**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007**

**Commission File Number0001383183**

**COMBIMATRIX CORPORATION**

(Exact Name of Registrant as Specified inIts Charter)

| **Delaware**                                                     |   | **47-0899439**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **6500  Harbour Heights Pkwy, Suite 303, Mukilteo, WA**          |   | **98275**                             |
| (Address of  Principal Executive Offices)                        |   | (Zip Code)                            |

 

Registrant’s telephone number, includingarea code: ** (425) 493-2000**

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to filing requirementsfor the past 90 days. 
|  | Yes x  No o |
|--|------------------|

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer   o | Accelerated  filer  o | Non-accelerated  filer  x |
|---------------------------------------|---------------------------------|-------------------------------------|

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).
|  | Yes o  No  x |
|--|------------------------|

 

As of July 27, 2007, 59,875,769 shares ofAcacia Research-CombiMatrix common stock were issued and outstanding, whichwill be redeemed for up to 5,987,577 shares of common stock of CombiMatrixCorporation on August 15, 2007.

 

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**COMBIMATRIX**CORPORATION

**Table of Contents**
| **Part I.Financial Information** | ** ** |
|----------------------------------|------------|
| ** **                       | ** ** |
| Item 1.                          |       | Financial Statements |   |
|                             |       |   |   |
|                             |       | CombiMatrix Corporation Consolidated Financial  Statements |   |
|                             |       |   |   |
|                             |       | Consolidated  Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 |   |
|                             |       |   |   |
|                             |       | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2007 and2006 (Unaudited) |   |
|                             |       |   |   |
|                             |       | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2007 and 2006(Unaudited) |   |
|                             |       |   |   |
|                             |       | Notes to Consolidated Financial Statements (Unaudited) |   |
|                             |       |   |   |
| Item 2.                          |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |
|                             |       |   |   |
| Item 3.                          |       | Quantitative and Qualitative Disclosures About Market  Risk |   |
|                             |       |   |   |
| Item 4T.                         |       | Controls and Procedures |   |
|                             |       |   |
| **Part  II.Other Information**   |
|                             |       |   |
| Item  1.                         |       | Legal  Proceedings |   |
|                             |       |   |   |
| Item 1A.                         |       | Risk Factors |   |
|                             |       |   |   |
| Item 2.                          |       | Unregistered Sales of Equity Securities and Use of  Proceeds |   |
|                             |       |   |   |
| Item 6.                          |       | Exhibits |   |
|                             |       |   |
| **Signatures**                   |       |   |
| ** **                       | ** ** | ** ** |
| **Exhibit Index**                |       |   |

 

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**COMBIMATRIX CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands)**

**(Unaudited)**
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                        | ** ** | ** **        |       |                  |       |
|                                              |       |              |       |                  |       |
| Current assets:                                   |       |              |       |                  |       |
| Cash and cash  equivalents                        |       | $                 | 2,383      |                  | $          | 7,829 |   |
| Available-for-sale  investments                   |       | 10,414            |       | 6,512                 |       |
| Accounts  receivable                              |       | 481               |       | 605                   |       |
| Inventory                                         |       | 564               |       | 480                   |       |
| Prepaid expenses  and other assets                |       | 149               |       | 125                   |       |
| Total current  assets                             |       | 13,991            |       | 15,551                |       |
|                                              |       |              |       |                  |       |
| Property and equipment,  net                      |       | 1,485             |       | 1,785                 |       |
| Patents and licenses,  net                        |       | 6,712             |       | 7,292                 |       |
| Goodwill                                          |       | 16,918            |       | 16,918                |       |
| Other assets                                      |       | 2,145             |       | 2,667                 |       |
| Total assets                                      |       | $                 | 41,251     |                  | $          | 44,213 |   |
|                                              |       |              |       |                  |       |
| **LIABILITIES  AND ALLOCATED NET WORTH**          | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                              |       |              |       |                  |       |
| Current liabilities:                              |       |              |       |                  |       |
| Accounts  payable, accrued expenses and other     |       | $                 | 1,935      |                  | $          | 2,770 |   |
| Current portion  of deferred revenues             |       | 326               |       | 365                   |       |
| Payable to  Acacia Technologies group             |       | 40                |       | 456                   |       |
| Total current  liabilities                        |       | 2,301             |       | 3,591                 |       |
|                                              |       |              |       |                  |       |
| Deferred revenues, net  of current portion        |       | 939               |       | 1,076                 |       |
| Other liabilities                                 |       | 9,379             |       | 6,732                 |       |
| Total  liabilities                                |       | 12,619            |       | 11,399                |       |
|                                              |       |              |       |                  |       |
| Commitments and  contingencies (Note 4)           |       |              |       |                  |       |
|                                              |       |              |       |                  |       |
| Allocated net worth:                              |       |              |       |                  |       |
| Net allocations  from Acacia Research Corporation |       | 178,884           |       | 177,404               |       |
| Accumulated net  losses                           |       | (150,252          | )          | (144,590              | )          |
| Total allocated  net worth                        |       | 28,632            |       | 32,814                |       |
| Total liabilities and  allocated net worth        |       | $                 | 41,251     |                  | $          | 44,213 |   |

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

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**COMBIMATRIXCORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, exceptshare and per share information)**

**(Unaudited)**
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Revenues:                                                               |       |                             |       |                           |       |   |   |   |   |
| Collaboration agreements                                                |       | $                                | 62         |                           | $          | — |   | $ | 125 |   | $ | — |   |
| Government contracts                                                    |       | 679                              |       | 574                            |       | 1,228 |   | 838 |   |
| Service contracts                                                       |       | 137                              |       | 60                             |       | 222 |   | 117 |   |
| Products                                                                |       | 458                              |       | 1,158                          |       | 898 |   | 2,082 |   |
| Total revenues                                                          |       | 1,336                            |       | 1,792                          |       | 2,473 |   | 3,037 |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                                    |       |                             |       |                           |       |   |   |   |   |
| Cost of government contract revenues                                    |       | 641                              |       | 542                            |       | 1,175 |   | 792 |   |
| Cost of product sales                                                   |       | 248                              |       | 340                            |       | 551 |   | 561 |   |
| Research and development expenses                                       |       | 1,102                            |       | 2,182                          |       | 2,950 |   | 4,561 |   |
| Marketing, general and administrative expenses                          |       | 2,304                            |       | 3,118                          |       | 4,789 |   | 7,030 |   |
| Patent amortization and royalties                                       |       | 344                              |       | 385                            |       | 662 |   | 709 |   |
| Equity in loss of investees                                             |       | 250                              |       | 294                            |       | 522 |   | 533 |   |
| Total operating expenses                                                |       | 4,889                            |       | 6,861                          |       | 10,649 |   | 14,186 |   |
| Operating loss                                                          |       | (3,553                           | )          | (5,069                         | )          | (8,176 | ) | (11,149 | ) |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                                                |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                         |       | 131                              |       | 137                            |       | 281 |   | 318 |   |
| Loss on sale of interest in subsidiary                                  |       | —                           |       | —                         |       | — |   | (84 | ) |
| Warrant gains (charges)                                                 |       | (145                             | )          | 1,490                          |       | 2,233 |   | (250 | ) |
| Total other income                                                      |       | (14                              | )          | 1,627                          |       | 2,514 |   | (16 | ) |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Loss from  operations before income taxes                               |       | (3,567                           | )          | (3,442                         | )          | (5,662 | ) | (11,165 | ) |
| Benefit for  income taxes                                               |       | —                           |       | —                         |       | — |   | 34 |   |
| Net loss                                                                |       | $                                | (3,567     | )                              | $          | (3,442 | ) | $ | (5,662 | ) | $ | (11,131 | ) |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Pro forma basic  and diluted net loss per share                         |       | $                                | (0.06      | )                              |       |   | $ | (0.09 | ) |   |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Pro forma basic and  diluted weighted average common shares outstanding |       | 59,875,769                       |       |                           |       | 59,875,769 |   |   |   |

 

