ACACIA RESEARCH CORP - 10-K Annual Report

Back to GetFilings.com

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

-----------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.

COMMISSION FILE NUMBER 0-26068

-----------

ACACIA RESEARCH CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 95-4405754
(State or Other jurisdiction of (I.R.S. Employer
Incorporation Organization) Identification No.)
55 SOUTH LAKE AVENUE, PASADENA, CALIFORNIA 91101
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (626) 396-8300

Securities registered pursuant to Section 12(b) of the Act: NONE

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

COMMON STOCK, $0.001 PAR VALUE

-----------

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

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average closing bid and asked
prices of such stock, as of March 27, 2001 was approximately $124,180,400. (All
officers and directors of the registrant are considered affiliates.)

At March 27, 2001 the registrant had 17,702,124 shares of common stock
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the close of its fiscal year are incorporated by reference into Part III.

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

FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2000
ACACIA RESEARCH CORPORATION

ITEM PAGE
- ---- ----
PART I

1. Business................................................................. 1
2. Property................................................................. 14
3. Legal Proceedings........................................................ 14
4. Submission of Matters to a Vote of Security Holders...................... 14

PART II

5. Market for Registrant's Common Equity and Related Stockholder Matters.... 15
6. Selected Financial Data.................................................. 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 18
7A. Quantitative and Qualitative Disclosures About Market Risk............... 25
8. Financial Statements and Supplementary Information....................... 25
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 25

PART III

10. Directors and Executive Officers of the Registrant....................... 26
11. Executive Compensation................................................... 26
12. Security Ownership of Certain Beneficial Owners and Management........... 26
13. Certain Relationships and Related Transactions .......................... 26

PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 27

ITEM 1. BUSINESS

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

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

As used in this Form 10-K, "company," "we," "us," "our," "Acacia" and
"Acacia Research" refer to Acacia Research Corporation and its subsidiary
companies.

GENERAL

Acacia Research Corporation develops and operates majority-owned
subsidiaries in the life science and technology industries. Our most important
subsidiary is CombiMatrix Corporation or CombiMatrix, which is developing a
proprietary biochip technology with applications in the genomic, proteomic and
combinational chemistry markets. Our primary focus is to enhance the value of
this technology by forming and acquiring companies that can utilize this new
technology in the medical, life science and research industries.

Our other majority-owned subsidiaries include: Advanced Material
Sciences, Incorporated, which holds the exclusive license for CombiMatrix's
biological array processor technology in certain fields of material sciences,
and Soundview Technologies, Incorporated, which owns a patent for television
V-chip technology. All of our subsidiaries are start-up or development-stage
entities with limited or no operating histories, and only one of our
subsidiaries has generated any significant revenues to date. Our subsidiaries
have primarily relied upon selling equity securities, including sales to and
loans from us, to generate the funds they need to finance implementation of
their operating plans.

We have also acquired minority-ownership positions in Advanced Data
Exchange, Corporation, which provides an electronic exchange to facilitate
trading relationships and document exchange, and Greenwich Information
Technologies, LLC, a licensing company for an international portfolio of
video-on-demand and audio-on-demand patents.

1

Our most significant majority and minority-owned subsidiaries are as
follows:

OWNERSHIP % AS OF 3/27/01
COMPANY NAME DESCRIPTION OF BUSINESS ON AN AS-CONVERTED BASIS
------------- ----------------------- ------------------------

Advanced Material Sciences, Incorporated....... A newly-formed company that holds the exclusive license
for CombiMatrix's biological array processor technology
in certain fields of material science. 66.7%

CombiMatrix Corporation........................ A life science technology company with a proprietary
system for rapid, cost competitive creation of DNA and
other compounds on a programmable semiconductor chip.
This proprietary technology has significant applications
relating to genomic and proteomic research. 57.9% (1)

Soundview Technologies, Incorporated........... A technology company that owns intellectual property
related to the telecommunications field, including a
television blanking system, also known as "V-chip,"
which it is licensing to television manufacturers. 66.7%

We also hold minority interests in the following businesses:

Advanced Data Exchange Corporation............. A technology company that enables mid-sized companies to
streamline the exchange of business documents over the
Internet with supply chain partners and emerging
digital marketplaces. 4.6%

Greenwich Information Technologies, LLC........ A marketing and licensing agent for several patents relating
to video-on-demand and audio-on-demand technology. 33.3%

- ----------
(1) We have entered into a shareholder agreement with an officer of
CombiMatrix which provides for (a) the collective voting of shares
(representing 70.1% of the voting power of CombiMatrix) for the
election of certain directors to CombiMatrix's board of directors and
(b) certain restrictions on the sale or transfer of the officer's
shares of common stock in CombiMatrix.

SUBSIDIARIES

ADVANCED MATERIAL SCIENCES, INCORPORATED

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

AMS is 66.7% owned by us and 33.3% owned by CombiMatrix. We have an 86%
economic interest in AMS by virtue of our 66.7% direct ownership interest in AMS
and our 57.9% interest in CombiMatrix. AMS intends to develop and exploit
CombiMatrix's biological processor technology in certain fields of material
science. The principal terms of our agreement with CombiMatrix are as follows:

2

o AMS holds an exclusive worldwide license to CombiMatrix's
biological array processor technology for use in certain
fields of material science;

o AMS will pay CombiMatrix a royalty on all net sales generated
from the sale of products in the area of material science;

o AMS will grant a royalty-free, worldwide license to
CombiMatrix to use improvements made by AMS to its technology
in all fields outside of material sciences; and

o the initial term of the license agreement with CombiMatrix is
20 years.

COMBIMATRIX CORPORATION

CombiMatrix Corporation was incorporated in October 1995 under the
laws of the State of California and reincorporated in the state of Delaware in
September, 2000. CombiMatrix is a development-stage company engaged in the
development of a proprietary universal biochip with applications in the
genomics, proteomics and combinatorial chemistry markets. CombiMatrix has
developed a unique method to synthesize DNA, peptides and chemical libraries on
a semiconductor chip with electrochemically-generated reagents. CombiMatrix's
first generation prototype chip contains 1,024 individually addressable
electrodes, equal in diameter to that of a human hair, where chemicals are
synthesized. The CombiMatrix biochip system consists of a fluid delivery station
where chemicals are stored and dispensed, semiconductor chips where chemicals
are synthesized and a computer controller. Production of arrays using this
technology is fully automated and controlled entirely by software, allowing
utilization of the Internet as a link between proprietary array design software
and automated array chip production capabilities.

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

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

CombiMatrix has 36 patent applications pending in the United States and
Europe. In July 2000, CombiMatrix was granted U.S. Patent No. 6,093,302, which
expires in July 2017, for this biochip microarray processor system. This system
enables quick and economical turnaround of custom-designed microarrays for use
in biological research. A microarray consists of a chemical "virtual flask"
located on the surface of a semiconductor chip containing thousands of
microarrays, which are separated from each other using special solutions instead
of physical barriers. Each microarray has electronic circuitry that may be
directed by a computer to construct a specified compound. The patent covers
CombiMatrix's core technology, which is a method for producing microarrays by
synthesizing biological materials on a three-dimensional, active surface.

