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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
OR

[ ] 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
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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: NONE

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

COMMON STOCK, $0.001 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes |X| No [ ]

Indicate by check mark 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 [ ]

The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average closing bid and asked
prices of such stock, as of March 22, 2002 was approximately $224,973,420. (All
officers and directors of the registrant are considered affiliates.)

At March 22, 2002 the registrant had 19,629,376 shares of common
stock 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.

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FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2001
ACACIA RESEARCH CORPORATION

ITEM PAGE
- ---- ----

PART I

1. Business................................................................................................1
2. Property...............................................................................................10
3. Legal Proceedings......................................................................................10
4. Submission of Matters to a Vote of Security Holders....................................................11

PART II

5. Market for Registrant's Common Equity and Related Stockholder Matters..................................12
6. Selected Financial Data................................................................................13
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................14
7A. Quantitative and Qualitative Disclosures About Market Risk.............................................36
8. Financial Statements and Supplementary Information.....................................................36
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................36

PART III

10. Directors and Executive Officers of the Registrant.....................................................37
11. Executive Compensation.................................................................................37
12. Security Ownership of Certain Beneficial Owners and Management.........................................37
13. Certain Relationships and Related Transactions.........................................................37

PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................38

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. 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," "our," "Acacia" and "Acacia
Research" refer to Acacia Research Corporation and its subsidiary companies.

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

ITEM 1. BUSINESS

GENERAL

Acacia Research Corporation develops, licenses and provides products
for the media technology and life science sectors.

Acacia's media technologies business, collectively referred to as
"Acacia Media Technologies Group," owns intellectual property related to the
telecommunications field, including a television blanking system, also known as
the "V-chip," which it licenses to television manufacturers. In addition, Acacia
Media Technologies Group owns a worldwide portfolio of pioneering patents
relating to audio and video transmission and receiving systems, commonly known
as audio-on-demand and video-on-demand, used for distributing content via
various methods including computer networks, cable television systems and direct
broadcasting satellite systems. Acacia Media Technologies Group is responsible
for the development, licensing and protection of its intellectual property and
proprietary technologies. Our media technologies group continues to pursue both
licensing and strategic business alliances with leading companies in the rapidly
growing media technologies industry.

Acacia's life sciences business, collectively referred to as "Acacia
Life Sciences Group," is comprised of CombiMatrix Corporation ("CombiMatrix")
and Advanced Material Sciences, Inc. ("Advanced Material Sciences"). Our core
technology opportunity in the life sciences sector has been developed through
our majority-owned subsidiary, CombiMatrix. CombiMatrix is a life science
technology company with a proprietary system for rapid, cost competitive
creation of DNA and other compounds on a programmable semiconductor chip. This
proprietary technology has significant applications relating to genomic and
proteomic research. Our majority-owned subsidiary, Advanced Material Sciences,
holds the exclusive license for CombiMatrix's biological array processor
technology in certain fields of material sciences.

Below is a summary of our most significant wholly and majority-owned
subsidiaries and our related ownership percentages on an as-converted basis:

OWNERSHIP % AS OF 3/22/02
COMPANY NAME DESCRIPTION OF BUSINESS ON AN AS-CONVERTED BASIS
------------- ----------------------- ------------------------

ACACIA MEDIA TECHNOLOGIES GROUP:

Soundview Technologies Incorporated........ A media technology company that owns intellectual 100.0%
property related to the telecommunications field,
including a television blanking system, also
known as "V-chip," which it is licensing to
television manufacturers.

Acacia Media Technologies Corporation
(formerly Greenwich Information
Technologies LLC)....................... A media technology company that owns a worldwide 100.0%
portfolio of pioneering patents relating to audio
and video transmission and receiving systems,
commonly known as audio-on-demand and
video-on-demand, used for distributing content
via various methods including computer networks,
cable television systems and direct broadcasting
satellite systems.

ACACIA LIFE SCIENCES GROUP:

CombiMatrix Corporation.................... A life science technology company with a 57.5%(1)
proprietary system for rapid, cost competitive
creation of DNA and other compounds on a
programmable semiconductor chip. This proprietary
technology has significant applications relating
to genomic and proteomic research.

Advanced Material Sciences, Inc............ A development-stage company that holds the 58.1%(2)
exclusive license for CombiMatrix's biological
array processor technology in certain fields of
material science.
- ----------------------------------

(1) We are a party to a shareholder agreement with an officer of
CombiMatrix, which provides for (a) the collective voting of shares
(representing 69.5% of the voting interests in CombiMatrix) for the
election of certain directors to CombiMatrix's board of directors and
(b) certain restrictions on the sale or transfer of the officer's
shares of common stock in CombiMatrix.
(2) Advanced Material Sciences is 58.1% owned by us, 28.5% owned by
CombiMatrix and 13.4% owned by third-parties. We have a 74.5% economic
interest in Advanced Material Sciences by virtue of our 58.1% direct
ownership interest in Advanced Material Sciences and our 57.5% interest
in CombiMatrix.

RECENT DEVELOPMENTS

On March 20, 2002, we announced that our board of directors approved a
plan to divide our common stock into two new classes - new "CombiMatrix" common
stock, that would reflect the performance of our CombiMatrix subsidiary, and new
"Acacia Technologies" common stock, that would reflect the performance of our
media technology businesses, including Soundview Technologies Incorporated and
Acacia Media Technologies Corporation. The plan will be submitted to our
stockholders for approval. If the recapitalization proposal were approved, our
stockholders would receive shares of both of the new classes of stock in
exchange for existing Acacia shares. The new share classes would be separately
listed on the NASDAQ National Market System.

We also announced that our board of directors and CombiMatrix's board
of directors have approved an agreement for Acacia to acquire the minority
stockholder interests in CombiMatrix. The proposed acquisition would be
accomplished through a merger in which the minority stockholders of CombiMatrix
would receive shares of the new "CombiMatrix" common stock, in exchange for
their existing shares. The proposed transaction will be submitted to the
stockholders of Acacia and CombiMatrix for approval.

The proposed recapitalization and merger are subject to several
important conditions, including receipt of stockholder approval, receipt of
satisfactory tax and accounting opinions, approval of the proposed merger by a
special committee of the CombiMatrix board of directors, receipt of a fairness
opinion, approval for listing of both of the new shares on the NASDAQ National
Market System and other customary conditions. We expect to present these
proposals to our stockholders for approval at a special meeting.

BUSINESS GROUPS

ACACIA MEDIA TECHNOLOGIES GROUP

SOUNDVIEW TECHNOLOGIES INCORPORATED

Soundview Technologies Incorporated ("Soundview Technologies") was
incorporated in March 1996 under the laws of the State of Delaware. Soundview
Technologies has acquired and is developing intellectual property in the
telecommunications field, including audio and video blanking systems, also known
as V-chip technology. In March 1998, the Federal Communications Commission
("FCC") approved the television guidelines rating system, as well as the V-chip
technical standards. Soundview Technologies owns the exclusive right and title
to U.S. Patent No. 4,554,584, which describes a method for implementing the
V-chip system in parallel with the existing closed-captioning circuits already
in place in televisions.

In June 2001, our ownership interest in Soundview Technologies
increased from 67% to 100%, following Soundview Technologies' completion of a
stock repurchase transaction with its former minority stockholders. Soundview
Technologies repurchased the stock of its former minority stockholders in
exchange for a cash payment and the grant to such stockholders of the right to
receive 26% of future net revenues generated by Soundview Technologies' current
patent portfolio, which includes its V-chip patent.

Soundview Technologies' patent was issued in November 1985 and expires
in July 2003. In April 1998, the U.S. Patent and Trademark Office issued a
reexamination certificate confirming the approval of all existing and newly
added claims of its issued patent. The reexamination was requested by Soundview
Technologies in August 1996 to confirm the strength of its patent in light of
other existing patents. Over 30 new prior art references were introduced and
examined during the process, which took more than eighteen months for the Patent
Office to complete. As a result, patentability of all original claims as issued
was confirmed and 17 new claims more specific to the V-chip implementation were
granted.

As of July 1, 1999, the 1996 Telecommunications Act required all
television manufacturers to include V-chip technology in 50% of all new
television sets with screens 13 inches or larger sold in the United States.
After January 1, 2000, the 1996 Telecommunications Act required all television
manufacturers to include V-chip technology in all new television sets with

screens 13 inches or larger sold in the United States. Approximately 26.0
million new televisions are sold each year in the United States. Soundview
Technologies' V-chip technology is a cost-effective method for V-chip
implementation that is compatible with components currently in use in
televisions. Soundview Technologies' V-chip technology uses a television's
receiver circuitry to decode content rating information sent as part of the
broadcast signal. By utilizing the broadcast signal that carries closed-caption
data, Soundview Technologies' technology is relatively inexpensive to implement.
The industry and its trade association adopted this method as the technical
standard for new television sets sold in the United States that are required to
have V-chip technology.

In 2000, Soundview Technologies filed a federal patent infringement and
antitrust lawsuit against certain television manufacturers, the Consumer
Electronics Manufacturers Association and the Electronics Industries Alliance
d/b/a/ Consumer Electronics Association. In its lawsuit now pending before the
United States District Court for the District of Connecticut, Soundview
Technologies alleges that television sets fitted with V-chips and sold in the
United States infringe Soundview Technologies' patent. Additionally, Soundview
Technologies alleges that the Consumer Electronics Manufacturers Association has
induced infringement of Soundview Technologies' patent and that the defendants
have violated the federal Clayton and Sherman Antitrust Acts by engaging in
collusive attempts to prevent others in the electronics and television
broadcasting industries from entering into licensing agreements with Soundview
Technologies. Soundview Technologies is seeking monetary damages, an injunction
preventing unlicensed use of its patented technology and other remedies.

During 2001, Soundview Technologies executed separate settlement and/or
license agreements with Samsung Electronics, Hitachi America, Ltd., LG
Electronics, Inc., Funai Electric Co., Ltd., Daewoo Electronics Corporation of
America, Sanyo Manufacturing Corporation, Thomson Multimedia, Inc., JVC Americas
Corporation, Matsushita Electric Industrial Co., Ltd. and Orion Electric Co.,
Ltd. In addition, Soundview Technologies settled its lawsuits with Pioneer
Electronics (USA) Incorporated, an affiliate of Pioneer Corporation, and
received payments from Philips Electronics North America Corporation pursuant to
a settlement and license agreement signed in December 2000. Certain of these
license agreements constitute settlements of patent infringement litigation
brought by Soundview Technologies. As of December 31, 2001, we have received
license fee payments from television manufacturers totaling $25.6 million and
have granted non-exclusive licenses of Soundview Technologies' U.S. Patent No.
4,554,584 to the respective television manufacturers. Certain of the settlement
and license agreements provide for future royalty payments to Soundview
Technologies. We received and recognized as revenue $2.4 million of the license
fee payments in the first quarter of 2001, $10.0 million of the license fee
payments in the second quarter of 2001, $10.7 million of the license fee
payments in the third quarter of 2001 and $1.0 million of the license fee
payments in the fourth quarter of 2001. License fee payments received during
2001 totaling $1.5 million are included in deferred revenues at December 31,
2001 pursuant to the terms of the respective agreements.

ACACIA MEDIA TECHNOLOGIES CORPORATION

Acacia Media Technologies Corporation ("Acacia Media Technologies"),
formerly Greenwich Information Technologies LLC which was formed as a limited
liability company under the laws of the State of Delaware in 1996, owns a
worldwide portfolio of pioneering patents relating to audio and video
transmission and receiving systems, commonly known as audio-on-demand and
video-on-demand, used for distributing content via various methods including
computer networks, cable television systems and direct broadcasting satellite
systems. Audio-on-demand offers similar functionality with music or other audio
content. Video-on-demand allows television viewers to order movies or other
programs from a remote file server and to view them at home with full VCR
functionality, including pause, fast-forward and reverse. Information-on-demand
is one of the primary applications of interactive entertainment.

On November 1, 2001, we increased our ownership interest in Acacia
Media Technologies, formerly Greenwich Information Technologies LLC, from 33% to
100% through the purchase of the ownership interest of the former limited
liability company's other member. In December 2001, we converted the company
from a limited liability company to a corporation and changed the name of the
company to Acacia Media Technologies Corporation (hereinafter referred to as
"Acacia Media Technologies").

Acacia Media Technologies owns five issued U.S. patents relating to
audio and video transmission and receiving systems, commonly known as
audio-on-demand and video-on-demand, used for distributing content via various
methods as follows: U.S. Patent No. 5,132,992, U.S. Patent No. 5,253,275, U.S.
Patent No. 5,550,863, U.S. Patent No. 6,002,720 and U.S. Patent No. 6,144,702.
In addition, Acacia Media Technologies owns sixteen foreign patents also
relating to audio and video transmission and receiving systems technology.
Foreign rights include patents granted in Mexico and the Republic of China, a
patent granted by the European Patent Office covering Austria, Belgium, Denmark,
France, Germany, Greece, Italy, Luxembourg, Monaco, the Netherlands, Spain,
Sweden, Switzerland and the United Kingdom, and patent applications pending in
Japan and South Korea. Those patents that have already been issued and granted
were issued or granted during the past nine years, the earliest of which will
expire in 2011. Acacia Media Technologies is pursuing business opportunities
with possible providers of information-on-demand systems and others involved in
supplying related information-on-demand services.

The market for audio and video transmission and receiving systems, such
as audio-on-demand and video-on-demand, continues to grow inside the United
States and abroad. The technology underlying the infrastructure required to
deliver digitized signals to consumers continues to rapidly improve, making the
expansion of the infrastructure more economical, and increasing the
opportunities for the commercialization of Acacia's audio and video-on-demand
patent portfolio. It is estimated that there are currently 17 million digital
satellite customers in the United States and 9 million outside the United
States. There are an estimated 13 million digital cable subscribers in the
United States, and this number is anticipated to increase to over 40 million by
2005. It is also estimated that there are currently 11 million broadband
Internet customers in the United States, and this number is anticipated to
increase significantly by 2005. Interactive services such as video-on-demand are
being rolled out to these digital customers, and it is anticipated that revenues
for the video-on-demand industry will reach $3 billion by 2005. We will continue
to pursue both licensing and strategic business alliances with leading companies
in the rapidly growing media technologies industry.

Subsequent to the acquisition of our 100% ownership interest in Acacia
Media Technologies, we have focused our efforts on building a management team
with expertise in licensing to the audio and video consumer electronics industry
that will focus on the commercialization of Acacia's audio and video-on-demand
patent portfolio.

In December 2001, Roy Mankovitz joined Acacia Media Technologies as
Senior Vice President, Intellectual Property. Mr. Mankovitz is best known for
his position as a Director, and Corporate Counsel, Intellectual Property of
Gemstar - TV Guide International ("Gemstar"). Mr. Mankovitz was with Gemstar
from 1991 to 1998, where he was responsible for the worldwide patent, trademark
and copyright program, including technology licensing, litigation, strategic
alliances and the establishment, acquisition and protection of intellectual
property rights. He was also a member of the research and development group for
new product development and a named inventor of more than two-dozen United
States and foreign patents assigned to Gemstar. Prior to Gemstar, Mr. Mankovitz
was a member of the law firm Christie, Parker and Hale, LLP where he was
responsible for intellectual property prosecution, litigation support,
infringement and validity studies, and client counseling for electronics
companies, including Gemstar, Samsung and Fujitsu.

In the first quarter of 2002, Andrew Duncan joined Acacia Media
Technologies as Vice President, Business Development. Mr. Duncan was formerly
Vice President, Consumer Electronics of Gemstar - TV Guide International with
direct reporting responsibility to the CEO. Mr. Duncan was with Gemstar from
1994 to 2001, where he was responsible for licensing and marketing of the highly
successful VCR Plus+ and Electronic Program Guide. At Gemstar, he developed and
controlled licensing and marketing policy with all major consumer electronic
manufacturers worldwide, including Sony, Philips and RCA. Prior to Gemstar, Mr.
Duncan was European Marketing and Product Manager for Thomson Multimedia
(formerly RCA/GE in the United States) where he was responsible for the
company's consumer electronics multi-brand business across Europe.

ACACIA LIFE SCIENCES GROUP

COMBIMATRIX CORPORATION

CombiMatrix, a majority-owned subsidiary of Acacia, was incorporated in
October 1995 under the laws of the State of California and reincorporated in the
State of Delaware in September 2000. CombiMatrix is a development-stage company
engaged in the development of a proprietary universal biochip with applications
in the genomics, proteomics and combinatorial chemistry markets.

CombiMatrix is developing a technology to allow it to rapidly produce
customizable biological array processors, which are semiconductor-based tools
for use in identifying and determining the roles of genes, gene mutations and
proteins. CombiMatrix is designing its products principally to be responsive to
the needs of pharmaceutical and biotechnology researchers to analyze raw genomic
data in the discovery and development of pharmaceutical products. CombiMatrix's
biological array processor is a semiconductor coated with a three-dimensional
layer of porous material in which DNA, RNA, peptides or small molecules can be
synthesized or immobilized within discrete test sites. CombiMatrix integrates a
semiconductor, proprietary software and chemistry and the Internet into a system
that should enable CombiMatrix to design, customize and ship biological array
processors made to its potential customers' specifications, typically in less
than a day. CombiMatrix's system should enable researchers to conduct rapid,
iterative experiments to analyze the large amounts of genomic information
generated by the Human Genome Project and other genomic research efforts. We
believe that CombiMatrix's customizable biological array processors will enable
potential customers to reduce the time and costs associated with the discovery
and development of pharmaceutical products.

CombiMatrix's technology potentially represents a significant advance
over existing biochip technologies and other platforms for combinatorial
chemistry. The first application of the technology that CombiMatrix is pursuing
is in the field of genomics, where CombiMatrix is developing a biochip for the
analysis of DNA. CombiMatrix believes that this technology may be applied to the
fields of genetic analysis and disease management. CombiMatrix also intends to
develop the genomic chip in the field of drug discovery, where genomic
information is used to discover and to validate new targets for pharmaceutical
intervention. CombiMatrix is also developing the chip in the emerging field of
proteomics, where analysis of DNA is correlated to the levels of proteins in
patient samples. Many researchers believe that the analysis of proteomic
information will lead to the development of new drugs and better disease
management. Once CombiMatrix demonstrates the feasibility of its approach in
each market, it intends to enter into strategic alliances with major
participants to speed commercialization in multiple applications.

CombiMatrix has 42 patent applications pending in the United States and
Europe. In July 2000, CombiMatrix was granted U.S. Patent No. 6,093,302, which
expires in July 2017, for its biochip microarray processor system. This system
enables quick and economical turnaround of custom-designed microarrays for use
in biological research. A microarray consists of a chemical "virtual flask"
located on the surface of a semiconductor chip containing thousands of
microarrays, which are separated from each other using special solutions instead
of physical barriers. Each microarray has electronic circuitry that may be
directed by a computer to construct a specified compound. The patent covers
CombiMatrix's core technology, which is a method for producing microarrays by
synthesizing biological materials on a three-dimensional, active surface.

The agreement allows Roche to use, develop and resell licensed
CombiMatrix products in diagnostic applications. The agreement includes a
revenue sharing arrangement and has a term of 15 years. The agreement provides
for minimum payments by Roche to CombiMatrix over the first three years,
including milestone achievements, payments for products, royalties and research
and development projects.

In August 2001, CombiMatrix entered into a license and supply agreement
with the National Aeronautics and Space Administration ("NASA"). The agreement
has a two-year term and provides for the license, purchase and use by the NASA
Ames Research Center of CombiMatrix's active biochips (microarrays) and related
technology to conduct biological research in terrestrial laboratories and in
space.

In October 2001, CombiMatrix formed a joint venture with Marubeni
Japan, one of Japan's leading trading companies. The joint venture, based in
Tokyo, will focus on development and licensing opportunities for CombiMatrix's
biochip technology with pharmaceutical and biotechnology companies in the
Japanese market. Marubeni made an investment to acquire a ten percent (10%)
minority interest in the joint venture.

In December 2001, CombiMatrix completed a major milestone in its
strategic alliance with Roche including demonstration of several key performance
metrics of its custom in-situ microarray system.

In 2000 and 1999, CombiMatrix was awarded a total of three contracts
from the U.S. Federal government with respect to its biochip technology. In July
1999, CombiMatrix was awarded a Phase I Small Business Innovative Research
("SBIR") contract from the Department of Energy to develop microarrays of
affinity probes for the analysis of gene product, which may be used to expedite
the drug discovery process in the pharmaceutical industry. In July 1999,
CombiMatrix was awarded a Phase I SBIR Department of Defense contract to use
CombiMatrix's proprietary biochip technology to develop nanode array sensor
microchips to enable simultaneous detection of chemical and biological warfare
agents. In January 2000, CombiMatrix was awarded a Phase II SBIR Department of
Defense contract for the use of its biochip technology to develop nanode array
sensor microchips. Grant revenue recorded in 2001 resulted from CombiMatrix's
continuing performance under the Phase II SBIR Department of Defense contract.

In February 2002, CombiMatrix was awarded a Phase I National Institutes
of Health grant for the development of its protein biochip technology. The title
of the grant is "Self-Assembling Protein Microchips." This grant is in addition
to a three-year Phase I and a Phase II SBIR grant from the U.S. Department of
Defense for the development of multiplexed chip based assays for chemical and
biological warfare agent detection.

In November 2000, CombiMatrix filed a registration statement with the
Securities and Exchange Commission ("SEC"), relating to the proposed initial
public offering of its common stock. CombiMatrix recently filed a letter with
the SEC to withdraw its registration statement.

In April 1996, we entered into a shareholder agreement with
CombiMatrix's Senior Vice President, Chief Technology Officer, who holds an
ownership interest of 12.0% of CombiMatrix, pertaining to certain matters
relating to CombiMatrix. This agreement provides for the collective voting of
shares (representing 69.5% of the voting interests in CombiMatrix) for the
election of certain directors to CombiMatrix's board of directors, as well as
certain restrictions on the sale or transfer of the individual's shares of
common stock in CombiMatrix.

ADVANCED MATERIAL SCIENCES, INC.

Advanced Material Sciences is a development-stage company that holds an
exclusive license to CombiMatrix's biological processor technology within the
field of material science. Material science includes fuel cell catalysts,
battery materials, sensor arrays, electronic and electrochemical materials and
other materials relating to the use, storage, conversion and delivery of energy
other than those involving living or biologic systems.

Advanced Material Sciences is 58.1% owned by us, 28.5% owned by
CombiMatrix and 13.4% owned by third-parties. We have a 74.5% economic interest
in Advanced Material Sciences by virtue of our 58.1% direct ownership interest
in Advanced Material Sciences and our 57.5% interest in CombiMatrix. Advanced
Material Sciences intends to develop and exploit CombiMatrix's biological
processor technology in certain fields of material science. The principal terms
of Advanced Material Sciences' agreement with CombiMatrix are as follows:

o Advanced Material Sciences holds an exclusive worldwide license to
CombiMatrix's biological array processor technology for use in certain
fields of material science;
o Advanced Material Sciences will pay CombiMatrix a royalty on all net
sales generated from the sale of products in the area of material
science;
o Advanced Material Sciences will grant a royalty-free, worldwide license
to CombiMatrix to use improvements made by Advanced Material Sciences
to its technology in all fields outside of material sciences; and
o The initial term of the license agreement with CombiMatrix is 20 years.

In May 2001, Advanced Material Sciences completed a private equity
financing raising gross proceeds of $2.0 million through the issuance of
2,000,000 shares of common stock. Advanced Material Sciences issued an
additional 29,750 shares of common stock, in lieu of cash payments, and warrants
to purchase approximately 54,000 shares of common stock, for finders' fees in
connection with the private placement. Each common stock purchase warrant
entitles the holder to purchase shares of Advanced Material Sciences common
stock at a price of $1.10 per share.

DISCONTINUED OPERATIONS

On February 13, 2001, the board of directors of Soundbreak.com
Incorporated ("Soundbreak.com"), one of our majority-owned subsidiaries,
resolved to cease operations as of February 15, 2001 and liquidate the remaining
assets and liabilities of the company. Accordingly, we reported the results of
operations and the estimated loss on disposal of Soundbreak.com as results of
discontinued operations in the consolidated statements of operations and
comprehensive loss as of and for the year ended December 31, 2000.

COMPETITION

We expect to encounter competition in the area of business
opportunities from other entities having similar business objectives. Many of
these potential competitors possess financial, technical, human and other
resources greater than our own.

The media technologies and life sciences industries are subject to
intense competition and rapid and significant technological change. We
anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies become available.

Other companies may develop competing technologies that offer better or
less expensive alternatives to the V-chip technology and/or our audio-on-demand
and video-on-demand technology. Many potential competitors, including television
manufacturers and other media technology companies, have significantly greater
resources. Technological advances or entirely different approaches developed by
one or more of our competitors could render Acacia Media Technologies Group's
technologies obsolete or uneconomical.

In the life sciences industry, many competitors have more experience in
research and development than CombiMatrix. Technological advances or entirely
different approaches developed by one or more of our competitors could render
CombiMatrix's processes obsolete or uneconomical. The existing approaches of our
competitors or new approaches or technology developed by our competitors may be
more effective than those developed by CombiMatrix.