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

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**COMBIMATRIX CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**
| ** **                                                                                   | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**                                | ** ** |
| ** **                                                                                   | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                                                         |       |                                             |       |   |   |
| Operating  activities:                                                                       |       |                                             |       |   |   |
| Net loss from  operations                                                                    |       | $                                                | (5,662     | ) | $ | (11,131 | ) |
| Adjustments to  reconcile net loss from operations to net cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                                |       | 947                                              |       | 1,016 |   |
| Non-cash stock compensation                                                                  |       | 736                                              |       | 1,168 |   |
| Deferred taxes                                                                               |       | —                                           |       | 84 |   |
| Warrant (charges) gains                                                                      |       | (2,233                                           | )          | 250 |   |
| Equity in loss of investee                                                                   |       | 522                                              |       | 533 |   |
| Loss on sale of interest in subsidiary                                                       |       | —                                           |       | 84 |   |
| Allowance for bad debt                                                                       |       | 225                                              |       | — |   |
| Equity issued to consultant                                                                  |       | 209                                              |       | — |   |
| Other                                                                                        |       | 27                                               |       | 6 |   |
| Changes in  assets and liabilities:                                                          |       |                                             |       |   |   |
| Accounts receivable                                                                          |       | (101                                             | )          | (228 | ) |
| Inventory, prepaid expenses and other assets                                                 |       | (98                                              | )          | (133 | ) |
| Accounts payable, accrued expenses and other                                                 |       | (1,286                                           | )          | 247 |   |
| Deferred revenues                                                                            |       | (176                                             | )          | 9 |   |
| Net cash used in operating activities                                                        |       | (6,890                                           | )          | (8,095 | ) |
|                                                                                         |       |                                             |       |   |   |
| Investing  activities:                                                                       |       |                                             |       |   |   |
| Purchase of property and equipment                                                           |       | (69                                              | )          | (450 | ) |
| Purchase of available-for-sale investments                                                   |       | (4,980                                           | )          | (1,021 | ) |
| Sale of available-for-sale investments                                                       |       | 1,089                                            |       | 6,520 |   |
| Purchase of additional interest in equity method  investee                                   |       | —                                           |       | (1,400 | ) |
| Sale of interest in subsidiary                                                               |       | —                                           |       | (369 | ) |
| Net cash provided by (used in) investing activities                                          |       | (3,960                                           | )          | 3,280 |   |
|                                                                                         |       |                                             |       |   |   |
| Financing  activities:                                                                       |       |                                             |       |   |   |
| Net cash flows transferred from Acacia Research  Corporation                                 |       | 5,404                                            |       | 79 |   |
|                                                                                         |       |                                             |       |   |   |
| Decrease in cash and cash equivalents                                                        |       | (5,446                                           | )          | (4,736 | ) |
|                                                                                         |       |                                             |       |   |   |
| Cash and cash equivalents, beginning                                                         |       | 7,829                                            |       | 5,718 |   |
|                                                                                         |       |                                             |       |   |   |
| Cash and cash  equivalents, ending                                                           |       | $                                                | 2,383      |   | $ | 982 |   |

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

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**COMBIMATRIX CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

****1.    OVERVIEWAND BACKGROUND****

CombiMatrixCorporation (the “Company” “we” “us” and “our”) was originally incorporated inOctober 1995 as a California corporation and later reincorporated as a Delawarecorporation in September 2000. On December 13, 2002 (the “Merger Date”), wemerged with and became a wholly owned subsidiary of Acacia Research Corporation(“Acacia”). Also on the Merger Date, Acacia entered into a recapitalization transactionwhereby Acacia created two classes of registered common stock called AcaciaResearch-CombiMatrix common stock (“AR-CombiMatrix stock”) and AcaciaResearch-Acacia Technologies common stock (“AR-Acacia Technologies stock”) anddivided its existing Acacia common stock into shares of the two new classes ofcommon stock. The AR-CombiMatrix stock was intended to reflect separately theperformance of CombiMatrix Corporation and its subsidiaries, referred to as “theCombiMatrix group”, whereas the AR-Acacia Technologies stock was intended toreflect separately the performance of Acacia’s technology business, referred toas “the Acacia Technologies group.” Immediately following the Merger Date, theCompany had 1,000 shares of common stock authorized and 100 shares issued andoutstanding, all of which were owned by Acacia.

In 2006, Acaciaannounced its intent to split-off the Company from Acacia as an independentpublic company. On December 26, 2006, we filed a registration statement withthe U.S. Securities and Exchange Commission (“SEC”) in order to register ourcommon stock under the Securities Act of 1934 to be redeemed for AR-CombiMatrixstock.  On June 8, 2007, the SEC declaredour registration statement effective.  OnAugust 15, 2007 (the “Redemption Date”), all currently issued and outstandingshares of AR-CombiMatrix stock will be redeemed and exchanged for shares ofCombiMatrix common stock at a redemption ratio of ten shares of AR-CombiMatrixcommon stock for one share of CombiMatrix common stock, which will be publiclytraded.  Concurrently with theRedemption, we will issue to holders of AR-CombiMatrix common stock shares ofCombiMatrix common stock and the 100 shares of CombiMatrix common stock ownedby Acacia will be cancelled so that the new number of registered CombiMatrixCorporation common shares will be approximately one-tenth the number of sharesof AR-CombiMatrix stock issued and outstanding as of the Redemption Date.  Concurrent with this process, we haveapplied, and our application has been approved, to list our registered sharesof common stock for trading on the Nasdaq Capital Market, to be effective uponthe split off.  We will be subject to theinitial listing standards of the Nasdaq Capital Market, including an initialtrading price of $4.00 per share.  Webelieve that we will be able to meet the initial listing standard of $4.00 pershare following the ten-to-one redemption ratio to be executed atRedemption.  

****Description of theCompany****

We are adiversified biotechnology business, through the development of proprietarytechnologies, products and services in the areas of drug development, geneticanalysis, molecular diagnostics, nanotechnology research, defense and homelandsecurity markets, as well as other potential markets where our products andservices could be utilized. The technologies we have developed include aplatform technology to rapidly produce customizable, in-situ synthesized,oligonucleotide arrays for use in identifying and determining the roles ofgenes, gene mutations and proteins. This technology has a wide range ofpotential applications in the areas of genomics, proteomics, biosensors, drugdiscovery, drug development, diagnostics, combinatorial chemistry, materialsciences and nanotechnology.  Othertechnologies include proprietary molecular synthesis and screening methods forthe discovery of potential new drugs. CombiMatrix Molecular Diagnostics, Inc. (“CMDX”), a wholly ownedsubsidiary of the Company located in Irvine California, has developedcapabilities of producing arrays that utilize bacterial artificial chromosomes,which also enable genetic analysis.   

****Basis ofPresentation****

The consolidated financial statements included hereininclude the assets, liabilities, operating results and cash flows of the Companyusing Acacia’s historical bases in the assets and liabilities and thehistorical results of operations of the Company. Historical allocated net worthrepresents the net allocations by Acacia to us for equity transactions ofAcacia that have been attributed to the Company as well as the accumulation ofour net losses.

The consolidatedfinancial statements include allocations of certain Acacia corporate expenses,including governance, legal, accounting, insurance services, management oftreasury and other Acacia corporate and infrastructure costs. The expenseallocations have been determined on bases that Acacia and the Companyconsidered to be a reasonable reflection of the utilization of servicesprovided or the benefit received by us.

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However,the financial information included herein may not reflect the consolidatedfinancial position, operating results, changes in stockholder’s equity and cashflows of the Company in the future or what they would have been had we been aseparate, stand-alone entity during the periods presented. Direct salaries,payroll taxes and fringe benefits incurred by Acacia are allocated to Acacia’sreporting groups based on the percentage of actual time incurred by specificemployees to total annual time available and direct costs including, postage,insurance, legal fees, accounting and tax and other expenses or costs areallocated to the groups based on specific identification of costs incurred onbehalf of each group. Other direct costs, including direct depreciation expense,computer costs, general office supplies and rent are allocated to the groupsbased on the ratio of direct salaries to total salaries. Indirect costs,including indirect salaries and benefits, investor relations, rent, generaloffice supplies and indirect depreciation are allocated to the groups based onthe ratio of direct salaries for each group to total direct salaries, which webelieve is reasonable. For the three and six months ended June 30, 2007 and2006, corporate expenses totaling $31,000, $87,000, $131,000 and $259,684,respectively, were allocated to us by Acacia.

The accompanyingconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, certain information andfootnotes required by generally accepted accounting principles in annualfinancial statements have been omitted or condensed in accordance withquarterly reporting requirements of the SEC. These interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto forthe year ended December 31, 2006, as reported by us in our Form S-1/ARegistration Statement dated June 8, 2007. The year-end consolidated balance sheet data was derived from auditedfinancial statements but does not include all disclosures required byaccounting principles generally accepted in the United States of America.  The consolidated financial statements includeall adjustments of a normal recurring nature which, in the opinion ofmanagement, are necessary for a fair statement of our financial position as ofJune 30, 2007, and results of operations and cash flows for the interim periodspresented.  The results of operations forthe three and six months ended June 30, 2007, are not necessarily indicative ofthe results to be expected for the entire year. 

****Liquidity andRisks****

We have a historyof incurring net losses and net operating cash flow deficits. We are alsodeploying new and unproven technologies and continue to develop commercialproducts. We have several ongoing long-term development projects that involveexperimental technology and may require several years and substantial expendituresto complete. Based on our cash and investment balances as of December 31, 2006,we believed that our cash and cash equivalent balances, anticipated cash flowsfrom operations and other external sources of available credit would besufficient to meet our cash requirements through December 31, 2007, whichraised substantial doubt about our ability to continue as a going concernbeyond this point.  On May 4, 2007,Acacia executed a registered direct offering of $5.0 million, the proceeds ofwhich were allocated to us (see Note 5). 

We will continueto require capital from external sources, and there can be no assurances thatadditional sources of financing, including the issuance of debt and/or equitysecurities will be available at times and at terms acceptable to us. Theissuance of equity securities will also cause dilution to our shareholders. Ifexternal financing sources of financing are not available or are inadequate tofund our operations, we will be required to reduce operating costs includingresearch projects and personnel, which could jeopardize the future strategicinitiatives and business plans of the Company. For example, reductions inresearch and development activities and/or personnel at our Mukilteo,Washington facility could result in the inability to invest the resourcesnecessary to continue to develop next-generation products and improve existingproduct lines in order to remain competitive in the marketplace, resulting inreduced revenues and cash flows from the sales of our CustomArray products andservices. Also, reduction in operating costs at our diagnostics subsidiary inIrvine, California, (CMDX), should they occur, could jeopardize its ability tolaunch, market and sell additional products and services necessary in order togrow and sustain its operations and eventually achieve profitability.

Our businessoperations are also subject to certain risks and uncertainties, including:

·       market acceptance of products andservices;

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

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

5

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·       the availability and cost of capital;

·       general economic conditions; and

·       governmental regulation that may restrictour business.

Historically, wehave been substantially dependent on arrangements with strategic partners andhave relied upon payments by our partners for a significant component of ourworking capital. We intend to enter into additional strategic partnerships todevelop and commercialize future products. However, there can be no assurancethat we will be able to implement our future plans. Failure to achieve ourplans would have a material adverse effect on our ability to achieve ourintended business objectives. Our success also depends on our ability toprotect our intellectual property, the loss thereof or our failure to securethe issuance of additional patents covering elements of our business processescould materially harm our business and financial condition. The patentscovering our core technology begin to expire in 2018.

Our products andservices are concentrated in a highly competitive market that is characterizedby rapid technological advances, frequent changes in customer requirements andevolving regulatory requirements and industry standards. Failure to anticipateor respond adequately to technological advances, changes in customerrequirements, changes in regulatory requirements or industry standards, or anysignificant delays in the development or introduction of planned products orservices, could have a material adverse effect on our business and operatingresults. The accompanying consolidated financial statements have been preparedassuming that the Company continues as a going concern.  The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the matters discussed herein. 

In addition toseeking additional capital from outside sources, our plans in regard to thesematters include reductions in personnel and in our fixed overhead costs made inlate 2006 and early 2007.  Also, we arefocusing our sales and product development efforts on our core diagnostic arrayplatform as well as our funded research and development projects for the U.S.Department of Defense (“DoD”). 

*Nasdaq Notification. *OnApril 23, 2007, Acacia received a Nasdaq Staff Deficiency Letter notifyingAcacia that the AR-CombiMatrix stock (trading symbol: CBMX) was not incompliance with the minimum trading price of the Nasdaq Global Market set forthin Marketplace Rule 4450(a)(5). To regain compliance, the closing trading priceof AR-CombiMatrix stock must be $1.00 or more for ten consecutive trading days.The AR-CombiMatrix stock must regain compliance by October 22, 2007, in orderto maintain the listing of stock.  Asdiscussed above, we intend to complete the split off of CombiMatrix from Acaciaby redeeming the AR-CombiMatrix stock for common stock of CombiMatrixCorporation prior to October 22, 2007. Upon redemption, the AR-CombiMatrixstock will no longer be issued nor outstanding. Holders of AR-CombiMatrix stockon the Redemption Date will hold shares of common stock of CombiMatrixCorporation, which will be traded on the Nasdaq Capital Market.  We believe that we will be able to meet theinitial listing standard of $4.00 per share following the 10:1 redemption ratiodescribed above. 

****2.    SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES****

*Use of Estimates. *Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

**Stock-basedCompensation**. For all periods presented, we did not haveany stock option plans authorized, nor were any stock options outstanding.However, since employees of CombiMatrix Corporation have been granted optionsto purchase AR-CombiMatrix common stock, the following disclosures relating toAR-CombiMatrix stock option plans and stock options outstanding have beenincluded herein. 

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In December 2006,the Acacia board of directors passed a clarifying amendment to the CombiMatrix2000 Stock Awards Plan and the 2002 CombiMatrix Stock Incentive Plan (the “plans”)to include the planned split off of CombiMatrix Corporation as a change incontrol under the terms of the plans. This is due to the fact that the holders of stock in Acacia ResearchCorporation will no longer own an interest in the assets of the CombiMatrixgroup, and the Board of Directors of Acacia Research Corporation will no longeradminister the plans.  As a result and asof the Redemption Date, all but 3,458 outstanding options under Acacia’sstock-based compensation plans relating to AR-CombiMatrix stock willimmediately vest as the split off of the Company from Acacia will be deemed achange in control for purposes of the various option plans to which the optionswere originally granted.  As of June 30,2007, we had $1,286,000 of unrecognized compensation expense related tononvested AR-CombiMatrix common stock option awards outstanding.  The unamortized deferred compensation as ofthe Redemption Date will be fully recognized on that date as an operatingexpense in our consolidated statement of operations.

EffectiveJanuary 1, 2006, we adopted the provisions of Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”),which sets forth the accounting requirements for “share-based” compensationpayments to employees and non-employee directors and requires that compensationcost relating to share-based payment transactions be recognized in thestatement of operations. The compensation cost for all stock-based awards ismeasured at the grant date, based on the fair value of the award, and isrecognized as an expense, on a straight-line basis, over the employee’srequisite service period (generally the vesting period of the equity award)which is generally two to four years. The fair value of each option award is estimated on the date of grantusing a Black-Scholes option valuation model. The fair value of restricted stock awards is determined by the productof the number of shares granted and the grant date market price of theunderlying common stock.  SFAS No. 123Rrequires stock-based compensation expense to be recorded only for those awardsexpected to vest using an estimated forfeiture rate.  We estimate pre-vesting option forfeitures atthe time of grant and reflect the impact of estimated pre-vesting optionforfeitures in compensation expense recognized. Stock-based compensationexpense for all periods presented attributable to our functional expensecategories were as follows (in thousands; unaudited):
| ** **                             | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development              |       | $                                                                 | 144        |                                                            | $          | 193 |   | $ | 402 |   | $ | 486 |   |
| Marketing,  general and administrative |       | 117                                                               |       | 280                                                             |       | 334 |   | 682 |   |
| Total non-cash stock compensation      |       | $                                                                 | 261        |                                                            | $          | 473 |   | $ | 736 |   | $ | 1,168 |   |

 

**Income Taxes**.  Effective January 1, 2007, we adopted FASBInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,”which clarifies the accounting for uncertainty in income taxes recognized inthe financial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.”  FIN 48 providesguidance on the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition.  Inaccordance with FIN 48, a tax position is a position in a previously filed taxreturn or a position expected to be taken in a future tax filing that isreflected in measuring current or deferred income tax assets andliabilities.  Tax positions shall berecognized only when it is more likely than not (likelihood of greater than50%), based on technical merits, that the position will be sustained uponexamination.  Tax positions that meet themore likely than not threshold should be measured using a probability-weightedapproach as the largest amount of tax benefit that is greater than 50% likelyof being realized upon settlement.  Theadoption of FIN 48 did not have a material impact on our consolidated financialposition, results of operations or cash flows.

