 31, 2007 and 2006, respectively.  To date, Acacia Research Corporation has relied primarily upon selling of equity securities and payments from our licensees to generate the funds needed to finance the operations of Acacia Research Corporation and our operating subsidiaries.
 
We cannot assure you that we will not encounter unforeseen difficulties, including the outside influences identified below, that may deplete our capital resources more rapidly than anticipated. As a result, our subsidiary companies may be required to obtain additional financing through bank borrowings, debt or equity financings or otherwise, which would require us to make additional investments or face a dilution of our equity interests. Any efforts to seek additional funds could be made through equity, debt or other external financings. Nevertheless, we cannot assure that additional funding will be available on favorable terms, if at all. If we fail to obtain additional funding when needed for our subsidiary companies and ourselves, we may not be able to execute our business plans and our business may suffer.
 
6

 
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD PLACE STRAINS ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES AND COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.
 
Our growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources. Further, as our subsidiary companies’ businesses grow, we will be required to manage multiple relationships. Any further growth by us or our subsidiary companies or an increase in the number of our strategic relationships will increase this strain on our managerial, operational and financial resources. This strain may inhibit our ability to achieve the rapid execution necessary to successfully implement our business plan.
 
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR ORGANIZATION TO MATCH THE GROWTH OF OUR SUBSIDIARIES.
 
As our subsidiaries grow, the administrative demands upon Acacia Research Corporation and on our operating subsidiaries, will grow, and our success will depend upon our ability to meet those demands. These demands include increased accounting, management, legal services, staff support, and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.
 
THE AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
 
In the future, we may issue securities to raise cash for acquisitions. We may also pay for interests in additional subsidiary companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute stockholders ownership interest in our company and have an adverse impact on the price of our common stock.
 
In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
 
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER OF ACACIA RESEARCH CORPORATION THAT MIGHT OTHERWISE RESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIR SHARES.
 
Provisions of Delaware law and our certificate of incorporation and bylaws could make the following more difficult: the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors. These provisions include:

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

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

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

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

·   
the division of our board of directors into three classes with staggered terms for each class, which could make it more difficult for an outsider to gain control of our board of directors.
 
Such potential obstacles to a takeover could adversely affect the ability of our stockholders to receive a premium price for their stock in the event another company wants to acquire us.
 
7

 
AS A RESULT OF THE REDEMPTION OF AR-COMBIMATRIX STOCK FOR THE COMMON STOCK OF COMBIMATRIX CORPORATION, ACACIA RESEARCH CORPORATION MAY BE SUBJECT TO CERTAIN TAX LIABILITY UNDER THE INTERNAL REVENUE CODE.  
 
Our distribution of the common stock of CombiMatrix Corporation in the redemption will be tax-free to Acacia Research Corporation if the distribution qualifies under Sections 368 and 355 of the Internal Revenue Code.  If the split-off failed to qualify under Section 355 of the Internal Revenue Code, corporate tax would be payable by the consolidated group of which Acacia Research Corporation is the common parent, based upon the difference between the aggregate fair market value of the assets of CombiMatrix Corporation’s business and the adjusted tax bases of such business to Acacia Research Corporation prior to the redemption.
 
Acacia Research Corporation received a private letter ruling from the IRS to the effect that, among other things, the redemption would be tax free to Acacia Research Corporation and the holders of AR-Acacia Technologies stock and AR-CombiMatrix stock under Sections 368 and 355 of the Internal Revenue Code. The private letter ruling, while generally binding upon the IRS, was based upon factual representations and assumptions and commitments on our behalf with respect to future operations made in the ruling request. The IRS could modify or revoke the private letter ruling retroactively if the factual representations and assumptions in the request were materially incomplete or untrue, the facts upon which the private letter ruling was based were materially different from the facts at the time of the redemption, or if we do not meet certain commitments made.
 
If the split-off failed to qualify under Section 355 of the Internal Revenue Code, corporate tax, if any, would be payable by the consolidated group of which Acacia Research Corporation is the common parent, as described above.  As such, the corporate level tax would be payable by Acacia Research Corporation. CombiMatrix Corporation has agreed however, to indemnify Acacia Research Corporation for this and certain other tax liabilities if they result from actions taken by CombiMatrix Corporation.  Notwithstanding CombiMatrix Corporation’s agreement to indemnify us, under the Internal Revenue Code’s consolidated return regulations, each member of the Acacia Research Corporation consolidated group, including our company, will be severally liable for these tax liabilities. Further, we may be liable for additional taxes if Acacia Research Corporation takes certain actions within two years following the redemption, as more fully discussed in the immediately following risk factor.  If we are found liable to the IRS for these liabilities, the resulting obligation could materially and adversely affect our financial condition, and we may be unable to recover on the indemnity from CombiMatrix Corporation.
 
FOLLOWING THE REDEMPTION OF AR-COMBIMATRIX STOCK FOR THE COMMON STOCK OF COMBIMATRIX CORPORATION, ACACIA RESEARCH CORPORATION MAY BE SUBJECT TO CERTAIN TAX LIABILITY UNDER THE INTERNAL REVENUE CODE FOR ACTIONS TAKEN BY EITHER OF THEM FOLLOWING THE REDEMPTION.
 
Even if the distribution qualifies under Section 368 and 355 of the Internal Revenue Code, it will be taxable to Acacia if Section 355(e) of the Internal Revenue Code applies to the distribution. Section 355(e) will apply if 50% or more of the AR-Acacia Technologies stock or CombiMatrix Corporation’s common stock, by vote or value, is acquired by one or more persons, other than the holders of AR-CombiMatrix stock who receive the common stock of CombiMatrix Corporation in the redemption, acting pursuant to a plan or a series of related transactions that includes the redemption. Any shares of the AR-Acacia Technologies stock, the AR-CombiMatrix stock or the common stock of CombiMatrix Corporation acquired directly or indirectly within two years before or after the redemption generally are presumed to be part of such a plan unless we can rebut that presumption. To prevent applicability of Section 355(e) or to otherwise prevent the distribution from failing to qualify under Section 355 of the Internal Revenue Code, CombiMatrix Corporation has agreed that, until two years after the redemption, it will not take any of the following actions unless prior to taking such action, it has obtained (and provided to us) a written opinion of tax counsel or a ruling from the Internal Revenue Service to the effect that such action will not cause the redemption to be taxable to us (collectively “Disqualifying Actions”):
 
 
merge or consolidate with another corporation;
 
 
liquidate or partially liquidate;
 
 
sell or transfer all or substantially all of its assets;
 
 
redeem or repurchase its stock (except in certain limited circumstances); or
 
 
take any other action which could reasonably be expected to cause Section 355(e) to apply to the distribution.
 
8

 
Further, if Acacia Research Corporation takes any Disqualifying Action, we may be subject to additional tax liability.  Many of our competitors are not subject to similar restrictions and may issue their stock to complete acquisitions, expand their product offerings and speed the development of new technology.  Therefore, these competitors may have a competitive advantage over us.  Substantial uncertainty exists on the scope of Section 355(e), and we may have undertaken, may contemplate undertaking or may otherwise undertake in the future transactions which may cause Section 355(e) to apply to the redemption notwithstanding our desire or intent to avoid application of Section 355(e). Accordingly, we cannot provide you any assurance that we will not be liable for taxes if Section 355(e) applies to the redemption.

BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY UNCONTROLLABLE OUTSIDE INFLUENCES, WE MAY NOT SUCCEED.
 
Our licensing and enforcement business operations are subject to numerous risks from outside influences, including the following:
 
·  
New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue.
 
Our operating subsidiaries acquire patents with enforcement opportunities and are spending a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented either by Congress, the United States Patent and Trademark Office, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our expenses and revenue. For example, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions. While we are not aware that any such changes are likely to occur in the foreseeable future, we cannot assure you that such changes will not occur.
 
·  
Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.

It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.
 
·  
More patent applications are filed each year resulting in longer delays in getting patents issued by the United States Patent and Trademark Office.
 
Certain of our operating subsidiaries hold and continue to acquire pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in recognizing revenue from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market. See the subheading “Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents,” below.
 
·  
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.

Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges, and as a result, we believe that the risk of delays in our patent enforcement actions will have a greater affect on our business in the future unless this trend changes.
 
·  
Any reductions in the funding of the United States Patent and Trademark Office could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications.

The assets of our operating subsidiaries consists of patent portfolios, including pending patent applications before the U.S. Patent and Trademark Office (USPTO). The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses.
 
9

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

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

Our licensing business also competes with venture capital firms and various industry leaders for technology licensing opportunities.  Many of these competitors may have more financial and human resources than our company.  As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
 
·  
Our patented technologies face uncertain market value.
 
Our operating subsidiaries have acquired patents and technologies that are at early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. Refer to the related risk factor below.
 
·  
As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents.
 
We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This may increase the risks associated with an investment in our company.
 
·  
The foregoing outside influences may affect other risk factors described in this annual report.
 
Any one of the foregoing outside influences may cause our company to need additional financing to meet the challenges presented or to compensate for a loss in revenue, and we may not be able to obtain the needed financing. See the heading “If we, or our subsidiaries, encounter unforeseen difficulties and cannot obtain additional funding on favorable terms, our business may suffer” above.

WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK TO DECLINE.
 
Our reported 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 revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our Acacia Research-Acacia Technologies common stock to decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period:
 
·  
the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;

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

·  
fluctuations in the total number of agreements executed;

10

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

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

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

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

·  
the timing of payments under the terms of any customer or license agreements into which our operating subsidiaries may enter; and

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

OUR REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM OUR FINANCIAL CONDITION.

