Cautionary Statement

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 26, 2009.

This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. 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 set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "should," "could," "expect," "plan," "believe," "estimate," "anticipate," "intend," "predict," "potential," "continue," or similar terms, variations of such terms or the negative of such terms, although not all forward-looking statements contain these 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 intellectual property acquisition and development, licensing and enforcement activities, capital expenditures, earnings, litigation, regulatory matters, markets for 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 demand for our services, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements contained herein to conform such statements to actual results or 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. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, including without limitation the disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements" in this Quarterly Report on Form 10-Q and the audited financial statements and the notes thereto and disclosures made under the captions "Management Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended December 31, 2008.

General

As used in this Quarterly Report on Form 10-Q, "we," "us" and "our" refer to Acacia Research Corporation, a Delaware corporation, and/or its wholly and majority-owned operating subsidiaries. All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority-owned operating subsidiaries.

Our operating subsidiaries acquire, develop, license and enforce patented technologies. Our operating subsidiaries generate license fee revenues and related cash flows from the granting of licenses for the use of patented technologies that our operating subsidiaries own or control. Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, if necessary, with the enforcement against unauthorized users of their patented technologies.

We are a leader in licensing patented technologies and have established a proven track record of licensing success with over 650 license agreements executed to date, across 55 of our technology license programs. On a consolidated basis, our operating subsidiaries own or control the rights to over 100 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999.

Overview

Our operating activities during the three and six months ended June 30, 2009 and 2008 were principally focused on the continued development, licensing and enforcement of the patent portfolios owned or controlled by our operating subsidiaries, including the continued pursuit of multiple ongoing technology licensing and enforcement programs and the commencement of new technology licensing and enforcement programs. In addition, we continued our focus on business development, including the acquisition of several additional patent portfolios by certain of our operating subsidiaries and the continued pursuit of additional opportunities to partner with patent owners and provide our unique intellectual property licensing, development and enforcement services.

License fee revenues recognized for the three months ended June 30, 2009 totaled $15.0 million, as compared to $7.1 million for the three months ended June 30, 2008. License fee revenues recognized for the six months ended June 30, 2009 totaled $27.7 million, as compared to $16.2 million for the six months ended June 30, 2008.

Revenues for the three and six months ended June 30, 2009 included license fees from 22 and 50, respectively, new licensing agreements covering 16 and 20, respectively, of our technology licensing and enforcement programs. During the six months ended June 30, 2009 and 2008, on a consolidated basis, our operating subsidiaries generated licensing revenues from 5 and 7 new technology licensing and enforcement programs, respectively. Revenues for the three and six months ended June 30, 2008 included license fees from 16 and 40, respectively, new licensing agreements covering 11 and 16, respectively, of our technology licensing and enforcement programs. As of June 30, 2009, we have generated revenues from 53 technology licensing and enforcement programs, as compared to 48 programs as of December 31, 2008, and 35 programs as of June 30, 2008.

During the six months ended June 30, 2009, we recorded initial license fee revenues from 5 new technology licensing programs, including our Database Access technology, Surgical Catheter technology, Encrypted Media & Playback Devices technology, Child-friendly Secure Mobile Phones technology and Heated Surgical Blades technology. Revenues for the six months ended June 30, 2009 also included fees from the licensing of our DMTŪ technology, Telematics technology, Pop-up Internet Advertising technology, Audio Communications Fraud Detection technology, Picture Archiving & Communication Systems technology, Remote Management of Imaging Devices technology, Projector technology, Rule Based Monitoring technology, Location Based Services technology, Online Auction Guarantee technology, eCommerce Pricing technology, Medical Image Stabilization technology, Audio Video Enhancement & Synchronization technology, Credit Card Fraud Protection technology and High Quality Image Processing technology.