**Income (Loss) PerShare**.  Asdiscussed in Note 1, we have been a wholly owned subsidiary of Acacia since theMerger Date and have had 100 shares of common stock outstanding for all periodspresented. Therefore, historical earnings (losses) per share have not beenpresented in the consolidated financial statements, as this information is notconsidered meaningful.

Pro forma net lossper share has been presented to reflect the capital structure of the Companysubsequent to the Redemption Date. Pro forma basic and diluted net loss pershare has been computed by dividing the net loss by the estimated number of AR-CombiMatrixshares assumed to be outstanding and converted into common stock of the Companyas of the Redemption Date.

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Theestimated number of AR-CombiMatrix shares assumed to be outstanding isequivalent to the actual number outstanding as of June 30, 2007.  Options and warrants to purchaseAR-CombiMatrix stock are assumed to be anti-dilutive as of the Redemption Dateand therefore were not included in the determination of the pro forma dilutednet loss per share for the periods presented.

****2.    RECENTACCOUNTING PRONOUNCEMENTS****

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities Including an Amendment of FASBStatement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue, with unrealized gains and losses related to these financial instrumentsreported in earnings at each subsequent reporting date.  We are currentlyassessing the impact, if any, of adopting SFAS No. 159 on our consolidatedfinancial position, results of operations and cash flows.

# **3.   COMMONSTOCK PURCHASE WARRANT LIABILITY**

AR-CombiMatrixstock purchase warrants outstanding for the periods presented are as follows:
| ** **                  | ** ** | **Number of Warrants Outstanding** | ** ** | ** **                  | ** ** | ** **          | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|-----------------------------|------------|---------------------|------------|
| **Date of Issue** | ** ** | **June 30,  2007**                           | ** ** | **December 31,  2006** | ** ** | **Exercise  Price** | ** ** | **Expiration** | ** ** |
|                        |       |                                              |       |                        |       |                |       |   |   |
| May 2007                    |       | 10,171,397                                        |       | —                      |       | $0.55               |       | May  2017 |   |
| December 2006               |       | 11,787,363                                        |       | 12,210,391                  |       | $0.87 - $1.09       |       | December  2011 |   |
| September 2005              |       | 1,596,478                                         |       | 1,596,478                   |       | $2.40               |       | September  2010 |   |
| May 2003                    |       | 283,410                                           |       | 283,410                     |       | $2.75               |       | May  2008 |   |
| Total                       |       | 23,838,648                                        |       | 14,090,279                  |       |                |       |   |   |

 

Acacia’s classes of common stock are subject to certain redemptionprovisions in the event that Acacia Research Corporation sells, transfers, assignsor otherwise disposes of, in one transaction or a series of relatedtransactions, all or substantially all of the properties and assets attributedto either the Acacia Technologies group or the CombiMatrix group, in which casethe shareholders of the related class of Acacia stock (i.e., AR-AcaciaTechnologies or AR-CombiMatrix common stock) would have the right to receive adividend or a redemption of the stock equal to the net proceeds generated fromthe sale of assets.  Pursuant to guidanceset forth in FSP No. 150-5, we record a liability representing the fair valueof common stock warrants issued to investors and adjust the warrant liabilityto its market value at each balance sheet date. As of June 30, 2007 and December 31, 2006, the warrant liability was$9,379,000 and $6,732,000, respectively. For the three and six months ended June 30, 2007, adjusting our warrantliabilities (incurred from previous financings) to their fair values resultedin a net charge (credit) to our consolidated statements of operations of$145,000 and $(2,233,000), respectively.

The fair value of AR-CombiMatrix stock purchase warrants at June 30,2007 and December 31, 2006 was determined using the Black-Scholesoption-pricing model, using weighted-average assumptions as follows:
|                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                        |       |                    |       |                        |       |
| Risk free  interest rate    |       | 4.9                     | %          | 4.71                        | %          |
| Volatility                  |       | 80                      | %          | 80                          | %          |
| Remaining contractual  term |       | 3.2 – 9.9 years    |       | 4.7 years                   |       |

 

Duringthe first quarter of 2007, proceeds of $368,000 were received from the issuanceof 423,000 shares of AR-CombiMatrix stock related to the exercise of certainwarrants issued in connection with previous equity financings.  There were no warrant exercises during thethree-month period ended June 30, 2007.  

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**4.    COMMITMENTS AND CONTINGENCIES**

**FacilitiesLease**

On February 1,2007, we executed an amendment to our operating lease for office and laboratoryspace in Mukilteo, Washington, which reduced our future annual lease commitmentby approximately 80%.  The amended leaseincludes an extension of two years beyond our original termination date ofOctober 31, 2008 (Termination Date). However, we have the right to terminate the lease without penalty as ofthe Termination Date if we provide notice to the landlord on or before July 31,2008.

**Collaborationand Research Agreements**

On March 13, 2007,we executed a one-year, $869,000 contract with the DoD, focusing on thedevelopment of a field-deployable influenza genotyping system based on ourelectrochemical detection technology to be used for military and homelandsecurity applications.  Under the termsof this contract, we will perform research and development activities, asdescribed under the contract, and will be reimbursed on a periodic basis foractual costs incurred to perform our obligations, plus a fixed fee, of up to$869,000.  As of June 30, 2007, we hadincurred $311,000 in actual contract costs for the genotyping contract, whichwas 49% complete.  

On August 9, 2006,we executed a two-year, $1.9 million contract with the DoD, focusing on theintegration of our electrochemical detection technology currently underdevelopment with our microfluidics “lab-on-a-chip” technology to be used formilitary and homeland security applications. Under the terms of this contract,we will perform research and development activities, as described under thecontract, and will be reimbursed on a periodic basis for actual costs incurredto perform our obligations, plus a fixed fee, of up to $1.9 million. As of June30, 2007 and December 31, 2006, we had incurred $585,000 and $190,000 in actualcosts for the microfluidics contract, which was approximately 41% and 13%complete, respectively.

On February 8,2006, we executed a one-year, $2.1 million contract with the DoD to further thedevelopment of our array technology for the electrochemical detection ofbiological and chemical threat agents. Under the terms of this contract, wewill perform research and development activities as described under thecontract and will be reimbursed on a periodic basis for actual costs incurredto perform our obligations, plus a fixed fee, of up to $2.1 million. Wesubstantially completed this contract during the first quarter of 2007 and donot expect to incur significant costs or revenues from this contract beyond thefirst quarter of 2007. 

**HumanResources**

We provide certainseverance benefits such that if an executive who is a vice president or higheris terminated for other than cause, death or disability, the executive willreceive payments equal to three months’ base salary plus medical and dentalbenefits. If termination occurs as a result of a change in control transaction,these benefits will be extended by three months.

**Litigation**

On September 30,2002, we entered into a settlement agreement with Nanogen, Inc. (“Nanogen”) tosettle all pending litigation between the parties. Pursuant to the terms of thesettlement agreement, we agreed to make quarterly payments to Nanogen equal to12.5% of total sales of products developed by us and our affiliates based onthe patents that had been in dispute in the litigation, up to an annual maximumof $1,500,000. The minimum quarterly payments under the settlement agreementare $25,000 per quarter until the patents expire in 2018. Royalty expensesrecognized under the agreement for the six months ended June 30, 2007 and 2006were $70,000 and $161,000, respectively, and are included in patentamortization and royalties in the accompanying consolidated statements ofoperations.

**Other**

Weare subject to other claims and legal actions that arise in the ordinary courseof business. We believe that the ultimate liability with respect to theseclaims and legal actions, if any, will not have a material effect on ourfinancial position, results of operations or cash flows. Based on adistribution agreement recently executed between us and Acacia, it is expectedthat such claims, legal actions, etc. attributable to CombiMatrix Corporationprior to the Redemption Date will remain with the Company subsequent to theRedemption Date.