Acacia Global Acquisition Corporation's acquisition of the assets of Global Patent Holdings, LLC in 2005, provided us with ownership of companies that control 27 patent portfolios, which include 120 U.S. patents and certain foreign counterparts.  Rights to additional patent portfolios were acquired subsequent to the acquisition of the assets of Global Patent Holdings, bringing the current total number of patent portfolios controlled by Acacia Research Corporation’s operating subsidiaries to approximately 91, covering technologies used in a wide variety of industries.   The acquisitions expand and diversify our revenue generating opportunities. We believe 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 March 2009, and for the foreseeable future.  However, due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt of license fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of our existing licensees and other factors, we cannot currently predict the amount and timing of the receipt of license fee revenues with a sufficient degree of precision.

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

OUR OPERATING SUBSIDIARIES DEPEND UPON RELATIONSHIPS WITH OTHERS TO PROVIDE TECHNOLOGY-BASED OPPORTUNITIES THAT CAN DEVELOP INTO PROFITABLE ROYALTY-BEARING LICENSES, AND IF IT IS UNABLE TO MAINTAIN AND GENERATE NEW RELATIONSHIPS, THEN IT MAY NOT BE ABLE TO SUSTAIN EXISTING LEVELS OF REVENUE OR INCREASE REVENUE.
 
Our operating subsidiaries do not invent new technologies or products; they depend on acquiring new patents and inventions through their relationships with inventors, universities, research institutions, and others.  If our operating subsidiaries are unable to maintain those relationships and continue to grow new relationships, then they may not be able to identify new technology-based opportunities for growth and sustainable revenue.  Further, because we rely upon acquiring technology from others, we cannot be certain that we will be able to obtain the volume and quality of available new technologies necessary to sustain our current or future growth.  If we are unable to obtain the necessary volume and quality of new technologies, then we may need to reduce operations or revise our business model.
 
TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY DEPRESS THE PRICE OF OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON 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 Acacia Research-Acacia Technologies common stock to fluctuate, perhaps substantially, including, among others, the following:

·  
announcements of developments in our patent enforcement actions;

·  
developments or disputes concerning our patents;

·  
our or our competitors’ technological innovations;

·  
developments in relationships with licensees;

11

 
·  
variations in our quarterly operating results;

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

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

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

·  
changes in market valuations of similar companies;

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

·  
failure to complete significant transactions.
 
For example, the Nasdaq Computer Index had a range of $1,008.96 - $1,353.94 during the 52-weeks ended December 31, 2007 and the Nasdaq Composite Index had a range of $1,108.49 - $2,892.36 over the same period.  Over the same period, our Acacia Research-Acacia Technologies common stock fluctuated within a range of $8.42 - $17.92, all of which was experienced in the fourth quarter.  We believe fluctuations in our stock price during this period could have been impacted by court rulings in our patent enforcement actions. Court rulings in patent enforcement actions are often difficult to understand, even when favorable or neutral to the value of our patents and our overall business, and we believe that investors in the market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets.
 
In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our Acacia Research-Acacia Technologies common 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 our business and financial results.
 
THE MARKETS SERVED BY OUR OPERATING SUBSIDIARIES ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND IF OUR OPERATING SUBSIDIARIES ARE UNABLE TO DEVELOP AND ACQUIRE NEW TECHNOLOGIES AND PATENTS, ITS REVENUES COULD STOP GROWING OR COULD DECLINE.
 
The markets served by our operating subsidiaries’ licensees frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. Products for communications applications, high-speed computing applications, as well as other applications covered by our operating subsidiaries’ intellectual property, are based on continually evolving industry standards. Our ability to compete in the future will, however, depend on our ability to identify and ensure compliance with evolving industry standards. This will require our continued efforts and success of acquiring new patent portfolios with licensing and enforcement opportunities. However, we expect to have sufficient liquidity and capital resources for the foreseeable future in order to maintain the level of acquisitions we believe we need to keep pace with these technological advances. However, outside influences may cause the need for greater liquidity and capital resources than expected, as described under the caption “Because our business operations are subject to many uncontrollable outside influences, we may not succeed” above.
 
THE SUCCESS OF OUR OPERATING SUBSIDIARIES DEPENDS IN PART UPON THEIR ABILITY TO RETAIN THE BEST LEGAL COUNSEL TO REPRESENT THEM IN PATENT ENFORCEMENT LITIGATION.
 
The success of our licensing business depends upon our operating subsidiaries’ ability to retain the best legal counsel to prosecute patent infringement litigation. As our operating subsidiaries’ patent enforcement actions increase, it will become more difficult to find the best legal counsel to handle all of our cases because many of the best law firms may have a conflict of interest that prevents its representation of our subsidiary companies.

OUR OPERATING SUBSIDIARIES, IN CERTAIN CIRCUMSTANCES, RELY ON REPRESENTATIONS, WARRANTIES AND OPINIONS MADE BY THIRD PARTIES, THAT IF DETERMINED TO BE FALSE OR INACCURATE, MAY EXPOSE CERTAIN OF OUR OPERATING SUBSIDIARIES TO CERTAIN LIABILITIES THAT COULD BE MATERIAL.
 
From time to time, our operating subsidiaries may rely upon representations and warranties made by third parties from whom certain of our operating subsidiaries acquired patents or the exclusive rights to license and enforce patents. We also may rely upon the opinions of purported experts.  In certain instances, we may not have the opportunity to independently investigate and verify the facts upon which such representations, warranties, and opinions are made. By relying on these representations, warranties and opinions, our operating subsidiaries may be exposed to liabilities in connection with the licensing and enforcement of certain patents and patent rights.  It is difficult to predict the extent and nature of such liabilities which, in some instances, may be material.

12

 
IN CONNECTION WITH PATENT ENFORCEMENT ACTIONS CONDUCTED BY CERTAIN OF OUR SUBSIDIARIES, A COURT MAY RULE THAT OUR SUBSIDIARIES HAVE VIOLATED CERTAIN STATUTORY, REGULATORY, FEDERAL, LOCAL OR GOVERNING RULES OR STANDARDS, WHICH MAY EXPOSE US AND OUR OPERATING SUBSIDIARIES TO MATERIAL LIABILITIES, WHICH COULD MATERIALLY HARM OUR OPERATING RESULTS AND OUR FINANCIAL POSITION.
 
In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions.  In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position.

OUR INVESTMENTS IN AUCTION RATE SECURITIES ARE SUBJECT TO RISKS, INCLUDING THE CONTINUED FAILURE OF FUTURE AUCTIONS, WHICH MAY CAUSE US TO INCUR LOSSES OR HAVE REDUCED LIQUIDITY.
 
We invest our cash balances in high-quality issuers and limit the amount of credit exposure to any one issuer other than the United States government and its agencies. At December 31, 2007, our investments in marketable securities consist of United States Government and Government Agency Bonds, and auction rate securities. Our auction rate securities are investment grade quality and are in compliance with our investment policy as of the end of 2007. We believe that the fair value of these investments continue to approximate their par value; however, we did experience failed auctions with certain of our issues in February 2008.  Given the deteriorating credit markets, and the increased incidence of failure within the auction market in February 2008, there can be no assurance as to when we would be able to liquidate a particular issue. In such case of a failure, the auction rate securities continue to pay interest in accordance with their terms; however, we may not be able to access the par value of the invested funds until a future auction of these investments is successful, the security is called by the issuer or a buyer is found outside of the auction process.  Furthermore, if this situation were to persist despite our ability to hold such investments until maturity, we may be required to record an impairment charge in a future period.  The systemic failure of future auctions for auction rate securities may result in a loss of liquidity, substantial impairment to our investments, realization of substantial future losses, or a complete loss of the investment in the long-term which may have a material adverse effect on our business, results of operations, liquidity, and financial condition. See Note 2 of our Notes to Consolidated Financial Statements for additional information about our investments in marketable securities.
 
Item 1B.    UNRESOLVED STAFF COMMENTS

None.
 
Item 2.    PROPERTIES

Acacia Research Corporation leases approximately 18,302 square feet of office space in Newport Beach, California, under a lease agreement that expires in February 2012.  Presently, we are not seeking any additional facilities.
 
Item 3.    LEGAL PROCEEDINGS

 In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our intellectual property enforcement activities.  We believe that any liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

13

 
PART II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Recent Market Prices
 
Acacia Research Corporation’s AR-Acacia Technologies stock and AR-CombiMatrix stock commenced trading on the Nasdaq Stock Market on December 16, 2002, under the symbols “ACTG” and “CBMX,” respectively.  Prior to December 16, 2002, Acacia Research Corporation’s only class of common stock began trading under the symbol “ACRI” on the NASDAQ National Market System on July 8, 1996.

As a result of the Split-off Transaction described above, all outstanding shares of AR-CombiMatrix stock were redeemed, and hence, all rights of holders of AR-CombiMatrix stock ceased as of the Redemption Date (August 15, 2007), except for the right, upon the surrender to the exchange agent of shares of AR-CombiMatrix stock, to receive new shares of CombiMatrix Corporation stock pursuant to the exchange ratio described above.  Subsequent to the consummation of the Split-off Transaction, Acacia Research Corporation’s only class of common stock outstanding is its AR-Acacia Technologies stock.
 
Prior to the Split-off Transaction, Acacia Research Corporation had two classes of common stock outstanding, its AR-Acacia Technologies stock and its AR-CombiMatrix stock.  AR-Acacia Technologies stock was intended to reflect separately the performance of Acacia Research Corporation’s “Acacia Technologies group.”  AR-CombiMatrix stock was intended to reflect separately the performance of Acacia Research Corporation’s “CombiMatrix group.”  Although the AR-Acacia Technologies stock and the AR-CombiMatrix stock were intended to reflect the performance of our different business groups, they were both classes of common stock of Acacia Research Corporation and were not stock issued by the respective groups.  As a result of the Split-off Transaction, the CombiMatrix group is no longer a business group of Acacia Research Corporation.