During the six months ended June 30, 2008, we recorded initial license fee revenues for 7 of our technology licensing programs, including our Authorized Spending Accounts technology, Picture Archiving & Communications System technology, Video Editing technology, Electronic Message Advertising technology, Remote Management of Imaging Devices technology, High Quality Image Processing technology and Wireless Traffic Information technology. Revenues for the six months ended June 30, 2008 also included fees from the licensing of our Audio Communications Fraud Detection technology, Credit Card Fraud Protection technology, DMTŪ technology, Electronic Address List Management technology, Image Resolution Enhancement technology, Pop-up Internet Advertising technology, Portable Storage Devices with Links technology, Remote Management of Imaging Devices technology, Rule-Based Monitoring technology and Telematics technology.

Our revenues historically have fluctuated quarterly based on the number of patented technology portfolios owned or controlled by our operating subsidiaries, the timing and results of patent filings and other enforcement proceedings relating to our intellectual property rights, the number of active licensing programs, and the relative maturity of active licensing programs during the applicable periods. Additional factors impacting the amount of license fee revenues recognized each period are included below.

We measure and assess the performance and growth of our patent licensing and enforcement business conducted by our operating subsidiaries based on consolidated license fee revenues recognized across all of our technology licensing and enforcement programs on a trailing twelve-month basis. Trailing twelve-month revenues totaled $59.7 million as of June 30, 2009, as compared to $51.8 million as of March 31, 2009, $48.2 million as of December 31, 2008, $42.0 million as of September 30, 2008, and $37.7 million as of June 30, 2008.

The consolidated net loss for the three and six months ended June 30, 2009 was $2.6 million and $5.0 million, respectively, as compared to $5.0 million and $9.5 million, respectively, for the three and six months ended June 30, 2008. Results for the three and six months ended June 30, 2009 included non-cash charges totaling $3.2 million and $6.2 million, respectively, comprised of non-cash stock compensation charges of $2.1 million and $4.1 million, respectively and non-cash patent amortization charges of $1.1 million and $2.1 million, respectively. Results for the three and six months ended June 30, 2008 included non-cash charges of $3.2 million and $6.3 million, respectively, comprised of non-cash stock compensation charges of $1.9 million and $3.8 million, respectively, and non-cash patent amortization charges of $1.2 million and $2.6 million, respectively.

Marketing, general and administrative expenses, including non-cash stock compensation charges, for the three and six months ended June 30, 2009 increased to $6.2 million and $12.0 million, respectively, as compared to $5.5 million and $11.6 million, respectively, for the three and six months ended June 30, 2008, due primarily to an increase in business development related research and consulting expenses, an increase in other corporate, general and administrative costs related to ongoing operations and an increase in noncash stock compensation charges resulting from the issuance of restricted stock incentive awards to new and existing employees subsequent to the end of the second quarter of 2008, in accordance with our customary incentive compensation practices.

In the aggregate, inventor royalties, net income attributable to noncontrolling interests in operating subsidiaries and contingent legal fees expenses increased by 88% and 63%, respectively, during the three and six months ended June 30, 2009, as compared to increases of 111% and 71%, respectively, in related license fee revenues for the three and six months ended June 30, 2008, as discussed above.

Patent-related legal expenses and patent-related research, consulting and other expenses for the three and six months ended June 30, 2009 increased in connection with new licensing and enforcement programs commenced since the end of the prior year period, and an increase in legal expenses related to certain of our ongoing licensing and enforcement actions that are further along in the litigation process.

We pursue enforcement actions in connection with our licensing and enforcement programs which can involve certain risks and uncertainties, including the following:

· Increases in patent-related legal expenses, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our revenue generating opportunities;

· Our patented technologies and enforcement actions are complex, and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents;

· New legislation, regulations or rules related to enforcement actions could significantly increase our operating costs and decrease our revenue generating opportunities; and

· Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position.

During the six months ended June 30, 2009, certain of our operating subsidiaries continued to execute their business strategy in the area of patent portfolio acquisitions, including the acquisition of, or the acquisition of the rights to 13 patent portfolios covering a variety of applications, including the 10 patent portfolios described below:

· Online Promotion. This patented technology generally relates to online promotion of consumer products and can be used to provide consumers with web access to discount coupons and rebate offers.