In April 1996, we entered into a shareholder agreement with
CombiMatrix's Sr. Vice President, Chief Technology Officer, who holds an
ownership interest of 12.2% of CombiMatrix, pertaining to certain matters
relating to CombiMatrix. This agreement provides for the collective voting of
shares (representing 70.1% of the corporation's voting power) for the election
of certain directors to CombiMatrix's board of directors, as well as certain
restrictions on the sale or transfer of the individual's shares of common stock
in CombiMatrix.

3

In November 2000, CombiMatrix filed a registration statement with the
Securities and Exchange Commission, or SEC, relating to the proposed initial
public offering of its common stock. All of the shares in the proposed offering
are to be sold by CombiMatrix.

SOUNDVIEW TECHNOLOGIES, INCORPORATED

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

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

As of July 1, 1999, the 1996 Telecommunications Act required all
television manufacturers to include V-chip technology in 50% of all new
television sets with screens 13 inches or larger sold in the United States.
After January 1, 2000, the 1996 Telecommunications Act required all television
manufacturers to include V-chip technology in all new television sets with
screens 13 inches or larger sold in the United States. Approximately 25 million
new televisions are sold each year in the United States. Soundview's V-chip
technology is a cost-effective method for V-chip implementation that can work
with components currently in use in televisions. Soundview's V-chip technology
uses a television's receiver circuitry to decode content rating information sent
as part of the broadcast signal. By utilizing the broadcast signal that carries
closed-caption data, Soundview's technology is relatively inexpensive to
implement. The industry and its trade association adopted this method as the
technical standard for new television sets sold in the United States that are
required to have V-chip technology.

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

Soundview has begun to license its patent to television manufacturers.
Soundview also intends to license companies who will include the V-chip
technology in cable boxes, VCRs and converter boxes.

In December 2000, Soundview announced that it would receive payment and
grant a non-exclusive license of its patent to Philips Electronics.
Subsequently, in the first quarter of 2001, Soundview announced that it would
receive payments and grant non-exclusive licenses for the patent to Samsung
Electronics, Hitachi America, Ltd., (a division of Hitachi), L.G. Electronics,
Inc. and to Funai Electric Co., Ltd. Several of these license agreements
constitute settlements of patent infringement litigation brought by Soundview.
In addition, Soundview has settled its lawsuit with Pioneer Electronics (USA)
Incorporated, an affiliate of Pioneer Corporation.

ADVANCED DATA EXCHANGE CORPORATION

In January 2000, we acquired a 7.6% interest in Advanced Data Exchange,
formerly known as The EC Company for $3 million in connection with a $17.3
million private placement offering of "non-voting" Series B preferred stock.
Advanced Data Exchange is engaged in business-to-business Internet exchange
transactions that allow mid-sized companies to exchange purchase orders,
purchase order acknowledgements, advance ship notices, invoices and other
business documents over the Internet with supply chain partners and emerging
digital marketplaces. Subsequent to our investment, Advanced Data Exchange
completed a $30 million private financing, reducing our ownership to 4.6%.
Advanced Data Exchange has entered into strategic alliances with American
Express, Ariba, Oracle, Vertical Net and Web Methods.

4

GREENWICH INFORMATION TECHNOLOGIES, LLC

Greenwich Information Technologies was formed as a limited liability
corporation under the laws of the State of Delaware in 1996 and is the exclusive
marketing and licensing agent for several patents relating to video-on-demand
and audio-on-demand, or information-on-demand. Video-on-demand allows television
viewers to order movies or other programs from a remote file server and to view
them at home with full VCR functionality, including pause, fast-forward and
reverse. Audio-on-demand offers similar functionality with music or other audio
files. Information-on-demand is one of the primary applications of interactive
entertainment.

Greenwich Information Technologies is the licensing agent with respect
to four issued U.S. patents. Foreign rights include patents issued in Japan,
Mexico and the Republic of China and a patent from the European Patent Office
covering Austria, Belgium, Denmark, France, Germany, Greece, Italy, Luxembourg,
Monaco, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom and a
pending application in South Korea. Those patents that have already been issued
were issued in the past seven years, the earliest of which, will not expire
until 2011. Greenwich Information Technologies has begun to pursue business
opportunities with possible providers of information-on-demand systems and
others involved in supplying related information-on-demand services.

OTHER

In connection with our increased focus on the medical, life sciences
and research industries and other factors, certain of our subsidiaries have
ceased operations in 2000. Acacia Launchpad LLC, our 100%-owned subsidiary,
ceased operations in October of 2000. MerkWerks Corporation, a subsidiary in
which we own a 99.9% interest, sold its sole substantial asset, a utility
software product, in December of 2000. Signature-mail.com llc, a subsidiary in
which we own a 9.8% interest, also ceased operations in December of 2000.

DISCONTINUED OPERATIONS

On February 13, 2001, the board of directors of Soundbreak.com, Inc.,
or Soundbreak.com, one of our majority-owned subsidiaries, resolved to cease
operations as of February 15, 2001 and liquidate the remaining assets and
liabilities of the company. Accordingly, we reported the results of operations
and the estimated loss on disposal of Soundbreak.com as results of discontinued
operations in the consolidated statements of operations and comprehensive loss.

COMPETITION

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

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

Other companies may develop competing technologies that offer better or
less expensive alternatives to the V-chip technology offered by Soundview. Many
potential competitors, including television manufacturers, have significantly
greater resources.

REGULATION

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

RESEARCH AND DEVELOPMENT

We are involved in research and development activities through our
consolidated subsidiaries. Our research and development-related expenses were
$11,864,000, $1,806,000 and $1,880,000 in 2000, 1999 and 1998, respectively.

5

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

THREE-YEAR SUMMARY OF SEGMENT INFORMATION

Financial information of the Company's reportable business segments for
each of the three years in the period December 31, 2000 is included in Note 11
of Notes to Consolidated Financial Statements.

EMPLOYEES

As of March 27, 2001 we and our consolidated subsidiaries had 122
full-time employees. We believe that our future success will depend in large
part on our ability to retain our key personnel and on our ability to attract,
retain, train and motivate additional highly skilled and dedicated employees.
Neither we nor any of our subsidiaries are a party to any collective bargaining
agreement. We have never experienced a work stoppage and believe that our
relations with our employees are excellent. From time to time, we may retain
independent third parties to provide services on an "as needed" basis.

RISK FACTORS

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

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

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

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

o competition;

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

o the availability and cost of capital;

o general economic conditions; and

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

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

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

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

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

6

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

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

We have sustained substantial losses since our inception resulting in
an accumulated deficit of $56,052,000 on a consolidated basis, including
operating losses of $37,163,000 and $7,580,000 in 2000 and 1999, respectively.
We may never become profitable or if we do, we may never be able to sustain
profitability. We expect to incur significant research and development, and
marketing, general and administrative expenses. As a result, we expect to incur
significant losses for the foreseeable future.

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

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

o changes in financial estimates by securities analysts;

o announcements by us, our customers, our subsidiaries or our
competitors;

o changes in market valuations of similar companies;

o changes in accounting rules and regulations; and

o future sales of our common stock by our existing stockholders.

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

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

o the operating results of our current and future subsidiary
companies;

o the nature and timing of our investments in new subsidiary
companies;

o our decisions to acquire or divest interests in our current
and future subsidiaries, which may create changes in losses or
income and amortization of goodwill;

o changes in our methods of accounting for our current and
future subsidiaries, which may cause us to recognize gains or
losses under applicable accounting rules;

o the timing of the sales of equity interests in our current and
future subsidiary companies;

o our ability to effectively manage our growth and the growth of
our subsidiary companies; and

o the cost of future acquisitions could increase from intense
competition from other potential acquirers of
technology-related companies or ideas.