The markets for securities such as our common stock have historically experienced significant price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock.

The high and low bid prices for our two classes of common stock as reported by NASDAQ for the periods indicated are shown in the table below. Such prices are inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions.
 
   
2007
   
2006
 
   
Fourth Quarter
   
Third Quarter
   
Second Quarter
   
First
Quarter
   
Fourth Quarter
   
Third Quarter
   
Second Quarter
   
First
Quarter
 
                                                 
Acacia Research-Acacia Technologies stock:
                                               
High                                           
  $ 17.92     $ 16.75     $ 16.84     $ 16.56     $ 15.58     $ 14.95     $ 14.65     $ 9.00  
Low                                           
  $ 8.42     $ 10.87     $ 12.76     $ 12.23     $ 11.05     $ 9.31     $ 8.85     $ 6.65  
                                                                 
Acacia Research-CombiMatrix stock(1):
                                                               
High                                           
    N/A     $ 0.74     $ 0.81     $ 1.85     $ 1.07     $ 1.68     $ 2.75     $ 2.90  
Low                                           
    N/A     $ 0.57     $ 0.50     $ 0.58     $ 0.70     $ 0.96     $ 1.45     $ 1.34  
____________________________                                                                       
1)  Reflects prices of AR-CombiMatrix stock through close of trading on August 14, 2007, immediately prior to the Redemption.

14

 
STOCK PERFORMANCE GRAPH
 
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Acacia Research Corporation under the Securities Act of 1933, as amended.

The Stock Performance Graph depicted below compares the yearly change in Acacia Research Corporation’s cumulative total stockholder return for the last five fiscal years with the cumulative total return of the Nasdaq Stock Market (U.S.) Composite Index and the Nasdaq Biotech Index.
 
 
   
2003
   
2004
   
2005
   
2006
   
2007
 
                               
AR-Acacia Technologies stock
  $ 226     $ 220     $ 286     $ 555     $ 373  
AR-CombiMatrix stock                                           
  $ 92     $ 109     $ 38     $ 22     $ 16 *
Nasdaq Composite Index                                           
  $ 150     $ 163     $ 165     $ 181     $ 199  
Nasdaq Biotech Index                                           
  $ 146     $ 155     $ 159     $ 161     $ 168  
____________________________
*Based on the closing trading price of AR-CombiMatrix stock on August 14, 2007, immediately prior to the Redemption.

The graph covers the period from December 31, 2002 to December 31, 2007, except the share price of AR-CombiMatrix stock in 2007 is measured as of August 14, 2007.  Cumulative total returns are calculated assuming that $100 was invested on December 31, 2002, in each class of Acacia Research Corporation’s common stock outstanding as of December 31, 2002, and in each index, and that all dividends, if any, were reinvested. Refer to Acacia Research Corporation’s Dividend Policy below.  Stockholder returns over the indicated period should not be considered indicative of future stock prices or shareholder returns.
 
On February 25, 2008, there were approximately 114 owners of record of Acacia Research Corporation stock. The majority of the outstanding shares of Acacia Research Corporation stock are held by a nominee holder on behalf of an indeterminable number of ultimate beneficial owners.
 
Dividend Policy

To date, we have not declared or paid any cash dividends with respect to our capital stock, and the current policy of the board of directors is to retain earnings, if any, to provide for the growth of Acacia Research Corporation and our operating subsidiaries. Consequently, we do not expect to pay any cash dividends in the foreseeable future. Further, there can be no assurance that our proposed operations will generate revenues and cash flow needed to declare a cash dividend or that we will have legally available funds to pay dividends.
 
15

 
Equity Compensation Plan Information
 
The following table provides information with respect to Acacia Research Corporation’s common shares issuable under our equity compensation plans as of December 31, 2007:
 
 
Plan Category
 
 
(a) Number of securities to be issued upon exercise of outstanding options
 
 
(b) Weighted-Average
exercise price
of outstanding options
 
 
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders            
2002 Acacia Technologies Stock Incentive Plan(1)
 
4,919,000
 
  $8.45
 
 18,000
2007 Acacia Technologies Stock Incentive Plan(2)
 
     50,000
 
$16.01
 
171,000
Subtotal
 
4,969,000
 
  $8.52
 
189,000
Equity compensation plans not approved by security holders(3)  
  N/A
 
  N/A
 
  N/A
Total
 
4,969,000
 
  $8.52
 
189,000
_________________________
(1)
Our 2002 Acacia Technologies Stock Incentive Plan, as amended, or the 2002 Plan, allows for the granting of stock options and other awards to eligible individuals, which generally includes directors, officers, employees and consultants.  The 2002 Plan does not segregate the number of securities remaining available for future issuance among stock options and other awards.  The shares authorized for future issuance represents the total number of shares available through any combination of stock options or other awards.  The share reserve under the 2002 Plan automatically increases on the first trading day in January each calendar year by an amount equal to three percent (3%) of the total number of shares of our Acacia Research-Acacia Technologies stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 500,000 shares and in no event will the total number of shares of common stock in the share reserve (as adjusted for all such annual increases) exceed twenty million shares.  Column (a) excludes 576,000 in nonvested restricted stock awards outstanding at December 31, 2007.  Refer to Note 11 to our consolidated financial statements included elsewhere herein.
 
 (2)
Our 2007 Acacia Technologies Stock Incentive Plan, or the 2007 Plan, allows for the granting of stock options and other awards to eligible individuals, which generally includes directors, officers, employees and consultants, and was approved by security holders on May 15, 2007.  The 2007 Plan does not segregate the number of securities remaining available for future issuance among stock options and other awards.  The shares authorized for future issuance represents the total number of shares available through any combination of stock options or other awards.  The initial share reserve under the 2007 Plan was 560,000 shares of our Acacia Research-Acacia Technologies stock. The share reserve under the 2007 Plan automatically increases on January 1, 2008 and 2009, by an amount equal to two percent (2%) of the total number of shares of our Acacia Research-Acacia Technologies stock outstanding on the last trading day of December in the prior calendar year, except that the automatic increase in the share reserve will be three percent (3%) of our outstanding common stock on such January 1, if our common stock has appreciated by at least thirty percent (30%) in the prior calendar year. After January 1, 2009, no new additional shares will be added to the 2007 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2007 Plan).   Column (a) excludes 339,000 in nonvested restricted stock awards outstanding at December 31, 2007.  Refer to Note 11 to our consolidated financial statements included elsewhere herein.
 
(3)
We have not authorized the issuance of equity securities under any plan not approved by security holders.
 
16


Item 6.            SELECTED FINANCIAL DATA
 
The consolidated selected balance sheet data as of December 31, 2007 and 2006 and the consolidated selected statements of operations data for the years ended December 31, 2007, 2006 and 2005 set forth below have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto).  The consolidated selected balance sheet data as of December 31, 2005, 2004 and 2003 and the consolidated selected statements of operations data for the years ended December 31, 2004 and 2003 have been derived from unaudited consolidated financial statements not included herein, but which were previously filed with the SEC.

Consolidating Statements of Operations Data
(In thousands, except share and per share data)
 
   
For the Years Ended December 31,
 
   
2007
   
2006
   
2005
   
2004
   
2003
 
                               
License fee revenues
  $ 52,597     $ 34,825     $ 19,574     $ 4,284     $ 692  
 
                                       
Marketing, general and administrative expenses (including non-cash stock compensation charges)
    20,042       14,123       8,097       5,043       4,300  
Inventor royalties and contingent legal fees expense - patents
    29,224       17,159       11,331       -       -  
Legal expenses - patents
    7,024       4,780       2,468       3,133       1,886  
Amortization of patents
    5,583       5,313       4,922       501       502  
Operating loss
    (9,511 )     (6,847 )     (7,244 )     (6,055 )     (6,013 )
Other income, net
    2,359       1,524       1,071       471       408  
Loss from continuing operations before minority interests
    (7,152 )     (5,323 )     (6,173 )     (5,445 )     (5,468 )
Loss from continuing operations
    (7,359 )     (5,363 )     (6,038 )     (5,439 )     (5,451 )
Discontinued operations - Split-off of CombiMatrix Corporation and other
    (8,086 )     (20,093 )     (12,638 )     606       (18,969 )
Net loss
  $ (15,445 )   $ (25,456 )   $ (18,676 )   $ (4,833 )   $ (24,420 )
                                         
Loss per common share - basic and diluted:
                                       
Loss from continuing operations
                                       
Acacia Research - Acacia Technologies stock
  $ (0.26 )   $ (0.19 )   $ (0.23 )   $ (0.27 )   $ (0.28 )
Discontinued operations - Split-off of CombiMatrix Corporation
                                       
Acacia Research - CombiMatrix stock
  $ (0.14 )   $ (0.49 )   $ (0.37 )   $ 0.02     $ (0.76 )
 
                                       
Weighted average number of common and potential common shares used in computation of income (loss) per common share:
                                       
Acacia Research - Acacia Technologies stock:
                                       
Basic and diluted
    28,503,314       27,547,651       26,630,732       19,784,883       19,661,655  
Acacia Research - CombiMatrix stock:
                                       
Basic
    55,862,707       40,605,038       33,678,603       29,962,596       24,827,819  
Diluted
    55,862,707       40,605,038       33,678,603       30,995,663       24,827,819  

 
Consolidating Balance Sheet Data
  (In thousands)
 
   
At December 31,
 
   
2007
   
2006
   
2005
   
2004
   
2003
 
Total assets:
                             
Acacia Research Corporation
  $ 71,051     $ 65,770     $ 68,893     $ 33,058     $ 39,978  
Discontinued operations - Split-off of CombiMatrix Corporation
    -       44,214       52,541       55,388       50,161  
Eliminations
    -       (380 )     -       (119 )     (99 )
Total
  $ 71,051     $ 109,604     $ 121,434     $ 88,327     $ 90,040  
Total liabilities:
                                       