· Interactive Mapping. This patented technology generally relates to interactive maps and can be used to provide user-generated data, such as places of interest or reviews, over the Internet.

· Improved Anti-Trap Safety. This patented technology can be used to adapt automatic vent closure to changes, such as environment or mechanical wear. This technology may be applicable to vehicles that implement anti-pinch/anti-trap safety systems on powered vents such as windows, doors and sunroofs.

· Improved Commercial Print. This patented technology can eliminate various print artifacts while improving resolution, color and ink consumption from commercial presses. Printers can benefit from these improvements, particularly those who specialize in high volume press work.

· Electronic Securities Trading. This patented technology generally relates to tools for automated electronic securities trading and may be used in online trading.

· User Programmable Engine Control. This patented technology generally relates to the user interface for the engine control module (ECM) and offers control and calibration of the ECM including input and output parameters controlling engine performance.

· Wireless LAN. This patented technology generally relates to wireless local area networking (WLAN) and includes communications architectures for use in spread spectrum systems. This technology can be used in equipment such as laptops, wireless routers, access points, handsets and other consumer electronics devices with WLAN capability.

· Network Monitoring. This patented technology generally relates to monitoring and reporting on management and financial characteristics of networks and can be used to help organizations make resource decisions.

· Medical Image Manipulation. This patented technology generally relates to the manipulation of medical images and can be used in the surgical process.

· Consumer Rewards Program. This patented technology generally relates to consumer rewards programs such as loyalty programs offered by airlines, hotels and credit card companies and may be used to provide a single source for consumers to access and utilize applicable benefits under different loyalty programs.

Refer to "Liquidity and Capital Resources" below for information regarding the impact of patent and patent rights acquisitions on the Consolidated Financial Statements for the periods presented.

As of June 30, 2009, on a consolidated basis, our operating subsidiaries owned or controlled the rights to over 100 patent portfolios, as compared to 95 patent portfolios as of June 30, 2008.

As of June 30, 2009, certain of our operating subsidiaries had several option agreements with third-party patent portfolio owners regarding the potential acquisition of additional patent portfolios. Future patent portfolio acquisitions will continue to expand and diversify our future revenue generating opportunities.

Critical Accounting Estimates

Our unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the SEC on February 26, 2009, in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates section. In addition, refer to Note 2 to the Consolidated Financial Statements included in this report.

Comparison of the Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008

Net Loss Attributable to Acacia Research Corporation (In thousands)

                                               For the Three Months Ended                For the Six Months Ended
                                           June 30, 2009        June 30, 2008       June 30, 2009         June 30, 2008
Net loss attributable to Acacia Research
Corporation                                $       (2,648 )     $       (5,041 )   $        (5,005 )     $        (9,530 )

The changes in net loss were primarily due to the operating results and activities for the periods presented as discussed below.

Revenue (In thousands)

License Fees. Revenues for the three months ended June 30, 2009 included license fees from 22 new licensing agreements covering 16 of our technology licensing and enforcement programs, as compared to 16 new licensing agreements covering 11 of our technology licensing and enforcement programs during the three months ended June 30, 2008. Two licensees accounted for 33% and 10% of license fee revenues recognized during the three months ended June 30, 2009, and two licensees accounted for 27% and 21% of license fee revenues recognized during the three months ended June 30, 2008.

Revenues for the six months ended June 30, 2009 included license fees from 50 new licensing agreements covering 20 of our technology licensing and enforcement programs, as compared to 40 new licensing agreements covering 16 of our technology licensing and enforcement programs during the six months ended June 30, 2008. One licensee accounted for 18% of license fee revenues recognized during the six months ended June 30, 2009, and two licensees accounted for 15% and 12% of license fee revenues recognized during the six months ended June 30, 2008.