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

7

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

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

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

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

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

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

o the level of product acceptance;

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

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

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

o the impact of price competition; and

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

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

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

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

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

COMBIMATRIX. CombiMatrix is developing a proprietary biochip microarray
processor system that integrates semiconductor technology with new developments
in biotechnology and chemistry. Although CombiMatrix has been awarded three
federal contracts, CombiMatrix is a developmental-stage company without any
significant current revenues. Its current activities relate almost exclusively
to research and development. Because the technologies critical to the success of
this industry are in their infancy, we cannot assure that CombiMatrix will be
able to successfully implement its technologies. If its technologies are
successful, CombiMatrix intends to pursue collaborations with pharmaceutical
companies for activities such as screening potential drug compounds. We cannot
assure you that CombiMatrix, even if successful in developing its technologies,
would be able to successfully implement collaborative efforts with
pharmaceutical companies.

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

8

ADVANCED DATA EXCHANGE CORPORATION. Advanced Data Exchange provides a
hosted Internet transaction exchange that manages data standards and facilitates
trading relationships within and across communities to enable the exchange of
business-to-business e-commerce transactions. Advanced Data Exchange is in the
development-stage and has created a number of relationships with vendors and
buyers for business-to-business e-commerce transactions. Advanced Data
Exchange's business model is new and unproven, and we cannot assure you that
vendors and buyers will continue to use its services for Internet transactions.

GREENWICH INFORMATION TECHNOLOGIES LLC. Greenwich Information
Technologies is the exclusive marketing and licensing agent for a number of
domestic and international patents pertaining to information-on-demand systems.
To date, Greenwich Information Technologies has yet to license any patents. It
is uncertain if and to what extent Greenwich Information Technologies will be
able to profitably market and license its rights to the information-on-demand
technology.

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

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

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

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

As of December 31, 2000, we had cash and short-term investments of
$76.6 million on our consolidated financial statements. However, portions of
these funds were held by certain of our consolidated subsidiaries and thus are
restricted to their individual use.

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

We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt or other
external financings; however, we cannot assure that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed for our subsidiary companies and ourselves, we may not be able to
execute our business plans, and our business may suffer.

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

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

o our ability to affect these sales;

o the timing of these sales; and

o the amount of proceeds from these sales.

9

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

FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD PLACE STRAINS ON OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.

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

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

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

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

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

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

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

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

ADVANCED DATA EXCHANGE. Competition for Internet products and services
is intense. Advanced Data Exchange competes for a share of a customer's
purchasing budget for services, materials and supplies with other online
providers and traditional distribution channels. Several companies offer
competitive solutions that compete with Advanced Data Exchange. We expect that
additional companies will offer competing solutions on a stand-alone or combined
basis in the future. Furthermore, competitors may develop Internet products or
services that are superior to, or have greater market acceptance than, the
solutions offered by Advanced Data Exchange. Advanced Data Exchange may be at a
disadvantage in responding to their competitors pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives.

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

10

GREENWICH INFORMATION TECHNOLOGIES, LLC. Other companies may develop
competing technologies that offer better or less expensive alternatives to the
information-on-demand technology offered by Greenwich Information Technologies.
In the event a competing technology emerges, Greenwich Information Technologies
would expect substantial competition.

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

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

AMS, CombiMatrix, Greenwich Information Technologies and Soundview
depend largely on the protection of enforceable patent rights. Collectively,
they have 36 applications on file with the U.S. Patent and Trademark Office,
seeking patents on their core technologies and/or have 9 patents or rights to
patents that have been issued. We cannot assure you that the pending patent
applications will be issued, that third parties will not violate, or attempt to
invalidate these intellectual property rights, or that certain aspects of their
intellectual property will not be reverse-engineered by third parties without
violating their patent rights. For Greenwich Information Technologies and
Soundview, intellectual property constitutes their only significant assets.

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

Our subsidiary companies also enter into confidentiality agreements
with third parties and generally limit access to information relating to their
proprietary rights. Despite these precautions, third parties may be able to gain
access to and use their proprietary rights to develop competing technologies
and/or products with similar or better features and prices. Any substantial
unauthorized use of our subsidiary companies' proprietary rights could
materially and adversely affect their business and operational results.

Soundview has filed a federal patent infringement and antitrust lawsuit
against television manufacturers, the Consumer Electronics Manufacturers
Association and the Consumer Electronics Association in the federal district
court alleging that television sets fitted with "V-chips" and sold in the United
States infringe Soundview's patent. However, no assurance can be given that
Soundview will prevail in that action or that the television manufacturers will
be required to pay royalties to Soundview. In December 2000, Soundview and
Philips Electronics North America Corporation reached a confidential settlement
agreement whereby Soundview will receive payment and grant a non-exclusive
license of its V-chip patent to Philips Electronics North America Corporation.
In the first quarter of 2001, Soundview entered into a separate confidential
settlement agreement with Hitachi America Ltd., Samsung Electronics, L.G.
Electronics, Inc. and Funai Electric Co., whereby Soundview will receive payment
and grant a non-exclusive license of its V-chip patent. Also in the first
quarter of 2001, Soundview settled its lawsuit with Pioneer Electronics (USA)
Inc., an affiliate of Pioneer Corporation.

On November 28, 2000, Nanogen, Inc. filed, but did not serve, suit
against CombiMatrix and Donald D. Montgomery, Ph.D., a former employee of
Nanogen and an officer and director of CombiMatrix, in the United States
District Court for the Southern District of California. Nanogen alleges breach
of contract, trade secret misappropriation and that United States Patent No.
6,093,302 and other proprietary information belonging to CombiMatrix are instead
the property of Nanogen. CombiMatrix and Dr. Montgomery both deny, and intend to
vigorously defend against, the claims in the lawsuit. Accordingly, on December
15, 2000, and without waiting for service, CombiMatrix and Dr. Montgomery filed
a motion to dismiss the lawsuit. Concurrently, CombiMatrix notified Nanogen of
its intent to bring an action against Nanogen and Nanogen's counsel to recover
damages resulting from any meritless claims by Nanogen. CombiMatrix also
notified Nanogen that it would seek punitive damages in such a proceeding. On
December 18, 2000, Nanogen served CombiMatrix and Dr. Montgomery.

11

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

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

During the fiscal year ended December 31, 2000, we had an operating
loss of approximately $37.2 million and a net loss of approximately $39
million. If we continue to incur operating losses, we may not have enough money
to expand our business and our subsidiary companies' businesses in the future.

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

ADVANCED DATA EXCHANGE CORPORATION. We currently own a 4.6% interest in
Advanced Data Exchange and have no board of director representation. Additional
rounds of equity financing may further dilute our interest in Advanced Data
Exchange. We do not have the ability to control decision-making at Advanced Data
Exchange.

GREENWICH INFORMATION TECHNOLOGIES, LLC. We currently maintain a
membership interest of 33.3% in Greenwich Information Technologies. Although we
are a senior member of Greenwich Information Technologies, we do not hold a
majority of the board of three senior members, and we have no control over its
day-to-day operations.