Acacia Research Corporation
  $ 6,247     $ 4,276     $ 6,647     $ 3,472     $ 4,188  
Discontinued operations - Split-off of CombiMatrix Corporation
    -       11,399       7,443       8,560       24,424  
Eliminations
    -       (380 )     -       (119 )     (99 )
Total
  $ 6,247     $ 15,295     $ 14,090     $ 11,913     $ 28,513  
Minority interests:
                                       
Acacia Research Corporation
  $ -     $ -     $ 443     $ 778     $ 1,127  
Discontinued operations - Split-off of CombiMatrix Corporation
    -       -       4       -       -  
Total
  $ -     $ -     $ 447     $ 778     $ 1,127  
Stockholders' equity:
                                       
Acacia Research Corporation
  $ 64,804     $ 61,494     $ 61,803     $ 28,808     $ 34,663  
Discontinued operations - Split-off of CombiMatrix Corporation
    -       32,815       45,094       46,828       25,737  
Total
  $ 64,804     $ 94,309     $ 106,897     $ 75,636     $ 60,400  
 
17

 
Factors Affecting Comparability:
 
·  
Effective January 1, 2006, Acacia Research Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires that compensation cost relating to share-based payment transactions be recognized in the statement of operations.  Refer to Note 2 and Note 11 to the Acacia Research Corporation consolidated financial statements included elsewhere herein, for additional information and a description of the impact of SFAS No. 123R on our consolidated statements of operations data presented above.  Non-cash stock compensation charges included in Marketing, General and Administrative expense were $5,908,000, $3,946,000 and $356,000 in 2007, 2006 and 2005, respectively.
 
·  
In September 2007, we recorded a non-cash impairment charge of $235,000, related to the write-off of a patent-related intangible asset.  In June 2006, we recorded a non-cash charge of $297,000, related to the write-off of a patent-related intangible asset.  In June 2003, we recorded an impairment charge of $207,000 for an other-than-temporary decline in the fair value of a cost method investment.
 
·  
As a result of the conclusion of the V-chip patent litigation, our subsidiary, Soundview Technologies Inc., recognized $1,500,000 of V-chip related deferred license fee revenues, $668,000 of V-chip related deferred legal costs, and a non-cash V-chip related goodwill impairment charge of $1.6 million in the third quarter of 2004.
 
·  
In January 2005, Acacia Global Acquisition Corporation consummated the GPH Acquisition as described above.  The aggregate purchase consideration was approximately $25.1 million, including $5.0 million of cash, the issuance of 3,938,832 shares of Acacia Research-Acacia Technologies common stock, or AR-Acacia Technologies stock, valued at $19.3 million (net of estimated common stock registration costs of $212,000) and acquisition costs, including registration costs, of $796,000.  $25.1 million of the purchase price was allocated to patent related intangible assets acquired, which are being amortized on a straight-line basis over a weighted-average estimated economic useful life of six years.  As a result of the GPH Acquisition and subsequent patent acquisitions through December 31, 2007, amortization expense totaled $5.6 million, $5.3 million and $4.9 million in 2007, 2006 and 2005, respectively, as compared to approximately $501,000, and $502,000, in 2004 and 2003, respectively.
 
·  
As a result of the Split-off Transaction, as discussed above, we have disposed of our investment in CombiMatrix Corporation.  Refer to Note 10A to the Acacia Research Corporation consolidated financial statements, included elsewhere herein, for information regarding presentation of the assets, liabilities, results of operations and cash flows for the CombiMatrix group as “Discontinued Operations,” for all periods presented, in accordance with guidance set forth in SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).
 
18

 
Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including those set forth under item 1A. “Risk Factors” elsewhere herein.

General

Acacia Research Corporation’s operating subsidiaries acquire, develop, license and enforce patented technologies.  Our operating subsidiaries generate license fee revenues and related cash flows from the granting of licenses for the use of patented technologies that our operating subsidiaries own or control.  Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, if necessary, with the enforcement against unauthorized users of their patented technologies. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to 91 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

As used in this Form 10-K, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly owned operating subsidiaries.  All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly owned operating subsidiaries.

CombiMatrix Group Split-off Transaction and Related Discontinued Operations. As discussed below under the caption “Discontinued Operations – Split-off of CombiMatrix Corporation,” the CombiMatrix group, which was previously presented as a separate reportable segment, was split-off from Acacia Research Corporation (the “Split-off Transaction”), effective August 15, 2007 (the “Redemption Date”).  As such, the results of operations for the CombiMatrix group in the accompanying consolidated financial statements are presented as part of Acacia Research Corporation’s results from discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144.  Accordingly, the CombiMatrix group’s results of operations in prior periods have been reclassified to discontinued operations to conform to the current period presentation.

The intellectual property acquisition, development, licensing and enforcement business conducted by Acacia Research Corporation’s operating subsidiaries, is described more fully in Item 1. “Business,” of this report.

Overview

Our operating activities during 2007, 2006 and 2005, were principally focused on the continued development, licensing and enforcement of the patent portfolios owned or controlled by our operating subsidiaries, including the continued pursuit of multiple ongoing technology licensing and enforcement  programs and the commencement of new technology licensing and enforcement programs.  In addition, we continued our focus on business development, including the acquisition of several additional patent portfolios by certain of our operating subsidiaries and the continued pursuit of additional opportunities to partner with patent owners and provide our unique intellectual property licensing, development and enforcement services.

License fee revenues recognized in 2007 totaled $52.6 million, representing a 51% increase over revenues recognized in 2006, which totaled $34.8 million, and a greater than 100% increase over revenues recognized in 2005, which totaled $19.6 million.  The increase in license fee revenues in 2007 and 2006 reflects the impact of the increase in patent portfolios owned or controlled by our operating subsidiaries, and the increase in the number of patent licensing and enforcement programs launched and generating revenues since the end of 2005.

Revenues for 2007 included license fees from 91 new licensing agreements covering 16 of our technology licensing and enforcement programs, as compared to 72 new licensing agreements covering 14 of our technology licensing and enforcement programs in 2006 and 83 new licensing agreements covering 12 of our technology licensing and enforcement programs in 2005.  On a consolidated basis, our operating subsidiaries generated licensing revenues from 8 new technology licensing and enforcement programs during 2007, as compared to 7 new programs in 2006 and 11 new programs in 2005.  To date, on a consolidated basis, we have generated revenues from 28 technology licensing and enforcement programs.

License fee revenues for 2007 included fees from the licensing of our Color Correction for Video Graphics Systems technology, DMT® technology, Audio/Video Enhancement and Synchronization technology, Audio Communications Fraud Detection technology, Credit Card Fraud Protection technology, Electronic Address List Management technology, Image Resolution Enhancement technology, Pop-Up Internet Advertising technology, Portable Storage Devices with Links technology, Multi-dimensional Bar Codes technology, Product Activation technology, Rule Based Monitoring technology, Spreadsheet Automation technology, Telematics technology, Vehicle Magnetic Braking technology and Virtual Computer Workspaces technology licensing programs.

19

 
Management measures and assesses the performance and growth of the patent licensing and enforcement business conducted by our operating subsidiaries based on consolidated license fee revenues recognized across all of our technology licensing and enforcement programs on a trailing twelve-month basis.  Trailing twelve-month revenues totaled $52.6 million as of December 31, 2007, as compared to $47.9 million as of September 30, 2007, $46.8 million as of June 30, 2007, $55.3 million as of March 31, 2007, $34.8 million as of December 31, 2006 and $19.6 million as of December 31, 2005.

Operating expenses increased during 2007 and 2006, as compared to 2005, due primarily to the hiring of additional patent licensing, business development and engineering personnel, an increase in patent related legal, research and consulting expenses incurred in connection with the continued growth and expansion of our technology licensing and enforcement business and an increase in corporate, general and administrative costs related to ongoing operations.  Inventor royalties expenses and contingent legal fees expenses increased in 2007 and 2006, as compared to 2005, primarily due to the related increase in license fee revenues, as discussed above, and the impact of the varying economic terms related to inventor agreements and contingent legal fee arrangements associated with the revenue generating patent portfolios in each period.

During 2007, certain of our operating subsidiaries continued to execute our business strategy in the area of patent portfolio acquisitions, including, in the fourth quarter of 2007, the acquisition of, or the acquisition of the rights to, patent portfolios in the Authorized Spending Accounts, Compiler, Copy Protection, Projector, and Virtual Server technology areas.  During 2007, we acquired a total of 31 new patent portfolios with applications over a wide range of technology areas, as compared to 20 new patent portfolios in 2006 and 8 new patent portfolios in 2005 (excluding portfolios acquired in connection with the 2005 GPH Acquisition).

In January 2005, Acacia Global Acquisition Corporation acquired substantially all of the assets of Global Patent Holdings, LLC, a privately held patent holding company, which owned 11 patent licensing companies (“GPH Acquisition”).  In connection with the acquisition we acquired ownership of companies that own or control the rights to 27 patent portfolios, which included 120 U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

Refer to “Liquidity and Capital Resources” below for information regarding the impact of patent and patent rights acquisitions on Acacia Research Corporation’s consolidated financial statements for the periods presented.

As of December 31, 2007, we had several option agreements with third-party patent portfolio owners regarding the potential acquisition of additional patent portfolios.
 
Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.  In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly.

We believe that, of the significant accounting policies discussed in Note 2 to our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:

·  
revenue recognition;
·  
stock-based compensation expense;
·  
valuation of long-lived and intangible assets; and
·  
impairment of marketable securities;

We discuss below the critical accounting assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, refer to Note 2 to the consolidated financial statements included herein.