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**5.   EQUITY FINANCING**

On May 4, 2007,Acacia executed a registered direct offering with certain directors ofCombiMatrix Corporation and other unaffiliated investors raising gross proceedsof $5,000,000 through the issuance of 6,780,931 units.  Each unit consists of one share ofAR-CombiMatrix common stock and a 1.5 ten-year common stock warrant, for atotal of 6,780,931 shares and warrants to purchase 10,171,397 shares ofAR-CombiMatrix common stock, respectively, issued to investors.  Each warrant entitles the holder to purchasea share of AR-CombiMatrix stock at a price of $0.55 per share.  The proceeds from this financing wereattributed to us.  As a result of thisfinancing, we believe that we will have sufficient funds to operate withoutrequiring additional external funding through May of 2008.

**6.  SUBSEQUENT EVENT**

On July 26, 2007, we executed a one-year, $2.2 millioncontract with the DoD to further development of our microarraytechnologies.  The primary objectives ofthe contract are to continue development of a multipathogen and chemicaldetection system.  Under the terms ofthis contract, we will perform research and development activities, asdescribed under the contract, and will be reimbursed on a periodic basis foractual costs incurred to perform these obligations, plus a fixed fee, of up to$2.2 million.

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

**Cautionary Statement**

Youshould read the following discussion and analysis in conjunction with theconsolidated financial statements and related notes thereto contained in PartI, Item 1 of this report. The information contained in this Quarterly Report onForm 10-Q is not a complete description of our businesses or the risksassociated with an investment in our common stock. We urge you to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission, or SEC,including our Form S-1/A, which was declared effective on June 8, 2007.

Thisreport contains forward-looking statements within the meaning of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995.Reference is made in particular to the description of our plans and objectivesfor future operations, assumptions underlying such plans and objectives, andother forward-looking statements included in this report. Such statements maybe 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 arebased on management’s current expectations and are subject to a number offactors and uncertainties, which could cause actual results to differmaterially from those described in the forward-looking statements. Suchstatements address future events and conditions concerning product development,capital expenditures, earnings, litigation, regulatory matters, markets forproducts and services, liquidity and capital resources and accounting matters.Actual results in each case could differ materially from those anticipated insuch statements by reason of factors such as future economic conditions,changes in consumer demand, legislative, regulatory and competitivedevelopments in markets in which we and our subsidiaries operate, results oflitigation and other circumstances affecting anticipated revenues and costs. Weexpressly disclaim any obligation or undertaking to release publicly anyupdates or revisions to any forward-looking statements contained herein toreflect any change in our expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based. Additionalfactors that could cause such results to differ materially from those describedin the forward-looking statements are set forth in connection with theforward-looking statements and in our “Risk Factors” incorporated by referencein Part II, Item 1A of this report.  

## **General**

We are adiversified biotechnology business, through the development of proprietarytechnologies, products and services in the areas of drug development, geneticanalysis, molecular diagnostics, nanotechnology research, defense and homelandsecurity markets, as well as other potential markets where our products andservices could be utilized. The technologies we have developed include aplatform technology to rapidly produce customizable, in-situ synthesized,oligonucleotide arrays for use in identifying and determining the roles ofgenes, gene mutations and proteins. This technology has a wide range ofpotential applications in the areas of genomics, proteomics, biosensors, drugdiscovery, drug development, diagnostics, combinatorial chemistry, materialsciences and nanotechnology.  We havealso developed the capabilities of producing arrays that utilize bacterialartificial chromosomes on our arrays, also enabling genetic analysis.  Other technologies include proprietarymolecular synthesis and screening methods for the discovery of potential newdrugs.  We currently recognize revenuesfrom selling these products and services and providing research and developmentservices for organizations including the U.S. Department of Defense and otherstrategic partners.

CombiMatrixMolecular Diagnostics, Inc., (“**CMDX**”) our wholly ownedsubsidiary located in Irvine, California, is exploring opportunities for ourarrays in the field of molecular diagnostics. This subsidiary has historically focusedon product development and has recently begun generating modest revenues. 

## **RelationshipWith Acacia Research Corporation**

We were originallyincorporated in October 1995 as a California corporation and laterreincorporated as a Delaware corporation in September 2000. On December 13,2002, we merged with and became a wholly owned subsidiary of Acacia ResearchCorporation, or “**Acacia**.”On the same date, Acacia entered into a recapitalization transaction wherebyAcacia created two classes of registered common stock called AcaciaResearch-CombiMatrix common stock (“**AR-CombiMatrix stock**”) andAcacia Research-Acacia Technologies common stock (“**AR-Acacia Technologies stock**”)and divided its existing Acacia common stock into shares of the two new classesof common stock.

11

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TheAR-CombiMatrix stock was intended to reflect separately the performance of theCombiMatrix Corporation and its subsidiaries, referred to as the******“CombiMatrix group****,**” whereas theAR-Acacia Technologies stock was intended to reflect separately the performanceof Acacia’s technology business, referred to as “**Acacia Technologies group**.”  

In December 2006,we filed a registration statement on Form S-1 with the Securities and ExchangeCommission (or “SEC”) to register our common stock in order to affect a split-offof our Company with Acacia by redeeming shares of existing AR-CombiMatrixcommon stock with our common stock.  TheForm S-1 was declared effective by the SEC on June 8, 2007 and on August 15,2007 (the “Redemption Date”), each one (1) share of our common stock will beissued in exchange for every ten (10) shares AR-CombiMatrix common issued andoutstanding on August 15, 2007.  Upon theRedemption Date, we will no longer be a subsidiary or an affiliate of Acacia,and the holders of AR-CombiMatrix stock will be the stockholders of ourcompany.  We have applied for listing ofour common stock on the Nasdaq Capital Market, and we received notice fromNASDAQ on May 16, 2007 that our application had been accepted.  We will be subject to the initial listing standardsof the Nasdaq Capital Market, including an initial trading price of $4.00 pershare.  We believe that we will be ableto meet this standard following the ten-to-one redemption ratio to be executedon the Redemption Date.

## **Liquidity**

At December 31, 2006,we had cash and cash equivalents of $14.3 million.  As a result, management anticipated that ourcash and cash equivalent balances, anticipated cash flows from operations andother sources of funding from the capital markets would be sufficient to meetour cash requirements through December 31, 2007.  On May 4, 2007, Acacia executed a registereddirect offering of $5.0 million of AR-CombiMatrix stock, the proceeds of whichhave been allocated to us by Acacia.  Asof June 30, 2007, we had cash and cash equivalent balances of $12.8 million andwe expect that our cash balances, anticipated cash flows from operations andother sources of funding will allow us to meet our cash requirements throughMay 2008.  In order for our company tocontinue as a going concern beyond this point and ultimately to achieveprofitability, we will be required to obtain capital from external sources,increase revenues and reduce operating costs. However, there can be no assurance that such capital will be availableat times and at terms acceptable to us, or that higher levels of product andservice revenues will be achieved. The issuance of additional equity securitieswill also cause dilution to our shareholders. If external financing sources of financing are not available or areinadequate to fund our operations, we will be required to reduce operatingcosts including research projects and personnel, which could jeopardize thefuture strategic initiatives and business plans of our company.  See Note 1 the consolidated financialstatements included in Part I, Item I of this report.  

## **BasisOf Presentation Of Financial Statements**

The consolidatedfinancial statements included in this Form 10-Q are consistent with ourhistorical financial statements included in our Form S-1/A as well as Acacia’sreports filed with the Securities and Exchange Commission under the SecuritiesAct of 1933 and the Securities Act of 1934 and include the assets, liabilities,operating results and cash flows of CombiMatrix Corporation using Acacia’shistorical bases in the assets and liabilities and the historical results ofoperations of CombiMatrix Corporation. The consolidated financial statementsalso include allocations of certain Acacia corporate expenses, includinggovernance, legal, accounting, insurance services, treasury and other Acaciacorporate and infrastructure costs.  Theexpense allocations have been determined on bases that we determined withAcacia to be a reasonable reflection of the utilization of services provided orthe benefit received by us and are discussed in more detail below.