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

We may incur significant costs to avoid investment company status and
may suffer other adverse consequences if deemed to be an investment company
under the Investment Company Act of 1940. Some of our equity investments may
constitute investment securities under the Investment Company Act. A company may
be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of its total assets, subject to certain exclusions.
Investment companies are subject to registration under, and compliance with, the
Investment Company Act unless a particular exclusion or regulatory safe harbor
applies. If we are deemed an investment company, we would become subject to the
requirements of the Investment Company Act. As a consequence, we would be
prohibited from engaging in business or issuing its securities as it has in the
past and might be subject to civil and criminal penalties for noncompliance. In
addition, certain of our contracts might be voidable, and a court-appointed
receiver could take control of us and liquidate our business.

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

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

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

12

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

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

Our facilities and the facilities of two of our subsidiary companies,
Advanced Data Exchange and Advanced Material Sciences, are located in
California. California is currently experiencing an energy shortage, and as a
result several cities have been subject to rolling blackouts. In the event we
experience rolling blackouts, our operations could be adversely impacted.

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

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

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

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

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

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

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

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

13

ITEM 2. PROPERTY

We lease a 7,019 square foot office, a 4,372 square foot office and a
9,996 square foot office in Pasadena, California pursuant to lease agreements
that terminate in November 2003, December 2001 and June 2001, respectively. Our
consolidated subsidiaries, CombiMatrix and Soundview, lease facilities in the
Seattle, Washington and Greenwich, Connecticut areas, respectively. Presently,
we are not seeking any additional facilities.

ITEM 3. LEGAL PROCEEDINGS

On April 5, 2000, Soundview filed a patent infringement and antitrust
lawsuit against Sony Corporation of America, Philips Electronics North America
Corporation, the Consumer Electronics Manufacturers Association, and the
Consumer Electronics Association in the United States District Court for the
Eastern District of Virginia, alleging that television sets fitted with
"V-chips" and sold in the United States infringe Soundview's patent. The case is
now pending in the US District Court for the District of CT. In December 2000,
Soundview and Philips Electronics North America Corporation reached a
confidential settlement agreement whereby Soundview will receive payment and
grant a non-exclusive license of its V-chip patent to Philips Electronics North
America Corporation. In the first quarter of 2001, Soundview entered into
separate confidential settlement agreements with Hitachi America Ltd., L.G.
Electronics, Inc. and Samsung Electronics and entered into an agreement with
Funai Electric Co., whereby Soundview will receive payment and grant a
non-exclusive license of its V-chip patent. Also in the first quarter of 2001,
Soundview settled its lawsuit with Pioneer Electronics (USA) Inc., an affiliate
of Pioneer Corporation.

On November 28, 2000, Nanogen, Inc. filed, but did not serve, suit
against CombiMatrix and Donald D. Montgomery, Ph.D., a former employee of
Nanogen and an officer and director of CombiMatrix, in the United States
District Court for the Southern District of California. Nanogen alleges breach
of contract, trade secret misappropriation and that United States Patent No.
6,093,302 and other proprietary information belonging to CombiMatrix are instead
the property of Nanogen. CombiMatrix and Dr. Montgomery both deny, and intend to
vigorously defend against, the claims in the lawsuit. Accordingly, on December
15, 2000, and without waiting for service, CombiMatrix and Dr. Montgomery filed
a motion to dismiss the lawsuit. Concurrently, CombiMatrix notified Nanogen of
its intent to bring an action against Nanogen and Nanogen's counsel to recover
damages resulting from any meritless claims by Nanogen. CombiMatrix also
notified Nanogen that it would seek punitive damages in such a proceeding. On
December 18, 2000, Nanogen served CombiMatrix and Dr. Montgomery.

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

None.

14

PART II

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

RECENT MARKET PRICES

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

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

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

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

2000 HIGH LOW

First Quarter $59 $29 1/2
Second Quarter $43 $13 3/8
Third Quarter $35 1/4 $21 7/8
Fourth Quarter $37 3/16 $13 3/4

1999 HIGH LOW

First Quarter $4 15/16 $3 1/8
Second Quarter $9 $3 1/2
Third Quarter $16 3/4 $6 5/8
Fourth Quarter $32 7/8 $14 1/8

On March 27, 2001, the closing bid and asked quotations for our common
stock were $7.00 and $7.03, respectively, per share.

On March 27, 2001, there were approximately 236 owners of record of our
common stock. The majority of the outstanding shares of the common stock are
held by a nominee holder on behalf of an indeterminable number of ultimate
beneficial owners.

DIVIDEND POLICY

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

15

DESCRIPTION OF SECURITIES

We are authorized to issue up to 60,000,000 shares of common stock,
$0.001 par value, of which 17,702,124 shares of common stock have been issued
and are outstanding as of March 27, 2001 and 20,000,000 shares of preferred
stock, $0.001 par value, no shares of which are issued or outstanding. Holders
of the common stock are entitled to one vote per share on all matters to be
voted on by the shareholders, and to cumulate votes in the election of
directors. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefore. Upon the liquidation, dissolution or winding up of
the Company, the holders of common stock are entitled to share ratably in all
assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities. Holders of common stock have no
preemptive, subscription, redemption or conversion rights.

TRANSFER AGENT AND REGISTRAR

U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale,
California 91204-2991, is our Transfer Agent and Registrar for our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

In July 2000, we completed an institutional private equity financing,
raising gross proceeds of $23.7 million through the sale of 861,638 units, each
unit consisting of one share of our common stock and one three-year callable
common stock purchase warrant. Each common stock purchase warrant entitles the
holder to purchase one share our common stock at a price of $33.00 per share and
is callable by us once the closing bid of our common stock averages $39.60 or
above for twenty consecutive trading days on the NASDAQ National Market System.
We issued an additional 11,000 units in lieu of cash payments in conjunction
with the private placement for finders' fees.

In January 2001, we completed an institutional private equity
financing, raising gross proceeds of $19 million through the sale of 1,107,274
shares of our common stock. The Company issued an additional 20,000 units in
lieu of cash payments in conjunction with the private placement for finders'
fees.

No underwriters were used in connection with the sales above. We relied
upon Section 4(2) of the Securities Act in each of the transactions. We
determined, based on information received from the investors that each investor
was an accredited investor and either received adequate information about us or
had access to such information. The recipients of securities in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions.

We have used, and expect to continue to use, the net proceeds from the
transactions listed above for general corporate purposes, including working
capital.

16

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below as of December 31, 2000 and
December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 have
been derived from our audited consolidated financial statements included
elsewhere herein, and should be read in conjunction with those financial
statements (including notes thereto). The selected financial data as of December
31, 1998, 1997 and 1996 and for the years ended December 31, 1997 and 1996 have
been derived from audited consolidated financial statements not included herein,
but which were previously filed with the SEC.