REGULATION

THE INVESTMENT COMPANY ACT OF 1940

The regulatory scope of the Investment Company Act of 1940 ("Investment
Company Act"), which was enacted principally for the purpose of regulating
vehicles for pooled investments in securities, extends generally to companies
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities. We believe that our anticipated principal activities will
not subject us to regulation under the Investment Company Act. However, the
Investment Company Act may also be deemed to be applicable to a company which
does not intend to be characterized as an investment company but which,
nevertheless, engages in activities which may be deemed to be within the scope
of certain provisions of the Investment Company Act. In such an event, we may
become subject to certain restrictions relating to our activities, including
restrictions on the nature of our investments and the issuance of securities. In
addition, the Investment Company Act imposes certain requirements on companies
deemed to be within its regulatory scope, including registration as an
investment company, adoption of a specific form of corporate structure and
compliance with certain burdensome reporting, record-keeping, voting, proxy,
disclosure and other rules and regulations, all of which could cause significant
registration and compliance costs. Accordingly, we will continue to review our
activities from time to time with a view toward reducing the likelihood that we
could be classified as an "investment company" within scope of the Investment
Company Act.

REGULATION OF MEDICAL DEVICES

CombiMatrix intends to sell products to the pharmaceutical,
biotechnology and academic communities for research applications. Therefore, its
initial products will not require approval from, or be regulated by, the United
States Food and Drug Administration ("FDA") as a manufacturer nor will they be
subject to the FDA's current good manufacturing practice ("cGMP") regulations.
Additionally, CombiMatrix's initial products will not be subject to certain
reagent regulations promulgated by the FDA. However, the manufacture, marketing
and sale of certain products and services for any clinical or diagnostic
applications will be subject to extensive government regulation as medical
devices in the United States by the FDA and in other countries by corresponding
foreign regulatory authorities.

The FDA requires that a manufacturer seeking to market a new or
modified medical device, or an existing medical device for a new indication,
obtain either a pre-market notification clearance under the Federal Food, Drug
and Cosmetic Act or a showing of substantial equivalence in function to an
existing regulated device. CombiMatrix anticipates that its products will become
subject to medical device regulations in the United States only when they are
marketed for clinical uses for any clinical or diagnostic purpose, excluding
pure research or product discovery research purposes. Material changes to
existing medical devices are also subject to FDA review and clearance or
approval prior to commercialization in the United States.

Should CombiMatrix market products for any clinical or diagnostic
purpose or act as a manufacturer or supplier of products for a third-party
customer to market for any clinical or diagnostic purpose, it will be required
to register as a medical device manufacturer with the FDA. As a registered
manufacturer, CombiMatrix would be subject to routine inspection by the FDA for
compliance with cGMP regulations and other applicable regulations. In addition,
CombiMatrix must currently comply with a variety of other federal, state and
local laws and regulations relating to safe work conditions and manufacturing
practices. The extent of government regulation that might result from any future
legislation or administration cannot be predicted. Moreover, there can be no
assurance that CombiMatrix or its third-party customers will be able to obtain
appropriate FDA regulatory approvals on a timely basis, or at all, or that
CombiMatrix will be able to comply with cGMP regulations.

Sales of CombiMatrix products outside the United States will be subject
to foreign regulatory requirements that vary from country to country. Additional
approvals from foreign regulatory authorities may be required, and there can be
no assurance that CombiMatrix will be able to obtain foreign marketing approvals
on a timely basis, or at all, or that it will not be required to incur
significant costs in obtaining or maintaining foreign regulatory approvals. For
example, if CombiMatrix products are marketed for clinical or diagnostic
purposes in the European Union, CombiMatrix will have to obtain the certificates
required for the "CE" mark to be affixed to CombiMatrix products for sales in
European Union member countries. The "CE" mark is a European Union symbol of
adherence to quality assurance standards and compliance with applicable European
Union directives and regulations.

ENVIRONMENTAL REGULATION

The operations of CombiMatrix and Advanced Material Sciences involve
the use, transportation, storage and disposal of hazardous substances, and as a
result, these subsidiaries are subject to environmental and health and safety
laws and regulations. Although these subsidiaries currently use fairly small

quantities of hazardous substances, as they expand their operations, their use
of hazardous substances will likely increase and lead to additional and more
stringent requirements. The cost of complying with these and any future
environmental regulations could be substantial. In addition, if one or more of
our subsidiaries fails to comply with environmental laws and regulations, or
releases any hazardous substance into the environment, such subsidiary could be
exposed to substantial liability in the form of fines, penalties, remediation
costs and other damages, or could suffer a curtailment or shut down of its
operations.

SATELLITE, CABLE AND TELECOMMUNICATIONS REGULATION

Acacia Media Technologies markets and licenses technologies relating to
audio-on-demand and video-on-demand. These technologies can be used to transmit
content by several means including satellite, cable and telecommunications
systems. The satellite, cable and telecommunications industries are subject to
federal regulation, including FCC licensing and other requirements. These
industries are also often subject to extensive regulation by local and state
authorities. While most satellite, cable and telecommunication industry
regulations do not apply directly to Acacia Media Technologies, they affect
programming distributors, one of the large potential customers for the
technologies covered by Acacia Media Technologies' patent portfolio. Acacia
Media Technologies monitors pending legislation and administrative proceedings
to ascertain relevance, analyze impact and develop strategies regarding
regulatory trends and developments within these industries.

Federal law requires cable operators to reserve up to one-third of a
system's channel capacity for local commercial television stations that have
elected must-carry status. In addition, a cable system is generally required to
carry local non-commercial television stations. The FCC has also implemented
comparable rules for satellite carriers requiring that if a satellite system
carries one local broadcast station in a local market pursuant to a royalty-free
license granted under the Satellite Home Viewer Improvement Act of 1999, then it
must carry all local broadcast stations in that market. To meet these
requirements, some cable and satellite systems must decide which programming
services to keep and which to remove in order to make space available for local
television stations. These must-carry requirements may impact Acacia Media
Technologies' information-on-demand and streaming media business by causing
cable and satellite systems operators to reduce the number of channels on their
systems that would have used technologies covered by Acacia Media Technologies'
patent portfolio.

On January 18, 2001, the FCC issued a Notice of Inquiry ("NOI")
concerning Interactive Television ("ITV"). The NOI raises a series of questions
that suggest that cable systems might be regarded as essential, open platforms
of spectrum for non-discriminatory third-party use, rather than facilities-based
providers competing in a wider market. ITV is a service so new that the FCC has
difficulty defining it, but the FCC states that it considers ITV to embrace at
least electronic program guides, interactive video content, and supplementary
signals that wrap around video and provide additional content or services. The
NOI seeks comments on the nature of ITV (e.g., what is it, who will provide it,
how will it be provided, what are the business models for its provision), and
whether cable systems will be a "superior platform" for the provision of ITV.
Although the NOI cannot lead directly to rules, it asks very detailed questions
all arising from a common regulatory premise: that cable operations who are
affiliated with ITV providers should not be permitted to "discriminate" in favor
of their own ITV services with respect to spectrum usage; and that ITV providers
affiliated with cable operators may need to be subjected to equivalent rules of
non-discrimination so that they may not obtain leverage from any exclusive
arrangement they would otherwise negotiate with popular programmers. The outcome
of the NOI will largely determine whether there will be subsequent FCC
regulations for the interactive television industry. As of March 19, 2002, the
FCC had not yet proposed any new regulations as a result of the NOI. Any
regulation of this industry could impact Acacia Media Technologies'
information-on-demand and streaming media business by limiting the growth of the
market for these technologies or regulating their licensing, but at this time,
it is too speculative to determine what those rules or their impact may be.

RESEARCH AND DEVELOPMENT

We are involved in research and development activities through our
consolidated subsidiaries. Our research and development-related expenses,
primarily related to CombiMatrix, were $18.8 million, $11.9 million and $1.8
million in 2001, 2000 and 1999, respectively.

Certain of our life sciences subsidiaries are developing a variety of
life sciences related products and services. These industries are characterized
by rapid technological development. We believe that our future success will
depend in large part on our subsidiaries' ability to continue to enhance their
existing products and services and to develop other products and services, which
complement existing ones. In order to respond to rapidly changing competitive
and technological conditions, we expect our subsidiaries to continue to incur
significant research and development expenses during the initial development
phase of new products and services, as well as on an ongoing basis.

ITEM 2. PROPERTY

Acacia leases approximately 7,143 square feet of office space in
Newport Beach, California, under a lease agreement that expires in February
2007. We also lease approximately 7,019 square feet of office space in Pasadena,
California, under a lease agreement that expires in November 2003, which is
subleased through the remaining term of the lease agreement. Our consolidated
subsidiary, CombiMatrix, leases office and laboratory space totaling
approximately 63,537 square feet located north of Seattle, Washington, under a
lease agreement that expires in December 2008. Presently, we are not seeking any
additional facilities.

We are a guarantor under a lease agreement for office space in
Hollywood, California that expires in August 2005. The lease agreement was
entered into by Soundbreak.com, which ceased operations in February 2001. A
portion of the leased premises is subleased through the remaining term of the
lease agreement, and we continue to pursue opportunities to sublease the
remaining space.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, we are the subject of, or party
to, various pending or threatened legal actions. We believe that any liability
arising from these actions will not have a material adverse effect on our
financial position, results of operations or cash flows.

SOUNDVIEW TECHNOLOGIES

On April 5, 2000, Soundview Technologies filed a federal patent
infringement and antitrust lawsuit against Sony Corporation of America, Philips
Electronics North America Corporation, the Consumer Electronics Manufacturers
Association and the Electronics Industries Alliance d/b/a/ Consumer Electronics
Association in the United States District Court for the Eastern District of
Virginia, alleging that television sets utilizing certain content blocking
technology (commonly known as the "V-chip") and sold in the United States
infringe Soundview Technologies' U.S. Patent No. 4,554,584. The case is now
pending in the U.S. District Court for the District of Connecticut against Sony
Corporation of America, Inc., Sony Electronics, Inc., the Electronics Industries
Alliance d/b/a/ Consumer Electronics Association, the Consumer Electronics
Manufacturers Association, Mitsubishi Digital Electronics America, Inc.,
Mitsubishi Electronics America, Inc., Toshiba America Consumer Products, Inc.
and Sharp Electronics Corporation. However, no assurance can be given that
Soundview Technologies will prevail in this action or that the television
manufacturers will be required to pay royalties to Soundview Technologies.

During 2001, Soundview Technologies entered into separate confidential
settlement and/or license agreements with Hitachi America Ltd., Pioneer
Electronics (USA) Incorporated, Samsung Electronics, LG Electronics, Inc.,
Daewoo Electronics Corporation of America, Sanyo Manufacturing Corporation,
Funai Electric Co., Ltd., JVC Americas Corporation, Thomson Multimedia, Inc.,
Orion Electric Co., Ltd. and Matsushita Electric Industrial Co., Ltd. whereby
Soundview Technologies will receive payments and grant non-exclusive licenses of
its V-chip patent. In 2000, Soundview Technologies settled its lawsuit with
Philips Electronics North America Corporation.

COMBIMATRIX

On November 28, 2000, Nanogen filed a complaint in the United States
District Court for the Southern District of California against CombiMatrix and
Donald D. Montgomery, Ph.D., Senior Vice President, Chief Technology Officer and
a director of CombiMatrix. Dr. Montgomery was employed by Nanogen as a senior
research scientist between May 1994 and August 1995. The Nanogen complaint
alleges, among other things, breach of contract, trade secret misappropriation
and that U.S. Patent No. 6,093,302 and other proprietary information belonging
to CombiMatrix are instead the property of Nanogen. The complaint seeks, among
other things, correction of inventorship on the patent, the assignment of rights
in the patent and pending patent applications to Nanogen, an injunction
preventing disclosure of trade secrets, damages for trade secret
misappropriation and the imposition of a constructive trust. On December 15,
2000, CombiMatrix and Dr. Montgomery filed a motion to dismiss the lawsuit,
which was denied in part and granted in part on February 1, 2001. On March 9,
2001, CombiMatrix and Dr. Montgomery filed a counterclaim, alleging breach of
express covenants not to sue or otherwise interfere with Dr. Montgomery arising
out of a release signed by Nanogen in 1996. On April 4, 2001, Nanogen filed a
motion to dismiss the counterclaim, which the court denied in its entirety on
July 27, 2001. Fact discovery is ongoing and is scheduled to close on June 3,
2002. CombiMatrix intends to vigorously defend the lawsuit and pursue the
counterclaim. Although we believe that Nanogen's claims are without merit, we
cannot predict the outcome of the litigation.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

RECENT MARKET PRICES

Our common stock began trading under the symbol ACRI on the NASDAQ
National Market System on July 8, 1996. Prior to our listing on the NASDAQ
National Market System and subsequent to June 15, 1995 when our Registration
Statement on Form SB-2 became effective under the Securities Act of 1933, as
amended, our common stock traded under the same symbol in the over-the-counter
market. Preceding June 15, 1995, there had been no public market for our common
stock.

The markets for securities such as our common stock historically have
experienced extreme 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.

On March 16, 1998, our board of directors declared a two-for-one split
of our common stock in the form of a 100% stock dividend. We distributed the
stock dividend on or about June 12, 1998 for each share held of record at the
close of business on May 29, 1998. All share and per share information presented
herein is adjusted for the stock split.

On October 22, 2001, our board of directors declared a ten percent
(10%) stock dividend. The stock dividend, totaling 1,777,710 shares, was
distributed on December 5, 2001 for stockholders of record as of November 21,
2001. All share and per share information presented herein is adjusted for the
stock dividend.

The high and low bid prices for our common stock as reported by the
NASDAQ National Market System for the periods indicated are as follows. Such
prices are inter-dealer prices without retail markups, markdowns or commissions
and may not necessarily represent actual transactions.

2000 HIGH LOW

First Quarter.................................... $53.64 $26.82
Second Quarter................................... $39.09 $12.16
Third Quarter.................................... $32.05 $19.89
Fourth Quarter................................... $33.81 $12.50

2001 HIGH LOW

First Quarter.................................... $18.98 $ 5.23
Second Quarter................................... $16.14 $ 4.69
Third Quarter.................................... $16.66 $ 5.83
Fourth Quarter................................... $13.42 $ 8.29

On March 22, 2001, the closing bid and asked quotations for our common
stock were $11.75 and $11.76, respectively, per share.

On March 22, 2001, there were approximately 211 owners of record of our
common stock. The majority of the outstanding shares of common 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. 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.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below as of December 31, 2001 and
2000 and for the years ended December 31, 2001, 2000 and 1999 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 selected financial data as of December 31, 1999, 1998 and
1997 and for the years ended December 31, 1998 and 1997 have been derived from
audited consolidated financial statements not included herein, but which were
previously filed with the SEC.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------

Revenues:
License fee income ........................ $ 24,180,000 $ -- $ -- $ -- $ --
Grant revenue ............................. 456,000 17,000 144,000 -- --
Capital management fee income and other ... -- 40,000 122,000 382,000 491,000
------------- ------------- ------------- ------------- -------------
Total revenues ............................... $ 24,636,000 $ 57,000 $ 266,000 $ 382,000 $ 491,000
============= ============= ============= ============= =============

Operating loss ............................... $(43,198,000) $(37,163,000) $ (7,580,000) $ (5,842,000) $ (3,420,000)
Other income (expense), net .................. 4,166,000 (1,235,000) (1,042,000) (545,000) (100,000)
Loss from continuing operations before
minority interests ......................... (39,812,000) (38,325,000) (8,642,000) (6,387,000) (3,270,000)
Minority interests ........................... 17,540,000 9,166,000 1,221,000 198,000 411,000
Loss from continuing operations .............. (22,272,000) (29,159,000) (7,421,000) (6,189,000) (2,859,000)
Loss from discontinued operations (1) ........ -- (9,554,000) (776,000) -- --
Loss before cumulative effect of change in
accounting principle ...................... (22,272,000) (38,713,000) (8,197,000) (6,189,000) (2,859,000)
Cumulative effect of change in accounting
principle due to beneficial conversion
feature ................................... -- (246,000) -- -- --
Net loss ..................................... (22,272,000) (38,959,000) (8,197,000) (6,189,000) (2,859,000)

Loss per common share:
Basic and diluted
Loss from continuing operations ........... $ (1.16) $ (1.78) $ (0.59) $ (0.58) $ (0.42)
Loss from discontinued operations ......... -- (0.58) (0.06) -- --
Cumulative effect of change in accounting
principle ............................... -- (0.02) -- -- --
------------- ------------- ------------- ------------- -------------
Net loss ..................................... $ (1.16) $ (2.38) $ (0.65) $ (0.58) $ (0.42)
============= ============= ============= ============= =============
Weighted average number of common and
potential shares outstanding used in
computation of loss per common share (2):
Basic ..................................... 19,259,256 16,346,099 12,649,133 10,748,982 6,739,996
Diluted ................................... 19,259,256 16,346,099 12,649,133 10,748,982 6,739,996

CONSOLIDATED BALANCE SHEET DATA:
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Total assets.................................. $110,859,000 $ 98,516,000 $ 51,791,000 $ 19,769,000 $ 8,854,000
Long-term indebtedness........................ -- -- -- 1,222,000 --
Total liabilities (3)......................... 19,824,000 20,848,000 1,633,000 1,828,000 447,000
Minority interests (3)........................ 32,303,000 17,524,000 4,896,000 -- 227,000
Stockholders' equity.......................... 58,732,000 60,144,000 45,262,000 17,941,000 8,180,000

- -----------------------------------

(1) Operating results in 1999 have been restated to present Soundbreak.com as
discontinued operations. See Note 9 to the 2001 consolidated financial
statements.
(2) Potential common shares in 2001, 2000, 1999, 1998 and 1997 have been
excluded from the per share calculation because the effect of their
inclusion would be anti-dilutive. In addition, all share and per share
information has been adjusted as appropriate for all periods presented to
reflect a two-for-one stock split effected in March 1998 and a ten percent
(10%) stock dividend distributed on December 5, 2001 for stockholders of
record as of November 21, 2001.
(3) Effective January 1, 2001, Acacia changed its accounting policy for
balance sheet classification of employee stock-based compensation
resulting from awards in consolidated subsidiaries. As a result, effective
January 1, 2001, amortized non-cash stock compensation charges related to
subsidiary stock options are included in minority interests in our
consolidated balance sheet. Prior to the change in accounting policy,
amortized non-cash stock compensation charges related to subsidiary stock
options were reflected as "accrued stock compensation" in consolidated
liabilities. There is no impact on previous consolidated statements of
operations as a result of this change in accounting policy.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Acacia Research Corporation develops, licenses and provides products
for the media technology and life science sectors. Acacia's media technologies
and life sciences businesses are referred to as "Acacia Media Technologies
Group" and "Acacia Life Sciences Group," respectively. Acacia licenses its
V-chip technology to television manufacturers and owns pioneering technology for
digital streaming and audio and video-on-demand. We will continue to pursue both
licensing and strategic business alliances with leading companies in the rapidly
growing media technologies industry. Acacia's core technology opportunity in the
life science sector has been developed through our majority-owned subsidiary,
CombiMatrix, which is developing a proprietary system for rapid, cost
competitive creation of DNA and other compounds on a programmable semiconductor
chip.

In 2001, our financial condition and results of operations were
highlighted by the receipt of $25.6 million in payments from the licensing of
our television V-chip technology, and $6.4 million received by CombiMatrix
pursuant to separate license, supply and research and development agreements
with Roche Diagnostics GmbH ("Roche") and the National Aeronautics and Space
Administration ("NASA") and continued performance under its Phase II SBIR
contract with the U.S. Department of Defense. In addition, CombiMatrix continued
its expansion of research and development activities in 2001. In 2000, our
financial condition and results of operations were highlighted primarily by the
continued expansion of research and development and the building of the
management team at CombiMatrix. In 1999, our financial condition and results of
operations were highlighted primarily by the investment in our subsidiary,
Soundbreak.com, and the expansion associated with CombiMatrix's research and
development. In the following discussion and analysis, the period-to-period
comparisons must be viewed in light of the impact that the acquisition and
disposition of securities of various business interests has had on our financial
condition and results of operations.

During 2001, we began to receive significant payments from the
licensing of our television V-chip technology to television manufacturers. In
addition, CombiMatrix began to receive significant payments from its strategic
partners and licensees. However, to date, our subsidiary companies have relied
primarily upon selling equity securities, including sales to and loans from us,
to generate the funds needed to finance the implementation of their plans of
operation. Our subsidiary companies may be required to obtain additional
financing through bank borrowings, debt or equity financings or otherwise, which
would require us to make additional investments or face a dilution of our equity
interests.

We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt or other
external financings; however, 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.

ACQUISITION AND OPERATING ACTIVITIES

During 2001, we continued to significantly increase financing,
acquisition and operating activities while receiving significant payments from
our media technologies licensing arrangements and from our life science
strategic partners and licensees. We intend to continue to pursue both licensing
and strategic business alliances with leading companies in the rapidly growing
media technologies industry. Additionally, we intend to continue to invest in
growing our life science businesses by identifying and developing opportunities
in the life science sector that will be created by commercializing the new
biochip technology of CombiMatrix and other related investments in that sector.
Financing activities are listed in the Liquidity and Capital Resources section
that follows. Highlights of the acquisition and operating activities for the
year ended December 31, 2001 include:

FIRST QUARTER:

In the first quarter of 2001, Soundview Technologies executed separate
settlement and/or license agreements with Samsung Electronics, Hitachi America,
Ltd., LG Electronics, Inc., Funai Electric Company, Ltd., Daewoo Electronics
Corporation of America and Sanyo Manufacturing Corporation. In addition,
Soundview Technologies settled its lawsuits with Pioneer Electronics (USA)
Incorporated. Certain of these license agreements constitute settlements of
patent infringement litigation brought by Soundview Technologies. The settlement

and license agreements provide for licensing payments to Soundview Technologies,
and grant non-exclusive licenses of Soundview Technologies' U.S. Patent No.
4,554,584 to the respective television manufacturers. Certain of these
settlement and license agreements provide for future royalty payments to
Soundview Technologies. We received, and recognized as revenue, $2.4 million in
license fee payments during the first quarter of 2001. In addition, we received
a payment of $1.0 million pursuant to a settlement and license agreement
executed in December 2000, which is included in deferred revenues at December
31, 2001.

In February 2001, the board of directors of Soundbreak.com resolved to
cease operations as of February 15, 2001 and liquidate its remaining assets and
liabilities of the company. Accordingly, we reported the results of operations
and the estimated loss on disposal of Soundbreak.com as results of discontinued
operations in the consolidated statements of operations and comprehensive loss
as of and for the year ended December 31, 2000.

SECOND QUARTER:

During the second quarter of 2001, Soundview Technologies executed
separate settlement and license agreements with Thomson Multimedia, Inc. and JVC
Americas Corporation. Certain of these settlement and license agreements provide
for future royalty payments to Soundview Technologies. We received, and
recognized as revenue, license fee payments totaling $10.0 million during the
second quarter of 2001.

THIRD QUARTER:

In the third quarter of 2001, Soundview Technologies executed separate
settlement and/or license agreements with Matsushita Electric Industrial Co.,
Ltd. and Orion Electric Co., Ltd. We received, and recognized as revenue,
license fee payments totaling $10.7 million during the third quarter of 2001. In
addition, we received a payment of $0.5 million pursuant to a license agreement
executed in December 2000, which is included in deferred revenues at December
31, 2001.

In July 2001, CombiMatrix entered into a non-exclusive worldwide
license, supply, and research and development agreement with Roche. Under the
terms of the agreement, it is contemplated that Roche will purchase, use and
resell CombiMatrix's biochips (microarrays) and related technology for rapid
production of customizable biochips. Additionally, CombiMatrix and Roche will
develop a platform technology, providing a range of standardized biochips for
use in important research applications. Roche will make payments for the
deliverables contemplated and for expanded license rights.

The agreement allows Roche in the future to use, develop and resell
licensed CombiMatrix products in diagnostic applications. The agreement includes
a revenue sharing arrangement and has a term of 15 years. The agreement provides
for minimum payments by Roche to CombiMatrix over the first three years,
including milestone achievements, payments for products, royalties and research
and development projects. In the third quarter of 2001, CombiMatrix received an
up-front payment under the Roche agreement, which is included in deferred
revenues at December 31, 2001.

In August 2001, CombiMatrix entered into a license and supply agreement
with NASA. The agreement provides for the license, purchase and use by the NASA
Ames Research Center of CombiMatrix's active biochips (microarrays) and related
technology to conduct biological research in terrestrial laboratories and in
space.

FOURTH QUARTER:

In November 2001, we increased our ownership interest in Acacia Media
Technologies, formerly Greenwich Information Technologies LLC, from 33% to 100%
through the purchase of the ownership interest of the former limited liability
company's other member. In December 2001, we converted the company from a

limited liability company to a corporation and changed the name of the company
to Acacia Media Technologies Corporation. Acacia Media Technologies owns a
worldwide portfolio of pioneering patents relating to audio and video
transmission and receiving systems, commonly known as audio-on-demand and
video-on-demand, used for distributing content via various methods including
computer networks, cable television systems and direct broadcasting satellite
systems.