The increase in license fee revenues was due to an increase in the number of license agreements executed and an increase in the average revenue per license agreement executed during the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008. License fee revenues recognized by our operating subsidiaries fluctuate from period to period primarily based on the following factors:

· the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;

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

· fluctuations in the total number of agreements executed;

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

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

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

Deferred license fee revenues, representing upfront license fee payments received from licensees at the beginning of the contractual license term, which are deferred and amortized in the statements of operations as license fee revenues on a straight-line basis over the applicable license term, increased to $3.6 million at June 30, 2009, compared to $318,000 at December 31, 2008. Related deferred royalties and contingent legal fees expense, which are also amortized in the statements of operations on a straight-line basis over the applicable license term, totaled $1.8 million at June 30, 2009. The noncurrent portion of deferred royalties and contingent legal fees, totaling $215,000 is included in "Other assets - noncurrent."

Operating Costs and Expenses and Net Income Attributable to Noncontrolling

Interests (In thousands)

                                               For the Three Months Ended                For the Six Months Ended
                                           June 30, 2009        June 30, 2008       June 30, 2009         June 30, 2008
Cost of revenues:
Inventor royalties                         $        2,352       $        2,177     $         5,880       $         4,267
Contingent legal fees                               3,257                1,928               6,420                 4,569
Legal expenses - patents                            2,084                1,014               3,344                 2,001
Research, consulting and other expenses               618                  495               1,066                 1,111
Amortization of patents                             1,060                1,244               2,125                 2,579
Marketing, general and administrative
expenses (including non-cash stock
compensation expense of $2,181 and
$4,101 for the three and six months
ended June 30, 2009, respectively and
$1,938 and $3,767 for the three and six
months ended June 30, 2008,
respectively)                                       6,195                5,511              11,987                11,550
Net income attributable to
noncontrolling interests in operating
subsidiary                                          2,121                    -               2,121                     -

Inventor Royalties, Net Income Attributable to Noncontrolling Interests in Operating Subsidiaries and Contingent Legal Fees Expense. Net income attributable to noncontrolling interests in operating subsidiaries, represents the portion of net proceeds from the licensing and enforcement activities of our majority-owned operating subsidiary that are distributable to the operating subsidiary's noncontrolling interest holders pursuant to the underlying operating agreement. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements, if any, including royalty rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by our operating subsidiaries. As such, inventor royalties, other payments to patent owners and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period and the mix of specific patent portfolios with varying economic terms generating revenues each period.

In the aggregate, inventor royalties and noncontrolling interests in operating subsidiaries increased 105% and 88%, respectively, during the three and six months ended June 30, 2009, as compared to increases in license fee revenues of 111% and 71%, respectively, for the three and six months ended June 30, 2008. Contingent legal fee expenses increased 69% and 41%, respectively, during the three and six months ended June 30, 2009, due to certain patent portfolios with lower contingent fee rates generating revenues during the three and six months ended June 30, 2009, as compared to the patent portfolios generating revenues during the three and six months ended June 30, 2008.

Legal Expense - Patents. Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside law firms engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. The net increase during the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, is primarily due to expenses incurred in connection with new licensing and enforcement programs commenced since the end of the prior year period, and an increase in legal expenses related to certain of our ongoing licensing and enforcement actions that are further along in the litigation process. We expect patent-related legal expenses to continue to fluctuate period to period based on the factors summarized above, in connection with our current and future patent acquisition, development, licensing and enforcement activities.

Research, Consulting and Other Expenses - Patents. Research, consulting and other expenses include third-party licensing and enforcement related research, development, consulting, and patent maintenance costs incurred in connection with the licensing and enforcement of patent portfolios. These costs fluctuate period to period based on patent-related licensing and enforcement activities in each period. The increase during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, is primarily due to expenses incurred in connection with new patent-related licensing and enforcement programs commenced since the end of the prior year period. Research, consulting and other expenses decreased slightly during the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, due to normal fluctuations in related licensing and enforcement activities. We expect patent-related research, consulting and other expenses to continue to fluctuate period to period based on the factors summarized above, in connection with our current and future . . .