2000 1999 1998 1997(2) 1996
------------- ------------- ------------- ------------- -------------

Revenues
Grant revenue ...................................... $ 17,000 $ 144,000 $ - $ - $ -
Advertising ........................................ 40,000 - - - -
Capital management fee income ...................... - 122,000 382,000 491,000 58,000
Management fee income .............................. - - - - 1,400,000
------------- ------------- ------------- ------------- -------------
Total revenues ..................................... 57,000 266,000 382,000 491,000 1,458,000
------------- ------------- ------------- ------------- -------------
Operating expenses
Research and development (including stock
compensation charges of $3,397 in 2000) .......... 11,864,000 1,806,000 1,880,000 888,000 505,000
Marketing, general and administrative (including
stock compensation charges of $7,307, $146 and
$227 in 2000, 1999 and 1998, respectively) ....... 22,089,000 4,418,000 2,776,000 2,104,000 2,135,000
Amortization of patents and goodwill ............... 2,251,000 1,622,000 1,568,000 459,000 -
Loss on disposal of consolidated subsidiaries ...... 1,016,000 - - - -
Legal settlement ................................... - - - 460,000 -
------------- ------------- ------------- ------------- -------------
Total operating expenses ........................... 37,220,000 7,846,000 6,224,000 3,911,000 2,640,000
------------- ------------- ------------- ------------- -------------
Operating loss ....................................... (37,163,000) (7,580,000) (5,842,000) (3,420,000) (1,182,000)
Other income (expense) ............................... (1,235,000) (1,042,000) (545,000) (100,000) 1,604,000
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing operations before
income taxes and minority interests ................ (38,398,000) (8,622,000) (6,387,000) (3,520,000) 422,000
(Provision) benefit for income taxes ................. 73,000 (20,000) - 250,000 (606,000)
------------- ------------- ------------- ------------- -------------
Loss from continuing operations before minority
interests .......................................... (38,325,000) (8,642,000) (6,387,000) (3,270,000) (184,000)
Minority interests ................................... 9,166,000 1,221,000 198,000 411,000 201,000
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing operations ............. (29,159,000) (7,421,000) (6,189,000) (2,859,000) 17,000
Loss from discontinued operations (3) ................ (9,554,000) (776,000) - - -
------------- ------------- ------------- ------------- -------------
Loss before cumulative effect of change in
accounting principle ............................... (38,713,000) (8,197,000) (6,189,000) (2,859,000) 17,000
Cumulative effect of change in accounting principle
due to beneficial conversion feature ............... (246,000) - - - -
------------- ------------- ------------- ------------- -------------
Net (loss) income .................................... (38,959,000) (8,197,000) (6,189,000) (2,859,000) 17,000
Unrealized gain on short-term investments ............ 77,000 - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive (loss) income .......................... $(38,882,000) $ (8,197,000) $ (6,189,000) $ (2,859,000) $ 17,000
============= ============= ============= ============= =============
Loss per common share
Basic
Loss from continuing operations .................... $ (1.99) $ (0.68) $ (0.69) $ (0.58) $ 0.00
Loss from discontinued operations .................. $ (0.66) $ (0.07) $ - $ - $ -
Cumulative effect of change in accounting
principle ........................................ $ (0.02) $ - $ - $ - $ -
------------- ------------- ------------- ------------- -------------
Net loss ............................................. $ (2.67) $ (0.75) $ (0.69) $ (0.58) $ 0.00
============= ============= ============= ============= =============
Diluted
Loss from continuing operations .................... $ (1.99) $ (0.68) $ (0.69) $ (0.58) $ 0.00
Loss from discontinued operations .................. $ (0.66) $ (0.07) $ - $ - $ -
Cumulative effect of change in accounting
principle ........................................ $ (0.02) $ - $ - $ - $ -
------------- ------------- ------------- ------------- -------------
Net loss ............................................. $ (2.67) $ (0.75) $ (0.69) $ (0.58) $ 0.00
============= ============= ============= ============= =============
Weighted average number of common and potential
shares outstanding used in computation of (loss)
earnings per share(1)
Basic .............................................. 14,568,389 10,871,423 8,971,272 4,962,286 3,826,014
Diluted ............................................ 14,568,389 10,871,423 8,971,272 4,962,286 4,976,434

CONSOLIDATED BALANCE SHEET DATA: 2000 1999 1998 1997(2) 1996(2)
------------- ------------- ------------- ------------- -------------
Total assets ......................................... $ 98,516,000 $ 51,791,000 $ 19,769,000 $ 8,854,000 $ 5,175,000
Long-term indebtedness ............................... $ - $ - $ 1,222,000 $ - $ -
Total liabilities .................................... $ 20,848,000 $ 1,633,000 $ 1,828,000 $ 447,000 $ 837,000
Minority interests ................................... $ 17,524,000 $ 4,896,000 $ - $ 227,000 $ 380,000
Stockholders' equity ................................. $ 60,144,000 $ 45,262,000 $ 17,941,000 $ 8,180,000 $ 3,959,000

- ----------

(1) Potential common shares in 2000, 1999, 1998, and 1997 have been excluded from per share calculation because the effect
of their inclusion would be anti-dilutive. In addition, all share and per share information has been adjusted as
appropriate for all periods presented to reflect a two-for-one stock split effected in March 1998.
(2) In 1997, we acquired a controlling interest in Soundview. The 1996 amounts have been restated for the effects of our
increased interest in Soundview. Prior to this restatement, we reported loss of $161,000 in equity in earnings of
affiliates and net income of $293,000.
(3) Operating results in 1999 have been restated to present Soundbreak.com, Inc. as discontinued operations. See Note 8
to Consolidated Financial Statements.

17

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

GENERAL

We develop and operate majority-owned subsidiaries in the life science
and technology industries. Our most important subsidiary is CombiMatrix, which
is developing a new biochip technology. Our primary focus is to enhance the
value of this technology by forming and acquiring companies that can utilize
this new technology in the medical, life science and research industries.

In 2000, our financial condition and results of operations were
highlighted primarily by the continued expansion of research and development and
the building of the management team at CombiMatrix. In 1999, our financial
condition and results of operations were highlighted primarily by the investment
in our new subsidiary, Soundbreak.com, and the expansion associated with
CombiMatrix's research and development. In 1998, our financial condition and
results of operations were highlighted primarily by the investment in
Signature-mail.com, the expenses associated with CombiMatrix's increased
research and development efforts and expenses related to an increase in
headcount. In the following discussion and analysis, the period-to-period
comparisons must be viewed in light of the impact that the acquisition and
disposition of securities of various business interests has had on the financial
condition and results of operations.

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

We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt or other
external financings; however, we cannot assure that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed for our subsidiary companies, and ourselves, we may not be able to
execute our business plans and our business may suffer.

ACQUISITION AND OPERATING ACTIVITIES

During 2000, we and our majority-owned subsidiaries began to
significantly increase financing, acquisition and operating activities. We
intend to continue to invest in growing our business by identifying and
developing opportunities in the life science sector that will be created by
commercializing the new biochip technology of our subsidiary, CombiMatrix, and
other related investments in that sector. Financing activities are listed in the
Liquidity and Capital Resources section that follows. Highlights of the
acquisition and operating activities for the year ended December 31, 2000
include:

FIRST QUARTER:

o We acquired a 7.6% interest in Advance Data Exchange
Corporation for $3 million, as part of a $17.3 million
"non-voting" Series B preferred stock private placement.
Advanced Data Exchange is a leader in business-to-business
Internet exchange transactions for mid-market suppliers. A
subsequent round of financing of $30 million reduced our
ownership interest to 4.6%.

o We issued a 30-day redemption notice for our common stock
purchase warrants issued in a December 1999 private placement.
As a result, all of the warrants were exercised prior to the
redemption date, and we received proceeds of approximately
$14.8 million for the issuance of 578,238 shares of common
stock.

o CombiMatrix completed a private equity financing raising gross
proceeds of $17.5 million through the sale of 3.5 million
shares of its common stock. We invested $10 million in this
private placement to acquire two million shares of
CombiMatrix. As a result of the transaction, we increased our
equity ownership in CombiMatrix from 50.01% to 51.8%.