In December 2001, CombiMatrix completed a major milestone in its
strategic alliance with Roche. CombiMatrix demonstrated several key performance
metrics of its custom in-situ microarray system. In the fourth quarter of 2001,
CombiMatrix received certain milestone payments under the Roche agreement, which
are included in deferred revenues at December 31, 2001.

In the fourth quarter of 2001, we received, and recognized as revenue,
license fee payments totaling $1.0 million. In addition, CombiMatrix received
payments under its license and supply agreement with NASA, which are included in
deferred revenues at December 31, 2001.

As of September 30, 2001, CombiMatrix capitalized costs incurred in
connection with the filing of a registration statement with the SEC in November
2000 totaling $1.4 million. Approximately $0.9 million of these costs were
included in current assets in our December 31, 2000 consolidated balance sheet.
In the fourth quarter of 2001, all of these deferred costs were charged to
operations due to uncertainty regarding the future recoverability of such costs
stemming from unfavorable market conditions in late 2001 and early 2002.

EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

o revenue recognition;
o research and development expenses;
o litigation, claims and assessments;
o stock-based compensation;
o accounting for income taxes; and
o valuation of long-lived and intangible assets and goodwill.

REVENUE RECOGNITION. We derive our revenues from three primary sources:
(i) fees from the licensing of our television V-chip technology to television
manufacturers, (ii) revenues under multiple-element arrangements with strategic
partners and licensees and (iii) government grant revenues.

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 our revenue for any
period if our management made different judgments.

Television V-chip License Fees: Our television V-chip technology
settlement and/or license agreements provide for the payment of contractually
determined license fees to us in consideration for the grant to certain
television manufacturers of a non-exclusive, retroactive and future license to
manufacture and/or sell products covered by Soundview Technologies' U.S. Patent
No. 4,554,584, through July 2003. Certain of the agreements also provide for
future royalties or additional required payments based on future television
sales or the outcome of future litigation and settlement activities. The
agreements executed with the various television manufacturers include certain
release provisions with respect to Soundview Technologies' ongoing patent
infringement and anti-trust enforcement efforts. Amounts received under the
settlement and license agreements are recorded as license fee income in our
consolidated statement of operations and comprehensive loss.

License fee income is recognized as revenue when (i) persuasive
evidence of an arrangement exists, (ii) all obligations have been performed
pursuant to the terms of the license agreement, (iii) amounts are fixed or
determinable and (iv) collectibility of amounts is reasonably assured. Pursuant
to the terms of the agreements, we have no further obligation with respect to
the sale of the non-exclusive retroactive and future license, including no

express or implied obligation on our part to maintain or upgrade the technology
or license, or provide future support or services. Generally, the agreements
provide for the grant of the license upon receipt by Soundview Technologies of
payment of the contractual license fee. As such, the earnings process is
generally complete upon the receipt of payment from the television manufacturer,
and revenue is recognized when all of the criteria above are met.

License fee payments received by us that do not meet the revenue
recognition criteria above are recorded as deferred revenues until the criteria
are met. In the event that license fee amounts due from television manufacturers
have been accrued, we assess collection based on a number of factors, including
past transaction history and credit-worthiness. If we determine that collection
of an accrued license fee is not reasonably assured, we defer the fee and
recognize revenue upon receipt of cash.

Revenues Under Multiple-Element Arrangements with Strategic Partners
and Licensees: CombiMatrix entered into a non-exclusive worldwide license,
supply, research and development agreement with Roche in July 2001. Under the
terms of the agreement, Roche will purchase, use and resell CombiMatrix's
microarray and related technologies for rapid production of customizable
biochips. Additionally, CombiMatrix and Roche will develop a platform
technology, providing a range of standardized biochips for use in research
applications. The agreement has a 15-year term and provides for minimum payments
by Roche to CombiMatrix over the first three years, including milestone
achievements, payments for products, royalties and research and development
projects.

Revenues from the sale of products and services under multiple-element
arrangements are recognized when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the
fees are fixed and determinable and (iv) collectibility is reasonably assured.

Pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"), an arrangement with multiple deliverables
should be segmented into individual units of accounting based on the separate
deliverables only if there is objective and reliable evidence of fair value to
allocate the consideration to the deliverables. Accordingly, revenues from
multiple-element arrangements involving license fees, up-front payments and
milestone payments, which are received or billable in connection with other
rights and services that represent continuing obligations of CombiMatrix, are
deferred until all of the elements have been delivered or until objective and
verifiable evidence of the fair value of the undelivered elements has been
established.

Upon establishing verifiable evidence of the fair value of the elements
in multiple-element arrangements, the fair value is allocated to each element of
the arrangement, such as licensing or research and development deliverables,
based on the relative fair values of the elements. We determine the fair value
of each element in multiple-element arrangements based on objective and
verifiable evidence of the price charged when the same element is sold
separately. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue.

For the year ended December 31, 2001, CombiMatrix received payments
totaling $5.3 million from Roche, including up-front payments and milestone
payments, which are classified as deferred revenues in the accompanying December
31, 2001 consolidated balance sheet due to management's determination that the
payments received relate to elements for which objective and reliable evidence
of fair value does not currently exist. Pursuant to SAB No. 101, the elements
associated with the amounts received to date and additional payments will be
treated as one accounting unit. The up-front fees and cash payments received
upon the accomplishment of the contractual milestones will be deferred. Revenue
will be recognized when all of the related elements, for which objective and
reliable evidence does not exist, have been delivered and there is objective and
reliable evidence to support the fair value for all of the undelivered elements.

Government Grants: Revenues from government grants and contracts are
recognized when the related services are performed and approved by the grantor
and when collectibility is reasonably assured. Amounts recognized are limited to
amounts due from customers based upon the contract or grant terms.

RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses to date have been incurred primarily by our CombiMatrix subsidiary.
CombiMatrix is engaged in several research and development initiatives to expand
its product offerings by increasing the number of test sites on their active
biochips from 1,024 sites per square centimeter currently to over 10,000 sites
per square centimeter and by developing additional applications of its
technology for drug discovery and development.

Research and development expenses have been CombiMatrix's largest
expense to date. Research and development expenses primarily relate to costs of
developing its semiconductor-based, active biochip system, including salaries
and benefits, recruiting and relocation expenses related to the expansion of its
research and development staff, costs associated with increased usage of

laboratory materials and supplies and increased facilities costs. CombiMatrix
expects to continue to incur significant expenses for research and development,
for developing and expanding its manufacturing capabilities and for other
efforts to commercialize its products. As a result, we expect that our research
and development expenses will continue to increase in the foreseeable future.

In July 2001, CombiMatrix signed a non-exclusive license and supply
agreement and a research and development agreement with Roche in the genomics
and related diagnostic fields, which provide for payments to CombiMatrix upon
development of proposed products incorporating its technology. In 2001, research
and development expenses incurred were primarily driven by CombiMatrix's
obligations under the research and development agreement with Roche. These
projects include continued development of production microarray synthesis
techniques, as well as higher density microarrays. These projects are expected
to continue into 2002 and 2003 as determined by the timelines outlined in
CombiMatrix's agreements with Roche.

We account for research and development expenses pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research and
Development Costs" ("SFAS No. 2"). SFAS No. 2 requires that all research and
development costs, as defined therein, be charged to expense as incurred.
Research and development expenses incurred to date consist of costs incurred for
direct and overhead-related research expenses and are expensed as incurred.
Costs to acquire technologies which are utilized in research and development and
which have no alternative future use are expensed when incurred. Costs related
to filing and pursuing patent applications are expensed as incurred, as
recoverability of such expenditures is uncertain. Under SFAS No. 2, research and
development refers to a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended for
sale or use. Significant management estimates are required with respect to the
determination of which costs relate to plans or designs for a new product or
process or for a significant improvement to an existing product. Had management
determined that certain costs incurred were not related to research and
development activities, different accounting treatment for such costs may have
been required.

The costs of software developed for use in CombiMatrix's products is
expensed as incurred until technological feasibility for the software has been
established. Software development costs incurred to date have been classified as
research and development expenses. Significant management estimates are required
with respect to the determination of when technological feasibility for the
software has been established. Technological feasibility is established upon
completion of a detail program design or, in its absence, completion of a
working model. Thereafter, all software production costs are required to be
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value. Had management made differing judgments regarding
technological feasibility, different accounting treatment of costs of software
developed for use in CombiMatrix's products may have been required.

LITIGATION, CLAIMS AND ASSESSMENTS. The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Specifically, our management must make estimates of whether
(i) it is probable that an asset has been impaired or a liability has been
incurred at the date of the consolidated financial statements and (ii) whether
the amount of loss can be reasonably estimated. In the event that in
management's estimation it is probable that an asset has been impaired or a
liability has been incurred at the date of the consolidated financial statements
and amounts of loss can be reasonably estimated, the estimated contingent loss
from the loss contingency is accrued by a charge to income.

Because of the uncertainties related to both probabilities of outcome
and amounts and ranges of potential loss associated with outstanding claims and
pending litigation at December 31, 2001, management is unable to make a
reasonable estimate of the likelihood of outcome or the liability that could
result from an unfavorable outcome. As such, we have not accrued for any loss
contingencies as of December 31, 2001. As additional information becomes
available, we will assess the potential liability related to our pending
litigation and revise our estimates. Such revisions in our estimates of the
potential liability could materially impact our results of operation and
financial position.

STOCK-BASED COMPENSATION. Acacia's stock option policies provide for
the granting of stock options to employees, generally, at exercise prices equal
to the fair value of the underlying stock on the date of grant. The fair values
of Acacia stock option grants are determined by reference to the quoted market
prices of our stock as listed on the NASDAQ National Market System on the grant
date. The fair values of stock options granted by our non-public subsidiaries
are determined by the board of directors of the respective companies.

Non-cash stock compensation cost related to stock options issued to
employees is accounted for in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"), and related interpretations. Compensation cost attributable to such
options is recognized based on the difference, if any, between the closing

market price of the stock on the date of grant and the exercise price of the
option. Compensation cost is deferred and amortized on an accelerated basis over
the vesting period of the individual option awards using the amortization method
prescribed in Financial Accounting Standards Board ("FASB") Interpretation No.
28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans" ("FIN No. 28"). Non-cash compensation cost of stock options and
warrants issued to non-employee service providers, which has not been
significant, is accounted for under the fair value method required by SFAS No.
123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."

During the year ended December 31, 2000, CombiMatrix recorded deferred
non-cash stock compensation charges aggregating approximately $53.8 million in
connection with the granting of stock options. Pursuant to Acacia's policy, the
stock options were originally granted by CombiMatrix at exercise prices equal to
the fair value of the underlying CombiMatrix stock on the date of grant as
determined by its board of directors. However, such exercise prices were
subsequently determined to have been granted at exercise prices below fair value
due to a substantial step-up in the fair value of CombiMatrix pursuant to a
valuation provided by an investment banker in contemplation of a potential
CombiMatrix initial public offering in 2000. In connection with the proposed
CombiMatrix initial public offering and pursuant to SEC rules and guidelines, we
were required to reassess the value of stock options issued during the one-year
period preceding the potential initial public offering and utilize the
stepped-up fair value provided by the investment banker for purposes of
determining whether such stock option issuances were compensatory, resulting in
the calculation of the $53.8 million in deferred non-cash stock compensation
charges in 2000. Deferred non-cash stock compensation charges are being
amortized over the respective option grant vesting periods, which range from one
to four years. Non-cash stock compensation charged to income during 2001 totaled
$20.8 million and related primarily to the continued amortization of
CombiMatrix's deferred stock compensation amounts during 2001. Pursuant to the
vesting terms of CombiMatrix's stock options outstanding at December 31, 2001,
we will incur non-cash stock compensation amortization expenses of $8.1 million
in 2002, $3.6 million in 2003 and $1.1 million in 2004.

During the third and fourth quarters of 2001, certain CombiMatrix
unvested stock options were forfeited. Pursuant to the provisions of APB No. 25
and related interpretations, the reversal of previously recognized non-cash
stock compensation expense on forfeited unvested stock options, in the amount of
$4.7 million, has been reflected in the 2001 consolidated statement of
operations and comprehensive loss as a reduction in 2001 non-cash stock
compensation expense. In addition, the forfeiture of certain unvested options
during 2001 resulted in a reduction of the remaining deferred non-cash stock
compensation expense scheduled to be amortized in future periods.

Amounts to be amortized in future periods reflected above may be
impacted by certain subsequent stock option transactions including modification
of terms, cancellations, forfeitures and other activity.

ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves the
estimating of our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, amortization of intangibles and asset depreciation for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the consolidated statement of operations and
comprehensive loss.

Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and our
valuation allowance. We have recorded a full valuation allowance against our net
deferred tax assets of $49.9 million as of December 31, 2001, due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward, before
they expire. In assessing the need for a valuation allowance, we have considered
our estimates of future taxable income, the period over which our deferred tax
assets may be recoverable, our history of losses and our assessment of the
probability of continuing losses in the foreseeable future. In management's
estimate, any positive indicators, including forecasts of potential future
profitability of our businesses, are outweighed by the uncertainties surrounding
our estimates and judgments of potential future taxable income. In the event
that actual results differ from these estimates or we adjust these estimates
should we believe we would be able to realize these deferred tax assets in the
future, an adjustment to the valuation allowance would increase income in the
period such determination was made. Any changes in the valuation allowance could
materially impact our financial position and results of operations.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess
the impairment of identifiable intangibles, long-lived assets and related
goodwill and enterprise level goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends; and
o significant decline in our stock price for a sustained period.

When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived assets
and goodwill amounted to $21.4 million as of December 31, 2001.

In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"), became effective and as a result, we will cease to amortize
approximately $4.7 million of goodwill effective January 1, 2002. We recorded
approximately $1.1 million of amortization on these amounts during 2001. In lieu
of amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the first quarter of 2002. We currently do
not expect to record an impairment charge upon completion of the initial
impairment review. However there can be no assurance that at the time the review
is completed, a material impairment charge will not be recorded.

ACCOUNTING FOR INVESTMENTS

The various interests that we acquire in our investees are accounted
for under two broad accounting methods: (i) the consolidation method and (ii)
the equity method. The applicable accounting method is generally determined
based on our voting interest in an investee.

Consolidation. Investees in which we directly or indirectly own
more that 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, the investee's
accounts are reflected within our consolidated statements of operations and
comprehensive loss. Participation of other stockholders in the earnings or
losses of a consolidated investee is reflected in the caption "minority
interests" in our consolidated statements of operations and comprehensive loss.
Minority interests adjust our consolidated net results of operations to reflect
only our share of the earnings or losses of consolidated, non-wholly-owned
investees. In the case in which losses applicable to the minority interests in
an investee exceed the minority interests in the equity capital of the investee,
such excess and any further losses applicable to the minority interests are
charged against the majority interest. However, if future earnings materialize,
the majority interest will be credited to the extent of such losses previously
absorbed.

Equity Method. Investees, over whom we exercise significant
influence, whose results we do not consolidate, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to an investee depends on an evaluation of several
factors including, among others, representation on the investee's board of
directors and ownership level, which is generally 20% to 50% interest in the
voting securities of the investee, including voting rights associated with our
holdings in common, preferred and other convertible instruments in the investee.
Under the equity method of accounting, an investee's accounts are not reflected
within our consolidated statements of operations and comprehensive loss;
however, our share of the earnings or losses of the investee is reflected in the
caption "equity income (losses) of affiliates" in the consolidated statements of
operations and comprehensive loss.

At December 31, 2001, we have consolidated all of our investees over
whom we exercise significant control. On November 1, 2001, we increased our
ownership interest in Acacia Media Technologies from 33% to 100% through the
purchase of the ownership interest of the former limited liability company's
other member. The results of operations have been included in the consolidated
statements of operations and comprehensive loss from November 1, 2001.

In most cases, we have representation on the boards of directors of our
investees. In addition to our investments in voting equity securities, we also
periodically make advances to our subsidiaries in the form of promissory notes.

RESULTS OF OPERATIONS

2001 2000 1999
------------- ------------- -------------

Revenues ............................................. $ 24,636,000 $ 57,000 $ 266,000
Research and development expenses .................... (18,839,000) (11,864,000) (1,806,000)
Marketing, general and administrative expenses ....... (46,300,000) (22,089,000) (4,418,000)
Amortization of patents and goodwill ................. (2,695,000) (2,251,000) (1,622,000)
Loss on disposal of consolidated subsidiaries ........ -- (1,016,000) --
Other income (expense), net .......................... 4,166,000 (1,235,000) (1,042,000)
Minority interests ................................... 17,540,000 9,166,000 1,221,000
Loss from discontinued operations of Soundbreak.com .. -- (7,443,000) (776,000)
Loss from disposal of Soundbreak.com ................. -- (2,111,000) --
(Provision) benefit for income taxes ................. (780,000) 73,000 (20,000)
Cumulative effect of change in accounting principle... -- (246,000) --
------------- ------------- -------------
Net loss ............................................. $(22,272,000) $(38,959,000) $ (8,197,000)
============= ============= =============

2001 COMPARED TO 2000

LICENSE FEE INCOME. In 2001, license fee income was $24.2 million as
compared to no license fee income during 2000. The increase in license fee
income for 2001 resulted primarily from the settlement of patent infringement
litigation brought by Soundview Technologies and includes license fee amounts
received from eleven of the twelve television manufacturers with whom we have
executed separate settlement and/or license agreements during 2001 and 2000.
Pursuant to the terms of the respective settlement and license agreements with
each of the television manufacturers, Soundview Technologies granted to such
manufacturers, non-exclusive licenses for its U.S. Patent No. 4,554,584.

GRANT REVENUE. In 2001, grant revenue was $0.5 million as compared to
$0.02 million in grant revenue in 2000. The increase in grant revenue during
2001 resulted from CombiMatrix's continuing performance under its Phase II Small
Business Innovative Research Department of Defense contract.

RESEARCH AND DEVELOPMENT EXPENSES. In 2001, research and development
expense was $18.8 million, all of which related to CombiMatrix, as compared to
$11.9 million in 2000, of which $9.3 million related to CombiMatrix. The
increase in research and development expense for 2001 as compared to the same
period in 2000 was primarily due to a general expansion of CombiMatrix's
research and development activities, including an increase in personnel and
amounts of supplies and materials used, an increase in CombiMatrix's non-cash
stock compensation charges included in research and development expense,
increased costs related to efforts to further develop and enhance its microarray
technology and increased costs related to significant engineering efforts
undertaken to productize its technology. Most of these efforts were driven by
CombiMatrix's obligations under the license and supply agreement with Roche,
executed in July 2001. These projects include development of production
microarray synthesis techniques, as well as higher density microarrays. These
projects are expected to continue into 2002 and 2003, as determined by the
timelines outlined in CombiMatrix's agreements with Roche.

In 2001, research and development expense included non-cash stock
compensation charges, all of which related to CombiMatrix, totaling $7.2
million. Non-cash stock compensation charges for 2001 are net of $0.8 million of
non-cash stock compensation expense reversal related to the forfeiture of
certain unvested stock options during the third and fourth quarters of 2001. In
2000, research and development expense for non-cash stock compensation was $3.4
million.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred marketing,
general and administrative expenses of $46.3 million ($27.7 million related to
CombiMatrix) in 2001, compared to $22.1 million ($11.2 million related to
CombiMatrix) in 2000. The increase in marketing, general and administrative
expenses for 2001 as compared to the same period in 2000 was primarily due to an
increase in non-cash stock compensation charges, the continued expansion of
CombiMatrix's operations including an increase in salaries and benefits due to
an increase in the number of CombiMatrix personnel, an increase in personnel
recruitment and relocation expenses, an increase in rent and utilities expenses
relating to CombiMatrix's move to larger office facilities during the first
quarter of 2001, the write-off of $1.4 million of deferred initial public
offering costs in the fourth quarter of 2001 by CombiMatrix and an increase in
legal fees related to Soundview Technologies' patent licensing and related
infringement settlements.

Marketing, general and administrative expenses included $13.6 million
($12.8 million related to CombiMatrix) and $7.3 million ($6.5 million related to
CombiMatrix) of non-cash stock compensation charges for 2001 and 2000,

respectively. Marketing, general and administrative non-cash stock compensation
charges for 2001 are net of $3.9 million of non-cash stock compensation expense
reversal related to the forfeiture of certain unvested stock options during the
third and fourth quarters of 2001.

AMORTIZATION OF PATENTS AND GOODWILL. In 2001, amortization expense
relating to patents and goodwill was $2.7 million as compared to $2.3 million in
2000. As a result of the increase in our ownership interest in Acacia Media
Technologies from 33% to 100% through the purchase of the ownership interest of
Acacia Media Technologies' other member in November 2001, and the purchase of
additional equity interests in CombiMatrix in July 2000, we incurred additional
amortization expense in 2001 as compared to 2000 relating to the intangible
assets acquired. See "Recent Accounting Pronouncements" for summary of
pronouncements affecting amortization of goodwill in future periods.

LOSS ON DISPOSAL OF CONSOLIDATED SUBSIDIARIES. In 2001, loss on
disposal of consolidated subsidiaries was zero as compared to $1.0 million in
2000. In the fourth quarter of 2000, we recorded $1.0 million in write-offs of
early stage investments.

OTHER INCOME (EXPENSE), NET. In 2001, other income, net (primarily
comprised of interest income, realized and unrealized gains and losses on
trading securities, equity in losses of affiliates and other) was $4.2 million
as compared to $1.2 million in net other expense in 2000.

INTEREST INCOME. In 2001, interest income was $3.8 million as
compared to $3.1 million in 2000. The increase in interest income during 2001
was due to higher cash balances during 2001 as compared to 2000, resulting from
various private equity financings and the receipt of significant license fee
payments by Soundview Technologies during the year. The increase in interest
income for 2001 was partially offset by the impact of a decrease in interest
rates on our short-term investments related to sharp interest rate cuts by the
Federal Open Market Committee and other external economic factors negatively
impacting rates of return on short-term investments occurring during the third
and fourth quarters of 2001.

REALIZED GAINS ON SHORT-TERM INVESTMENTS. In 2001, net realized
gains on short-term investments was $0.4 million as compared to no realized
gains on short-term investments in 2000. The increase in realized gains on
short-term investments during 2001 was due to realized gains recorded on our
short-term investments classified as trading securities during 2001.

UNREALIZED GAINS ON SHORT-TERM INVESTMENTS. In 2001, net
unrealized gains were $0.2 million as compared to no unrealized gains in 2000.
The increase is due to our investment in equity securities during 2001
classified as trading securities under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). Pursuant to SFAS
No. 115, unrealized gains and losses on trading securities are recorded in the
consolidated statement of operations. In 2000, all of our short-term investments
were classified as available-for-sale, and pursuant to SFAS No. 115, unrealized
gains and losses were recorded as a separate component of comprehensive income
(loss) in stockholders' equity until realized.

EQUITY IN LOSSES OF AFFILIATES. In 2001, equity in losses of
affiliates was $0.2 million as compared to $1.7 million in 2000. Losses during
2001 were comprised of a loss of $0.2 million for our investment in Acacia Media
Technologies, as determined by the equity method of accounting through November
1, 2001. We increased our ownership percentage in Acacia Media Technologies to
100% on November 1, 2001. Losses during 2000 were comprised of a loss of $0.3
million for our investment in Signature-mail.com, a loss of $0.2 million for our
investment in Acacia Media Technologies, a loss of $0.1 million for our
investment in Whitewing Labs and a loss of $1.1 for our investment in
Mediaconnex, as determined by the equity method of accounting. We wrote-off our
equity investments in Signature-mail.com, Whitewing Labs Mediaconnex, as of
December 31, 2000.

MINORITY INTERESTS. Minority interests in the losses of consolidated
subsidiaries increased to $17.5 million in 2001 as compared to $9.2 million in
2000. The increase in minority interests in 2001 was primarily due to the
increase in losses incurred by CombiMatrix as a result of increased non-cash
stock compensation amortization charges, its continued expansion of research and
development efforts and increased marketing, general and administrative
expenses. The increase in 2001 minority interests resulting from CombiMatrix's
increased losses was partially offset by minority interests in the income of
Soundview Technologies from January through June 2001. We increased our
ownership percentage in Soundview Technologies to 100% in June 2001.

PROVISION (BENEFIT) FOR INCOME TAXES. In 2001, the provision for income
taxes was $0.8 million as compared to a benefit of $0.07 million in 2000. The
increase in the provision for income taxes in 2001 was primarily due to a
significant increase in taxable income generated by Soundview Technologies
related to its patent infringement settlement and patent licensing activities as
compared to the 2000 period.

DISCONTINUED OPERATIONS. On February 13, 2001, the board of directors
of Soundbreak.com resolved to cease operations as of February 15, 2001 and
liquidate the remaining assets and liabilities of the company. Accordingly, we
reported the results of operations and the estimated loss on disposal of
Soundbreak.com as results of discontinued operations in our 2000 consolidated
statements of operations and comprehensive loss. Discontinued operations of
Soundbreak.com included $7.4 million of loss from discontinued operations in
2000 and $2.1 million of accrued expenses in connection with its cessation of
operations.