## **OverviewOf Recent Business Activities**

For the six monthsended June 30, 2007, our operating activities included the recognition of $2.5million in revenues, including $1.2 million in government contract revenues and$898,000 in CustomArraysTM product and service revenues.  Research and development expenses, excludinggovernment contract costs and non-cash stock based compensation, decreased dueprimarily to the impact of our cost reduction efforts, which began during thefourth quarter of 2006 and continued during the first and second quarter of2007.  Such efforts also contributed to theoverall decrease in general and administrative expenses, which were impactedprimarily by the execution of an amendment to our facilities lease in Mukilteothat reduced the amount of space as well as the lease rate paid by us.  

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Historically, wehave relied primarily upon investing and financing activities to fund operatingactivities. At December 31, 2006, our cash and cash equivalent balances, includinganticipated cash flows from future operations and other existing sources ofcredit were not considered to be sufficient to meet our operating capitalrequirements beyond December 31, 2007. However, due to the May 4, 2007 registered direct offering discussedabove, we believe the proceeds from this offering will allow us to meet ourcash requirements through May 2008 (see Note 1 and 5 of our consolidatedfinancial statements included herein). We will continue to seek additional sources of capital including theissuance of debt and/or equity securities.

**CriticalAccounting Estimates**

Our unaudited interim financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America. Preparation of these statements requiresmanagement to make judgments and estimates. Some accounting policies have asignificant impact on amounts reported in these financial statements. A summaryof significant accounting policies and a description of accounting policiesthat are considered critical may be found in our Form S-1/A, which was declaredeffective on June 8, 2007, in the Notes to the Consolidated FinancialStatements and the Critical Accounting Estimates section.  In addition, refer to Note 2 to the consolidatedinterim financial statements included in Part I, Item 1 of this report.

**Comparison of the Resultsof Operations for the Three and Six Months Ended June 30, 2007 and 2006**

**Revenues and Cost ofRevenues (In thousands)**
| ** **                            | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                  |       |                                                              |       |                                                            |       |   |   |   |   |
| Collaboration  agreements             |       | $                                                                 | 62         |                                                            | $          | — |   | $ | 125 |   | $ | — |   |
| Government  contracts                 |       | 679                                                               |       | 574                                                             |       | 1,228 |   | 838 |   |
| Cost of  government contract revenues |       | (641                                                              | )          | (542                                                            | )          | (1,175 | ) | (792 | ) |
| Service contracts                     |       | 137                                                               |       | 60                                                              |       | 222 |   | 117 |   |
| Products                              |       | 458                                                               |       | 1,158                                                           |       | 898 |   | 2,082 |   |
| Cost of product sales                 |       | (248                                                              | )          | (340                                                            | )          | (551 | ) | (561 | ) |
|                                       |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

**GovernmentContracts and Cost of Government Contract Revenues.**Underthe terms of our contracts with the Department of Defense (or “DoD”), we arereimbursed on a periodic basis for actual costs incurred to perform ourobligations, plus a fixed fee. Revenues are recognized under thepercentage-of-completion method of accounting, using the cost-to-cost approachto measure completeness at the end of the each reporting period. Cost ofgovernment contract revenues reflect research and development expenses incurredin connection with our commitments under our current contracts with theDoD.  

The increase forboth the three- and six-month periods ended June 30, 2007 vs. 2006 was due toongoing performance of our electrochemical detection, microfluidics andinfluenza genotyping contracts during 2007 compared to only the electrochemicaldetection contract in the comparable 2006 period.  This increase in contract activity alsoresulted in the increase of government contract costs during the three- andsix-month periods ended June 30, 2007 vs. 2006. 

**Product Revenuesand Cost of Product Sales**.  Product revenues and costs of product salesrelate to domestic and international sales of our array products.  Product revenues include the sale ofCustomArray 12K DNA expression arrays, ElectraSenseTM microarray readers and related hardware duringthe three- and six month periods ended June 30, 2007, compared to DNA synthesizerinstruments and 12K DNA expression arrays during the comparable 2006periods.  The decrease in productrevenues was due primarily to the lack of DNA synthesizer instrument sales in2007 compared to 2006.  As we shift ourbusiness focus from selling array-based research and development products toproviding array-based diagnostic services, we have reduced internal salesstaff, marketing and production efforts regarding sales of CustomArray productsand instead have executed product distribution and manufacturing agreementswith various third party distributors for the sales of our suite of CustomArrayproducts into the research and development markets.  As a result, CustomArray product revenueswill likely be volatile in future periods depending on the sales efforts of ourdistributors.

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**Operating Expenses (In Thousands)**
| ** **                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Research and  development expenses |       | $                                                                 | 1,102      |                                                            | $          | 2,182 |   | $ | 2,950 |   | $ | 4,561 |   |
|                                    |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

*Researchand Development Expenses*. The decrease in internal research and development expenses was dueprimarily to the impact of cost reduction efforts in the area of full-timestaff and ongoing research and development projects for the CustomArray platform,while continuing to develop microarray-based diagnostics services at CMDX.  The decrease also reflects $144,000 and$402,000 in non-cash stock compensation charges recognized for the three- andsix-month periods ended June 30, 2007 vs. $193,000 and $486,000 in thecomparable 2006 periods, respectively.  

Futureresearch and development expenses will continue to be incurred in connectionwith our ongoing internal research and development efforts in the areas ofgenomics, diagnostics, drug discovery and development.   We expect our research and developmentexpenses to continue to fluctuate and such expenses could increase in futureperiods as additional internal research and development agreements areundertaken and/or as new research and development collaborations are executedwith strategic partners.
| ** **                                      | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                                                              |       |                                                            |       |   |   |   |   |
| Marketing,  general and administrative expenses |       | $                                                                 | 2,304      |                                                            | $          | 3,118 |   | $ | 4,789 |   | $ | 7,030 |   |
| Patent  amortization and royalties              |       | 344                                                               |       | 385                                                             |       | 662 |   | 709 |   |
| Equity in loss of of  investees                 |       | 250                                                               |       | 294                                                             |       | 522 |   | 533 |   |
|                                                 |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

**Marketing, Generaland Administrative Expenses.**  The decrease for both the three- andsix-month periods ended June 30, 2007 vs. 2006 was due primarily to a decreasein facilities-related costs from executing the February 1, 2007 lease amendmentthat significantly reduced our office space and lease rates, reduction in salesand marketing staff and expenses at our Mukilteo operations and overall reductionsin general and administrative staff, which included one-time bonuses andseverance-related costs in the first quarter of 2006, which were not incurredin 2007.  The decrease also reflects$117,000 and $334,000 in non-cash stock compensation charges recognized for thethree- and six-month periods ended June 30, 2007 vs. $280,000 and $682,000 inthe comparable 2006 periods, respectively. The decrease in 2007 was due tocertain employee terminations in marketing, general and administrative staff aswell as existing option awards becoming fully vested during the past year, thusresulting in overall lower stock-based compensation expense in 2007 as comparedto 2006.

A summary of the main drivers of the changes inmarketing, general and administrative expenses for the periods presented is asfollows (in thousands): 
| ** **                                               | ** ** | **For the Three Months Ended  June 30, 2007 vs. 2006** | ** ** | **For the Six Months Ended  June 30, 2007 vs. 2006** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
|                                                     |       |                                                                                           |       |                                                                                         |       |
| Decrease in  marketing and sales expenses                |       | $                                                                                              | (112       | )                                                                                            | $          | (429 | ) |
| Decrease in  general and administrative expenses at CMDX |       | (120                                                                                           | )          | (609                                                                                         | )          |
| Decrease in  salaries and benefits                       |       | (131                                                                                           | )          | (297                                                                                         | )          |
| Decrease in  facilities lease and related costs          |       | (437                                                                                           | )          | (746                                                                                         | )          |
| Increase in  allowance for bad debt expense              |       | 225                                                                                            |       | 225                                                                                          |       |
| Decrease in non-cash  stock compensation                 |       | (163                                                                                           | )          | (348                                                                                         | )          |
| Decrease in other  general and administrative expenses   |       | (76                                                                                            | )          | (37                                                                                          | )          |
|                                                          |            |                                                                                                |            |                                                                                              |            |  |  |

 

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### ****OtherNon-Operating Items****

**Warrant Gains(Charges).**In accordance with SFAS No. 150, “Accountingfor Certain Instruments with Characteristics of Both Liabilities and Equity,”and related interpretations, certain AR-CombiMatrix stock purchase warrantsoutstanding at June 30, 2007 and 2006 have been classified as long-termliabilities due to certain redemption provisions associated with the underlyingAR-CombiMatrix stock. Changes in the fair value of the stock purchase warrantliabilities are reflected in the consolidated statement of operations.  