18

SECOND QUARTER:

o We amended our 1996 Stock Option Plan, or the 1996 Plan, which
provides for the grant of nonqualified stock options and
incentive stock options to key employees, including our and
our subsidiaries' officers. The authorized number of shares of
common stock subject to the amended 1996 Plan was increased by
1,000,000 shares to a total of 4,000,000 shares.

THIRD QUARTER:

o In July 2000, we increased our ownership in CombiMatrix from
51.8% to 61.4%. We acquired the additional ownership position
from existing shareholders of CombiMatrix in exchange for
approximately 489,000 shares of our common stock, valued at
approximately $11.6 million. The purchase price was allocated
to the fair value of assets acquired and liabilities assumed,
including acquired in-process research and development. The
amount attributable to goodwill was $2.9 million, which is
amortized using the straight-line method over the estimated
remaining useful life of five years. The amount attributable
to in-process research and development of $2.5 million was
charged to expense and is included in the Consolidated
Statements of Operations and Comprehensive Loss for the year
ended December 31, 2000.

o In July 2000, we completed an institutional private equity
financing, raising gross proceeds of $23.7 million through the
sale of 861,638 units, each unit consisting of one share of
our common stock and one three-year callable common stock
purchase warrant. Each common stock purchase warrant entitles
the holder to purchase one share of our common stock at a
price of $33.00 per share and is callable by us once the
closing bid of our common stock averages $39.60 or above for
twenty consecutive trading days on the NASDAQ National Market.
We issued an additional 11,000 units in lieu of cash payments
in conjunction with the private placement for finders' fees.

o We appointed Gerald D. Knudson, Chief Executive Officer of
CombiMatrix, to our board of directors. Robert L. Harris II,
one of our directors, was named as our President.

o In August 2000, CombiMatrix completed a private equity
financing, raising gross proceeds of $36 million through the
sale of four million shares of CombiMatrix common stock. We
invested $17.5 million in this private placement to acquire
1,944,445 shares. As a result of the transaction, our equity
ownership in CombiMatrix decreased from 61.4% to 58.4%

o Combimatrix was granted a U.S. Patent for its biochip
microarray processor system, which enables quick and
economical turnaround of custom-designed microarrays for use
in biological research. A microarray consists of a chemical
"virtual flask" located on the surface of a semiconductor
chip containing thousands of microarrays, which are separated
from each other using special solutions instead of physical
barriers. Each microarray has electronic circuitry that may be
directed by a computer to construct a specified compound. The
patent covers CombiMatrix's core technology, which is a method
for producing microarrays by synthesizing biological materials
on a three-dimension active surface.

FOURTH QUARTER:

o We entered into an exclusive license and development agreement
with CombiMatrix and related investors and co-sale rights
agreements pertaining to the use of and further development of
CombiMatrix's technology within the field of material science.
We have formed a new subsidiary, AMS, that will develop and
exploit our technology in material science.

o CombiMatrix filed a registration statement with the SEC
relating to the proposed initial public offering of its common
stock. All of the shares in the proposed are to be sold by
CombiMatrix.

o We recorded $1,016,000 in write-offs of other early-stage
investments and $2,603,000 in write-offs of equity
investments.

o Soundview announced that it will receive payment and grant a
non-exclusive license of its U.S. Patent No. 4,554,584 to
Philips Electronics. The license to Philips was part of a
settlement agreement regarding pending litigation brought by
Soundview.

19

EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS

The various interests that we acquire in our subsidiaries are accounted
for under two broad accounting methods: consolidation and equity method. The
applicable accounting method is generally determined based on our voting
interest in a subsidiary.

CONSOLIDATION. Subsidiary companies in which we directly or indirectly
own more that 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, a
subsidiary company's accounts are reflected within our Consolidated Statements
of Operations and Comprehensive Loss. Participation of other stockholders in the
earnings or losses of a consolidated subsidiary is reflected in the caption
"Minority Interests" in our Consolidated Statement of Operations and
Comprehensive Loss. Minority interests adjust our consolidated net results of
operations to reflect only our share of the earnings or losses of the
subsidiary. As of December 31, 1999, we accounted for four of our subsidiaries
under the consolidation method. As of December 31, 2000, we accounted for five
of our subsidiaries under this method.

Our subsidiaries accounted for under the consolidation method of
accounting at December 31, 2000 and December 31, 1999 included:

Ownership
Subsidiary ----------------------
Since 12/31/2000 12/31/1999
---------- ---------- ----------

CONSOLIDATION METHOD:
Advanced Material Sciences, Incorporated... 2000 66.7% -
CombiMatrix Corporation.................... 1995 58.3% 50.0%
MerkWerks Corporation...................... 1995 99.9% 99.9%
Soundbreak.com, Incorporated .............. 1999 66.9% 73.6%
Soundview Technologies, Incorporated....... 1996 66.7% 66.7%

EQUITY METHOD. Subsidiaries whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a subsidiary depends on an evaluation of several
factors including, among others, representation on the subsidiary's board of
directors and ownership level, which is generally 20% to 50% interest in the
voting securities of the partner company, including voting rights associated
with our holdings in common, preferred and other convertible instruments in the
subsidiary. Under the equity method of accounting, a subsidiary's accounts are
not reflected within our Consolidated Statements of Operations and Comprehensive
Loss; however, our share of the earnings or losses of the subsidiary is
reflected in the caption "Equity income (loss) of affiliates" in the
Consolidated Statements of Operations and Comprehensive Loss. As of December 31,
2000 and December 31, 1999, we accounted for four subsidiaries, under the equity
method of accounting. Our subsidiaries accounted for under the equity method of
accounting at December 31, 2000 and 1999 included:

Ownership
Subsidiary ----------------------
Since 12/31/2000 12/31/1999
---------- ---------- ----------
EQUITY METHOD:
Whitewing Labs, Incorporated............... 1993 23.7% 23.7%
Greenwich Information Technologies, LLC.... 1996 33.3% 33.3%
Signature-mail.com, LLC.................... 1998 9.8% 25.0%
Mediaconnex Communications, Incorporated... 1999 31.0% 31.0%

In most cases, we have representation on the boards of directors of the
above-listed companies, including those in which we hold non-voting securities.
In addition to our investments in voting and non-voting equity and debt
securities, we also periodically make advances to our subsidiaries in the form
of promissory notes.