2000 COMPARED TO 1999

NET REVENUE. In 2000, net revenue was $0.06 million as compared to $0.3
million in 1999. The decrease in net revenues was primarily due to an increase
of $0.04 million in advertising revenues, offset by a decrease of $0.1 million
in CombiMatrix revenue from federal grants, and a decrease of $0.1 million in
capital management fees due to the closure in 1999 of Acacia Research Capital
Management division, which was the general partner in two domestic private
investment partnerships and an investment advisor to two offshore private
investment corporations. During 2000, grant revenue was $0.02 million as
compared to $0.1 million in grant revenue during 1999. The grant revenue
resulted from CombiMatrix's award of two grants in July 1999 for Phase I SBIR
from the Department of Energy and the Department of Defense and a Phase II SBIR
Department of Defense contract for the use of its biochip technology to develop
nanode array sensor microchips in January 2000. No capital management fee
income, which includes performance fee income, was earned during 2000 compared
to $0.1 million during 1999 due to the closure of the Acacia Research Capital
Management division on December 31, 1999. Costs associated with exiting this
business were not material.

RESEARCH AND DEVELOPMENT EXPENSES. We incurred research and development
expenses of $11.9 million in 2000 as compared to $1.8 million in 1999. Research
and development expenses for 2000 are comprised of costs primarily incurred by
CombiMatrix, which increased to $9.3 million from $2.4 million in 1999. This
increase was due to an increase in the number of CombiMatrix personnel and
larger laboratory facilities to accommodate the expansion of its research and
development efforts focused on developing and improving microarray synthesis
techniques. In addition, $2.5 million of acquired in-process research and
development expense was charged to income related to our acquisition of an
additional ownership position from existing CombiMatrix stockholders in July
2000.

In 2000, research and development expenses for non-cash stock
compensation (including warrants), all of which related to CombiMatrix, totaled
$3.4 million. In 1999, research and development expenses for non-cash stock
compensation were not material.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred marketing,
general and administrative expenses of $22.1 million in 2000, compared to
expenses of $4.4 million in 1999. The increase in marketing, general and
administrative expenses in 2000 was primarily due to general expansion of our
operations, including an increase in business development expenses as we
explored new business opportunities, the extensive use of consultants to assist
in solving specialized issues or providing specific services, an increase in
facilities costs due to the expansion of our office facilities and increased
personnel and payroll expenses. In 2000, CombiMatrix relocated from Burlingame,
California to Mukilteo, Washington. This relocation was completed during the
third quarter, and related costs of $0.8 million were incurred in 2000 in
connection with the relocation.

Marketing, general and administrative expenses included $7.3 million
($6.5 million related to CombiMatrix) and $0.2 million of non-cash stock
compensation charges for 2000 and 1999, respectively.

AMORTIZATION OF PATENTS AND GOODWILL. In 2000, amortization expenses
relating to patents and goodwill were $2.3 million as compared to $1.6 million
in 1999. As a result of our purchase of additional equity interests in Soundview
Technologies in July 1997 and January 1998, in MerkWerks in January 1998 and
June 1999 and in CombiMatrix in July 2000, we are incurring increased
amortization expenses each quarter for periods ranging from three to five years
relating to the intangible assets acquired.

LOSS ON DISPOSAL OF CONSOLIDATED SUBSIDIARIES. In 2000, loss on
disposal of consolidated subsidiaries was $1.0 million as compared to zero in
1999. In the fourth quarter of 2000, we recorded $1.0 million in write-offs of
early stage investments.

OTHER EXPENSE, NET. In 2000, other expense, net (primarily comprised of
interest income, write-off of equity investments, equity in losses of affiliates
and other) totaled $1.2 million as compared to other expense, net of $1.0

million in 1999. The increase in other expense, net in 2000 was primarily due to
$2.6 million of write-offs of equity investments in Signaturemail.com, Whitewing
Labs and Mediaconnex, and an increase in equity in losses of affiliates,
partially offset by an increase in interest income in 2000.

INTEREST INCOME. In 2000, interest income was $3.1 million as
compared $0.3 million in 1999. The increase was due to higher cash balances in
2000 as compared to 1999. We received $64.5 million in cash from outside
investors in connection with our warrant call and private equity financings for
Acacia and CombiMatrix in 2000.

INTEREST EXPENSE. In 2000, we reported no interest expense as
compared to $0.3 million in 1999. The expense incurred in 1999 was primarily
attributable to CombiMatrix and relates to three-year 6% unsecured subordinated
promissory notes issued by CombiMatrix in a private offering completed in March
1998. Warrants to purchase CombiMatrix common stock were also issued in this
private placement. During the fourth quarter of 1999, CombiMatrix offered
holders of the unsecured subordinated notes the opportunity to convert their
outstanding principal balance into CombiMatrix common stock and all noteholders
had converted as of December 1999.

EQUITY IN LOSSES OF AFFILIATES. In 2000, equity in losses of
affiliates was $1.7 million as compared to $1.1 million in 1999. In 2000, losses
were primarily attributable to a loss of $1.1 million for our investment in
Mediaconnex. This amount was offset by a decrease in the recognized losses for
Whitewing Labs, Acacia Media Technologies and Signature-mail.com totaling $0.6
million in 2000 as compared to $1.1 million in 1999.

MINORITY INTERESTS. In 2000, minority interests in the losses of
consolidated subsidiaries was $9.2 million as compared to $1.2 million in 1999.
The increase in minority interests in 2000 was primarily due to the increase in
losses incurred by CombiMatrix as a result of its continued expansion of
research and development efforts, an increase in non-cash stock compensation
charges and increased marketing, general and administrative expenses.

DISCONTINUED OPERATIONS. On February 13, 2001, the board of directors
of Soundbreak.com resolved to cease operations as of February 15, 2001 and
liquidate the remaining assets and liabilities of the company. Accordingly, we
reported the results of operations and the estimated loss on disposal of
Soundbreak.com as results of discontinued operations in the consolidated
statements of operations and comprehensive loss in 2000. Discontinued operations
of Soundbreak.com included $7.4 million of loss from discontinued operations in
2000 and $2.1 million of accrued expenses to be incurred in connection with its
cessation of operations. Operating results in 1999 were restated to present
Soundbreak.com as discontinued operations resulting in a loss from discontinued
operations of $0.8 million in 1999.

INFLATION

Inflation has not had a significant impact on Acacia.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, we had cash and short-term investments of $84.6
million on a consolidated basis, including discontinued operations, of which
Acacia Research Corporation had $44.2 million. Working capital was $72.4 million
on a consolidated basis at December 31, 2001. Highlights of the financing and
commitment activities for the year ended December 31, 2001 include the
following:

o In January 2001, we completed an institutional private equity financing
raising gross proceeds of $19.0 million through the issuance of
1,107,274 units. Each unit consists of one share of our common stock
and one three-year callable common stock purchase warrant. Each common
stock purchase warrant entitles the holder to purchase 1.10 shares of
our common stock at a price of $19.09 per share and is callable by us
once the closing bid price of our common stock averages $23.86 or above
for 20 or more consecutive trading days on the NASDAQ National Market
System. We issued an additional 20,000 units in lieu of cash payments
for finders' fees in conjunction with the private placement.

o In May 2001, Advanced Material Sciences completed a private equity
financing raising gross proceeds of $2.0 million through the issuance
of 2,000,000 shares of common stock. Advanced Material Sciences issued
an additional 29,750 shares of common stock, in lieu of cash payments,
and warrants to purchase approximately 54,000 shares of common stock,
for finders' fees in connection with the private placement. Each common
stock purchase warrant entitles the holder to purchase shares of
Advanced Material Sciences common stock at a price of $1.10 per share.

o In September 2001, CombiMatrix entered into a sale and leaseback
arrangement with a bank, providing up to $7.0 million in financing for
equipment and other capital purchases. Pursuant to the terms of the

agreement, certain equipment and leasehold improvements, totaling $2.6
million in net book value, were sold to the bank at a purchase price of
$3.0 million resulting in a deferred gain on the sale of assets of $0.4
million. In addition, CombiMatrix entered into a capital lease
arrangement to lease the fixed assets from the bank. The capital lease
agreement provides CombiMatrix with the option to purchase the
equipment for a nominal amount at the end of the lease term, which
expires in September 2004.

o In October 2001, CombiMatrix formed a joint venture with Marubeni
Japan, one of Japan's leading trading companies. The joint venture,
based in Tokyo, will focus on development and licensing opportunities
for CombiMatrix's biochip technology with pharmaceutical and
biotechnology companies in the Japanese market. Marubeni made an
investment of $1.0 million to acquire a ten percent (10%) minority
interest in the joint venture.

Net cash used in continuing operating activities was $10.4 million in
2001. Cash used for continuing operations is primarily due to a loss from
continuing operations of $22.3 million, increased by minority interests of $17.5
million and the purchase of trading securities of $4.1 million, partially offset
by non-cash expenses including depreciation, amortization and compensation
expense relating to stock options and warrants in the amount of $24.7 million,
and license fee, up-front and milestone payments received and recorded as
deferred revenues at December 31, 2001 totaling $7.5 million. In 2001, we had an
additional $2.2 million of net cash used in operating activities of discontinued
operations.

Our net cash provided by investing activities of continuing operations
was $13.0 million in 2001. Significant investing activities include a net sale
of short-term investments classified as available-for-sale of $19.6 million, net
of purchases of common stock from minority stockholders of subsidiaries totaling
$2.6 million and purchases of additional equity in consolidated subsidiaries
totaling $3.3 million. We had an additional $0.2 million used in investing
activities of discontinued operations.

Our net cash provided by financing activities was $23.2 million in
2001. Cash provided by financing activities in 2001 was primarily due to $18.3
million of net proceeds from an institutional private equity financing in
January 2001, capital contributions from minority stockholders of subsidiaries
totaling $3.3 million and proceeds from the exercise of stock options and
warrants totaling $1.8 million.

Warrants issued by us in connection with our private placement
completed in January 2001 contain call and redemption provisions should the
closing bid price of our common stock exceed $23.86 per share for 20 or more
consecutive trading days. The exercise price per share for the common stock
underlying the warrants is $19.09. In the event the requirements to call the
warrants are satisfied, we may call such warrants and we expect most, if not
all, of the holders to exercise such warrants in response. There can be no
assurance that the closing bid price of our common stock will exceed all such
thresholds or that, if it does, we will decide to call the warrants.

We have sustained losses since our inception contributing to an
accumulated deficit of $100.0 million on a consolidated basis, which includes
operating losses of $43.2 million and $37.2 million in 2001 and 2000,
respectively. The consolidated accumulated deficit of $100.0 million also
includes an increase related to a reclassification of accumulated deficit in the
amount of $21.7 million to permanent capital representing the fair value of the
ten percent (10%) stock dividend distributed to stockholders in 2001. There can
be no assurance that we will become profitable. If we do, we may never be able
to sustain profitability. We expect to incur significant losses for the
foreseeable future. We are making efforts to reduce expenses and may take steps
to raise additional capital.

Generally, our subsidiary companies have relied primarily upon selling
equity securities, including sales to and loans from us, to generate the funds
needed to finance implementation of their plans of operations. In 2001, we began
to receive significant payments from our media technology licensing arrangements
and from our life sciences strategic partners and licensees. However, we may be
required to obtain additional financing through bank borrowings, debt or equity
financings or otherwise, which would require us to make additional investments
or face a dilution of our equity interests.

We have no significant commitments for capital expenditures in 2001.
Our minimum rental commitments on operating leases related to continuing
operations total $8.6 million through December 2006. We have no committed lines
of credit or other significant committed funding. However, we anticipate that
existing working capital reserves will provide sufficient funds for our
operating expenses for at least the next twelve months in the absence of making
any major new investments. We intend to seek additional financing to fund new or
existing businesses.

There can be no assurances that we will not encounter unforeseen
difficulties that may deplete our capital resources more rapidly than
anticipated. Any efforts to seek additional funding could be made through

equity, debt or other external financing and there can be no assurance that
additional funding will be available on favorable terms, if at all. Such
financing transactions may be dilutive to existing investors. If we fail to
obtain additional funding when needed, we may not be able to execute our
business plans and our business may suffer.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 141 requires that the purchase method be used for all
business combinations initiated after June 30, 2001 and that certain intangible
assets acquired in a business combination be recognized apart from goodwill. We
believe that the adoption of SFAS No. 141 will not have a material effect on our
consolidated results of operations or financial position.

SFAS No. 142 requires goodwill to be tested for impairment under
certain circumstances, and written off when determined to be impaired, rather
than being amortized as previous standards required. We will adopt SFAS No. 142
effective January 1, 2002. We have recorded approximately $1.1 million of
goodwill amortization during 2001. As a result of SFAS No. 142, we will no
longer amortize goodwill. In lieu of amortization, we are required to perform an
initial impairment review of our goodwill in 2002 and an annual impairment
review thereafter. We expect to complete our initial review during the first
quarter of 2002. We currently do not expect to record an impairment charge upon
completion of the initial impairment review. However, there can be no assurance
that at the time the review is completed a material impairment charge will not
be recorded.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of. SFAS No. 144 also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
temporarily controlled subsidiary. SFAS No. 144 requires long-lived assets to be
tested for recoverability whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In conjunction with such tests,
it may be necessary to review depreciation estimates and methods as required by
APB No. 20, "Accounting Changes," or the amortization period as required by SFAS
No. 142. We will adopt SFAS No. 144 effective January 1, 2002. We are currently
assessing the impact of SFAS No. 144 on our operating results and financial
condition upon adoption.

CHANGE IN ACCOUNTING POLICY

Effective January 1, 2001, we changed our accounting policy for balance
sheet classification of employee stock-based compensation resulting from awards
in consolidated subsidiaries. Historically, the consolidated financial
statements have accounted for cumulative earned employee stock-based
compensation related to subsidiaries as a liability, under the caption "accrued
stock compensation." Management believes a change to reflect these cumulative
charges as minority interests is preferable as it better reflects the underlying
economics of the stock-based compensation transaction. As a result of the
change, effective January 1, 2001, minority interests has been increased by
$10.4 million, and accrued stock compensation of $10.4 million has been
decreased. The change in accounting policy does not affect previously reported
consolidated net income.

RISK FACTORS

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

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

o our subsidiary companies' products and services face uncertain market
acceptance;
o technological advances may make our subsidiary companies' products and
services obsolete or less competitive;
o competition;
o increases in operating costs, including costs for supplies, personnel
and equipment;
o the availability and cost of capital;
o general economic conditions; and
o governmental regulation that excessively restricts our subsidiary
companies' businesses.

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

BECAUSE OF THE RISKS INHERENT IN INVESTING IN EMERGING COMPANIES, INCLUDING THE
LACK OF OPERATING HISTORIES AND UNPROVEN TECHNOLOGIES AND PRODUCTS, WE MAY INCUR
SUBSTANTIAL LOSSES.

Investing in emerging companies carries a high degree of risk,
including difficulties in selecting ventures with viable business plans and
acceptable likelihoods of success and future profitability. There is a high
probability of loss associated with investments in emerging companies. We must
also dedicate significant amounts of financial resources, management attention
and personnel to identify and develop each new business opportunity without any
assurance that these expenditures will prove fruitful.

We generally invest in start-up ventures with no operating histories,
unproven technologies and products and, in some cases, without experienced
management. We may not be successful in developing these start-up ventures.
Because of the uncertainties and risks associated with such start-up ventures,
we could experience substantial losses associated with failed ventures.

In addition, the market for venture capital in the United States is
increasingly competitive. As a result, we may lose business opportunities and
may need to accept financing and equity investments on less favorable terms.
Also, we may be unable to participate in additional ventures because we lack the
financial resources to provide them with full funding. We, as well as our
subsidiary companies, may need to depend on external financing to provide
sufficient capital.

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

We have sustained substantial losses since our inception resulting in
an accumulated deficit of $100.0 million (including a reclassification of
accumulated deficit in the amount of $21.7 million to permanent capital
representing the fair value of the ten percent (10%) stock dividend paid in
2001) on a consolidated basis, including operating losses of $43.2 million and
$37.2 million in 2001 and 2000, respectively. We may never become profitable or
if we do, we may never be able to sustain profitability. We expect to incur
significant research and development, marketing, general and administrative
expenses. As a result, we expect to incur significant losses for the foreseeable
future.

TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.

Our common stock, which is quoted on the NASDAQ National Market System,
has experienced significant price and volume fluctuations. Additionally, the
stock market generally, and the stock prices of technology companies,
specifically, have been very volatile. The market price of our common stock may
fluctuate significantly in response to a number of factors beyond our control,
including:

o changes in financial estimates by securities analysts;
o our failure to meet the expectations of securities analysts;
o announcements by us, our customers, our subsidiaries or our
competitors;
o changes in market valuations of similar companies;
o changes in accounting rules and regulations; and
o future sales of our common stock by our existing stockholders.

BECAUSE OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY AND MAY CONTINUE TO
DO SO IN THE FUTURE, OUR STOCK PRICE MAY BE VERY VOLATILE.

Our operating results may vary significantly from quarter to quarter
due to a variety of factors, including:

o the operating results of our current and future subsidiary companies;
o the nature and timing of our investments in new subsidiary companies;
o our decisions to acquire or divest interests in our current and future
subsidiaries, which may create changes in losses or income and
amortization of goodwill;
o changes in our methods of accounting for our current and future
subsidiaries, which may cause us to recognize gains or losses under
applicable accounting rules;
o the timing of the sales of equity interests in our current and future
subsidiary companies;
o our ability to effectively manage our growth and the growth of our
subsidiary companies;
o general economic conditions; and
o the cost of future acquisitions, which may increase due to intense
competition from other potential acquirers of technology-related
companies or ideas.

We have incurred and expect to continue to incur significant expenses
in pursuing and developing new business ventures. To date, we have lacked a
consistent source of recurring revenue. Each of the factors we have described
may cause our stock to be more volatile than the stock of other companies.

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

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

o the timing of new product introductions by each subsidiary company;
o the stage of development of the business of each subsidiary company;
o the technical feasibility of each subsidiary company's technologies and
techniques;
o the novelty of the technology owned by our subsidiary companies;
o the accuracy, effectiveness and reliability of products developed by
our subsidiary companies;
o the level of product acceptance;
o the strength of each subsidiary company's intellectual property rights;
o the ability of each subsidiary company to avoid infringing the
intellectual property rights of others;
o each subsidiary company's ability to exploit and commercialize its
technology;
o the volume and timing of orders received and product line maturation;
o the impact of price competition; and
o each subsidiary company's ability to access distribution channels.

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

A LACK OF MARKET ACCEPTANCE OF OUR SUBSIDIARY COMPANIES' PRODUCTS WILL RESULT IN
OPERATING LOSSES.

Each of our subsidiary companies is developing new technologies and
products, as further detailed below. To the extent any of these technologies and
products are not accepted by their respective markets, we will incur operating
losses.

ADVANCED MATERIAL SCIENCES. Although Advanced Material Sciences holds
the exclusive license for CombiMatrix's biological array processor technology in
certain fields of material sciences, it is a developmental-stage company without
any significant revenues.

COMBIMATRIX. CombiMatrix is developing a proprietary biochip microarray
processor system that integrates semiconductor technology with new developments
in biotechnology and chemistry. Although CombiMatrix has been awarded three
research grants sponsored by different U.S. governmental agencies, CombiMatrix
is a developmental-stage company without any significant current revenues. Its
current activities relate almost exclusively to research and development.
CombiMatrix must conduct additional testing before any of its products will be
ready for sale. Because the technologies critical to the success of this
industry are in their infancy, we cannot assure you that CombiMatrix will be
able to successfully implement its technologies. If its technologies are
successful, CombiMatrix intends to pursue collaborations with pharmaceutical
companies for activities such as screening potential drug compounds. We cannot
assure you that CombiMatrix, even if successful in developing its technologies,
would be able to successfully implement collaborative efforts with
pharmaceutical companies and create commercially successful products. Even if
CombiMatrix develops commercially viable products, it has no experience
manufacturing, marketing, pricing or selling products in the volumes that would
be required for commercial success. This inexperience could hinder CombiMatrix's
ability to profit from any viable products it may develop.

SOUNDVIEW TECHNOLOGIES. Soundview Technologies was formed to
commercialize patent rights of a method of video and audio blanking technology,
also known as V-chip technology, that screens objectionable television
programming and blocks it from the viewer. Although Soundview Technologies has
licensed its technology to certain television manufacturers, we cannot assure
you that it will continue to be profitable.

ACACIA MEDIA TECHNOLOGIES (FORMERLY KNOWN AS GREENWICH INFORMATION
TECHNOLOGIES LLC). Acacia Media Technologies owns a worldwide portfolio of
pioneering patents relating to audio and video transmission and receiving
systems, commonly known as audio-on-demand and video-on-demand, used for
distributing content via various methods including computer networks, cable
television systems and direct broadcasting satellite systems The market for
information-on-demand systems has only recently begun to develop and is rapidly
evolving. Demand and market acceptance for information-on-demand systems are
subject to substantial uncertainty and risk. We cannot predict whether, or how
fast, this market will grow or how long it can be sustained. To date, Acacia
Media Technologies has yet to license any of its technology. It is uncertain if
and to what extent Acacia Media Technologies will be able to profitably market
and license its rights to the information-on-demand technology.

THE EXPANSION OF COMBIMATRIX'S PRODUCT LINES MAY SUBJECT IT TO REGULATION BY THE
FDA AND FOREIGN REGULATORY AUTHORITIES, WHICH COULD PREVENT OR DELAY THE
INTRODUCTION OF NEW PRODUCTS.

If CombiMatrix manufactures, markets or sells any products for any
regulated clinical or diagnostic applications, those products will be subject to
extensive governmental regulation as medical devices in by the FDA and in other
countries by corresponding foreign regulatory authorities. The process of
obtaining and maintaining required regulatory clearances and approvals is
lengthy, expensive and uncertain. Products that CombiMatrix manufactures,
markets or sells for research purposes only are not subject to governmental
regulations as medical devices or as analyte specific reagents to aid in disease
diagnosis. We believe that CombiMatrix's success will depend upon commercial
sales of improved versions of products, certain of which cannot be marketed in
the United States and other regulated markets unless and until CombiMatrix
obtains clearance or approval from the FDA and its foreign counterparts, as the
case may be. There can be no assurance that these approvals will be received on
a timely basis, or at all, and delays or failures in receiving these approvals
may limit our ability to benefit from new CombiMatrix products.

ETHICAL, SOCIAL, POLITICAL AND LEGAL ISSUES CONCERNING GENOMIC RESEARCH AND
TESTING MAY RESULT IN REGULATIONS RESTRICTING THE USE OF COMBIMATRIX'S
TECHNOLOGY OR REDUCE DEMAND FOR ITS PRODUCTS.

In the case that CombiMatrix or its customers manufacture, market or
sell a regulated diagnostic product, ethical, social and legal concerns about
genomic testing and genomic research could result in regulations restricting
CombiMatrix's or its customers' activities. For example, the potential
availability of testing for genetic predispositions has raised issues regarding
the use and confidentiality of information obtained from this testing. Some
states in the United States have enacted legislation restricting the use of
information derived from genomic testing, and the United States Congress and
some foreign governments are considering similar legislation. Restrictions on
CombiMatrix or its customers could result in a reduction of sales, if any, and
harm our financial results.

AS COMBIMATRIX'S OPERATIONS EXPAND, ITS COSTS TO COMPLY WITH ENVIRONMENTAL LAWS
AND REGULATIONS WILL INCREASE; FAILURE TO COMPLY WITH THESE LAWS AND REGULATIONS
COULD EXPOSE COMBIMATRIX TO SUBSTANTIAL LIABILITIES AND HARM OUR FINANCIAL
RESULTS.

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

COMBIMATRIX MAY BE EXPOSED TO LIABILITY DUE TO PRODUCT DEFECTS.

If CombiMatrix commences testing, manufacturing and selling of
regulated diagnostic products, it will be exposed to potential product liability
claims inherent in such activities. When desirable, CombiMatrix intends to
acquire additional insurance for clinical liability risks. CombiMatrix may not
be able to obtain such insurance or general product liability insurance on
acceptable terms or at reasonable costs. In addition, such insurance may not
provide sufficient amounts of coverage for all potential liabilities. A product
liability claim or recall could materially and adversely affect CombiMatrix's
business, financial condition and results of operations.

BECAUSE EACH SUBSIDIARY COMPANY'S SUCCESS GREATLY DEPENDS ON ITS ABILITY TO
DEVELOP AND MARKET NEW PRODUCTS AND SERVICES AND TO RESPOND TO THE RAPID CHANGES
IN TECHNOLOGY AND DISTRIBUTION CHANNELS, WE CANNOT ASSURE YOU THAT OUR
SUBSIDIARY COMPANIES WILL BE SUCCESSFUL IN THE FUTURE.