**Inflation**

Inflation has not had a significant impacton our company.

**Liquidity and CapitalResources**

At June 30, 2007,cash and cash equivalents and short-term investments totaled $12.8 millioncompared to $14.3 million at December 31, 2006. Working capital at June 30, 2007 was $11.7 million, compared $12.0million at December 31, 2006.  The changein working capital was due primarily to the impact of net cash flow activitiesas discussed below.  The net change in cashand cash equivalents for the periods presented was comprised of the following(in thousands): 
|                                                        | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| Net cash  provided by (used in) continuing operations: |       |                                                            |       |   |   |
| Operating activities                                   |       | $                                                               | (6,890     | ) | $ | (8,095 | ) |
| Investing activities                                   |       | (3,960                                                          | )          | 3,280 |   |
| Financing activities                                   |       | 5,404                                                           |       | 79 |   |
| Decrease in cash and  cash equivalents                 |       | $                                                               | (5,446     | ) | $ | (4,736 | ) |

 

Cash receipts fromcustomers for the six months ended June 30, 2007, were $2.2 million, comprisedof $1.1 million from the sale of array products and services and $1.1 millionin payments received from the DoD.  Cashreceipts in the comparable 2006 period totaled $2.8 million, comprised of $1.6million from the sale of array products and services and $1.2 million inpayments received from the DoD.  Cashoutflows from operations for the six months ended June 30, 2007 and 2006 were$9.1 million and 10.8 million, respectively.

The change in netcash flows provided by (used in) investing activities was due primarily to netpurchases and sales of available-for-sale investments in connection withongoing short-term cash management activities during the periodspresented.  For the six months ended June30, 2007 and 2006, we incurred $69,000 and $450,000, respectively, of capitalexpenditures.  Our net cash outflows frominvesting activities for the six months ended June 30, 2006, includedadditional contractual investments in Leuchemix totaling $1.4 million.  There were no such investments for thesix-month period ending June 30, 2007.

The change in netcash flows provided by financing activities was due primarily to the completionof a registered direct offering of AR-CombiMatrix common stock in May of 2007for $5.0 million as well as the exercise of AR-CombiMatrix common stockwarrants totaling $368,000 during February of 2007.  See Notes 3 and 5 to our consolidatedfinancial statements included in Part I, Item I of this report.

Based on ourending cash balances as of June 30, 2007, we believe that our cash and cashequivalent balances, anticipated cash flows from operations and externalsources of funding from the capital markets will be sufficient to meet our cashrequirements through May 2008.  In orderfor us to continue to meet our cash requirements beyond this point, we will berequired to obtain capital from external sources.  However, there can be no assurances that wewill be able to secure additional sources of financing at times and at termsacceptable to management.  The issuanceof additional equity securities will also cause dilution to ourshareholders.  If external financingsources of financing are not available or are inadequate to fund ouroperations, management will be required to reduce our operating costs includingresearch projects and personnel, which could jeopardize our future strategicinitiatives and business plans.  Forexample, reductions in research and development activities and/or personnel atour Mukilteo, Washington facility could result in the inability to invest theresources necessary to continue to develop next-generation products and improveexisting product lines in order to remain competitive in the marketplace,resulting in reduced revenues and cash flows from the sales of our CustomArrayproducts and services.

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Also,reductions in operating costs at our diagnostics subsidiary in Irvine,California, (CMDX), should they occur, could jeopardize our ability to launch,market and sell additional products and services necessary to grow and sustainour operations and eventually achieve profitability.  As discussed in Note 1 to the consolidatedfinancial statements included herein, the anticipation that we would berequired to obtain additional financing in the foreseeable future raisedsubstantial doubt about our ability to continue as a going concern beyondDecember 31, 2007.  However, we believethat we have resources to remain a going concern through May of 2008 basedprimarily on the May 4, 2007 financing discussed above and in Note 5 of ourconsolidated financial statements.  Inaddition to seeking capital from outside sources, our plans in regard to thesematters included reductions in personnel and in fixed overhead costs (e.g., ourlease commitment reduction discussed elsewhere herein) made in late 2006 andearly 2007.  Also, we are focusing oursales and product development efforts on our core diagnostic array platform aswell as our funded research and development projects for the DoD.

We may alsoencounter unforeseen difficulties that may deplete our capital resources morerapidly than anticipated.  Any efforts toseek additional funding could be made through equity, debt or other externalfinancing, and there can be no assurance that additional funding will beavailable on favorable terms, if at all.

Our long-termcapital requirements will be substantial and the adequacy of available fundswill depend upon many factors, including:

·                  thecosts of commercialization activities, including sales and marketing,manufacturing and capital equipment;

·                  ourcontinued progress in research and development programs;

·                  thecosts involved in filing, prosecuting, enforcing and defending any patentsclaims, should they arise;

·                  ourability to license technology;

·                  competingtechnological developments;

·                  thecreation and formation of strategic partnerships;

·                  thecosts associated with leasing and improving our Irvine, California facility;and other factors that may not be within our control.

Pursuant to thetax allocation agreement executed between us and Acacia, we have agreed not totake certain actions for two years following the split off, unless we obtain anIRS ruling or an opinion of counsel to the effect that these actions will notaffect the tax-free nature of the split off. These actions include certain issuances of our stock, a liquidation ormerger of our company, and dispositions of assets outside the ordinary courseof our business.  If any of thesetransactions were to occur, the split off could be deemed to be a taxabledistribution to Acacia.  In particular,we have agreed to indemnify Acacia for any tax resulting from an acquisition byone or more persons of a 50% or greater interest in our company.

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#### **Off-Balance Sheet Arrangements**

We have notentered into off-balance sheet financing arrangements, other than operatingleases. We have no significant commitments for capital expenditures in 2007 orbeyond. Other than as set forth below, we have no committed lines of credit orother committed funding or long-term debt. The following table lists ourmaterial known future cash commitments as of June 30, 2007: 

 
| ** **                         | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Obligations**        | ** ** | **2007**                                                           | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **2012 and** Thereafter | ** ** |
|                               |       |                                                               |       |   |   |   |   |   |   |
| Operating leases (1)               |       | $                                                                  | 266        |   | $ | 1,055 |   | $ | 333 |   | $ | — |   |
| Minimum license  payments          |       | 250                                                                |       | — |   | — |   | — |   |
| Minimum royalty  payments (2)      |       | 50                                                                 |       | 200 |   | 200 |   | 675 |   |
| Total contractual cash obligations |       | $                                                                  | 566        |   | $ | 1,255 |   | $ | 533 |   | $ | 675 |   |

 

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|        | (1) | Refer to Note 4 to our consolidated financial  statements for a description of the February 1, 2007 modification to our  Mukilteo, Washington facilities lease.               |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Refer to Note 4 to our consolidated financial  statements for a description of the September 30, 2002 settlement agreement  between CombiMatrix Corporation and Nanogen, Inc. |

 

**Recent Accounting Pronouncements**

Refer to Note 2 to our consolidatedfinancial statements included in Part I, Item 1 of this report.

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Ourexposure to market risk is limited primarily to interest income sensitivity,which is affected by changes in the general level of United States interestrates, particularly because a significant portion of our investments are inshort-term debt securities issued by the U.S. government, U.S. corporations,institutional money market funds and other money market instruments. Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income received without significantlyincreasing risk. To minimize risk, we maintain a portfolio of cash, cashequivalents and short-term investments in a variety of investment-gradesecurities and with a variety of issuers, including corporate notes, commercialpaper and money market instruments. Due to the nature of our short-terminvestments, we believe that we are not subject to any material market riskexposure. We do not have any derivative financial instruments.

**Item 4T. CONTROLS AND PROCEDURES**

*Evaluation of DisclosureControls and Procedures*

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended. Based on this evaluation, our principal executive officer andour principal financial officer concluded that, as of the end of the periodcovered by this quarterly report, our disclosure controls and procedures wereeffective to ensure that the information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934 isaccumulated and communicated to management, including our chief executiveofficer and chief financial officer, to allow timely decisions regardingrequired disclosure, and that such information is recorded, processed,summarized and reported within the time periods prescribed by the SEC.