20

 
Revenue Recognition
 
As described below, significant management judgments must be made and used in connection with the revenue recognized in any accounting period.  Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.

Revenue is recognized, in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” (“SAB No. 104”), when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the terms of the agreement, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.

We make estimates and judgments when determining whether the collectibility of license fees receivable from licensees is reasonably assured. We assess the collectibility of license fees receivable based on a number of factors, including past transaction history and the credit-worthiness of licensees.  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. Management estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues.  Our assumptions and judgments regarding future collectibility could differ from actual events, thus materially impacting our financial position and results of operations.

Certain license agreements provide for the payment of contractually determined paid-up license fees to our operating subsidiaries in consideration for the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries.  Generally, the execution of these license agreements also provide for the release of the licensee from certain claims and the dismissal of any pending litigation.  Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future license and related releases, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services.  Generally, the agreements provide for the grant of the license and releases upon execution of the agreement.  As such, the earnings process is generally complete upon the execution of the agreement, and revenue is recognized upon execution of the agreement, when collectibility is reasonably assured, and all other revenue recognition criteria have been met.

For those arrangements where royalties cannot be reasonably estimated, our operating subsidiaries recognize revenue upon the receipt of cash or license fee statements from their licensees, as described at Note 2 to our consolidated financial statements contained elsewhere herein.  Our operating subsidiaries recognize certain license fee revenues when earned over the term of the license agreement in exchange for the grant of non-exclusive licenses to use certain technologies for which our operating subsidiaries own or control patents. Our operating subsidiaries recognize revenue for estimates of license fees earned during the applicable period, based on historical activities of licensees, historical sales or per unit growth rates of licensees and other relevant available information regarding licensee activities that factor into the calculation of periodic license fees due.  Revisions, if any, are made for actual licensee fees received in the following quarter. Historically, these revisions have not been material to our consolidated financial statements. Estimates of periodic license fees due could differ from actual events, thus materially impacting our financial position and results of operations.
 
Our operating subsidiaries are responsible for the licensing and enforcement of their respective patented technologies and pursue third parties that are utilizing their intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement.  As a result of these activities, from time to time, our operating subsidiaries may recognize royalty revenues in a current period that relate to infringements by licensees that occurred in prior periods.  These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods.  Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts, are recognized in the period such adjustment is determined as a change in accounting estimate.

Stock-based Compensation Expense
 
Effective January 1, 2006, Acacia Research Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, “Statement of Cash Flows.”  SFAS No. 123R sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires all share based-payments to be recognized as expense in the statement of operations. In March 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”), which requires stock-based compensation to be classified in the same expense line items as cash compensation (i.e. marketing, general and administrative expenses).  The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using a Black-Scholes option pricing model), and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).  Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our classes of common stock and employee stock option exercise behavior.
 
21

 
SFAS No. 123R also requires stock-based compensation expense to be recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate.  As such, SFAS No. 123R requires Acacia Research Corporation to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation expense recognized.  Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if actual forfeitures differ from those estimates.  We consider several factors in connection with our estimate of pre-vesting forfeitures including types of awards, employee class, and historical pre-vesting forfeiture data.  The estimation of stock awards that will ultimately vest requires judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised.  If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
 
Refer to Notes 2 and 11 to the Acacia Research Corporation consolidated financial statements included in Part IV, Item 15 of this report for more information.
  
Valuation of Long-lived and Intangible Assets

We review long-lived assets, including patent related intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Factors we consider important, which could trigger an impairment review include the following:
 
·  
significant underperformance relative to expected historical or projected future operating results;
 
·  
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
 
·  
significant negative industry or economic trends;
 
·  
significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and
 
·  
significant decline in our stock price for a sustained period.
 
We calculate estimated future undiscounted cash flows, before interest and taxes, resulting from the use of the asset and its estimated value at disposal and compare it to its carrying value in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on a valuation model and discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists.

As described above, in assessing the recoverability of intangible assets, estimates of market values, estimates of the amount and timing of future cash flows, and estimates of other factors are used to determine the fair value of the respective assets. If these estimates or related projections change in future periods, future intangible asset impairment tests may result in a charges to earnings.  Refer to Note 6 to the consolidated financial statements, included elsewhere herein, for information on impairment charges recorded during the periods presented.

Impairment of Marketable Securities

The fair value of our investments is determined by quoted market prices.  Realized and unrealized gains and losses are recorded based on the specific identification method.  We review impairments associated with our investments in marketable securities in accordance with Emerging Issues Task Force (“EITF”) 03-1 and FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” to determine the classification of any impairment as “temporary” or “other-than-temporary.”   For investments classified as available-for-sale, unrealized losses that are other than temporary are recognized in the consolidated statement of operations and comprehensive income (loss) (hereinafter “consolidated statement of operations”).  An impairment is deemed other than temporary unless (a) we have the ability and intent to hold an investment for a period of time sufficient for recovery of its carrying amount and (b) positive evidence indicating that the investment's carrying amount is recoverable within a reasonable period of time outweighs any evidence to the contrary. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, the carrying amount of the investment is recoverable within a reasonable period of time.
 
We believe that our investments in certain auction rate securities continue to approximate their par value;  however, such risks, including the systemic failure of future auctions for auction rate securities, may result in a loss of liquidity, substantial impairment to our investments, realization of substantial future losses, or a complete loss of the investment in the long-term which may have a material adverse effect on our business, results of operations, liquidity, and financial condition.  See Note 2 of our Notes to Consolidated Financial Statements for additional details about our investments in auction rate securities and other marketable securities.

22


Acacia Research Corporation
Results of Operations

Net Loss (In thousands)
 
   
2007
   
2006
   
2005
 
                   
Loss from continuing operations
  $ (7,359 )   $ (5,363 )   $ (6,038 )
Loss from discontinued operations - Split-off of CombiMatrix Corporation and other
    (8,086 )     (20,093 )     (12,638 )
Net loss
    (15,445 )     (25,456 )     (18,676 )

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

Revenues (In thousands)
 
   
2007
   
2006
   
2005
 
                   
License fees
  $ 52,597     $ 34,825     $ 19,574  
 
License Fees.  Revenues for 2007 included license fees from 91 new licensing agreements covering 16 of our technology licensing and enforcement programs, as compared to 72 new licensing agreements covering 14 of our technology licensing and enforcement programs in 2006, and 83 new licensing agreements covering 12 of our technology licensing and enforcement programs in 2005.  The increase in license fee revenues in 2007 and 2006, as compared to 2005, reflects the impact of the increase in patent portfolios owned or controlled by our operating subsidiaries since 2005, and the related increase in the number of patent licensing and enforcement programs developed, launched and generating revenues since 2005.  On a consolidated basis, as of December 31, 2007, 28 of our licensing programs had begun generating licensing revenues, up from 20 as of December 31, 2006 and 13 as of December 31, 2005.  License fee revenues recognized by our operating subsidiaries fluctuate from period to period primarily based on the following factors:
 
·   
the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;
·   
the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments;
·    fluctuations in the total number of agreements executed;
·   
fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;
·    the timing of the receipt of periodic license fee payments and/or reports from licensees; and
·   
fluctuations in the net number of active licensees period to period.

Costs incurred in connection with our operating subsidiaries licensing and enforcement activities, other than inventor royalties expense, contingent legal fees expense and patent-related legal expenses, are included in marketing, general and administrative expenses.
 
Operating Expenses (In thousands)
 
   
2007
   
2006
   
2005
 
                   
Marketing, general and administrative expenses (including non-cash stock compensation
                 
expense of $5,908 for 2007, $3,946 for 2006 and $356 for 2005)
  $ 20,042     $ 14,123     $ 8,097  
Inventor royalties and contingent legal fees expense - patents
    29,224       17,159       11,331  
Legal expenses - patents
    7,024       4,780       2,468  
Write-off of patent-related intangible asset
    235       297       -  
Amortization of patents
    5,583       5,313       4,922  

 
Marketing, General and Administrative Expenses.  Marketing, general and administrative expenses consist of compensation and related personnel costs including non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration and other corporate costs, and patent related development, commercialization, research, consulting and maintenance costs.

Excluding the impact of non-cash stock compensation charges discussed below, the net increase for the periods presented was due primarily to the addition of licensing, business development and engineering personnel and an increase in other personnel related expenses in each comparable period, a one-time severance charge for an employee separation under the Acacia Research Corporation Executive Severance Plan in the first quarter of 2007, an increase in patent acquisition and business development related research and consulting costs and an increase in corporate, general and administrative costs, including an increase in accounting fees related to the CombiMatrix Split-off Transaction.  The overall increase in marketing, general and administrative expenses is reflective of the continued growth and expansion of our intellectual property acquisition, licensing and enforcement business conducted by our operating subsidiaries and related ongoing operations.   In 2007, as compared to 2006, these increases were partially offset by a decrease in consulting expenses due to the expiration of the consulting agreement with the former CEO of Global Patent Holdings, LLC in January 2007.  The increases in 2006, as compared to 2005, were partially offset by a reduction in Acacia Research Corporation’s Sarbanes-Oxley compliance costs.

23

 
Non-cash stock compensation charges increased during 2007, as compared to 2006, due to the issuance of equity based incentive awards to new and existing employees during 2007.  In addition, the increase in non-cash stock compensation expense also reflects the increase in the AR-Acacia Technologies stock price during 2007, as compared to 2006, as illustrated at Item 5. “Recent Market Prices” above.  The weighted average fair value of stock options granted during 2007 and 2006 was $9.07 and $5.35, respectively.  The weighted average fair value of nonvested restricted shares granted during 2007 and 2006 was $14.04 and $11.87, respectively (see Note 11 to the consolidated financial statements for information on the determination of fair value for share based awards under SFAS No. 123R).  The increase in non-cash stock compensation charges in 2006, as compared to 2005, reflects our adoption of SFAS No. 123R, effective January 1, 2006, which required public companies to measure all employee stock-based compensation awards using a fair-value method and record such expense in their consolidated financial statements, as described under “Critical Accounting Estimates.”