The markets for each subsidiary company's products are marked by
extensive competition, rapidly changing technology, frequent product and service
improvements and evolving industry standards. We cannot assure you that the
existing or future products and services of our subsidiary companies will be
successful or profitable. We also cannot assure you that competitors' products,
services or technologies will not render our subsidiary companies' products and
services non-competitive or obsolete.

Our success will depend on our subsidiary companies' ability to adapt
to this rapidly evolving marketplace and to develop and market new products and
services or enhance existing ones to meet changing customer demands. Our
subsidiary companies may be unable to adequately adapt products and services or
acquire new products and services that can compete successfully. In addition,
our subsidiary companies may be unable to establish and maintain distribution
channels.

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

As of December 31, 2001, we had cash and short-term investments of
$84.6 million on our consolidated financial statements. However, portions of
these funds were held by certain of our consolidated subsidiaries and thus are
restricted to their individual use.

To date, our subsidiary companies have relied primarily upon selling
equity securities, including sales to and loans from us, to generate the funds
needed to finance implementing their plans of operations. Our subsidiary
companies may be required to obtain additional financing through bank
borrowings, debt or equity financings or otherwise, which would require us to
make additional investments or face a dilution of our equity interests.

We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt or other
external financings. However, 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.

OUR BUSINESS MAY BE HARMED IF MARKET AND OTHER CONDITIONS ADVERSELY AFFECT OUR
ABILITY TO DISPOSE OF CERTAIN ASSETS AT FAVORABLE PRICES.

An element of our business plan involves disposing of, in public
offerings or private transactions, our subsidiary companies and future partner
companies, or portions of assets thereof, to the extent such assets are no
longer consistent with our business plan. If we sell any such subsidiary
companies or assets, the price we receive will depend upon market and other
conditions. Therefore, we may not be able to sell at favorable prices. Market
and other conditions beyond our control affect:

o our ability to effect these sales;
o the timing of these sales; and
o the amount of proceeds from these sales.

In some instances, we may not be able to sell some or any of these
assets due to poor market and other conditions. As a result, we may be adversely
affected because we will be unable to dispose of assets or may receive a lesser
amount for our assets than we believe is favorable.

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
significant strain on our managerial, operational and financial resources.
Further, as the number of our subsidiary companies and their respective
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. In addition, our future success depends on our ability to expand our
organization to match the growth of our business and our subsidiaries.

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

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

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

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

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

OUR SUBSIDIARY COMPANIES FACE INTENSE COMPETITION, OFTEN AGAINST COMPETITORS
WITH LONGER HISTORIES, GREATER NAME RECOGNITION AND MORE EXPERIENCE IN RESEARCH
AND DEVELOPMENT. OUR FAILURE TO COMPETE EFFECTIVELY COULD HARM OUR BUSINESS.

Each of our subsidiary companies faces intense competition. Many of the
competitors to our subsidiary companies have greater financial, marketing and
other resources. In addition, a number of competitors may have greater brand
recognition and longer operating histories than our subsidiary companies. Our
subsidiary companies' individual risks are regarding competition further
described below.

ADVANCED MATERIAL SCIENCES. The material sciences industry is subject
to intense competition and rapid change. Many competitors have more experience
in research and development than Advanced Material Sciences.

COMBIMATRIX. The pharmaceutical and biotechnology industries are
subject to intense competition and rapid and significant technological change.
CombiMatrix anticipates that it will face increased competition in the future as
new companies enter the market and advanced technologies become available. Many
of these competitors have more experience in research and development than
CombiMatrix. Technological advances or entirely different approaches developed
by one or more of CombiMatrix's competitors could render CombiMatrix's processes
obsolete or uneconomical. The existing approaches of CombiMatrix's competitors
or new approaches or technology developed by CombiMatrix's competitors may be
more effective than those developed by CombiMatrix.

SOUNDVIEW TECHNOLOGIES. Other companies may develop competing
technologies that offer better or less expensive alternatives to the V-chip
offered by Soundview Technologies. Many potential competitors, including
television manufacturers, have significantly greater resources. In addition, the
outcome of Soundview Technologies' pending litigation against television
manufacturers is uncertain.

ACACIA MEDIA TECHNOLOGIES. Other companies may develop competing
technologies that offer better or less expensive alternatives to the
information-on-demand technology offered by Acacia Media Technologies. In the
event a competing technology emerges, Acacia Media Technologies would expect
substantial competition.

WE CANNOT ASSURE THAT WE WILL BE ABLE TO EFFECTIVELY PROTECT OUR SUBSIDIARY
COMPANIES' PROPRIETARY TECHNOLOGY, AND WE COULD ALSO BE SUBJECT TO INFRINGEMENT
CLAIMS.

The success of our subsidiary companies relies, to varying degrees, on
proprietary rights and their protection or exclusivity. Although reasonable
efforts will be taken to protect their proprietary rights, the complexity of
international trade secret, copyright, trademark and patent law, and common law,
coupled with limited resources and the demands of quick delivery of products and
services to market, create risk that these efforts will prove inadequate. From
time to time, we may be subject to third-party claims in the ordinary course of
business, including claims of alleged infringement of proprietary rights by us
and our subsidiary companies. Any such claims may damage our business by
subjecting us and our subsidiary companies to significant liability for damage
and invalidating proprietary rights, with or without merit, and could subject
our subsidiary companies to costly litigation and the diversion of their
technical and management personnel. In the event of any adverse ruling in any
intellectual property litigation, we could be required to:

o pay substantial damages;
o cease the manufacturing, use and sale of certain products;
o discontinue the use of certain process technologies; and
o obtain a license from a third-party claiming infringement, which might
not be available on reasonable terms, if at all.

Advanced Material Sciences, CombiMatrix, Acacia Media Technologies and
Soundview Technologies depend largely on the protection of enforceable patent
rights. Collectively, they have more than 45 applications pending with the U.S.
Patent and Trademark Office and other major foreign country or region (e.g.
Europe) patent offices, seeking protection for their core technologies and or
related product applications and processes, and have 32 patents or rights to
patents that have been issued or granted. We cannot assure you that the pending
patent applications will be issued or granted, that third-parties will not
infringe, or attempt to invalidate these intellectual property rights or that
certain aspects of their intellectual property will not be engineered-around by
third-parties without violating the patent rights of Advanced Material Sciences,
CombiMatrix, Acacia Media Technologies or Soundview Technologies. For Acacia
Media Technologies and Soundview Technologies, intellectual property constitutes
their only significant assets.

Existing patents owned by our subsidiary companies and any future
issued patents may not be sufficiently broad to prevent others from practicing
our subsidiary companies' technologies or developing competitive technologies.
In addition, others may oppose or invalidate our subsidiary companies' patents
and those patents may fail to provide a competitive advantage. Enforcing our
subsidiary companies' intellectual property rights may be difficult, costly and
time consuming and ultimately may not be successful.

Many of our subsidiary companies also hold licenses from third-parties,
and it is possible that they could become subject to infringement actions based
upon such licenses. Our subsidiary companies generally obtain representations as
to the origin and ownership of such licensed content. However, this may not
adequately protect them.

Our subsidiary companies also enter into confidentiality agreements
with third-parties and generally limit access to information relating to their
proprietary rights. Despite these precautions, third-parties may be able to gain
access to and use their proprietary rights to develop competing technologies and

products with similar or better features and prices. Any substantial
unauthorized use of our subsidiary companies' proprietary rights could
materially and adversely affect their business and operational results.

Since some genetic sequences are patented, CombiMatrix intends to
secure indemnification from its customers in the case of any inadvertent
synthesis of a patented genetic sequence in preparing its biological array
processors. This indemnity will not protect CombiMatrix from being joined or
held liable in any litigation involving a claim for misappropriation of
unlicensed rights and will not protect CombiMatrix against awards of substantial
damages if a customer is unwilling or unable to honor an indemnity obligation.
In such an event, CombiMatrix would be required to devote substantial time to
defending the litigation and might be required to expend substantial funds
defending itself or in the satisfaction of damage awards if our customer refuses
or is unable to honor its indemnity obligations. This could materially and
adversely affect CombiMatrix's business and operational results.

PENDING LAWSUITS INVOLVING SOUNDVIEW TECHNOLOGIES AND COMBIMATRIX COULD
ADVERSELY AFFECT THE BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS OF
THOSE SUBSIDIARIES.

In 2000, Soundview Technologies filed a federal patent infringement and
antitrust lawsuit against certain television manufacturers, the Consumer
Electronics Manufacturers Association and the Electronics Industries Alliance
d/b/a/ Consumer Electronics Association in the United States District Court for
the Eastern District of Virginia, alleging that television sets utilizing
certain content blocking technology (commonly known as the "V-chip") and sold in
the United States infringe Soundview Technologies' Patent No. 4,554,584. The
case is now pending in the U.S. District Court for the District of Connecticut
against Sony Corporation of America, Inc., Sony Electronics, Inc., the
Electronics Industries Alliance d/b/a/ Consumer Electronics Association, the
Consumer Electronics Manufacturers Association, Mitsubishi Digital Electronics
America, Inc., Mitsubishi Electronics America, Inc., Toshiba America Consumer
Products, Inc. and Sharp Electronics Corporation. However, no assurance can be
given that Soundview Technologies will prevail in this action or that the
television manufacturers will be required to pay royalties to Soundview
Technologies. If Soundview Technologies does not prevail in this litigation, its
business, results of operations and financial condition would be materially
adversely affected.

On November 28, 2000, Nanogen, Inc. ("Nanogen") filed a complaint
against CombiMatrix and Donald D. Montgomery, Ph.D., a former employee of
Nanogen and an officer and director of CombiMatrix, in the United States
District Court for the Southern District of California. Nanogen alleges breach
of contract, trade secret misappropriation and that U. S. Patent No. 6,093,302
and other proprietary information belonging to CombiMatrix are instead the
property of Nanogen. CombiMatrix and Dr. Montgomery both deny, and intend to
vigorously defend against, the claims in the lawsuit. Accordingly, on December
15, 2000, CombiMatrix and Dr. Montgomery filed a motion to dismiss the lawsuit,
which was denied in part and granted in part on February 1, 2001. On March 9,
2001, CombiMatrix and Dr. Montgomery filed a counterclaim, alleging breach of
express covenants not to sue or otherwise interfere with Dr. Montgomery arising
out of a release signed by Nanogen in 1996. On April 4, 2001, Nanogen filed a
motion to dismiss the counterclaim, which the court denied in its entirety on
July 27, 2001. Fact discovery is ongoing and is scheduled to close on June 3,
2002. CombiMatrix intends to vigorously defend the lawsuit and pursue the
counterclaim. Although we believe that Nanogen's claims are without merit, we
cannot predict the outcome of the litigation. If Nanogen prevails in its lawsuit
against CombiMatrix, CombiMatrix's business, results of operations and financial
condition could be materially adversely affected.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT ASSURE THAT OUR
OPERATIONS WILL BE PROFITABLE.

We commenced operations in 1993 and, accordingly, have a limited
operating history. In addition, many of our subsidiary companies are in the
early stages of development and have limited operating histories. You should
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies with such limited operating histories. Since
we have a limited operating history, we cannot assure you that our operations
will be profitable or that we will generate sufficient revenues to meet our
expenditures and support our activities.

During the fiscal year ended December 31, 2001, we had an operating
loss of approximately $43.2 million and a net loss of approximately $22.3
million. If we continue to incur operating losses, we may not have enough money
to expand our business and our subsidiary companies' businesses in the future.

OUR LACK OF CONTROL OVER DECISION-MAKING AND DAY-TO-DAY OPERATIONS AT CERTAIN
SUBSIDIARY COMPANIES MEANS THAT WE CANNOT PREVENT THEM FROM TAKING ACTIONS THAT
WE BELIEVE MAY RESULT IN ADVERSE CONSEQUENCES.

We currently own a 4.9% interest in Advanced Data Exchange and have no
board of director representation. Additional rounds of equity financing may
further dilute our interest in Advanced Data Exchange. We do not have the
ability to control decision-making at Advanced Data Exchange.

WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY.

We may incur significant costs to avoid investment company status and
may suffer other adverse consequences if deemed to be an investment company
under the Investment Company Act. Some of our equity investments may constitute
investment securities under the Investment Company Act. A company may be deemed
to be an investment company if it owns investment securities with a value
exceeding 40% of its total assets, subject to certain exclusions. Investment
companies are subject to registration under, and compliance with, the Investment
Company Act unless a particular exclusion or regulatory safe harbor applies. If
we are deemed an investment company, we would become subject to the requirements
of the Investment Company Act. As a consequence, we would be prohibited from
engaging in business or issuing securities as we have in the past and might be
subject to civil and criminal penalties for noncompliance. In addition, certain
of our contracts might be voidable, and a court-appointed receiver could take
control of us and liquidate our business.

Although we believe our investment securities currently comprise less
than 40% of our assets, fluctuations in the value of these securities or of our
other assets may cause this limit to be exceeded. This would require us to
attempt to reduce our investment securities as a percentage of our total assets.
This reduction can be attempted in a number of ways, including the disposition
of investment securities and the acquisition of non-investment security assets.
If we sell investment securities, we may sell them sooner than we otherwise
would. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. Some
investments may not be sold due to contractual or legal restrictions or the
inability to locate a suitable buyer. Moreover, we may incur tax liabilities
when we sell assets. We may also be unable to purchase additional investment
securities that may be important to our operating strategy. If we decide to
acquire non-investment security assets, we may not be able to identify and
acquire suitable assets and businesses.

THE AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE
OF OUR COMMON STOCK.

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

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

BECAUSE SOME OF OUR FACILITIES ARE LOCATED IN CALIFORNIA, WE COULD BE ADVERSELY
AFFECTED BY ROLLING BLACKOUTS OR A MAJOR EARTHQUAKE.

Our facilities, excluding CombiMatrix, are primarily located in
California. California experienced an energy shortage in 2001, and as a result,
several cities were subject to rolling blackouts. In the event we experience
rolling blackouts or other loss or reduction of electrical power, our operations
could be adversely impacted.

Additionally, in the event of a major earthquake, our facilities could
be significantly damaged or destroyed and result in a material adverse loss to
us and some of our subsidiary companies. We have not obtained and do not
presently intend to obtain earthquake insurance or business interruption
coverage.

DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER OF ACACIA THAT MIGHT OTHERWISE RESULT IN OUR
STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIR SHARES.

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

o Section 203 of the Delaware General Corporation Law, which prohibits a
merger with a 15%-or-greater stockholder, such as a party that has
completed a successful tender offer, until three years after that party
became a 15%-or-greater stockholder;
o amendment of our bylaws by the stockholders requires a two-thirds
approval of the outstanding shares;
o the authorization in our certificate of incorporation of undesignated
preferred stock, which could be issued without stockholder approval in
a manner designed to prevent or discourage a takeover;
o provisions in our bylaws eliminating stockholders' rights to call a
special meeting of stockholders, which could make it more difficult for
stockholders to wage a proxy contest for control of our board of
directors or to vote to repeal any of the anti-takeover provisions
contained in our certificate of incorporation and bylaws; and
o the division of our board of directors into three classes with
staggered terms for each class, which could make it more difficult for
an outsider to gain control of our board of directors.

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

WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY.

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of our stock price, we may be the
target of such litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
seriously harm our business, financial condition and results of operations.

WE INTEND TO DIVIDE OUR COMMON STOCK INTO TWO NEW CLASSES AND TO ACQUIRE THE
MINORITY STOCKHOLDER INTERESTS IN COMBIMATRIX.

On March 20, 2002, we announced our intention to divide our common
stock into two new classes: one that would reflect the performance of our
CombiMatrix subsidiary, and another that would reflect the performance of our
media technologies business, including Soundview Technologies and Acacia Media
Technologies. We also announced our intention to acquire the minority
stockholder interests in CombiMatrix. Our operating results could be negatively
affected by various factors related to the recapitalization and acquisition,
including: difficulty obtaining or meeting conditions imposed for any necessary
legal, governmental and administrative approvals for the transactions; costs
related to the transactions; fluctuating stock market levels that could cause
the new stock classes to be less than our current stock value; the failure of
the stock market to ascribe value to our new business structure; and the failure
of Acacia to realize anticipated benefits of these transactions.

WE MAY NOT COMPLETE THE RECAPITALIZATION OF OUR STOCK OR THE ACQUISITION OF THE
MINORITY STOCKHOLDER INTERESTS IN COMBIMATRIX.

Both the recapitalization of our stock and the acquisition of the
remaining minority interests in CombiMatrix are subject to several conditions,
including the approval of our stockholders, receipt of satisfactory tax and
accounting opinions, approval of the proposed merger by a special committee of
the CombiMatrix board of directors, receipt of a fairness opinion, approval for
listing of both of the new share classes on the NASDAQ National Market System
and other customary conditions. As a result, there cannot be any assurance that
recapitalization of our stock or the acquisition of the minority stockholder
interests in CombiMatrix will be completed. If either event does not occur, we
expect to continue to operate under our current operating structure. This would
prevent us from realizing the possible benefits that the recapitalization and
the acquisition would provide to us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SHORT-TERM INVESTMENTS

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

MARKETABLE EQUITY SECURITIES. We conduct a portion of our investing
activity through a limited partnership, of which a wholly-owned subsidiary of
Acacia is the general partner. As a result of the significant control that we
exercise over the limited partnership, the assets and liabilities and results of
operations have been consolidated by us at December 31, 2001. We maintain an
investment portfolio of common stock in several publicly held companies. These
common stock investments are classified as trading securities and, consequently,
are recorded on the balance sheet at their fair value, with unrealized gains and
losses reported in the consolidated statement of operations. We are exposed to
equity price risk on our portfolio of marketable equity securities. As of
December 31, 2001, our total equity holdings in publicly traded companies were
valued at $4.4 million compared to zero at December 31, 2000. We believe that it
is reasonably possible that the fair values of these securities could experience
significant fluctuations in the near term.

The following table represents the potential decrease in fair values of
our marketable equity securities that are sensitive to changes in the stock
market. Fair value deteriorations of minus 50%, 35% and 15% were selected based
on the probability of their occurrence.

Potential decrease to the value of securities given X% decrease in each
stock's price:

FAIR VALUE AS OF
(50%) (35%) (15%) DECEMBER 31, 2001
----------- ----------- ----------- -----------------

Marketable equity securities.......... $ 2,186,000 $ 1,530,000 $ 656,000 $ 4,372,000
=========== =========== =========== ===========

OTHER

We also hold a minority investment in a private company, Advanced Data
Exchange. This investment is included in long-term assets and is carried at
cost. We monitor our long-term minority investments in private companies for
impairment and make appropriate reductions in carrying value when an
other-than-temporary decline in fair value is determined to exist.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

The financial statements and related financial information required to
be filed hereunder are indexed under Item 14 of this report and are incorporated
herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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 30, 2002.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from
the information under the caption entitled "Executive Officer Compensation" in
our definitive proxy statement to be filed with the SEC no later than April 30,
2002.

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 30, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference from
the information under the caption entitled "Transactions with Management and
Others" in our definitive proxy statement to be filed with the SEC no later than
April 30, 2002.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

PAGE
----

Report of Independent Accountants................................................F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000.....................F-2
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 2001, 2000 and 1999..........................F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999........................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999..............................................F-5
Notes to Consolidated Financial Statements.......................................F-6

(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. The following exhibits are either filed herewith or
incorporated herein by reference:

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)
3.1 Certificate of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.2 Form of Specimen Certificate of Acacia's Common Stock (4)
10.1 Lease Agreement dated April 30, 1998, between Acacia and EOP-Pasadena
Towers, L.L.C., a Delaware limited liability company doing business as
EOP-Pasadena, LLC (5)
10.2 Lease Agreement between Soundbreak.com Incorporated and 8730 Sunset
Towers and related Guaranty (6)
10.3 1993 Stock Option Plan (7)
10.4 Form of Stock Option Agreement for 1993 Stock Option Plan (7)
10.5 1996 Stock Option Plan (8)
10.6 Form of Option Agreement constituting the 1996 Executive Stock Bonus Plan
(9)
10.7 Agreement between Acacia Research and Paul Ryan (10)
10.8 First Amendment dated June 26, 2000, to Lease Agreement between Acacia
and Pasadena Towers, L.L.C.
10.9* Research & Development Agreement dated as of June 18, 2001, between
CombiMatrix Corporation and Roche Diagnostics GmbH (3)
10.10* License and Supply Agreement dated as of July 1, 2001, between
CombiMatrix Corporation and Roche Diagnostics GmbH (3)
10.11 Sublease dated November 30, 2001, between Acacia and Jenkens & Gilchrist
10.12 Lease Agreement dated January 28, 2002, between Acacia and The Irvine
Company
18.1 Preferability letter from PricewaterhouseCoopers LLP, dated as of March
31, 2002, regarding change in accounting policy
21 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP

- -----------

* Confidential treatment for portions of these exhibits granted pursuant to an
Order Granting Confidential Treatment under the Securities Exchange Act of 1934,
issued on November 9, 2001, by the United States Securities and Exchange
Commission.

(1) Incorporated by reference from Acacia'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 Definitive Proxy
Statement on Schedule 14A filed on November 2, 1999 (SEC File No.
000-26068) and to the Definitive Proxy Statement on Schedule 14A filed
on April 10, 2000 (SEC File No. 000-26068).

(3) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on August 10, 2001 (SEC File No. 000-26068).

(4) Incorporated by reference from Amendment No. 2 on Form 8-A/A filed on
December 30, 1999 (SEC File No. 000-26068).

(5) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on August 14, 1998. (SEC File No. 000-26068).

(6) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on November 15, 1999. (SEC File No. 000-26068).

(7) Incorporated by reference from Acacia's Registration Statement on Form
SB-2 (33-87368-L.A.), which became effective under the Securities Act
of 1933, as amended, on June 15, 1995.

(8) Incorporated by reference as Appendix A to the Definitive Proxy
Statement on Schedule 14A filed on April 10, 2000 (SEC File No.
000-26068).

(9) Incorporated by reference from Acacia's Definitive Proxy as Appendix A
Statement on Schedule 14A filed on April 26, 1996 (SEC File No.
000-26068).

(10) Incorporate by reference from Acacia's Annual Report on Form 10-K for
the year ended December 31, 1997 filed on March 30, 1998 (SEC File No.
000-26068).

(b) Reports on Form 8-K.

On October 24, 2001, Acacia filed a Current Report on Form 8-K to
report results for the quarter ended September 30, 2001.

On October 26, 2001, Acacia filed a Current Report on Form 8-K to
report the declaration by Acacia's board of directors of a ten percent (10%)
stock dividend for stockholders of record as of November 21, 2001, with a
payment date of December 5, 2001.

On October 30, 2001, Acacia filed a Current Report on Form 8-K/A to
amend the Form 8-K dated October 23, 2001 and filed on October 26, 2001 to
report that the Form 8-K/A was being filed solely to reflect that the Form 8-K
dated October 23, 2001 was filed under Item 5 rather than under Item 9.

On November 14, 2001, Acacia filed a Current Report on Form 8-K to
report the filing with the SEC of Acacia's Form 10-Q for the quarter ended
September 30, 2001, with retroactive recognition of the ten percent (10%) stock
dividend in earnings per shares computations.

On December 21, 2001, Acacia filed a Current Report on Form 8-K to
report the establishment by Paul R. Ryan, Chairman of the Board and Chief
Executive Officer of Acacia, of a plan under Rule 10b5-1 of the SEC to provide
predetermined sales of a portion of his Acacia common stock.

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 27, 2002 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 27, 2002
- ----------------------------------- Chief Executive Officer
Paul R. Ryan (Principal Chief Executive)

/s/ Robert L. Harris, II Director and President March 27, 2002
- -----------------------------------
Robert L. Harris, II

/s/ Clayton J. Haynes Chief Financial Officer March 27, 2002
- ----------------------------------- (Principal Financial Officer)
Clayton J. Haynes

/s/ Thomas B. Akin Director March 27, 2002
- -----------------------------------
Thomas B. Akin

/s/ Fred A. de Boom Director March 27, 2002
- -----------------------------------
Fred A. de Boom

/s/ Edward W. Frykman Director March 27, 2002
- -----------------------------------
Edward W. Frykman

/s/ G. Louis Graziadio, III Director March 27, 2002
- -----------------------------------
G. Louis Graziadio, III

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Acacia Research Corporation

In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 38 present fairly, in all material
respects, the financial position of Acacia Research Corporation ("Acacia" or
"we") and its subsidiaries at December 31, 2001 and December 31, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Acacia'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 auditing standards generally
accepted in the United States of America, which 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,
effective January 1, 2001, Acacia changed its balance sheet classification for
accrued subsidiary employee stock-based compensation charges, resulting in no
cumulative effect on income.