*Changes in InternalControls*

Therewere no changes in our internal control over financial reporting that occurredduring our last fiscal quarter (the quarter ended June 30, 2007) that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. 

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**PART II—OTHER INFORMATION**

**Item 1.  LEGAL PROCEEDINGS**

On or about July12, 2007, Mr. Jeffrey Oster filed a complaint against CombiMatrix Corporation,Acacia Research Corporation, Amit Kumar and Brooke Anderson before the U.S.District Court, Western District of Washington in Seattle, Case No. C07-1086.  The complaint alleges that Mr. Oster’semployment with CombiMatrix Corporation was terminated in violation of 18U.S.C. §1514A and was a breach of his employment contract.  Mr. Oster is requesting an unspecified amountof damages for back pay, front pay in lieu of reinstatement under hisemployment agreement, damages for adverse tax consequences, and attorney’s feesand costs.

The complaint isbased upon allegations of the existence of an employment contract, terminationof employment without cause, and termination of employment specifically inretaliation for allegedly raising concerns to outside legal counsel andCombiMatrix Corporation’s Board of Directors regarding additional disclosure hefelt was necessary in Acacia Research Corporation’s periodic reports andregistration statements. Before Mr. Oster filed his complaint in district courtand shortly after his termination for cause, we investigated his allegationswith respect to 18 U.S.C. §1514A violations and found that they had no merit.

We intend tovigorously defend against this action. Management does not believe that theallegations made by Mr. Oster in the complaint have any merit, nor doesmanagement believe that the lawsuit will have any material affect upon thefinancial statements or other information included in this report. Furthermore,we are committed to compliance with all local, state, and federal laws andregulations, and as a part of that commitment, we have a Code ofConduct/Anti-Fraud Hotline that is posted and readily available to allemployees and was posted during Mr. Oster’s term of employment. At no timeduring Mr. Oster’s employment did he use the Hotline, and in fact, Mr. Ostermade his allegations of securities violations after his termination for cause.Finally, Mr. Oster filed his complaint in district court following aninvestigation of a similar complaint filed by him within the Department ofLabor; this matter was previously reported. The Department of Labor did not take action against CombiMatrixCorporation and has dismissed the complaint as of July 17, 2007, after Mr.Oster terminated proceedings without waiting for a final ruling by theSecretary of Labor.

**Item 1A.  RISK FACTORS**

**A FORMER VICE PRESIDENT OF COMBIMATRIX CORPORATIONHAS FILED A COMPLAINT FOR AN UNSPECIFIED AMOUNT OF DAMAGES AGAINST THE COMPANYIN FEDERAL DISTRICT COURT ALLEGING THAT HE WAS WRONGFULLY TERMINATED.**

A former Vice Presidentof CombiMatrix Corporation, following his termination of employment in Octoberof 2006, has filed a complaint in the U.S. District Court, Western District ofWashington in Seattle, alleging that his employment was terminated out of fearthat the former employee would report the Company’s failure to disclose certaininformation to the public. See the section titled “Legal Proceedings” in PartII, Item 1 of this report. CombiMatrix terminated Mr. Oster’s employment forcause. This complaint was filed following an investigation by the Department ofLabor, wherein the Department of Labor did not take action against CombiMatrix.  Management does not believe that theallegations have any merit, nor does management believe that resolution of thismatter will have any material affect upon the financial statements or otherinformation included in this report. However, Mr. Oster has requested an unspecified amount of damages, andif he were to succeed, we cannot predict at this time, the amount of damagesthat might be incurred by CombiMatrix Corporation.

The risk factors on pages7 through 20 of our prospectus included in our registration statement on FormS-1/A filed with the Commission and declared effective on June 8, 2007, arehereby incorporated by reference and included as Exhibit 99.1 of this report.

Aninvestment in our stock involves a number of risks.  Before making a decision to purchase oursecurities, you should carefully consider all of the risks incorporated intothis quarterly report.  If any of therisks included in this quarterly report actually occur, our business, financialcondition and results of operations could be materially adverselyaffected.  If this were to occur, thetrading price of our securities could decline significantly and you may loseall or part of your investment.  

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**Item 2. UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

In May 2007, AcaciaResearch Corporation sold 340,000 shares of unregistered AcaciaResearch-CombiMatrix common stock pursuant to a consulting services agreementbetween CombiMatrix Corporation and a third-party consultant.  Pursuant to the terms of the agreement,306,000 shares of Acacia Research-CombiMatrix common stock were issued to theconsultant on May 29, 2007, and an additional 30,000 shares and 4,000 shares ofAcacia Research-CombiMatrix common stock are to be issued to the consultant inAugust 2007 and November 2007, respectively. This transaction is more fully described in Part II, Item 2 of theQuarterly Report of Acacia Research Corporation for the period ended June 30,2007, incorporated by reference herein and included as Exhibit 99.2 of thisreport.  The shares of AcaciaResearch-CombiMatrix common stock issued to the consultant as of August 15,2007 will be redeemed for up to 30,600 shares of our common stock on August 15,2007, with the remaining 3,400 shares to be issued in CombiMatrix Corp. commonstock in accordance with the terms of the consulting agreement.

**Item 6. EXHIBITS**
| 4.1    | Form of Warrant Certificate(1)                                                                     |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
| 10.1   | Form of Securities Purchase Agreement(1)                                                           |
|   |                                                                                               |
| 31.1   | Rule 13a-14(a) Certification of Principal Executive  Officer                                       |
|   |                                                                                               |
| 31.2   | Rule 13a-14(a) Certification of Principal Financial  Officer                                       |
|   |                                                                                               |
| 32.1   | Section 1350 Certification of Principal Executive  Officer                                         |
|   |                                                                                               |
| 32.2   | Section 1350 Certification of Principal Financial  Officer                                         |
|   |                                                                                               |
| 99.1   | Risk Factors from Registration Statement Declared  Effective June 8, 2007                          |
|   |                                                                                               |
| 99.2   | Part II, Item 2 of Quarterly Report of Acacia  Research Corporation for Period Ended June 30, 2007 |

 

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| (1) | Incorporated by reference to the Form 8-K of Acacia  Research Corporation filed with the Commission on May 9, 2007, as File No.  07829749 |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                                  | COMBIMATRIX  CORPORATION |                           |
|----------------------------------|--------------------------|--------------------------------|
|                             |                     |                           |
|                             |                     |                           |
|                             | By:                      | /s/  Amit Kumar           |   |
|                             |                     | Amit Kumar                     |   |
|                             |                     | Chief Executive  Officer       |   |
|                             |                     | (Authorized  Signatory)        |   |
|                             |                     |                           |   |
|                             |                     |                           |   |
|                             | By:                      | /s/  Scott R. Burell      |   |
|                             |                     | Scott R. Burell                |   |
|                             |                     | Chief Financial  Officer       |   |
|                             |                     | (Principal Financial  Officer) |   |
|                             |                     |                           |   |
|                             |                     |                           |   |
| Date:   August 6, 2007 |                     |                           |   |

 

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**EXHIBIT INDEX**
| EXHIBIT   NUMBER | ** ** | **EXHIBIT**                                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------------------|
|             |       |                                                                                               |
| 4.1              |       | Form of Warrant Certificate(1)                                                                     |
|             |       |                                                                                               |
| 10.1             |       | Form of Securities Purchase Agreement(1)                                                           |
|             |       |                                                                                               |
| 31.1             |       | Rule 13a-14(a) Certification of Principal Executive  Officer                                       |
|             |       |                                                                                               |
| 31.2             |       | Rule 13a-14(a) Certification of Principal Financial  Officer                                       |
|             |       |                                                                                               |
| 32.1             |       | Section 1350 Certification of Principal Executive  Officer                                         |
|             |       |                                                                                               |
| 32.2             |       | Section 1350 Certification of Principal Financial  Officer                                         |
|             |       |                                                                                               |
| 99.1             |       | Risk Factors from Registration Statement Declared  Effective June 8, 2007                          |
|             |       |                                                                                               |
| 99.2             |       | Part II, Item 2 of Quarterly Report of Acacia  Research Corporation for Period Ended June 30, 2007 |

 

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| (1) | Incorporated by reference to the Form 8-K of Acacia  Research Corporation filed with the Commission on May 9, 2007, as File No.  07829749 |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------|

 

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