A summary of the main drivers of the change in marketing, general and administrative expenses, including the impact of non-cash stock compensation charges, for the periods presented, is as follows (in thousands):
 
   
2007 vs. 2006
   
2006 vs. 2005
 
             
Increase in personnel expenses
  $ 2,767     $ 1,247  
Increase (decrease) in GPH Acquisition related consulting expenses
    (925 )     96  
One-time severance charge for employee separation
    360       -  
Increase in foreign taxes paid on licensing fees
    125       6  
Increase in accounting and other professional fees
    141       392  
Increase in patent development / commercialization and other
    1,021       92  
Increase in office and facilities and other marketing, general and administrative costs
    468       603  
Increase in non-cash stock compensation expense
    1,962       3,590  

Inventor Royalties and Contingent Legal Fees Expense.  Inventor royalties expense totaled $12.1 million and $9.6 million in 2007 and 2006, respectively, and contingent legal fees expense totaled $17.2 million and $7.5 million in 2007 and 2006, respectively.  Inventor royalties expenses and contingent legal fees expenses for the periods presented were incurred in connection with the recognition of the related license fee revenues, summarized above.  The majority of the patent portfolios owned or controlled by our operating subsidiaries are subject to patent and patent rights agreements with inventors containing provisions granting to the original patent owner the right to receive inventor royalties based on future net revenues, as defined in the respective agreements, and may also be subject to contingent legal fee arrangements with external law firms engaged on a contingent fee basis.  The economic terms of the inventor and contingent fee arrangements, if any, vary across our patent portfolios.  As such, inventor royalties and contingent legal fee expenses fluctuate period to period based on the amount of revenues recognized each period and the mix of specific patent portfolios, with varying economic terms, generating revenues each period.

The increase in inventor royalties expense and contingent legal fees expense in 2007 was due in part to the increase in license fee revenues recognized in 2007, as compared to 2006, as discussed above, and also reflects the impact of the mix of patent portfolios with varying economic terms generating the revenues during the respective periods.  A portion of 2006 revenues were comprised of license fees from patent portfolios that were not subject to a contingent legal fee arrangement, whereas the majority of patent portfolios generating revenues in 2007 were subject to contingent legal fee arrangements.  As a result, in 2006, no contingent legal fees expense was incurred on a portion of revenues, resulting in the 128% increase in contingent legal fees expense in 2007, as compared to 2006, as compared to 51% increase in license fee revenues for the same periods.

Results in 2005 included $225,000 of V-chip related inventor royalties expense recognized as a result of the conclusion of all V-chip related litigation activities in October of 2005.

Legal Expense – Patents. Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside law firms engaged on an hourly basis and the out-of-pocket expenses incurred by outside law firms engaged on a contingent fee basis.  Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period.  Patent-related legal expenses include case related costs billed by outside counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, case related audio/video presentations for the court, and other litigation support and administrative costs.

24

 
The increase in patent related legal expenses in 2007, as compared to 2006,  is primarily due to a net increase in ongoing patent enforcement litigation and an increase in litigation support related out of pocket expenses, third party technical consulting expenses and professional expert expenses incurred in connection with certain of our patent portfolios that are further along in the prosecution of the related litigation and certain of our patent portfolios that have proceeded to trial and concluded.  The increase in patent related legal expenses in 2006, as compared to 2005, is primarily due to a net increase in ongoing patent enforcement litigation in each respective period, and to a lesser extent, an increase in the number of portfolios where we have engaged outside law firms on an hourly or discounted hourly basis.

We expect patent-related legal expenses to continue to fluctuate period to period based on the factors summarized above, in connection with current and future patent commercialization and enforcement programs.

Amortization of Patents.  The increase in 2007, as compared to 2006, was due to additional patent amortization charges related to certain patent portfolios acquired by our operating subsidiaries in late 2006 and throughout 2007.  Patent amortization charges will continue to be significant in future periods as we continue to amortize the acquired patent related costs over a weighted-average remaining economic useful life of approximately four years.

The increase in 2006, as compared to 2005, was due to twelve full months of patent amortization expense resulting from the GPH Acquisition in 2006, as compared to 11 months of amortization in 2005.  Patent amortization expense related to the GPH Acquisition was $4.7 million and $4.4 million in 2006 and 2005, respectively.  In addition, patent amortization expense in 2006 and 2005 includes additional patent amortization charges related to certain of the patent portfolios acquired by our operating subsidiaries subsequent to the GPH Acquisition.

Refer to “Liquidity and Capital Resources” below for patent portfolio acquisition costs incurred during the periods presented.

Write-off of Patent-related Intangible Asset.  In September 2007, we recorded a non-cash impairment charge of $235,000, related to the write-off of a patent-related intangible asset.  The related licensing program was completed during the third quarter of 2007 resulting in the write-off of the remaining carrying value of the patent-related intangible asset as of September 30, 2007.  In June 2006, we recorded a non-cash impairment charge of $297,000, related to the write-off of a patent-related intangible asset.  During the second quarter of 2006, pursuant to the terms of the respective license agreement, management elected to terminate its rights to exclusively license and enforce the patent, resulting in the write-off of the remaining carrying value of the patent-related intangible asset as of June 30, 2006.

Discontinued Operations – Split-off of CombiMatrix Corporation

In January 2006, Acacia Research Corporation’s board of directors approved a plan for its wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company.  CombiMatrix Corporation’s registration statement on Form S-1 was declared effective by the SEC on June 8, 2007.  Following the redemption period required by Acacia Research Corporation’s Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia Research Corporation through the redemption of all outstanding shares of AR-CombiMatrix common stock in exchange for the distribution of new shares of CombiMatrix Corporation, on a pro-rata basis, to the holders of AR-CombiMatrix stock as of the Redemption Date (the “Split-off Transaction”).  On the Redemption Date, every ten (10) shares of AR-CombiMatrix stock outstanding on August 15, 2007, was redeemed for one (1) share of common stock of CombiMatrix Corporation.  Subsequent to the Redemption Date, Acacia Research Corporation no longer owns any equity interests in CombiMatrix Corporation and the two companies operate independently of each other.

As a result of the Split-off Transaction, the assets, liabilities, results of operations and cash flows of CombiMatrix Corporation have been eliminated from the continuing operations of Acacia Research Corporation and Acacia Research Corporation does not have any continuing involvement in the operations of CombiMatrix Corporation.  As a result of the Split-off Transaction, we have disposed of our investment in CombiMatrix Corporation, and therefore, in accordance with guidance set forth in SFAS No. 144, Acacia Research Corporation’s accompanying consolidated balance sheets, statements of operations and statements of cash flows for the current period presented reflect the assets, liabilities, results of operations and cash flows for CombiMatrix Corporation as discontinued operations.  Consolidated financial statements presented for the comparable prior year periods have been restated to conform to this presentation.  CombiMatrix Corporation was previously presented as a separate operating segment of Acacia Research Corporation under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

25

 
The Split-off Transaction was accounted for by Acacia Research Corporation at historical cost.  Accordingly, no gain or loss on disposal was recognized in the accompanying consolidated statements of operations. Included in the current period consolidated balance sheet is a charge to consolidated shareholders’ equity totaling $35,444,000, reflecting the distribution of our investment in the net assets of CombiMatrix Corporation to holders of AR-CombiMatrix stock, as of the Redemption Date, as described above.  We received a private letter ruling from the IRS with regard to the U.S. federal income tax consequences of the Split-off Transaction to the effect that the Split-Transaction will be treated as a tax-free exchange under Sections 368 and 355 of the Internal Revenue Code of 1986, as amended.

Refer to Note 10A to the Acacia Research Corporation consolidated financial statements included elsewhere herein for information regarding the carrying amount(s) of the major classes of assets, liabilities, revenues and pretax loss included in discontinued operations for the periods presented.

Other Discontinued Operations.  Results for 2005 include charges, net of minority interests, of $237,000 related to estimated additional costs to be incurred in connection with the discontinued operations of Soundbreak.com (originally ceased operations in February 2001), related primarily to certain noncancellable lease obligations and a reduction in estimated amounts recoverable from existing sublease arrangements.  The related lease obligations, which were guaranteed by Acacia Research Corporation, expired in August 2005.

Inflation

Inflation has not had a significant impact on Acacia Research Corporation or any of our subsidiaries in the current or prior periods.

Liquidity and Capital Resources

Acacia Research Corporation’s consolidated cash and cash equivalents and short-term investments totaled $51.4 million at December 31, 2007, compared to $45.0 million at December 31, 2006. Working capital, related to continuing operations, at December 31, 2007 was $48.1 million, compared to $42.2 million at December 31, 2006.

The net change in cash and cash equivalents and short-term investments related to continuing operations for 2007, 2006 and 2005 was comprised of the following (in thousands):

   
2007
   
2006
   
2005
 
                   
Net cash provided by (used in) continuing operations:
                 
Operating activities
  $ 5,166     $ 6,608     $ (2,608 )
Investing activities
    (2,145 )     10,513       (13,094 )
Financing activities
    5,014       1,475       19,836  
 
Operating Activities. License fee payments received from licensees increased to $51.4 million in 2007, compared to $38.6 million in 2006, reflecting the increase in license fee revenues recognized in 2007, as compared to 2006, as discussed above.  The decrease in consolidated net cash inflows from operations in 2007, as compared to 2006, was primarily due to the increases in patent-related legal expenses, personnel expenses, and other corporate, general and administrative expenses, as described above, and the impact of the timing of payments to inventors, attorneys and other vendors. Consolidated accounts receivable increased to $1.4 million at December 31, 2007, compared to $269,000 at December 31, 2006.  The majority of accounts receivable from licensees at December 31, 2007 was collected in January 2008, in accordance with the terms of the related underlying license agreements.
 