As discussed in Note 2 to the consolidated financial statements,
effective October 1, 2000, Acacia adopted Emerging Issues Task Force Consensus
on Issue No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments," resulting in a charge of $246,000 in the year ended December 31,
2000 for cumulative effect of change in accounting principle due to beneficial
conversion feature of debt.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
February 25, 2002, except as to Note 14,
which is as of March 27, 2002

F-1

ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

2001 2000
---------- ----------

ASSETS

Current assets:
Cash and cash equivalents ............................................... $ 59,451 $ 36,163
Short-term investments .................................................. 25,110 40,600
Prepaid expenses, other receivables and other assets .................... 1,613 1,471
---------- ----------

Total current assets ............................................... 86,174 78,234

Property and equipment, net of accumulated depreciation ...................... 4,906 3,727
Investment in affiliate, at equity ........................................... -- 346
Investment in affiliate, at cost ............................................. 3,000 3,000
Patents, net of accumulated amortization ..................................... 11,855 9,038
Goodwill, net of accumulated amortization .................................... 4,627 3,904
Other assets ................................................................. 297 267
---------- ----------

$ 110,859 $ 98,516
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............................ $ 5,756 $ 7,767
Current portion of deferred revenues .................................... 7,088 --
Current portion of capital lease obligation ............................. 934 --
Accrued stock compensation (Note 2) ..................................... -- 10,392
---------- ----------

Total current liabilities .......................................... 13,778 18,159

Deferred income taxes ........................................................ 3,829 2,689
Deferred revenues, net of current portion .................................... 372 --
Capital lease obligation, net of current portion ............................. 1,845 --
---------- ----------

Total liabilities .................................................. 19,824 20,848
---------- ----------

Commitments and contingencies (Note 12)

Minority interests ........................................................... 32,303 17,524
---------- ----------

Stockholders' equity:
Preferred stock, par value $0.001 per share; 20,000,000 shares
authorized; no shares issued or outstanding .......................... -- --
Common stock, par value $0.001 per share; 60,000,000 shares authorized;
19,592,459 and 16,090,587 (Note 1 and 7) shares issued and outstanding
as of December 31,2001and 2000, respectively ......................... 20 16
Additional paid-in capital .............................................. 158,529 116,017
Warrants to purchase common stock ....................................... 199 86
Comprehensive (loss) income ............................................. (4) 77
Accumulated deficit ..................................................... (100,012) (56,052)
---------- ----------

Total stockholders' equity ......................................... 58,732 60,144
---------- ----------

$ 110,859 $ 98,516
========== ==========

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

F-2

ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

2001 2000 1999
------------- ------------- -------------

Revenues:
License fee income ..................................................... $ 24,180 $ -- $ --
Grant revenue .......................................................... 456 17 144
Other income ........................................................... -- 40 122
------------- ------------- -------------
Total revenues ..................................................... 24,636 57 266
------------- ------------- -------------
Operating expenses:
Research and development expenses (including stock compensation
charges of $7,183 and $3,397 in 2001 and 2000, respectively) ....... 18,839 11,864 1,806
Marketing, general and administrative expenses (including stock
compensation charges of $13,636, $7,307 and $146 in 2001, 2000
and 1999, respectively) ............................................ 46,300 22,089 4,418
Amortization of patents and goodwill ................................... 2,695 2,251 1,622
Loss on disposal of consolidated subsidiaries .......................... -- 1,016 --
------------- ------------- -------------
Total operating expenses .......................................... 67,834 37,220 7,846
------------- ------------- -------------
Operating loss ......................................................... (43,198) (37,163) (7,580)
------------- ------------- -------------
Other income (expense):
Write-off of equity investments ........................................ -- (2,603) --
Interest income ........................................................ 3,762 3,086 333
Realized gains on short-term investments ............................... 350 -- --
Unrealized gains on short-term investments ............................. 237 -- --
Interest expense ....................................................... (65) -- (254)
Equity in losses of affiliates ......................................... (195) (1,746) (1,121)
Other income ........................................................... 77 28 --
------------- ------------- -------------
Total other income (expense) ...................................... 4,166 (1,235) (1,042)
------------- ------------- -------------
Loss from continuing operations before income taxes and minority interests .. (39,032) (38,398) (8,622)
(Provision) benefit for income taxes ........................................ (780) 73 (20)
------------- ------------- -------------
Loss from continuing operations before minority interests ................... (39,812) (38,325) (8,642)
Minority interests .......................................................... 17,540 9,166 1,221
------------- ------------- -------------
Loss from continuing operations ............................................. (22,272) (29,159) (7,421)
Discontinued operations
Loss from discontinued operations of Soundbreak.com .................... -- (7,443) (776)
Estimated loss on disposal of Soundbreak.com ........................... -- (2,111) --
------------- ------------- -------------
Loss before cumulative effect of change in accounting principle ............. (22,272) (38,713) (8,197)
Cumulative effect of change in accounting principle due to
beneficial conversion feature of debt ................................... -- (246) --
------------- ------------- -------------
Net loss .................................................................... (22,272) (38,959) (8,197)
Unrealized gain (loss) on short-term investments ......................... (9) 77 --
Unrealized loss on foreign currency translation .......................... (72) -- --
------------- ------------- -------------
Comprehensive loss .......................................................... $ (22,353) $ (38,882) $ (8,197)
============= ============= =============
Loss per common share:
Basic
Loss from continuing operations ........................................ $ (1.16) $ (1.78) $ (0.59)
Loss from discontinued operations ...................................... -- (0.58) (0.06)
Cumulative effect of change in accounting principle .................... -- (0.02) --
------------- ------------- -------------
Net loss .................................................................... $ (1.16) $ (2.38) $ (0.65)
============= ============= =============
Diluted
Loss from continuing operations ........................................ $ (1.16) $ (1.78) $ (0.59)
Loss from discontinued operations ...................................... -- (0.58) (0.06)
Cumulative effect of change in accounting principle .................... -- (0.02) --
------------- ------------- -------------
Net loss .................................................................... $ (1.16) $ (2.38) $ (0.65)
============= ============= =============
Weighted average number of common and potential common
shares outstanding used in computation of loss per share:
Basic .................................................................. 19,259,256 16,346,099 12,649,133
Diluted ................................................................ 19,259,256 16,346,099 12,649,133

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

F-3

ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

WARRANTS TO
ADDITIONAL PURCHASE COMPREHENSIVE
COMMON COMMON PAID-IN COMMON ACCUMULATED INCOME
SHARES STOCK CAPITAL STOCK DEFICIT (LOSS) TOTAL
------------ -------- --------- -------- ----------- --------- ----------

1999
Balance at December 31, 1998 .................. 10,190,815 $ 10 $ 26,727 $ 100 $ (8,896) $ -- $ 17,941
Net loss ...................................... (8,197) (8,197)
Units issued in private placements, net ....... 974,771 1 19,014 58 19,073
Shares issued to purchase equity investments .. 60,107 288 288
Stock options exercised ....................... 326,450 1 757 758
Warrants exercised ............................ 2,055,050 2 14,542 (100) 14,444
Increase in capital due to issuance of stock
by subsidiaries ............................ 928 928
Compensation expense relating to stock
options and warrants ....................... 27 27
------------ -------- --------- -------- ----------- --------- ----------

Balance at December 31, 1999 .................. 13,607,193 14 62,283 58 (17,093) -- 45,262

2000
Net loss ...................................... (38,959) (38,959)
Units issued in private placements, net ....... 872,638 1 22,199 86 22,286
Stock options exercised ....................... 543,961 1 2,131 2,132
Stock issuance related to acquisition of
additional CombiMatrix shares .............. 488,557 11,634 11,634
Warrants exercised ............................ 578,238 14,878 (58) 14,820
Increase in capital due to issuance of stock
by subsidiaries ............................ 2,293 2,293
Compensation expense relating to stock
options and warrants ....................... 599 599
Unrealized gain on short-term investments ..... 77 77
------------ -------- --------- -------- ----------- --------- ----------

Balance at December 31, 2000 .................. 16,090,587 16 116,017 86 (56,052) 77 60,144

2001
Net loss ...................................... (22,272) (22,272)
Units issued in private placement, net ........ 1,127,274 1 18,247 113 18,361
Stock options exercised ....................... 596,888 1 1,251 1,252
Increase in capital due to issuance of stock
by subsidiaries ............................ 1,283 1,283
Compensation expense relating to stock
options and warrants ....................... 47 47
Stock dividend (Note 1 and 7) ................. 1,777,710 2 21,684 (21,688) (2)
Unrealized loss on short-term investments ..... (9) (9)
Unrealized loss on foreign currency translation (72) (72)
------------ -------- --------- -------- ----------- --------- ----------
Balance at December 31, 2001 .................. 19,592,459 $ 20 $158,529 $ 199 $ (100,012) $ (4) $ 58,732
============ ======== ========= ======== =========== ========= ==========

F-4

ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)

2001 2000 1999
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ...................................................... $(22,272) $(29,159) $ (7,421)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................... 3,869 2,657 1,771
Equity in losses of affiliates .................................................. 195 1,746 1,121
Minority interests in net loss .................................................. (17,540) (9,166) (1,221)
Compensation expense relating to stock options and warrants ..................... 20,819 10,704 146
Charge for acquired in-process research and development ......................... -- 2,508 --
Deferred tax benefit ............................................................ (182) (81) --
Write-off of other assets ....................................................... 918 -- --
Write-off of equity investments ................................................. -- 2,603 --
Net purchases of trading securities ............................................. (4,135) -- --
Unrealized gain on short-term investments ....................................... (237) -- --
Other ........................................................................... 354 293 251
Changes in assets and liabilities, net of effects of acquisitions:
Prepaid expenses, other receivables and other assets ............................ (713) (2,029) 223
Accounts payable, accrued expenses and other .................................... 1,085 2,040 415
Deferred revenues ............................................................... 7,460 -- --
--------- --------- ---------

Net cash used in operating activities of continuing operations .................. (10,379) (17,884) (4,715)
Net cash used in operating activities of discontinued operations ................ (2,182) (16,600) (1,420)
--------- --------- ---------
Net cash used in operating activities ........................................... (12,561) (34,484) (6,135)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments .................................................. -- (54) (2,387)
Purchase of additional equity in consolidated subsidiaries ...................... (3,304) (970) --
Deposit on investment ........................................................... -- -- (3,000)
Withdrawals from partnerships ................................................... -- -- 1,710
Purchase of property and equipment .............................................. (3,775) (2,476) (241)
Proceeds from sale and leaseback arrangement .................................... 3,000 -- --
Sale of available-for-sale investments .......................................... 76,275 3,975 --
Purchase of available-for-sale investments ...................................... (56,686) (43,606) --
Purchase of common stock from minority stockholders of subsidiaries ............. (2,550) -- --
Other ........................................................................... -- -- (84)
--------- --------- ---------

Net cash provided by (used in) investing activities of continuing operations .... 12,960 (43,131) (4,002)
Net cash used in investing activities of discontinued operations ................ (145) (1,173) (649)
--------- --------- ---------
Net cash provided by (used in) investing activities ............................. 12,815 (44,304) (4,651)
--------- --------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ............................ 1,774 17,771 15,202
Capital contributions from minority stockholders of subsidiaries ................ 3,257 37,322 6,634
Proceeds from sale of common stock, net of issuance costs ....................... 18,349 22,199 19,073
Other ........................................................................... (221) 28 --
--------- --------- ---------

Net cash provided by financing activities ....................................... 23,159 77,320 40,909
--------- --------- ---------

Increase (decrease) in cash and cash equivalents ................................ 23,413 (1,468) 30,123
Cash and cash equivalents, beginning ............................................ 36,163 37,631 7,508
Effect of exchange rate on cash ................................................. (125) -- --
--------- --------- ---------

Cash and cash equivalents, ending ............................................... $ 59,451 $ 36,163 $ 37,631
========= ========= =========

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

F-5

ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Acacia Research Corporation ("Acacia" or "we") develops, licenses and
provides products for the media technology and life science sectors.

Acacia's media technologies business, collectively referred to as,
"Acacia Media Technologies Group," owns intellectual property related to the
telecommunications field, including a television blanking system, also known as
the "V-chip," which it licenses to television manufacturers. In addition, Acacia
Media Technologies Group owns a worldwide portfolio of pioneering patents
relating to audio and video transmission and receiving systems, commonly known
as audio-on-demand and video-on-demand, used for distributing content via
various methods including computer networks, cable television systems and direct
broadcasting satellite systems. Acacia Media Technologies Group is responsible
for the development, licensing and protection of its intellectual property and
proprietary technologies. Our media technologies group continues to pursue both
licensing and strategic business alliances with leading companies in the rapidly
growing media technologies industry.

Acacia's life sciences business, collectively referred to as "Acacia
Life Sciences Group" is comprised of CombiMatrix Corporation ("CombiMatrix") and
Advanced Material Sciences, Inc. ("Advanced Material Sciences"). Our core
technology opportunity in the life sciences sector has been developed through
our majority-owned subsidiary, CombiMatrix. CombiMatrix is a life science
technology company with a proprietary system for rapid, cost competitive
creation of DNA and other compounds on a programmable semiconductor chip. This
proprietary technology has significant applications relating to genomic and
proteomic research. Our majority-owned subsidiary, Advanced Material Sciences,
holds the exclusive license for CombiMatrix's biological array processor
technology in certain fields of material sciences.

We were incorporated on January 25, 1993 under the laws of the State of
California. In December 1999, we changed our state of incorporation from
California to Delaware. Acacia owns and operates emerging corporations with
intellectual property rights, certain of which are involved in developing new or
unproven technologies. There is no assurance that any or all such technologies
will be successful, and even if successful, that the development of such
technologies can be commercialized.

Below is a summary of our most significant wholly and majority-owned
subsidiaries and our related ownership percentages on an as-converted basis:

OWNERSHIP % AS OF 3/22/02
COMPANY NAME DESCRIPTION OF BUSINESS ON AN AS-CONVERTED BASIS
------------- ----------------------- ------------------------

ACACIA MEDIA TECHNOLOGIES GROUP:

F-6

ACACIA LIFE SCIENCES GROUP:

(1) We are a party to a shareholder agreement with an officer of
CombiMatrix, which provides for (a) the collective voting of shares
(representing 69.5% of the voting interests of CombiMatrix) for the
election of certain directors to CombiMatrix's board of directors
and (b) certain restrictions on the sale or transfer of the
officer's shares of common stock in CombiMatrix.
(2) Advanced Material Sciences is 58.1% owned by us, 28.5% owned by
CombiMatrix and 13.4% owned by third-parties. We have a 74.5%
economic interest in Advanced Material Sciences by virtue of our
58.1% direct ownership interest in Advanced Material Sciences and
our 57.5% interest in CombiMatrix.

ACACIA RESEARCH CORPORATION

In January 2001, we completed an institutional private equity financing
raising gross proceeds of $19.0 million through the issuance of 1,107,274 units.
Each unit consists of one share of our common stock and one three-year callable
common stock purchase warrant. Each common stock purchase warrant entitles the
holder to purchase 1.10 shares of our common stock at a price of $19.09 per
share and is callable by us once the closing bid price of our common stock
averages $23.86 or above for 20 or more consecutive trading days on the NASDAQ
National Market System. We issued an additional 20,000 units in lieu of cash
payments for finders' fees in conjunction with the private placement.

In June 2001, our ownership interest in Soundview Technologies
Incorporated ("Soundview Technologies") increased from 67% to 100%, following
Soundview Technologies' completion of a stock repurchase transaction with its
former minority stockholders. Soundview Technologies repurchased the stock of
its former minority stockholders in exchange for a cash payment and the grant to
such stockholders of the right to receive 26% of future net revenues generated
by Soundview Technologies' current patent portfolio, which includes its V-chip
patent.

On October 22, 2001, our board of directors declared a ten percent
(10%) stock dividend. The stock dividend totaling 1,777,710 shares of our common
stock was distributed on December 5, 2001 to stockholders of record as of
November 21, 2001. All references to the number of shares (other than common
stock issued or outstanding on the 2000 consolidated balance sheet and 2001,
2000 and 1999 consolidated statements of stockholders' equity), per share
amounts and any other reference to shares in the consolidated financial
statements and accompanying notes to the consolidated financial statements,
unless otherwise noted, have been adjusted to reflect the stock dividend on a
retroactive basis.

In November 2001, we increased our ownership interest in Acacia Media
Technologies Corporation ("Acacia Media Technologies"), formerly Greenwich
Information Technologies LLC, from 33% to 100% through the purchase of the
ownership interest of the former limited liability company's other member. In
December 2001, we converted the company from a limited liability company to a
corporation and changed the name of the company to Acacia Media Technologies.

In the third quarter of 2000, we completed a private offering of
861,638 units at $27.50 per unit for gross proceeds of approximately $23.7
million. Each unit consists of one share of common stock and one common stock
purchase warrant entitling the holder to purchase 1.10 shares of common stock at
an exercise price $30.00 per share, subject to adjustment, expiring in three
years. The warrants are callable by Acacia once the closing bid price of
Acacia's common stock averages $36.00 or above for 20 consecutive trading days
on the NASDAQ National Market System. We issued an additional 11,000 units in
lieu of cash payments for finders' fees in conjunction with the private
placement.

F-7

In the fourth quarter of 1999, we completed a private placement
consisting of the sale of units, each composed of one share of Acacia's common
stock and one-half of a common stock purchase warrant. We issued 974,771 units
at an offering price of $21.50 per unit. Approximately $21.0 million was raised
from this financing. During the first quarter of 2000, we issued a 30-day
redemption notice for these warrants. As a result, all of these warrants were
exercised prior to the redemption date with Acacia receiving proceeds of
approximately $14.8 million.

ACACIA MEDIA TECHNOLOGIES GROUP

SOUNDVIEW TECHNOLOGIES

In June 2001, Soundview Technologies repurchased the stock of the
former minority stockholders of Soundview Technologies in exchange for a cash
payment and the grant to the former stockholders of the right to receive 26% of
future net revenues generated by Soundview Technologies' current patent
portfolio, which includes its V-chip patent. As of December 31, 2001, total
consideration paid combined with amounts accrued pursuant to the stock
repurchase agreements totaled $2,767,000. As a result of the stock repurchase
transaction our ownership interest in Soundview Technologies increased from 67%
to 100%.

During 2001, Soundview Technologies executed separate settlement and/or
license agreements with Samsung Electronics, Hitachi America, Ltd., LG
Electronics, Inc., Funai Electric Co. Ltd., Daewoo Electronics Corporation of
America, Sanyo Manufacturing Corporation, Thomson Multimedia, Inc., JVC Americas
Corporation, Matsushita Electric Industrial Co., Ltd. and Orion Electric Co.,
Ltd. In addition, Soundview Technologies settled its lawsuits with Pioneer
Electronics (USA) Incorporated, an affiliate of Pioneer Corporation, and
received payments from Philips Electronics pursuant to a settlement and license
agreement signed in December 2000. Certain of these license agreements
constitute settlements of patent infringement litigation brought by Soundview
Technologies. As of December 31, 2001, we received license fee payments totaling
$25,630,000 from the settlement and license agreements and have granted
non-exclusive, retroactive and future licenses of Soundview Technologies' U.S.
Patent No. 4,554,584 to the respective television manufacturers. Certain of the
settlement and license agreements provide for future royalty payments to
Soundview Technologies. We received and recognized as revenue $2,390,000,
$10,000,000, $10,740,000 and $1,000,000 of the license fee payments during the
first, second, third and fourth quarters of 2001, respectively. License fee
payments received during 2001 totaling $1,500,000 are included in deferred
revenues pursuant to the terms of the respective agreements.

In the second quarter of 2000, Soundview Technologies announced that it
filed a federal patent infringement and antitrust lawsuit against Sony
Corporation of America, Philips Electronics North America Corporation, the
Consumer Electronics Manufacturers Association and the Electronics Industries
Alliance d/b/a/ Consumer Electronics Association. In its lawsuit, Soundview
Technologies alleged that Sony and Philips Television sets fitted with "V-chips"
infringe Soundview Technologies' patent and that the Consumer Electronics
Manufacturers Association had induced infringement of the patent.

ACACIA MEDIA TECHNOLOGIES

Acacia Media Technologies, formally Greenwich Information Technologies
LLC, owns a worldwide portfolio of pioneering patents relating to audio and
video transmission and receiving systems, commonly known as audio-on-demand and
video-on-demand, used for distributing content via various methods including
computer networks, cable television systems and direct broadcasting satellite
systems.

In November 2001, we increased our ownership interest in Acacia Media
Technologies from 33% to 100% through the purchase of the ownership interest of
the former limited liability company's other member. In December 2001, we
converted the company from a limited liability company to a corporation, and
changed the name of the company to Acacia Media Technologies Corporation.

F-8

ACACIA LIFE SCIENCES GROUP

COMBIMATRIX

In July 2001, CombiMatrix entered into a non-exclusive worldwide
license, supply, research and development agreement with Roche Diagnostics GmbH
("Roche"). Under the terms of the agreement, Roche will purchase, use and resell
CombiMatrix's microarray and related technologies for rapid production of
customizable biochips. Additionally, CombiMatrix and Roche will develop a
platform technology, providing a range of standardized biochips for use in
research applications. The agreement has a 15-year term and provides for minimum
payments by Roche to CombiMatrix over the first three years, including milestone
achievements, payments for products, royalties and research and development
projects. In the third and fourth quarters of 2001, CombiMatrix received
up-front and milestone payments totaling $5.3 million from Roche, which are
included in deferred revenues in the accompanying December 31, 2001 consolidated
balance sheet.

In August 2001, CombiMatrix entered into a license and supply agreement
with the National Aeronautics and Space Administration ("NASA"). The agreement
has a two-year tern and provides for the license, purchase and use by the NASA
Ames Research Center of CombiMatrix's active biochips (microarrays) and related
technology to conduct biological research in terrestrial laboratories and in
space.

In October 2001, CombiMatrix formed a joint venture with Marubeni
Japan, one of Japan's leading trading companies. The joint venture, based in
Tokyo, will focus on development and licensing opportunities for CombiMatrix's
biochip technology with pharmaceutical and biotechnology companies in the
Japanese market. Marubeni made an investment of $1.0 million to acquire a ten
percent (10%) minority interest in the joint venture.

In the first quarter of 2000, CombiMatrix completed a private equity
financing raising gross proceeds of $17.5 million through the sale of 3,500,000
shares of CombiMatrix common stock. Acacia invested $10.0 million in this
private placement to acquire 2,000,000 shares of CombiMatrix common stock. As a
result of the transaction, we increased our equity ownership in CombiMatrix from
50.01% to 51.8%.

In the third quarter of 2000, we increased our ownership interest in
CombiMatrix from 51.8% to 61.4% by acquiring an additional ownership position
from existing stockholders of CombiMatrix in exchange for 488,557 shares of
Acacia's common stock. This purchase was accounted for as a step acquisition.
The purchase price of $11.6 million was allocated to the fair value of assets
acquired and liabilities assumed, including acquired in-process research and
development. The amount attributable to goodwill was $2.9 million, which is
amortized using the straight-line method over the estimated remaining useful
life of five years. The amount attributable to in-process research and
development of $2.5 million was charged to expense and is included in the
consolidated statement of operations and comprehensive loss for the year ended
December 31, 2000.

In the third quarter of 2000, CombiMatrix completed a private equity
financing raising gross proceeds of $36.0 million through the sale of 4,000,000
shares of CombiMatrix common stock. Acacia invested $17.5 million in this
private placement to acquire 1,944,445 shares. As a result of the transaction,
our equity ownership in CombiMatrix decreased from 61.4% to 58.4%.

ADVANCED MATERIAL SCIENCES

In May 2001, Advanced Material Sciences completed a private equity
financing raising gross proceeds of $2.0 million through the issuance of
2,000,000 shares of common stock. Acacia invested $155,000 in this private
placement to acquire 155,000 shares. As a result of the transaction, our equity
ownership in Advanced Material Sciences decreased from 66.7% to 58.1%. Advanced
Material Sciences issued an additional 29,750 shares of common stock, in lieu of
cash payments, and warrants to purchase approximately 54,000 shares of common
stock, for finders' fees in connection with the private placement. Each common
stock purchase warrant entitles the holder to purchase shares of Advanced
Material Sciences common stock at a price of $1.10 per share.

Advanced Material Sciences was formed in November 2000 and holds an
exclusive license to CombiMatrix's biological processor technology within the
field of material science. Initial investments for Advanced Material Sciences
consisted of $2.0 million from us and $1.0 million from CombiMatrix.

F-9

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING PRINCIPLES AND FISCAL YEAR END. The consolidated financial
statements and accompanying notes are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles in the
United States of America. We have a December 31 year end.

PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of Acacia and its wholly-owned and
majority-owned subsidiaries. Material intercompany transactions and balances
have been eliminated in consolidation. Investments in companies in which we
maintain an ownership interest of 20% to 50% or exercise significant influence
over operating and financial policies are accounted for under the equity method.
The cost method is used where we maintain ownership interests of less than 20%
and do not exercise significant influence over the investee.

REVENUE RECOGNITION. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). License fee income is recognized as revenue when (i) persuasive
evidence of an arrangement exists, (ii) all obligations have been performed
pursuant to the terms of the license agreement, (iii) amounts are fixed or
determinable and (iv) collectibility of amounts is reasonably assured. Revenue
from government grant and contract activities is accounted for in the period the
services are performed on a percentage-of-completion method of accounting when
the services have been approved by the grantor and collectibility is reasonably
assured. Amounts recognized under the percentage-of-completion method are
limited to amounts due from customers based on contract or grant terms.