20

RESULTS OF OPERATIONS

2000 1999 1998
------------- ------------- -------------

Revenues .......................................... $ 57,000 $ 266,000 $ 382,000
Operating expenses ................................ (37,220,000) (7,846,000) (6,224,000)
Other expense, net ................................ (1,235,000) (1,042,000) (545,000)
Minority interests ................................ 9,166,000 1,221,000 198,000
Loss from discontinued operation of Soundbreak.com (7,443,000) (776,000) -
Loss from disposal of Soundbreak.com .............. (2,111,000) - -
(Provision) benefit for income taxes .............. 73,000 (20,000) -
Cumulative effect of change in accounting principle (246,000) - -
------------- ------------- -------------
Net loss ....................................... $(38,959,000) $ (8,197,000) $ (6,189,000)
============= ============= =============

2000 COMPARED TO 1999

NET REVENUE. In 2000, our net revenues decreased to $57,000 from
$266,000 in 1999, mainly due to an increase of $40,000 from advertising
revenues, a decrease in CombiMatrix revenue from federal grants, and a decrease
in capital management fees due to the closure of Acacia Research Capital
Management. During 2000, grant revenue was $17,000 as compared to $144,000 grant
revenue during 1999. The grant revenue resulted from CombiMatrix's award of
three contracts from the federal government with respect to its biochip
technology. CombiMatrix was awarded two grants in July 1999 for Phase I SBIR
from the Department of Energy and the Department of Defense. CombiMatrix was
further awarded a Phase II SBIR Department of Defense contract for the use of
its biochip technology to develop nanode array sensor microchips in January
2000.

No capital management fee income, which includes performance fee
income, was earned during 2000 compared to $122,000 during 1999. No capital
management fee income was earned in 2000 because we closed the Acacia Research
Capital Management division on December 31, 1999. Costs associated with exiting
this business were not material.

OPERATING EXPENSES. Total operating expenses increased to $37,220,000
during 2000 from $7,846,000 during 1999 primarily due to an expansion of
CombiMatrix's research and development efforts, $10,100,000 in noncash
compensation charges relating to a step-up in value of CombiMatrix in connection
with its proposed initial public offering, a charge for acquired in-process
research and development, an increase in our compensation costs, a write-off of
$1,016,000 in investments in early-stage subsidiaries and rent for larger office
facilities.

We incurred research and development expenses of $11,864,000 in 2000,
compared to expenses of $1,806,000 in 1999. Such expenses for 2000 are comprised
of costs primarily incurred by CombiMatrix, which increased to $9,305,000 from
$2,368,000 in the prior year. This increase was due to a greater number of
CombiMatrix personnel and larger laboratory facilities to accommodate its
expansion of its research and development efforts. In addition, $2,508,000 of
acquired in-process research and development expense resulted from the
acquisition of additional ownership position from existing CombiMatrix
shareholders. In July 2000, we increased our ownership of CombiMatrix from 51.8%
to 61.4%. We acquired the additional ownership position from existing
shareholders of CombiMatrix in exchange for approximately 489,000 shares of our
common stock, valued at approximately $11.6 million. This purchase was accounted
for as a step acquisition. The purchase price was allocated to the fair value of
assets acquired and liabilities assumed, including acquired in-process research
and development.

Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general operations. As such, we anticipate that our
operating expenses in connection with CombiMatrix will continue to increase in
future periods.

In 2000, research and development expenses for noncash stock
compensation, all of which related to CombiMatrix, totaled $3,397,000. In 1999,
research and development expenses for noncash stock compensation, all of which
related to CombiMatrix, was not material. The noncash stock compensation was
related to options and warrants issued to employees, non-employees and
non-employee consultants.

21

We incurred marketing, general and administrative expenses of
$22,089,000 in 2000, compared to expenses of $4,418,000 in 1999. In 2000, these
expenses increased due to general expansion, including an increase in business
development expenses as we explored new business opportunities, expanded our
office facilities and increased personnel and payroll expenses.

CombiMatrix is increasing its employee base and has made extensive use
of consultants to assist in solving specialized issues or providing particular
services. Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general and administrative operations. CombiMatrix
relocated from Burlingame, California to Mukilteo, Washington. This relocation
was completed during the third quarter, and related costs of $794,000 were
incurred in 2000.

In 2000, marketing, general and administrative expenses for noncash
stock compensation totaled $7,307,000, of which $6,522,000 relates to
CombiMatrix. In 1999, marketing, general and administrative expenses for noncash
stock compensation totaled $146,000 of which $2,000 related to CombiMatrix. The
noncash stock compensation was related to options and warrants issued to
employees, non-employees and non-employee consultants.

In 2000, we reported amortization expenses relating to patents and
goodwill of $2,251,000, which was an increase from $1,622,000 in 1999. As a
result of our purchase of additional equity interests in Soundview in July 1997
and January 1998, in MerkWerks in January 1998 and June 1999, and in CombiMatrix
in July 2000, we are incurring amortization expenses each quarter for periods
ranging from three to five years relating to the intangible assets acquired.
Amortization expenses at or above the current level are expected to continue for
the foreseeable future.

OTHER INCOME (EXPENSE). We reported other expenses of $1,235,000 for
2000 compared to other expense of $1,042,000 for 1999. The increase in 2000 was
primarily due to $2,603,000 of write-offs of equity investments in Mediaconnex,
Signaturemail.com and Whitewing Labs, and an increase in equity in losses of
affiliates, partially offset by an increase in interest income.

In 2000, interest income was $3,086,000 as compared to interest income
in 1999, of $333,000. The increase was due to higher cash balances in 2000 as
compared to 1999. We received $64.5 million in cash from outside investors in
connection with our warrant call and private placements for us and CombiMatrix
in 2000.

We reported no interest expense in 2000 as compared to $254,000 in
1999. The expense incurred in 1999 was primarily attributable to CombiMatrix and
relates to three-year 6% unsecured subordinated promissory notes issued by
CombiMatrix in a private offering completed in March 1998. Warrants to purchase
CombiMatrix common stock were also issued in this private placement. During the
fourth quarter of 1999, CombiMatrix offered holders of the unsecured
subordinated notes the opportunity to convert their outstanding principal
balance into CombiMatrix common stock and all noteholders had converted as of
December 1999.

We reported no equity in loss of partnerships in 2000, compared to
equity in loss of partnerships of $1,000 in 1999. The decrease was a result of
the liquidation of the partnerships during 1999.

We reported equity in losses of affiliates of $1,746,000 in 2000,
compared to equity in losses of affiliates of $1,120,000 in 1999. In 2000,
losses were primarily attributable to a loss of $1,054,000 for our investment in
Mediaconnex. This amount was offset by a decrease in the recognized losses for
Whitewing Labs, Greenwich and Signature-mail.com, totaling $686,000 in 2000 as
compared to $1,120,000 in 1999.

MINORITY INTERESTS. Minority interests in the losses of consolidated
subsidiaries increased to $9,166,000 in 2000 as compared to $1,221,000 in 1999.
The increase in minority interests relates to the CombiMatrix private
placements. Minority shareholders participated in the losses of CombiMatrix in
2000.

DISCONTINUED OPERATIONS. On February 13, 2001, the board of directors
of Soundbreak.com, Inc., or Soundbreak.com, one of our majority-owned
subsidiaries, resolved to cease operations as of February 15, 2001 and liquidate
the remaining assets and liabilities of the company. Accordingly, we reported
the results of operations and the estimated loss on disposal of Soundbreak.com
as results of discontinued operations in the Consolidated Statements of
Operations and Comprehensive Loss.

22

1999 COMPARED TO 1998

NET REVENUE. Our net revenues decreased to $266,000 in 1999 from
$382,000 in 1998 primarily due to lower returns and the winding down of the
Acacia Research Capital Management division, partially offset by an increase in
research and development grant income. Acacia Research Capital Management was a
general partner in two domestic private investment partnerships and was an
investment advisor to two offshore private investment corporations. The level of
management and performance fee revenue we received was dependent on the amount
of money invested in the funds managed by us. We closed this division because we
intend to aggressively focus our efforts on developing our affiliate companies
and incubating new companies. The closing of the funds also contributed to the
decrease in the equity income of partnerships with recognized losses of $1,000
in 1999 from income of $184,000 in 1998.