The change to consolidated net cash inflows from operations in 2006, as compared to net cash outflows from operations in 2005, was primarily due to the increase in license fee payments received from licensees, which totaled $38.6 million in 2006, compared to $15.6 million in 2005.  The increase in license fee revenues in 2006 was partially offset by increases in inventor royalties expenses, contingent legal fees expenses, patent-related legal expenses, personnel expenses, and other corporate, general and administrative expenses, as described above, and the impact of the timing of payments to inventors, attorneys and other vendors.  Consolidated accounts receivable decreased to $269,000 at December 31, 2006, compared to $4.4 million at December 31, 2005, due to the collection of license fees receivable at December 31, 2005, during the first quarter of 2006, in accordance with the terms of the related underlying license agreements.

Investing Activities. The change in net cash flows used in investing activities for the periods presented reflects fluctuations in net purchases and sales of available-for-sale investments in connection with ongoing short-term cash management activities.  Short-term investments represent capital available to fund current operations and fund capital expenditures.  Net cash outflows from investing activities for 2005 also included the impact of cash consideration and related acquisition and registration costs, totaling $5.8 million, paid by Acacia Global Acquisition Corporation, in connection with the GPH Acquisition in the first quarter of 2005.  In addition, certain of our operating subsidiaries incurred patent acquisition costs of $3.8 million, $1.0 million and $445,000 in 2007, 2006 and 2005, respectively, related to the acquisition of additional patent portfolios, as described earlier.

26

 
Financing Activities.  Consolidated net cash inflows from financing activities in 2005 included net proceeds of approximately $19.5 million, related to the sale of 3.5 million shares of AR–Acacia Technologies stock in February 2005.  Net cash inflows from financing activities in 2007, 2006 and 2005 also included stock option exercise proceeds of $5.0 million, $1.5 million, and $304,000, respectively.

Management believes that Acacia Research Corporation’s consolidated 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 March 2009 and for the foreseeable future.  Acacia Research Corporation and its subsidiaries may however encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth in Item 1A. “Risk Factors” included elsewhere herein.  Any efforts to seek additional funding could be made through equity, debt or other external financing and there can be no assurance that additional funding will be available on favorable terms, if at all. If Acacia Research Corporation and its subsidiaries fail to obtain additional funding when needed, they may not be able to execute their business plans and their businesses may suffer. Refer to the “Liquidity and Risks” discussion included in Note 1 to the Acacia Research Corporation consolidated financial statements included elsewhere herein for additional information.

As of March 5, 2008, we held $6.3 million of investment grade securities with an auction reset feature (“auction rate securities”). Our auction rate securities consist of securities issued by closed-end investment companies with portfolio asset coverage of at least 200%, and auction rate investments backed by student loans, issued under programs such as the Federal Family Education Loan Program, all of which had credit ratings of AAA when purchased.  The Dutch auction process that resets the applicable interest rate at predetermined calendar intervals is intended to provide liquidity to the holder of auction rate securities by matching buyers and sellers within a market context enabling the holder to gain immediate liquidity by selling such interests at par or rolling over their investment. If there is an imbalance between buyers and sellers the risk of a failed auction exists.

We have not experienced a failed auction for any of our securities as of December 31, 2007.  However, we did experience failed auctions with certain of our issues in February 2008.  Given the deteriorating credit markets, and the increased incidence of failure within the auction market in February 2008, there can be no assurance as to when we would be able to liquidate a particular issue. In such case of a failure, the auction rate securities continue to pay interest in accordance with their terms, however, we may not be able to access the par value of the invested funds until a future auction of these investments is successful, the security is called by the issuer or a buyer is found outside of the auction process.  Furthermore, if this situation were to persist despite our ability to hold such investments until maturity, we may be required to record an impairment charge in a future period.

Management believes that the fair value of our investments in auction rate securities continue to approximate  their par value and that the underlying credit quality of the assets backing its auction rate securities investments have not been impacted by the reduced liquidity of these investments subsequent to December 31, 2007.  We will continue to monitor and evaluate our investments in auction rate securities for any further reduction in liquidity and potential impairment in future periods.  See Note 2 of our Notes to Consolidated Financial Statements for additional details about our investments in auction rate securities and other marketable securities.


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 2008.  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 December 31, 2007, and any material known commitments arising from events subsequent to year end:
 
   
Payments Due by Period (In thousands)
 
Contractual Obligations    
Total 
     
2008 
     
2009 
     
2010 
     
2011 
     
2012 
     
2013 and Thereafter 
 
                                                         
  Operating leases
  $ 3,850     $ 868     $ 903     $ 939     $ 977     $ 163     $ -  
  Total contractual obligations
  $ 3,850     $ 868     $ 903     $ 939     $ 977     $ 163     $ -  
 
27

 
FIN 48 Liability.  Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” (see Note 2 to the consolidated financial statements included elsewhere herein). As of December 31, 2007, the liability for uncertain tax positions, associated primarily with state income taxes, was $115,000, of which none is expected to be paid within one year. The liability for uncertain tax positions is recorded in other long-term liabilities in the consolidated balance sheet.

Recent Accounting Pronouncements

Refer to Note 2 to the Acacia Research Corporation consolidated financial statements included elsewhere herein.

28

 
Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 December 31, 2007, all of our investments were in money market funds, high-grade corporate bonds, auction rate securities, certificates of deposit 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 December 31, 2007.  Refer to Item 1A. “Risk Factors,” Item 7. “Liquidity and Capital Resources,” and Notes 2 and 3 to the Acacia Research Corporation consolidated financial statements included in this report for additional information.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements and related financial information required to be filed hereunder are indexed under Item 15 of this report and are incorporated herein by reference.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Management’s Report on Internal Control Over Financial Reporting  

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Grant Thornton, LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements included in this Form 10-K, has issued a report on the Company’s internal control over financial reporting, which is included herein.

Item 9B.    OTHER INFORMATION
None 

29

 
PART III
 
 
Item 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Except as provided below, the information required by this Item is incorporated by reference from the information under the captions entitled “Election of Directors-Nominees,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed with the SEC no later than April 29, 2008.

Code of Conduct.

Acacia Research Corporation has adopted a Code of Conduct that applies to all of its employees, including its chief executive officer, chief financial and accounting officer, president and any persons performing similar functions.  Our Code of Conduct is provided on our internet website at www.acaciaresearch.com.
 
 
Item 11.     EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the information under the caption entitled “Executive Officer Compensation and Other Information” in our definitive proxy statement to be filed with the SEC no later than April 29, 2008.
 
 
Item 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference from the information under the caption entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement to be filed with the SEC no later than April 29, 2008.
 
 
Item 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference from the information under the caption entitled “Certain Transactions” in our definitive proxy statement to be filed with the SEC no later than April 29, 2008.
 
 
Item 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference from the information under the caption entitled “Audit Committee Report” in our definitive proxy statement to be filed with the SEC no later than April 29, 2008.
 
30

 
PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)   The following documents are filed as part of this report.
 
(1)  Financial Statements
 
Page
   
Acacia Research Corporation Consolidated Financial Statements
 
   
Reports of Independent Registered Public Accounting Firm – Grant Thornton LLP
F-1
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP
F-3
Consolidated Balance Sheets as of December 31, 2007 and 2006
F-4
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2007, 2006 and 2005
F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
F-7
Notes to Consolidated Financial Statements
F-8
 
(2)   Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes thereto.
 
(3)   Exhibits
 
   Refer to Item 15(b) below.

(b)    Exhibits.  The following exhibits are either filed herewith or incorporated herein by reference:
 
Exhibit
Number
Description
   
2.1
Agreement and Plan of Merger of Acacia Research Corporation, a California corporation, and Acacia Research Corporation, a Delaware corporation, dated as of December 23, 1999 (1)
2.2
Agreement and Plan of Reorganization by and among Acacia Research Corporation, Combi Acquisition Corp. and CombiMatrix Corporation dated as of March 20, 2002 (2)
3.1
Restated Certificate of Incorporation as amended(3)
 3.2
Amended and Restated Bylaws
10.1*
Acacia Research Corporation 1996 Stock Option Plan, as amended (4)
10.2*
Form of Option Agreement constituting the Acacia Research Corporation 1996 Executive Stock Bonus Plan (5)
10.3*
2002 Acacia Technologies Stock Incentive Plan (6)
10.4*
2007 Acacia Technologies Stock Incentive Plan (7)
10.5*
Form of Acacia Technologies Stock Option Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)
10.6*
Form of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia Technologies Stock Incentive Plan (8)
10.7*
Form of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)
10.8
Lease Agreement dated January 28, 2002, between Acacia Research Corporation and The Irvine Company (9)
10.9
Settlement Agreement dated September 30, 2002, by and among Acacia Research Corporation, CombiMatrix Corporation, Donald D. Montgomery, Ph.D. and Nanogen, Inc.(10)
10.10
Form of Indemnification Agreement (11)
10.11
Form of Subscription Agreement between Acacia Research Corporation and certain investors (12)
10.12
Third Amendment to lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (13)
 
31

 
Exhibit
Number
 
Description
   
10.13
Standby Equity Distribution Agreement dated June 14, 2006 between Acacia Research Corporation and Cornell Capital Partners, L.P. (14)
10.14
Amendment to Standby Equity Distribution Agreement dated June 14, 2006 between Acacia Research Corporation and Cornell Capital Partners, L.P. (15)
10.15
Manufacturing and Supply Agreement between Acacia Research Corporation and Furuno Electric Company, Ltd. Effective July 1, 2006 (16)
10.16
Placement Agency Agreement between Acacia Research Corporation and Oppenheimer & Co., dated December 7, 2006 (17)
10.17
Form of Subscription Agreement (17)
10.18
Form of Investors Warrant (17)
10.19*
Employment Agreement, dated January 28, 2005, by and between Acacia Technologies Services Corporation, and Dooyong Lee, as amended
10.20*
Employment Agreement, dated April 12, 2004, by and between Acacia Media Technologies Corporation and Edward Treska.
10.21
Fourth Amendment to lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company
10.22
Fifth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company
21.1
List of Subsidiaries
23.1
Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
23.2
Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification 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
Certification 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
___________________________
 
*
The referenced exhibit is a management contract, compensatory plan or arrangement.
 
Portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the United States Securities and Exchange Commission.
 
(1)
Incorporated by reference from Acacia Research Corporation’s Report on Form 8-K filed on December 30, 1999 (SEC File No. 000-26068).
 
(2)
Incorporated by reference as Appendix A to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s Registration Statement on Form S-4 (SEC File No. 333-87654) which became effective on November 8, 2002.
 
(3)
Incorporated by reference to Acacia Research Corporation’s Quarterly Report Amendment No. 1 on Form 10-Q/A for the period ended June 30, 2006, filed on June 5, 2007.
 
(4)
Incorporated by reference as Appendix A to the Definitive Proxy Statement on Schedule 14A filed on April 10, 2000 (SEC File No. 000-26068).
 
(5)
Incorporated by reference from Acacia Research Corporation’s Definitive Proxy as Appendix A Statement on Schedule 14A filed on April 26, 1996 (SEC File No. 000-26068).
 
(6)
Incorporated by reference as Appendix E to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s Registration Statement on Form S-4 (SEC File No. 333-87654) which became effective on November 8, 2002.
 
32

 
(7)
Incorporated by reference to Acacia Research Corporation’s Registration Statement on Form S-8 (SEC File No. 333-144754) which became effective on July 20, 2007.
 
(8)
Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2007.
 
(9)
Incorporated by reference from Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001 filed on March 27, 2002 (SEC File No. 000-26068).
 
(10)
Incorporated by reference as Appendix D to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s Registration Statement on Form S-4 (SEC File No. 333-87654) which became effective on November 8, 2002.
 
(11)
Incorporated by reference from Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 27, 2003 (SEC File No. 000-26068).
 
(12)
Incorporated by reference from Acacia Research Corporation’s Report on Form 8-K filed on September 19, 2005 (SEC File No. 000-26068).
 
(13)
Incorporated by reference from Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on May 10, 2006 (SEC File No. 000-26068).
 
(14)
Incorporated by reference from Acacia Research Corporation’s Report on Form 8-K filed on June 15, 2006 (SEC File No. 000-26068).
 
(15)
Incorporated by reference from Acacia Research Corporation’s Report on Form 8-K filed on June 22, 2006 (SEC File No. 000-26068).
 
(16)
Incorporated by reference from Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on November 9, 2006 (SEC File No. 000-26068).
 
(17)
Incorporated by reference from Acacia Research Corporation’s Report on Form 8-K filed on December 13, 2006 (SEC File No. 000-26068).
 
33


SIGNATURES

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

 
Dated:  March 14, 2008
ACACIA RESEARCH CORPORATION
 
 
/s/ Paul R. Ryan                                                              
Paul R. Ryan
Chairman of the Board
and Chief Executive Officer
(Authorized Signatory)
   

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

Signature
Title
Date
     
/s/  Paul R. Ryan                             
Chairman of the Board and
March 14, 2008
Paul R. Ryan
Chief Executive Officer
 
 
(Principal Chief Executive)
 
     
/s/  Robert L. Harris, II                    
Director and President
March 14, 2008
Robert L. Harris, II
   
     
     
/s/  Clayton J. Haynes                     
Chief Financial Officer and Treasurer
March 14, 2008
Clayton J. Haynes
(Principal Financial Officer)
 
     
     
/s/  Fred A. de Boom                        
Director
March 14, 2008
Fred A. de Boom
   
     
     
/s/  Edward W. Frykman                  
Director
March 14, 2008
Edward W. Frykman
   
     
     
/s/  G. Louis Graziadio, III                 
Director
March 14, 2008
G. Louis Graziadio, III
   
     
     
/s/  William S. Anderson                   
Director
March 14, 2008
William S. Anderson
   
 
 
34

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 


Board of Directors and Stockholders of
Acacia Research Corporation

We have audited the accompanying consolidated balance sheet of Acacia Research Corporation (a Delaware corporation) as of December 31, 2007, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acacia Research Corporation as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Acacia Research Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2008 expressed an unqualified opinion thereon.



/s/ GRANT THORNTON LLP

Irvine, California
March 12, 2008

 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

Board of Directors and Stockholders of
Acacia Research Corporation
 
We have audited Acacia Research Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Acacia Research Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Acacia Research Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Acacia Research Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Acacia Research Corporation as of December 31, 2007 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended and our report dated March 12, 2008, expressed an unqualified opinion on these financial statements.
 

/s/ GRANT THORNTON LLP
 
Irvine, California
March 12, 2008
 
F-2

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 


To the Board of Directors and Stockholders
of Acacia Research Corporation:

In our opinion, the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2006, present fairly, in all material respects, the financial position of Acacia Research Corporation and its subsidiaries at December 31, 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.

/s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
Orange County, California
March 12, 2007, except for the last paragraph
   in Note 9, and Note 10A, as to which the
   date is March 10, 2008


 
F-3

 
ACACIA RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(In thousands, except share and per share information)
 
   
December 31,
   
December 31,
 
   
2007
   
2006
 
             
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 40,467     $ 32,215  
Short-term investments
    10,966       12,783  
Accounts receivable
    1,409       269  
Prepaid expenses and other current assets
    1,356       1,187  
Total current assets related to discontinued operations - Split-off of CombiMatrix Corporation
    -       15,552  
                 
Total current assets
    54,198       62,006  
                 
Property and equipment, net of accumulated depreciation
    323       221  
Patents, net of accumulated amortization
    16,307       18,515  
Other assets
    223       200  
Total non-current assets related to discontinued operations - Split-off of CombiMatrix Corporation
    -       28,662  
                 
    $ 71,051     $ 109,604  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 3,462     $ 2,201  
Royalties and contingent legal fees payable
    2,343       1,684  
Deferred revenues
    321       360  
Total current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
    -       3,211  
                 
Total current liabilities
    6,126       7,456  
                 
Other liabilities
    121       31  
Total non-current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
    -       7,808  
                 
Total liabilities
    6,247       15,295  
                 
Commitments and contingencies (Note 12)
               
                 
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; 100,000,000
               
shares authorized; 28,231,701 shares issued and outstanding as of December 31, 2006
    -       28  
Acacia Research - CombiMatrix stock, par value $0.001 per share; 100,000,000 shares
               
authorized;  50,365,810 shares issued and outstanding as of December 31, 2006
    -       50  
Additional paid-in capital             326,599  
Accumulated comprehensive income             2  
Accumulated deficit             (232,370
                 
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; 100,000,000
               
shares authorized; 30,102,482 shares issued and outstanding as of December 31, 2007
    30       -  
Additional paid-in capital
    159,972       -  
Accumulated comprehensive income
    (3 )     -  
Accumulated deficit
    (95,195 )     -  
                 
Total stockholders' equity
    64,804       94,309  
                 
    $ 71,051     $ 109,604  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-4

 
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2007, 2006 and 2005
(In thousands, except share and per share information)

                     
     
2007
   
2006
   
2005
 
                     
License fee revenues
  $ 52,597     $ 34,825     $ 19,574  
                           
Operating expenses:
                       
 
Marketing, general and administrative expenses (including non-cash stock compensation
                       
 
expense of $5,908 for 2007, $3,946 for 2006 and $356 for 2005)
    20,042       14,123       8,097  
 
Inventor royalties and contingent legal fees expense - patents
    29,224       17,159       11,331  
 
Legal expenses - patents
    7,024       4,780       2,468  
 
Write-off of patent-related intangible asset
    235       297       -  
 
Amortization of patents
    5,583       5,313       4,922  
                           
 
Total operating expenses
    62,108       41,672       26,818  
                           
 
Operating loss
    (9,511 )     (6,847 )     (7,244 )
                           
Interest and investment income
    2,359       1,524       1,071  
                           
Loss from continuing operations before income taxes
    (7,152 )     (5,323 )     (6,173 )
                           
(Provision) benefit for income taxes
    (207 )     (40 )     135  
                           
Loss from continuing operations
    (7,359 )     (5,363 )     (6,038 )
                           
Discontinued operations:
                       
Loss from discontinued operations - Split-off of CombiMatrix Corporation
    (8,086 )     (20,093 )     (12,401 )
Loss on disposal of discontinued operations - Soundbreak.com
    -       -       (237 )
                           
 
Total loss from discontinued operations
    (8,086 )     (20,093 )     (12,638 )
                           
Net loss
    (15,445 )     (25,456 )     (18,676 )
                           
 
Unrealized gains (losses) on short-term investments
    (21 )     59       (36 )
 
Unrealized gains (losses) from discontinued operations - Split-off of CombiMatrix Corporation
    16       (55 )     111  
                           
Comprehensive loss
  $ (15,450 )   $ (25,452 )   $ (18,601 )
                           
Loss per common share:
                       
Acacia Research - Acacia Technologies stock:
                       
Loss from continuing operations
  $ (7,359 )   $ (5,363 )   $ (6,038 )
Basic and diluted loss per share
    (0.26 )     (0.19 )     (0.23 )
Loss on disposal of discontinued operations
  $ -     $ -     $ (237 )
Basic and diluted loss per share
    -       -       (0.01 )
Net loss
  $ (7,359 )   $ (5,363 )   $ (6,275 )
Basic and diluted loss per share