Revenue from the sale of products and services is recognized when (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the fees are fixed and determinable and (iv)
collectibility is reasonably assured.

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

Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as a current liability. At December
31, 2001, we recorded $7.5 million as deferred revenues related to payments
received under multiple-element arrangements and other advances, which will be
recognized as revenue in future periods when the applicable revenue recognition
criteria as describe above are met.

CASH AND CASH EQUIVALENTS. We consider all highly liquid, short-term
investments with original maturities of three months or less when purchased to
be cash equivalents.

SHORT-TERM INVESTMENTS. Our short-term investments are held in a
variety of interest bearing instruments including high-grade corporate bonds,
commercial paper, money market accounts and other marketable securities.
Investments in securities with maturities of greater than three months and less
than one year are classified as short-term investments. Investments are
classified into categories in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). Certain of our
investments are classified as available-for-sale, which are reported at fair
value with related unrealized gains and losses in the value of such securities
recorded as a separate component of comprehensive income (loss) in stockholders'
equity until realized. Certain of our investments are classified as trading
securities, which are reported at fair value. Realized and unrealized gains and
losses in the value of trading securities are included in net income (loss) in
the consolidated statements of operations and comprehensive loss.

The fair value of our investments is primarily determined by quoted
market prices. Realized and unrealized gains and losses are recorded based on
the specific identification method. For investments classified as
available-for-sale, unrealized losses that are other than temporary are
recognized in net income.

F-10

CONCENTRATION OF CREDIT RISKS. Cash and cash equivalents are invested
in deposits with certain financial institutions and may, at times, exceed
federally insured limits. We have not experienced any losses on our deposits of
cash and cash equivalents.

PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Major additions and improvements are capitalized. When these assets are sold or
otherwise disposed of, the asset and related depreciation are relieved, and any
gain or loss is included in income for the period of sale or disposal.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, ranging from three to ten years.

Certain equipment held under capital lease is included in property,
plant and equipment and amortized using the straight line method over the lease
term. The related capital lease obligation is recorded as a liability in the
consolidated balance sheet. Capital lease amortization is included in
depreciation expense in the consolidated statement of operations and
comprehensive loss.

PREPAID PUBLIC OFFERING COSTS. As of September 30, 2001, CombiMatrix
capitalized $1,353,000 of costs incurred in connection with the filing of a
registration statement with the Securities and Exchange Commission ("SEC") in
November 2000. Deferred costs totaling $918,000 are included in current assets
in our December 31, 2000 consolidated balance sheet. In the fourth quarter of
2001, all of these deferred costs were charged to operations.

ORGANIZATION COSTS. Costs of start-up activities, including
organization costs, are expensed as incurred.

MANAGEMENT FEES. Capital management fees in 1999 include asset-based
and performance-based fees earned from two domestic private investment
partnerships in which we were a general partner and two offshore investment
corporations for which we served as an investment advisor. These capital
management fees were recognized when earned in accordance with the respective
partnership and management agreements. Management fees also include income from
other consulting and management services provided by Acacia to other parties.
These fees are recognized when the related services are provided. On December
31, 1999, we closed the Acacia Capital Management division.

PATENTS AND GOODWILL. Patents, once issued, and goodwill are amortized
on the straight-line method over their estimated remaining useful lives, ranging
from three to twenty years. Amortization charged to operations relating to
goodwill amounted to $1,078,000, $921,000 and $465,000 at December 31, 2001,
2000 and 1999, respectively. Accumulated amortization of goodwill amounted to
$3,651,000 and $1,894,000 at December 31, 2001 and 2000, respectively.
Amortization charged to operations relating to patents amounted to $1,617,000,
$1,330,000 and $1,157,000 at December 31, 2001, 2000 and 1999, respectively.
Accumulated amortization of patents amounted to $5,655,000 and $4,038,000 at
December 31, 2001 and 2000, respectively.

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

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and
cash equivalents, other receivables, accounts payable and accrued expenses
approximate fair value due to their short-term maturity. The carrying value of
our capital lease obligation approximates its fair value based on the current
interest rate for similar type instruments. The fair values of our investments
are primarily determined by quoted market prices.

FOREIGN CURRENCY TRANSLATION. The functional currency of our foreign
entity is the local currency. Foreign currency translation is reported pursuant
to SFAS No. 52, "Foreign Currency Translation" ("SFAS No. 52"). Assets and
liabilities recorded in foreign currencies are translated at the exchange rate
on the balance sheet date. Translation adjustments resulting from this process
are charged or credited to other comprehensive income. Revenue and expenses are
translated at average rates of exchange prevailing during the year.

F-11

STOCK-BASED COMPENSATION. Compensation cost of stock options issued to
employees is accounted for in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25") and related interpretations. Compensation cost attributable to such options
is recognized based on the difference, if any, between the closing market price
of the stock on the date of grant and the exercise price of the option.
Compensation cost is deferred and amortized on an accelerated basis over the
vesting period of the individual option awards using the amortization method
prescribed in Financial Accounting Standards Board ("FASB") Interpretation No.
28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans" ("FIN No. 28"). We have adopted the disclosure only requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") with
respect to options issued to employees. Compensation cost of stock options and
warrants issued to non-employee service providers is accounted for under the
fair value method required by SFAS No. 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

See "ACCOUNTING CHANGES" for change in accounting policy for accrued
subsidiary employee stock-based compensation charges.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of costs incurred for direct and overhead-related research expenses and
are expensed as incurred. Costs to acquire technologies which are utilized in
research and development and which have no alternative future use are expensed
when incurred. Costs related to filing and pursuing patent applications are
expensed as incurred, as recoverability of such expenditures is uncertain.
Software developed for use in our products is expensed as incurred until both
(i) technological feasibility for the software has been established and (ii) all
research and development activities for the other components of the system have
been completed. We believe these criteria are met after we have received
evaluations from third-party test sites and completed any resulting
modifications to the products. Expenditures to date have been classified as
research and development expense.

INCOME TAXES. Income taxes are accounted for using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in Acacia's financial statements or tax returns. A valuation
allowance is established to reduce deferred tax assets if all, or some portion,
of such assets will more than likely not be realized.

ACCOUNTING FOR SALES OF STOCK BY A SUBSIDIARY. Gains resulting from a
subsidiary's sale of stock to third-parties at a price per share in excess of
Acacia's average carrying amount per share are generally reflected in
stockholders' equity as a direct increase to capital in excess of par or stated
value. See Note 7 for description of current year gains reflected in
stockholders' equity as a result of our subsidiaries sales of stock to
third-parties.

COMPREHENSIVE (LOSS) INCOME. Comprehensive income is the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners.

SEGMENT REPORTING. We use the management approach, which designates the
internal organization that is used by management for making operating decisions
and assessing performance as the basis of Acacia's reportable segments. At
December 31, 2001, our reporting segments were modified to include Soundview
Technologies and Acacia Media Technologies in our Acacia Media Technologies
Group segment. In addition, CombiMatrix and Advanced Material Sciences comprise
our Acacia Life Sciences Group segment. Segment information has been adjusted
for all periods presented.

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

F-12

LOSS PER SHARE. Loss per share is presented on both a basic and diluted
basis. A reconciliation of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:

2001 2000 1999
---------- ---------- ----------

Weighted Average Number of Common Shares Outstanding Used in Computation of
Basic EPS ................................................................. 19,259,256 16,346,099 12,649,133
Dilutive Effect of Outstanding Stock Options and Warrants (a) ................ -- -- --
---------- ---------- ----------
Weighted Average Number of Common and Potential Common Shares Outstanding
Used in Computation of Diluted EPS ........................................ 19,259,256 16,346,099 12,649,133
========== ========== ==========
- ------------------------

(a) Potential common shares of 719,471, 1,046,072 and 940,002 at December
31, 2001, 2000 and 1999, respectively, have been excluded from the per
share calculation because the effect of their inclusion would be
anti-dilutive.

RECLASSIFICATIONS. Certain immaterial reclassifications of prior year
amounts have been made to conform to the 2001 presentation.

ACCOUNTING CHANGES. Effective January 1, 2001, we changed our
accounting policy for balance sheet classification of employee stock-based
compensation resulting from awards in consolidated subsidiaries. Historically,
the consolidated financial statements have accounted for cumulative earned
employee stock-based compensation related to subsidiaries as a liability, under
the caption "accrued stock compensation." Management believes a change to
reflect these cumulative charges as minority interests is preferable as it
better reflects the underlying economics of the stock-based compensation
transaction. As a result of the change, effective January 1, 2001, minority
interests has been increased by $10.4 million, and accrued stock compensation of
$10.4 million has been decreased. The change in accounting policy does not
affect previously reported consolidated net income.

During March 1998, CombiMatrix issued $1,450,000 principal amount of 6%
unsecured subordinated convertible promissory notes due in 2001. The notes had a
contingent beneficial conversion feature with intrinsic value of $246,000. We
adopted Emerging Issues Task Force Consensus of Issues No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments" ("EITF 00-27"), in the
fourth quarter of 2000. The adoption of EITF 00-27 resulted in a charge of
$246,000 in the year ended December 31, 2000 for the cumulative effect of a
change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes."

RECENT ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB issued SFAS
No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the
purchase method be used for all business combinations initiated after June 30,
2001 and that certain intangible assets acquired in a business combination be
recognized apart from goodwill. The adoption of SFAS No. 141 did not have a
material effect on our consolidated results of operations or financial position.

F-13

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of. SFAS No. 144 also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
temporarily controlled subsidiary. SFAS No. 144 requires long-lived assets to be
tested for recoverability whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In conjunction with such tests,
it may be necessary to review depreciation estimates and methods as required by
APB Opinion No. 20, "Accounting Changes," or the amortization period as required
by SFAS No. 142. We will adopt SFAS No. 144 effective January 1, 2002. We are
currently assessing the impact of SFAS No. 144 on our operating results and
financial condition upon adoption.

3. SHORT-TERM INVESTMENTS

Short-term investments consists of the following at December 31, 2001
and 2000:

2001 AMORTIZED FAIR
COST VALUE
----------- -----------

Trading securities .............................................. $ -- $ 4,372,000

Available-for-sale-securities:
Corporate bonds and notes ................................... 14,427,000 14,869,000
U.S. government securities .................................. 5,643,000 5,869,000
----------- -----------
$20,070,000 $25,110,000
=========== ===========

2000 AMORTIZED FAIR
COST VALUE
----------- -----------
Available-for-sale-securities:
Corporate bonds and notes ................................... $37,689,000 $38,622,000
U.S. government securities .................................. 1,971,000 1,978,000
----------- -----------
$39,660,000 $40,600,000
=========== ===========

Gross unrealized gains and losses related to available-for-sale
securities were not material for 2001 and 2000.

Contractual maturities for investments in debt securities classified as
available-for-sale as of December 31, 2001 are as follows:

FAIR
COST VALUE
----------- -----------

Due within one year.............................................. $ 5,103,000 $ 5,669,000
Due after one year through two years............................. 14,967,000 15,069,000
----------- -----------
$20,070,000 $20,738,000
=========== ===========

F-14

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2001
and 2000:

2001 2000
------------ ------------

Machine shop and laboratory equipment ....................... $ 844,000 $ 1,250,000
Furniture and fixtures ...................................... 445,000 550,000
Computer hardware and software .............................. 1,203,000 1,085,000
Leasehold improvements ...................................... 565,000 228,000
Facilities and equipment held under capital lease ........... 3,000,000 --
Construction in progress .................................... 84,000 1,346,000
------------ ------------
$ 6,141,000 $ 4,459,000
Less: accumulated depreciation and amortization ............ (1,235,000) (732,000)
------------ ------------
$ 4,906,000 $ 3,727,000
============ ============

Depreciation expense was $1,174,000, $471,00 and $248,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. Amortization of assets
held under capital lease was $161,000 for the year ended December 31, 2001.

5. BALANCE SHEET COMPONENTS

Accounts payable, accrued expenses and other consists of the following
at December 31, 2001 and December 31, 2000:

2001 2000
------------ ------------

Accounts payable............................................ $ 837,000 $ 2,285,000
Payroll, vacation and other employee benefits............... 1,740,000 711,000
Accrued liabilities of discontinued operations.............. 1,342,000 3,599,000
Taxes payable............................................... 356,000 --
Accrued subsidiary shareholder redemption payments.......... 217,000 --
Other accrued liabilities................................... 1,264,000 1,172,000
------------ ------------
$ 5,756,000 $ 7,767,000
============ ============

Deferred revenues consist of the following at December 31, 2001:

2001
------------
Milestone and up-front payments............................. $ 5,960,000
License fee payments........................................ 1,500,000
------------
$ 7,460,000
------------
Less: current portion...................................... (7,088,000)
------------
$ 372,000
============

F-15

6. INVESTMENTS

At December 31, 2000, we carried our 33% ownership interest in Acacia
Media Technologies, formerly Greenwich Information Technologies LLC, under the
equity method at a carrying value of $346,000. In November 2001, we increased
our ownership interest in Acacia Media Technologies from 33% to 100% through the
purchase of the ownership interest of the former limited liability company's
other member. In December 2001, Acacia Media Technologies was incorporated under
the laws of the State of Delaware and we changed the name from Greenwich
Information Technologies LLC to Acacia Media Technologies Corporation. The
ownership interest purchase has been accounted for as a purchase transaction in
accordance with SFAS No. 141. The excess purchase price was allocated to Acacia
Media Technologies' patent portfolio and is being amortized over the remaining
life of the respective patents, which is approximately 10 years. The results of
operations have been included in the consolidated statement of operations and
comprehensive loss from the date of acquisition. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
material on either an individual or aggregate basis.

In the first quarter of 2000, Acacia acquired a 7.6% interest in
Advanced Data Exchange for $3.0 million out of a $17.3 million private placement
of "non-voting" Series B preferred stock. Advanced Data Exchange is a
corporation engaged in business-to-business Internet exchange transactions that
allow mid-sized companies to exchange its purchase orders, purchase order
acknowledgments, advance ship notices, invoices and other business documents
over the Internet with supply chain partners and emerging digital marketplaces.
Subsequent to an additional $30 million equity financing completed in the second
quarter of 2000, we currently own a 4.9% interest in Advanced Data Exchange and
have no board of directors representation. Additional rounds of financing may
further dilute our interest. We do not have the ability to control decision
making at Advanced Data Exchange.

In the fourth quarter of 2000, we recorded $1,016,000 in write-offs of
early stage investments. In addition, we recorded $2,603,000 in write-offs of
certain equity investments.

7. STOCKHOLDERS' EQUITY

The authorized capital stock of Acacia consists of 60,000,000 shares of
common stock, $0.001 par value, of which 19,592,459 and 17,699,646 (as adjusted
for ten percent (10%) stock dividend distributed on December 5, 2001) shares
were issued and outstanding as of December 31, 2001 and 2000, respectively, and
20,000,000 shares of preferred stock, $0.001 par value, no shares of which are
issued or outstanding. Under the terms of Acacia's Certificate of Incorporation,
the board of directors may determine the rights, preferences and terms of our
authorized but unissued shares of preferred stock. Holders of common stock are
entitled to one vote per share on all matters to be voted on by the
stockholders, and to receive ratably such dividends, if any, as may be declared
by the board of directors out of funds legally available therefore. Upon the
liquidation, dissolution or winding up of Acacia, the holders of common stock
are entitled to share ratably in all assets of Acacia which are legally
available for distribution, after payment of all debts and other liabilities.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights.

On October 22, 2001, our board of directors declared a ten percent
(10%) stock dividend. The stock dividend totaling 1,777,710 shares of our common
stock was distributed on December 5, 2001 to stockholders of record as of
November 21, 2001. The fair value of the stock dividend paid, based on the
market value of our common stock on the date of declaration as adjusted for the
dilutive effect of the stock dividend declared, is reflected as a
reclassification of accumulated deficit in the amount of $21,688,000, to
permanent capital, represented by our common stock and additional paid-in
capital accounts. All references to the number of shares (other than common
stock issued or outstanding on the 2000 consolidated balance sheet and 2001,
2000 and 1999 consolidated statements of stockholders' equity), per share
amounts and any other reference to shares in the consolidated financial
statements and accompanying notes to the consolidated financial statements,
unless otherwise noted, have been adjusted to reflect the stock dividend on a
retroactive basis.

In May 2001, Advanced Material Sciences completed a private equity
financing raising gross proceeds of $2.0 million through the issuance of
2,000,000 shares of common stock. Acacia invested $155,000 in this private
placement to acquire 155,000 shares. As a result of the transaction, our equity
ownership in Advanced Material Sciences decreased from 66.7% to 58.1%.
Additionally, in October 2001, a subsidiary of CombiMatrix sold 10% of its
voting common stock to a joint venture partner in Japan. The gain, totaling
$1,283,000, resulting from our subsidiaries sale of stock to third-parties at a
price per share in excess of our carrying amount per share has been reflected as
a direct increase to additional paid-in capital in consolidated stockholders'
equity.

F-16

8. PROVISIONS FOR INCOME TAXES

Provision (benefit) for income taxes consists of the following:

2001 2000 1999
------------- ------------- -------------

Current:
U.S. Federal tax............................................... $ 776,000 $ 2,500 $ 12,000
State taxes.................................................... 186,000 3,500 8,000
------------- ------------- -------------
962,000 6,000 20,000
------------- ------------- -------------
Deferred:
U.S. Federal tax............................................... (182,000) (79,000) --
State taxes.................................................... -- -- --
------------- ------------- -------------
(182,000) (79,000) --
------------- ------------- -------------
$ 780,000 $ (73,000) $ 20,000
============= ============= =============

The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred assets and liabilities consist of the
following at December 31, 2001 and 2000:

2001 2000
------------- -------------

Basis of investments in affiliates................................... $ 16,789,000 $ 9,362,000
Intangibles.......................................................... (3,829,000) (2,689,000)
Depreciation and amortization........................................ (4,000) (118,000)
Stock compensation................................................... 6,993,000 2,737,000
Accrued liabilities.................................................. 1,061,000 740,000
Net operating loss carryforwards and credits......................... 25,084,000 27,257,000
------------- -------------
46,094,000 37,289,000
Less: valuation allowance........................................... (49,923,000) (39,978,000)
------------- -------------
$ (3,829,000) $ (2,689,000)
============= =============

A reconciliation of the federal statutory income tax rate and the
effective income tax rate is as follows:

2001 2000 1999
------------- ------------- -------------

Statutory federal tax rate....................................... (34%) (34%) (34%)
State income taxes, net of federal benefit....................... (3%) (3%) (3%)
Amortization of intangible assets................................ 2% 1% 5%
Stock compensation............................................... 7% 3% 0%
Valuation allowance.............................................. 30% 33% 32%
------------- ------------- -------------
2% 0% 0%
============= ============= ==============

At December 31, 2001, we had U.S. Federal and California state income
tax net operating loss carry forwards ("NOLs") of approximately $29,680,000 and
$16,531,000, expiring between 2002 and 2021, excluding NOLs at CombiMatrix and
other subsidiaries. In addition, we had tax credit carryforwards of
approximately $102,000.

The aggregate tax NOLs at CombiMatrix and other subsidiaries are
approximately $40,225,000 and $8,999,000 for federal and state income tax
purposes, respectively, expiring between 2002 and 2021. CombiMatrix and other
subsidiaries also have tax credit carryforwards of approximately $840,000, which
begin expiring in 2011. However, the use of these NOLs and tax credits are
limited to the separate earnings of the respective subsidiaries. In addition,
ownership changes may also restrict the use of NOLs and tax credits.

F-17

As of December 31, 2001, approximately $9,507,000 of the valuation
allowance related to the tax benefits of stock option deductions included in
Acacia's NOLs. At such time as the valuation allowance is released, the benefit
will be credited to additional paid-in capital.

9. DISCONTINUED OPERATIONS

On February 13, 2001, the board of directors of Soundbreak.com
Incorporated ("Soundbreak.com"), a majority-owned subsidiary of Acacia, resolved
to cease operations as of February 15, 2001 and liquidate the remaining assets
and liabilities of the subsidiary. Accordingly, we reported the results of
operations and the estimated loss on disposal of Soundbreak.com as results of
discontinued operations in the 2000 consolidated statements of operations and
comprehensive loss.

Following is summary financial information for the discontinued
operations:

2000 1999
------------- -------------

Net sales ......................................................... $ 4,000 $ --
============= =============
Loss from discontinued operations:
Before minority interests ...................................... $ 16,437,000 $ 1,784,000
Minority interests ............................................. (8,994,000) (1,008,000)
------------- -------------
Net............................................................. $ 7,443,000 $ 776,000
============= =============
Estimated loss on disposal:
Before minority interests ...................................... $ 5,066,000 $ --
Minority interests.............................................. (2,955,000) --
------------- -------------
Net ............................................................ $ 2,111,000 $ --
============= =============

Discontinued operations did not have an impact on the December 31, 2001
consolidated statement of operations and comprehensive loss.

The assets and liabilities of the discontinued operations at December
31, 2001 consist primarily of $4,014,000 of cash and cash equivalents and
$1,342,000 of accounts payable and accrued expenses.

The assets and liabilities of the discontinued operations at December
31, 2000 primarily consist of $6,620,000 of cash and cash equivalents, $10,000
of management fees and other receivables, $74,000 of prepaid expenses, $164,000
of other assets, $207,000 in property and equipment and $3,599,000 of accounts
payable and accrued expenses.

F-18

10. STOCK OPTIONS AND WARRANTS

We have three stock option plans currently in effect: the 1993 Stock
Option Plan (the "1993 Plan"), the 1996 Executive Stock Bonus Plan (the "Bonus
Plan") and the 1996 Stock Option Plan (the "1996 Plan").

Options under the 1993 plan authorize the granting of both options
intended to qualify as "incentive stock options" under Section 422A of the
Internal Revenue Code ("Incentive Stock Options") and stock options that are not
intended to so qualify ("Nonqualified Stock Options") to officers, directors,
employees, consultants and others expected to provide significant services to
Acacia or its subsidiaries. The 1993 Plan covers an aggregate of 2,000,000
shares of common stock. We have reserved 2,000,000 shares of common stock in
connection with the 1993 Plan. Under the terms of the 1993 Plan, options may be
exercised upon terms approved by Acacia's board of directors and expire at a
maximum of ten years from the date of grant. Incentive Stock Options are granted
at prices equal to or greater than fair market value at the date of grant.
Nonqualified Stock Options are generally granted at prices equal to or greater
than 85% of the fair market value at the date of grant. All of the shares under
the 1993 Plan have been awarded.

The Bonus Plan provided for a one-time grant of options to purchase an
aggregate of 720,000 shares of our common stock to directors, officers and other
key employees performing services for our affiliates and us. Under each option
agreement of the Bonus Plan, 25% of the options become exercisable on each of
the first four anniversaries of the grant date. The options granted under the
Bonus Plan expire in March 2001. All of the shares under the Bonus Plan have
been awarded.

In April 1996, the board of directors adopted the 1996 Plan, which was
approved by the stockholders in May 1996. The 1996 Plan provides for the grant
of Nonqualified Stock Options and Incentive Stock Options to key employees,
including officers of Acacia and its subsidiaries and certain other individuals.
The 1996 Plan also provides for the automatic grant of 20,000 shares of
Nonqualified Stock Options to non-employee directors upon initial election to
the board of directors and 2,000 shares thereafter on an annual basis under the
Non-Employee Director Program. These options are generally exercisable six
months to one year after grant and expire five years after grant for directors
or up to ten years after grant for key employees. In May 1998, stockholders
approved amendments to the 1996 Stock Option Plan, which increased the
authorized number of shares of common stock subject to the amended plan by
500,000 shares. In May 1999, stockholders approved amendments to the 1996 Stock
Option Plan, which increased the authorized number of shares of common stock
subject to the amended plan by 2,000,000 shares. In May 2000, stockholders
approved amendments to the 1996 Stock Option Plan, which increased the
authorized number of shares of common stock subject to the amended plan by
1,000,000 shares. At the years ended December 31, 2001 and 2000, 482,000 and
1,129,000 shares were available for grant, respectively.