The increase in research and development grant income is due to two
Phase 1 SBIR grants awarded to CombiMatrix in July 1999 from the Department of
Energy and the Department of Defense.

OPERATING EXPENSES. Total operating expenses increased to $7,846,000 in
1999 from $6,224,000 in 1998 primarily due to an increase in marketing, general
and administrative costs. Our marketing, general and administrative costs
consist primarily of employee compensation, outside services (such as legal,
accounting and consulting), rent and travel expenses increased to $4,418,000 in
1999 from $2,776,000 in 1998. Expenses related to research and development and
amortization of patents and goodwill did not materially change between 1999 and
1998. Operating expenses of CombiMatrix also increased to $2,493,000 in 1999
from $1,592,000 in 1998. During 1999, CombiMatrix increased its employee base
and made extensive use of consultants to assist in solving specialized issues or
providing particular services. Most of the remaining increase in marketing,
general and administrative expenses resulted from the expansion of our
operations during 1999 to grow our infrastructure by adding more personnel and
acquiring additional office space.

OTHER EXPENSE. Other expense increased to $1,042,000 in 1999 from
$545,000 in 1998 due to the following: an increase of $219,000 in the equity in
losses of affiliates, an increase of $124,000 in interest expense, an increase
of $31,000 in interest income, and a decrease in the equity in income of
partnerships of $185,000. Equity in losses of affiliates increased due primarily
to additional losses recognized for Signature-mail.com and Whitewing of $129,000
and $128,000, respectively. These losses were due to Signature-mail.com further
seeking proprietary software in order to excel in a highly competitive software
industry and a decrease in net revenue for Whitewing due to an intensely
competitive market with short product life cycles and rapid price declines.
Interest expense increased compared to the prior year due primarily to
additional amortization of the discount associated with the CombiMatrix note.
Interest income increased due to an increase in the average cash balance of the
company. Lastly, the closing of the investment funds, in which we participated
in, contributed to the decrease in the equity income of partnerships with
recognized losses of $1,000 in 1999 from income of $184,000 in 1998.

MINORITY INTERESTS. Minority interests increased to $1,221,000 in 1999
from $198,000 in 1998, primarily reflecting minority interest in net losses of
CombiMatrix.

INFLATION

Inflation has not had a significant impact on us.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, we had cash and cash equivalents and short-term
investments of $76.6 million on a consolidated basis, including discontinued
operations. Working capital was $59.9 million on a consolidated basis at
December 31, 2000. Highlights of the financing and commitment activities for the
year ended December 31, 2000, include:

o $14.8 million of proceeds received from the exercise of common
stock purchase warrants issued in connection with a private
placement in December 1999.

o $17.5 million of proceeds from private equity financing
completed for CombiMatrix in which we contributed $10 million.

23

o $23.7 million of gross proceeds from an institutional private
equity financing, consisting of the sale of 861,638 units at
an offering price of $27.50 per unit in addition to 11,000
units issued in lieu of cash payments for finders' fees. Each
unit consisted of one share of common stock and one three-year
callable common stock purchase warrant.

o $36 million of private equity financing completed by
CombiMatrix, in which we contributed $17.5 million.

SUBSEQUENT TO DECEMBER 31, 2000:

o Discontinued operations of Soundbreak.com and recorded $7.4
million of loss from discontinued operations and $2.1 million
of expenses in connection with its closing for the year ended
December 31, 2000.

o $19 million of gross proceeds from an institutional private
equity financing consisting of the sale of 1,107,274 units at
offering price of $17.50 per unit in addition to 20,000 units
in lieu of cash payments for finders fees. Each unit
consisting of one share of common stock and one three-year
callable common stock purchase warrant.

Net cash used in operating activities was $34.7 million in 2000. Cash
used for operations is primarily due to loss from continuing operations of $29.2
million, partially offset by noncash expenses, such as depreciation,
amortization and compensation expense relating to stock options/warrants. In
addition, in 2000 we had an additional $16.8 million net cash used in operating
activities of discontinued operations.

Our net cash used in investing activities was $44.3 million in 2000.
These activities were primarily due to short-term investments by CombiMatrix
totaling $43.6 million. In addition, we had an additional $1.2 million used in
investing activities of discontinued operations.

Our net cash provided by financing activities was $77.3 million in
2000. Cash provided by financing activities in 2000 was primarily due to
proceeds from our common stock purchase warrants issued in our December 1999
private placement and called in the first quarter of 2000, capital contributions
from minority shareholders of subsidiaries relating to CombiMatrix's March 2000
and August 2000 private placements, as well as a private placement completed in
March 2000 by our discontinued operations, and proceeds from issuance of common
stock from our July 2000 private placement.

Warrants issued by us in connection with private placements completed
in July 2000 and January 2001 contain call and redemption provisions should the
closing bid of our common stock exceed $39.60 and $26.25, respectively, for
twenty or more consecutive trading days. The exercise price per share for the
common stock underlying the warrants is $33.00 for the July 2000 warrants and
$21.00 for the January 2001 warrants. In the event the requirements to call the
warrants are satisfied, we may call such warrants and we expect most, if not
all, of the holders to exercise such warrants in response. There can be no
assurance that the closing bid price of our common stock will exceed all such
thresholds or that, if it does, we will decide to call the warrants.

We have sustained losses since our inception resulting in an
accumulated deficit of $56,052,000 on a consolidated basis, which includes
operating losses of $37,163,000 and $7,580,000 in 2000 and 1999, respectively.
There can be no assurance that we will become profitable. If we do, we may never
be able to sustain profitability. We expect to incur significant losses for the
foreseeable future. We are making efforts to reduce expenses and may take steps
to raise additional capital.

We cannot assure that we will not encounter unforeseen difficulties
that may deplete our capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt, or other
external financings; however, we cannot assure that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed for our subsidiary companies, and the Company we may not be able to
execute our business plans and our business may suffer.

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

We have no significant commitments for capital expenditures in 2001.
Our minimum rental commitments on operating leases total $7.9 million through
December 2005. We have no committed lines of credit or other committed funding.
However, we anticipate that existing working capital reserves will provide
sufficient funds for our operating expenses for at least the next twelve months
in the absence of making any major new investments. We intend to seek additional
financing to fund new or existing businesses. There can be no assurances that we
will not encounter unforeseen difficulties that may deplete our capital
resources more rapidly than anticipated. Any efforts to seek additional funding
could be made through equity, debt or other external financing and there can be
no assurance that additional funding will be available on favorable terms, if at
all. Such financing transactions may be dilutive to existing investors.

24

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for
Derivative Financial Instruments and for Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 is effective for us beginning
January 1, 2001; however, we do not anticipate that it will have an impact on
our results of operations or financial condition when adopted by us, as we hold
no derivative financial instruments and do not currently engage in hedging
activities.

In December 1999, the SEC issued Staff Accounting Bulleting No. 101, or
SAB No. 101, "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. The adoption of SAB No. 101 did not have a material effect on our
financial position or results of operations; however, as we begin to generate
sales of our products, SAB No. 101 may impact our recognition of revenue.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

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

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

None.

25