The following is a summary of common stock option activities:

EXERCISE WEIGHTED
SHARES PRICES AVERAGE PRICE
------------- ----------------- -------------

Balance at December 31, 1998...................... 1,829,000 $ 0.91 - $ 7.85 $ 2.95
Options Granted................................... 799,000 $ 3.89 - $21.59 $12.22
Options Exercised................................. (359,000) $ 0.91 - $ 4.24 $ 2.11
Options Cancelled................................. (51,000) $ 3.28 - $ 7.16 $ 4.72
--------------
Balance at December 31, 1999...................... 2,218,000 $ 0.91 - $21.59 $ 6.38
Options Granted................................... 2,709,000 $ 14.55 - $50.28 $27.90
Options Exercised................................. (585,000) $ 2.39 - $14.55 $ 3.41
Options Cancelled................................. (717,000) $ 1.82 - $46.79 $19.48
--------------
Balance at December 31, 2000...................... 3,625,000 $ 2.77 - $50.28 $20.51
Options Granted................................... 1,390,000 $ 5.65 - $16.08 $ 7.14
Options Exercised................................. (790,000) $ 2.77 - $14.55 $ 3.48
Options Cancelled................................. (743,000) $ 3.18 - $48.69 $30.48
--------------
Balance at December 31, 2001...................... 3,482,000 $ 3.47 - $50.28 $16.94
==============
Exercisable at December 31, 2000.................. 1,181,000 $ 2.77 - $46.79 $ 7.48
Exercisable at December 31, 2001.................. 1,315,000 $ 3.47 - $50.28 $18.47

F-19

10. STOCK OPTIONS AND WARRANTS

Options outstanding at year ended December 31, 2001 are summarized as
follows:

WEIGHTED OUTSTANDING EXERCISABLE
NUMBER OF AVERAGE WEIGHTED WEIGHTED
NUMBER OF OUTSTANDING REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------

$ 0.00 - $ 5.00............ 103,000 0.5 $ 3.54 103,000 $ 3.54
$ 5.01 - $10.00............ 1,354,000 8.6 $ 6.29 373,000 $ 6.13
$10.01 - $15.00............ 135,000 5.2 $12.72 27,000 $13.93
$15.01 - $20.00............ 179,000 8.8 $17.04 103,000 $17.28
$20.01 - $25.00............ 761,000 7.6 $22.07 260,000 $21.97
$25.01 - $30.00............ 615,000 7.5 $27.55 251,000 $27.61
$30.01 - $35.00............ 212,000 6.8 $30.17 126,000 $30.17
$35.01 - $40.00............ -- -- $ -- -- $ --
$40.01 - $45.00............ 116,000 8.2 $41.96 68,000 $41.97
$45.01 - $52.00............ 7,000 8.2 $50.28 4,000 $50.28
---------- -----------
3,482,000 1,315,000
========== ===========

At year ended December 31, 2001, the total number of warrants
outstanding represent rights to purchase 960,000 and 1,240,000 shares of
Acacia's common stock at a per share exercise price of $30.00 and $19.09,
respectively. At December 31, 2000, the total number of warrants outstanding
represent rights to purchase 960,000 shares of Acacia's common stock at a per
share exercise price of $30.00.

We have adopted the disclosure only requirements of SFAS No. 123 with
respect to options issued to employees. The weighted average fair value of
options granted during 2001, 2000 and 1999 for which the exercise price equals
the fair market price on the grant date was $4.19, $20.17 and $13.33,
respectively. The weighted average fair value of options granted during 1999 for
which the exercise price is less than fair market value on grant date was
$16.70. There were no options granted during 2001 or 2000 with exercise price
less than the market value.

As of December 31, 2001, CombiMatrix had a total of 3,534,000 shares of
options and warrants outstanding, of which, 1,798,000 shares are exercisable. As
of December 31, 2000, CombiMatrix had a total of 4,539,000 shares of options and
warrants outstanding, of which 1,062,000 shares are exercisable. As of December
31, 1999, CombiMatrix had a total of 798,000 shares of options and warrants
outstanding, of which 444,000 shares are exercisable.

Had we accounted for stock compensation expense related to stock
options issued to employees in accordance with SFAS No. 123, our pro forma loss
from continuing operations and loss per share would have been as follows:

2001 2000 1999
------------- ------------- ------------

Loss from continuing operations as reported......................... $(22,272,000) $(29,159,000) $(7,421,000)
Loss from continuing operations, pro forma.......................... $(30,806,000) $(37,671,000) $(8,505,000)
Basic loss from per share from continuing operations as reported.... $ (1.16) $ (1.78) $ (0.59)
Basic loss from per share from continuing operations, pro forma..... $ (1.60) $ (2.31) $ (0.67)
Diluted loss from per share from continuing operations as reported.. $ (1.16) $ (1.78) $ (0.59)
Diluted loss from per share from continuing operations, pro forma... $ (1.60) $ (2.31) $ (0.67)

The fair value of the options was determined using the Black-Scholes
option-pricing model, assuming weighted average risk free annual interest of
4.52%, 6.31% and 5.79% in 2001, 2000 and 1999, respectively, volatility of
approximately 75%, with expected lives of approximately four years and no
expected dividends.

F-20

11. DEFERRED NON-CASH STOCK COMPENSATION CHARGES

During the year ended December 31, 2000, our majority-owned subsidiary,
CombiMatrix, recorded deferred non-cash stock compensation charges aggregating
approximately $53.8 million in connection with the granting of stock options.
Pursuant to Acacia's policy, the stock options were granted at exercise prices
equal to the fair value of the underlying CombiMatrix stock on the date of grant
as determined by Acacia. However, such exercise prices were subsequently
determined to be below fair value due to a substantial step-up in the fair value
of CombiMatrix pursuant to a valuation provided by an investment banker in
contemplation of a potential CombiMatrix initial public offering in 2000. In
connection with the proposed CombiMatrix initial public offering and pursuant to
SEC rules and guidelines, we were required to reassess the value of stock
options issued during the one-year period preceding the potential initial public
offering and utilize the stepped-up fair value provided by the investment banker
for purposes of determining whether such stock option issuances were
compensatory, resulting in the calculation of the $53.8 million in deferred
non-cash stock compensation charges in 2000. Deferred non-cash stock
compensation charges are being amortized by CombiMatrix over the respective
option grant vesting periods, which range from one to four years. The table
below reflects the gross deferred non-cash stock compensation charges recorded
by CombiMatrix related to stock option grants, the amortization of deferred
non-cash stock compensation for 2001 and 2000, and the impact of certain other
CombiMatrix stock option transactions during 2001, as follows:

Gross CombiMatrix deferred non-cash stock compensation charges........................... $ 53,773,000
Less amounts amortized to date and other items:
Amortization through December 31, 2000................................................... (9,709,000)
Deferred non-cash stock compensation charges related to 2001 stock option grants......... 729,000
Amortization for the year ended December 31, 2001 (net of $4,698,000 of
amortization reversal related to forfeitures of certain unvested options and other).... (18,807,000)
Forfeitures of certain unvested options (results in a net reduction in deferred stock
compensation to be amortized in future periods)........................................ (13,220,000)
-------------
Remaining CombiMatrix deferred non-cash stock compensation as of December 31, 2001
to be amortized in subsequent periods.................................................. $ 12,766,000
=============

During the third and fourth quarters of 2001, certain CombiMatrix
unvested stock options were forfeited. Pursuant to the provisions of APB No. 25
and related interpretations, the reversal of previously recognized non-cash
stock compensation expense on forfeited unvested stock options, in the amount of
$4,698,000, has been reflected in the consolidated statements of operations and
comprehensive loss as a reduction in 2001 non-cash stock compensation expense.
In addition, the forfeiture of certain unvested options during 2001 results in a
reduction of the remaining deferred non-cash stock compensation expense
scheduled to be amortized in future periods.

The remaining deferred non-cash stock compensation balance as of
December 31, 2001 related to stock options issued by CombiMatrix represents the
future non-cash deferred stock compensation expense that will be reflected in
our consolidated statements of operations and comprehensive loss as non-cash
stock compensation charges over the next twelve quarters from January 1, 2002
through December 31, 2004 as follows:

FIRST SECOND THIRD FOURTH
YEAR QUARTER QUARTER QUARTER QUARTER TOTAL
---- ----------- ----------- ----------- ----------- -----------

2002...................... $ 2,273,000 $ 2,311,000 $ 2,212,000 $ 1,276,000 $ 8,072,000
2003...................... 1,036,000 1,041,000 997,000 510,000 3,584,000
2004...................... 366,000 360,000 329,000 55,000 1,110,000
-----------
$12,766,000
===========

Non-cash deferred stock compensation expense scheduled to be recognized
in future periods reflected above may be impacted by certain subsequent stock
option transactions including modification of terms, cancellations, forfeitures
and other activity.

F-21

12. COMMITMENTS AND CONTINGENCIES

SALE AND LEASEBACK ARRANGEMENT

In September 2001, CombiMatrix entered into a sale and leaseback
arrangement with a bank, providing up to $7,000,000 in financing for equipment
and other capital purchases. Pursuant to the terms of the agreement, certain
equipment and leasehold improvements, totaling $2,557,000 in net book value were
sold to the bank at a purchase price of $3,000,000, resulting in a deferred gain
on the sale of assets of $443,000. The deferred gain is being amortized over 4
years, the term of the related lease arrangement. In addition, CombiMatrix
entered into a capital lease arrangement to lease the fixed assets from the
bank. The capital lease agreement provides CombiMatrix with the option to
purchase the equipment for a nominal amount at the end of the lease term, which
expires in September 2004.

Future minimum lease payments under scheduled capital leases that have
initial or remaining non-cancelable terms in excess of one year are as follows:

YEAR
----

2002...................................................... $ 1,141,000
2003...................................................... 1,141,000
2004...................................................... 855,000
------------
Total minimum payments.................................... 3,137,000
Less: amount representing interest....................... (358,000)
------------
Obligations under capital lease........................... 2,779,000
Less: current portion.................................... (934,000)
------------
$ 1,845,000
============

OPERATING LEASES

We lease certain office furniture and equipment and laboratory and
office space under various operating lease agreements expiring over the next 7
years. Minimum annual rental commitments on operating leases of continuing
operations having initial or remaining non-cancelable lease terms in excess of
one year are as follows:

YEAR
----
2002...................................................... $ 1,642,000
2003...................................................... 1,894,000
2004...................................................... 1,650,000
2005...................................................... 1,721,000
2006...................................................... 1,735,000
Thereafter................................................ 3,312,000
------------
Total minimum lease payments.............................. $11,954,000
============

Rent expenses of continuing operations at year ended December 31, 2001,
2000 and 1999 approximated $1,979,289, $1,032,000 and $431,000, respectively.

F-22

LITIGATION

On November 28, 2000, Nanogen, Inc. ("Nanogen") filed suit against
CombiMatrix and one of its principal stockholders, who is also a member of
CombiMatrix's board of directors. Nanogen alleges breach of contract, trade
secret misappropriation and that United States Patent No. 6,093,302 and other
proprietary information belonging to CombiMatrix are instead the property of
Nanogen. The litigation is in early stages, and CombiMatrix cannot predict its
outcome. While CombiMatrix believes it has strong defenses to Nanogen's claims,
if Nanogen were to prevail in its suit against CombiMatrix and obtain the
injunction and monetary relief that is being sought, CombiMatrix could incur
significant financial liabilities that would materially affect our consolidated
financial condition and results of operations.

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

13. SEGMENT INFORMATION

Acacia has two reportable segments as follows:

ACACIA MEDIA TECHNOLOGIES GROUP - Acacia Media Technologies Group owns
intellectual property related to the telecommunications field, including a
television blanking system, also known as the "V-chip," which it licenses to
television manufacturers. In addition, our media technologies group owns a
worldwide portfolio of pioneering patents relating to audio and video
transmission and receiving systems, commonly known as audio-on-demand and
video-on-demand, used for distributing content via various methods including
computer networks, cable television systems and direct broadcasting satellite
systems.

ACACIA LIFE SCIENCES GROUP - CombiMatrix is developing a proprietary
biochip array processor system that integrates semiconductor technology with new
developments in biotechnology and chemistry. Our majority-owned subsidiary,
Advanced Material Sciences, holds the exclusive license for CombiMatrix's
biological array processor technology in certain fields of material sciences.

We evaluate segment performances based on revenue earned and cost
versus earnings potential of future completed products or services. Material
intercompany transactions and transfers have been eliminated in consolidation.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Corporate and other includes
corporate costs, certain assets and liabilities and other investment activities,
which are included in our consolidated financial statements but are not
allocated to the reportable segments.

F-23

The table below presents information about our reportable segments in
continuing operations for the years ended December 31, 2001, 2000 and 1999:

ACACIA ACACIA
MEDIA LIFE
TECHNOLOGIES SCIENCES CORPORATE
2001 GROUP GROUP AND OTHER TOTAL
------------- ------------- ------------- -------------

Revenue ................................................. $ 24,130,000 $ 456,000 $ 50,000 $ 24,636,000
Amortization of patents and goodwill .................... 49,000 -- 2,646,000 2,695,000
Other income ............................................ -- -- 77,000 77,000
Interest income ......................................... 137,000 2,120,000 1,505,000 3,762,000
Interest expense ........................................ -- 65,000 -- 65,000
Realized gains on investments ........................... -- -- 350,000 350,000
Unrealized gains on investments ......................... -- -- 237,000 237,000
Equity in losses of affiliate ........................... -- -- 195,000 195,000
Loss (income) from continuing operations before
operations before minority interests and taxes ..... (12,311,000) 44,416,000 6,927,000 39,032,000
Non-cash stock compensation charges ..................... -- 19,963,000 856,000 20,819,000
Segment assets .......................................... 10,339,000 40,161,000 56,168,000 106,668,000
Investments in affiliate, at cost ....................... -- -- 3,000,000 3,000,000
Purchase of property and equipment ...................... 7,000 3,756,000 12,000 3,775,000

ACACIA ACACIA
MEDIA LIFE
TECHNOLOGIES SCIENCES CORPORATE
2000 GROUP GROUP AND OTHER TOTAL
------------- ------------- ------------- -------------

Revenue $ -- $ 17,000 $ 40,000 $ 57,000
Amortization of patents and goodwill.................... 15,000 -- 2,236,000 2,251,000
Other income............................................ -- -- 28,000 28,000
Interest income......................................... -- 1,661,000 1,425,000 3,086,000
Equity in losses of affiliates.......................... -- -- 1,746,000 1,746,000
Loss from continuing operations before
minority interests and taxes....................... 335,000 19,045,000 19,018,000 38,398,000
Non-cash stock compensation charges..................... -- 10,205,000 499,000 10,704,000
Segment assets.......................................... 146,000 52,173,000 39,121,000 91,440,000
Investments in affiliates, at equity.................... -- -- 346,000 346,000
Investments in affiliate, at cost....................... -- -- 3,000,000 3,000,000
Purchase of property and equipment...................... 13,000 2,921,000 459,000 3,393,000

F-24

ACACIA ACACIA
MEDIA LIFE
TECHNOLOGIES SCIENCES CORPORATE
1999 GROUP GROUP AND OTHER TOTAL
------------- ------------- ------------- -------------

Revenue................................................. $ -- $ 144,000 $ 122,000 $ 266,000
Amortization of patents and goodwill.................... 14,000 -- 1,608,000 1,622,000
Interest income......................................... -- 40,000 293,000 333,000
Interest expense........................................ -- 253,000 1,000 254,000
Equity in losses of affiliates.......................... -- -- 1,121,000 1,121,000
Loss from continuing operations before
minority interests and taxes......................... 240,000 2,507,000 5,875,000 8,622,000
Non-cash stock compensation charges..................... -- 19,000 127,000 146,000
Segment assets.......................................... 150,000 1,908,000 43,396,000 45,454,000
Investments in affiliates, at equity.................... -- -- 4,636,000 4,636,000
Purchase of property and equipment...................... -- 85,000 156,000 241,000

Segment information has been restated to exclude Soundbreak.com for
the years ended December 31, 2001, 2000 and 1999. See Note 9 to consolidated
financial statements.

14. SUBSEQUENT EVENTS

In February 2002, CombiMatrix, a majority-owned subsidiary, was awarded
a Phase I National Institutes of Health grant for the development of its protein
biochip technology. The title of the grant is "Self-Assembling Protein
Microchips." This grant is in addition to a three-year Phase I and a Phase II
SBIR Grant from the U.S. Department of Defense for the development of
multiplexed chip based assays for chemical and biological warfare agent
detection.

In February 2002, in conjunction with the relocation of our corporate
headquarters, we entered into a non-cancelable lease agreement to lease
approximately 7,143 square feet of office space in Newport Beach, California
through February 2007. Minimum annual rental commitments under this operating
lease are $255,000 in 2002; $286,000 in 2003; $295,000 in 2004; $303,000 in
2005; $312,000 in 2006; and $39,000, thereafter.

In February 2002, we executed a sublease agreement, expiring in
November 2003, to sublet the Pasadena, California office space. In 2002 and
2003, rent expense will be offset by $142,399 and $154,418 respectively, related
to rental payments due pursuant to the terms of the sublease agreement.

On March 20, 2002, we announced that our board of directors approved a
plan to divide our common stock into two new classes - new "CombiMatrix" common
stock, that would reflect the performance of our CombiMatrix subsidiary, and new
"Acacia Technologies" common stock, that would reflect the performance of our
media technology businesses, including Soundview Technologies and Acacia Media
Technologies. The plan will be submitted to our stockholders for approval. If
the recapitalization proposal were approved, our stockholders would receive
shares of both of the new classes of stock in exchange for existing Acacia
shares. The new share classes would be separately listed on the NASDAQ National
Market System.

F-25

15. SUPPLEMENT CASH FLOW INFORMATION

FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------

Supplemental disclosures of cash flow information:

Cash paid for interest ........................................................... $ 42 $ 79 $ 78
Cash paid for income taxes ....................................................... 597 -- 7

Supplemental schedule of non-cash investing and financing activities:

Issuance of common stock for additional equity
in consolidated subsidiary and affiliates..................................... -- 11,634 288
Liabilities assumed in acquisition of minority ownership interest in subsidiary... 200 -- --
Increase in minority interests due to conversion of subsidiary notes payable ..... -- -- 1,400
Fixed assets purchased with accounts payable...................................... -- 917 --
Purchase of equipment under capital lease agreement............................... (3,000) -- --
Capital lease obligation incurred................................................. 3,000 -- --
Accrued payments for purchase of common stock from
former minority stockholders of subsidiary.................................... 217 -- --

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth unaudited consolidated statement of
operations data for the eight quarters in the period ended December 31, 2001.
This information has been derived from our unaudited condensed consolidated
financial statements that have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information when read in conjunction with the audited
consolidated financial statements and related notes thereto. Our quarterly
results have been in the past and may in the future be subject to significant
fluctuations. As a result, we believe that results of operations for interim
periods should not be relied upon as any indication of the results to be
expected in any future periods.

F-26

QUARTER ENDED
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2001 2001 2001 2001 2000 2000 2000 2000
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

Revenues:
License fee income ..... $ 2,440 $ 10,000 $ 10,740 $ 1,000 $ -- $ $ -- $ --
Grant revenue .......... 183 91 91 91 17 -- -- --
Other income ........... -- -- -- -- -- 22 18 --
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Total revenues ............ 2,623 10,091 10,831 1,091 17 22 18 --
Operating expenses ........ 18,424 20,028 18,527 10,855 3,250 4,150 11,881 17,939
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Operating loss ............ (15,801) (9,937) (7,696) (9,764) (3,233) (4,128) (11,863) (17,939)
Other income (expense) .... 1,144 1,031 796 1,195 99 21 457 (1,812)
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Loss from continuing
operations before
income taxes and
minority interests ...... (14,657) (8,906) (6,900) (8,569) (3,134) (4,107) (11,406) (19,751)
(Provision) benefit for
income taxes ............ (13) (228) (778) 239 (5) (2) 38 42
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Loss from continuing
operations before
minority interests ...... (14,670) (9,134) (7,678) (8,330) (3,139) (4,109) (11,368) (19,709)
Minority interests ........ 5,191 4,362 4,851 3,136 461 659 2,528 5,518
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Loss from continuing
operations .............. (9,479) (4,772) (2,827) (5,194) (2,678) (3,450) (8,840) (14,191)
Loss from discontinued
operations .............. -- -- -- -- (884) (2,787) (2,057) (3,826)
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Loss before cumulative
effect of change in
accounting principle .... (9,479) (4,772) (2,827) (5,194) (3,562) (6,237) (10,897) (18,017)
Cumulative effect of
change in accounting
principle due to
beneficial conversion
feature ................. -- -- -- -- (246) -- -- --
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Net loss .................. $ (9,479) $ (4,772) $ (2,827) $ (5,194) $ (3,808) $ (6,237) $ (10,897) $ (18,017)
============ ============ ============ ============= ============ ============ ============ ============

Loss per common share:
Basic
Loss from continuing
operations ............ $ (0.50) $ (0.25) $ (0.15) $ (0.27) $ (0.17) $ (0.21) $ (0.51) $ (0.80)
Loss from discontinued
operations ............ $ -- $ -- $ -- $ -- $ (0.06) $ (0.17) $ (0.12) $ (0.21)
Cumulative effect of
change in accounting
principle ............. $ -- $ -- $ -- $ -- $ (0.02) $ -- $ -- $ --
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Net loss .................. $ (0.50) $ (0.25) $ (0.15) $ (0.27) $ (0.25) $ (0.38) $ (0.63) $ (1.01)
============ ============ ============ ============= ============ ============ ============ ============
Diluted
Loss from continuing
operations ........... $ (0.50) $ (0.25) $ (0.15) $ (0.27) $ (0.17) $ (0.21) $ (0.51) $ (0.80)
Loss from discontinued
operations ........... $ -- $ -- $ -- $ -- $ (0.06) $ (0.17) $ (0.12) $ (0.21)
Cumulative effect of
change in accounting
principle ............ $ -- $ -- $ -- $ -- $ (0.02) $ -- $ -- $ --
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Net loss .................. $ (0.50) $ (0.25) $ (0.15) $ (0.27) $ (0.25) $ (0.38) $ (0.63) $ (1.01)
============ ============ ============ ============= ============ ============ ============ ============

Weighted average number
of common and potential
shares outstanding used
in computation of loss
per share:
Basic ................. 18,985,864 19,503,645 19,525,807 19,558,572 15,630,070 16,292,859 17,502,640 17,840,672
Diluted ............... 18,985,864 19,503,645 19,525,807 19,558,572 15,630,070 16,292,859 17,502,640 17,840,672

Market price per share:
High ................... $ 18.98 $ 16.14 $ 16.66 $ 13.42 $ 53.64 $ 39.09 $ 32.05 $ 33.81
Low .................... $ 5.23 $ 4.69 $ 5.83 $ 8.29 $ 26.82 $ 12.16 $ 19.89 $ 12.50

F-27

EXHIBIT INDEX

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)
3.1 Certificate of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.2 Form of Specimen Certificate of Acacia's Common Stock (4)
10.1 Lease Agreement dated April 30, 1998, between Acacia and EOP-Pasadena
Towers, L.L.C., a Delaware limited liability company doing business as
EOP-Pasadena, LLC (5)
10.2 Lease Agreement between Soundbreak.com Incorporated and 8730 Sunset
Towers and related Guaranty (6)
10.3 1993 Stock Option Plan (7)
10.4 Form of Stock Option Agreement for 1993 Stock Option Plan (7)
10.5 1996 Stock Option Plan (8)
10.6 Form of Option Agreement constituting the 1996 Executive Stock Bonus
Plan (9)
10.7 Agreement between Acacia Research and Paul Ryan (10)
10.8 First Amendment dated June 26, 2000, to Lease Agreement between Acacia
and Pasadena Towers, L.L.C.
10.9* Research & Development Agreement dated as of June 18, 2001, between
CombiMatrix Corporation and Roche Diagnostics GmbH (3)
10.10* License and Supply Agreement dated as of July 1, 2001, between
CombiMatrix Corporation and Roche Diagnostics GmbH (3)
10.11 Sublease dated November 30, 2001, between Acacia and Jenkens &
Gilchrist
10.12 Lease Agreement dated January 28, 2002, between Acacia and The Irvine
Company
18.1 Preferability letter from PricewaterhouseCoopers LLP, dated as of March
31, 2002, regarding change in accounting policy
21 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP

- -----------
* Confidential treatment for portions of these exhibits granted pursuant to an
Order Granting Confidential Treatment under the Securities Exchange Act of 1934,
issued on November 9, 2001, by the United States Securities and Exchange
Commission.

(1) Incorporated by reference from Acacia'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 Definitive Proxy
Statement on Schedule 14A filed on November 2, 1999 (SEC File No.
000-26068) and to the Definitive Proxy Statement on Schedule 14A filed
on April 10, 2000 (SEC File No. 000-26068).
(3) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on August 10, 2001 (SEC File No. 000-26068).
(4) Incorporated by reference from Amendment No. 2 on Form 8-A/A filed on
December 30, 1999 (SEC File No. 000-26068).
(5) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on August 14, 1998. (SEC File No. 000-26068).
(6) Incorporated by reference from Acacia's Quarterly Report on Form 10-Q
filed on November 15, 1999. (SEC File No. 000-26068).
(7) Incorporated by reference from Acacia's Registration Statement on Form
SB-2 (33-87368-L.A.), which became effective under the Securities Act
of 1933, as amended, on June 15, 1995.
(8) Incorporated by reference as Appendix A to the Definitive Proxy
Statement on Schedule 14A filed on April 10, 2000 (SEC File No.
000-26068).
(9) Incorporated by reference from Acacia's Definitive Proxy as Appendix A
Statement on Schedule 14A filed on April 26, 1996 (SEC File No.
000-26068).
(10) Incorporate by reference from Acacia's Annual Report on Form 10-K for
the year ended December 31, 1997 filed on March 30, 1998 (SEC File No.
000-26068).