Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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 such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨x No ¨

Indicate by check mark if 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. ¨x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

The aggregate market value of issuer’s outstanding Common Stock held by non-affiliates was approximately ~~$72~~$53 million based upon the bid price of issuer’s Common Stock on March 31, ~~2010.~~2011.

As of December ~~22, 2010, 71,806,694~~15, 2011, 10,525,941 shares of the issuer’s Common Stock were outstanding.

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Annual Report on Form 10-K except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, ~~formerly known as InterActive Group, Inc.,~~ (2) the terms the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers collectively to Arrowhead Madison Inc. (“Madison”), Calando Pharmaceuticals, Inc. (“Calando”), ~~Unidym,~~Ablaris Therapeutics, Inc. (“~~Unidym”~~Ablaris”), Agonn Systems, Inc. (“Agonn”,) and Tego Biosciences Corporation (“Tego”) as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”) and Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, and (5) the term “Common Stock” refers to Arrowhead’s Common Stock and the term “stockholder(s)” refers to the holders of Arrowhead Common Stock.

Arrowhead Research Corporation is a ~~development~~clinical stage ~~nanotechnology holding~~nanomedicine company ~~that forms, acquires, and operates subsidiaries commercializing~~developing innovative nanotechnologies. By working closely with leading scientists and universities, Arrowhead identifies advances in nanotechnology and matches them with product development opportunities in high-growth markets. The Company is focusing on developing and advancing a portfolio of subsidiaries in the field of nanomedicine.

Providing strategic management, financing, and operational services to its subsidiaries and minority investments, Arrowhead takes an active role in their development, keeping the business and development teamstherapies at the ~~subsidiary companies focused~~interface of biology and nanoengineering. Arrowhead’s world-class capabilities and intellectual property covering nucleic acid delivery, siRNA chemistry, and tissue targeting allow it to design and develop therapeutic agents for a wide range of diseases. The company’s lead products include CALAA-01, an oncology drug candidate based on ~~operations, technical development~~the gene silencing RNA interference (RNAi) mechanism, and ~~near term revenue opportunities.~~Adipotide^™, an anti-obesity peptide that targets and kills the blood vessels that feed white adipose tissue. Arrowhead is leveraging its proprietary Dynamic Polyconjugate^™ (DPC), Liposomal Nanoparticle (LNP), and RONDEL^™ delivery platforms to support its own pipeline of preclinical and clinical candidates and to secure external partnerships and collaborations with biotech and pharmaceutical companies.

~~Arrowhead’s ultimate goal is to realize the value of its investments through:~~

Arrowhead owns two majority-owned operating subsidiaries, Calando Pharmaceuticals and Unidym, Inc. and has minority investments in two early-stage nanotechnology companies, Nanotope, Inc. and Leonardo Biosystems, Inc. Arrowhead also owns two nonoperating subsidiaries, Agonn Systems, Inc. and Tego Biosciences Corporation. Arrowhead plans to add to this portfolio through selective acquisition and formation of new nanomedicine companies, as capital resources allow.

Arrowhead was originally incorporated in South Dakota in 1989, and was reincorporated in Delaware in 2000. The Company’s principal executive offices are located at ~~201~~225 South Lake Avenue, Suite ~~703,~~300, Pasadena, California 91101, and its telephone number is (626) 304-3400. As of September 30, ~~2010,~~2011, Arrowhead had 11 full-time employees at the corporate office and seven full-time employees at its Subsidiaries. On October 21, 2011, as a result of an acquisition of Roche’s RNAi business, 39 full-time employees were added at Arrowhead’s newly acquired Madison, Wisconsin research facility.

Partnerships with other pharmaceutical and biotech companies to drive revenue are the primary focus of our business development efforts. Given the array of our siRNA delivery platforms, we expect to enter disease specific siRNA therapeutic collaborations and siRNA delivery collaborations with large pharmaceutical and biotechnology companies which we believe will provide the opportunity to generate revenue in the near term. Using our experience, disease specific collaborations will seek to develop and optimize siRNA lead candidates based on disease targets supplied by the partner. The siRNA therapeutics will be optimized to operate efficiently using the delivery system that best addresses the disease indication. Arrowhead will seek to generate revenue through upfront technology access fees, research funding, research milestones, licensing fees, clinical milestone payments and royalties. The company also plans to continue development of its internal preclinical and clinical pipeline including ongoing RONDEL-enabled siRNA drug candidates, DPC-enabled drug candidate development, and the non-siRNA-based anti-obesity drug candidate, Adipotide. If these efforts are successful, these candidates may be sold or out-licensed in the future.

In October 2011, Arrowhead acquired Roche’s RNAi business, including its RNA therapeutic assets, related intellectual property and research facility in Madison, Wisconsin. Over the last year, we have been implementing our transition from a diversified nanotechnology company to a pure play nanomedicine company. This strategic acquisition serves as the cornerstone of this transition. We are now a full-service, fully-enabled nanomedicine company with new R&D capabilities that can support the development of our existing and new programs. Our recently acquired scientific leaders, licensed technology, and development operations are expected to accelerate both our RNAi and non-RNAi programs synergistically.

The addition of these assets to Arrowhead’s existing RNAi technologies solidifies our position as one of the most advanced and broadest RNAi therapeutics companies in the world. With completion of the Roche acquisition, Arrowhead now possesses the following siRNA assets:

We believe this represents one of the broadest siRNA drug technology and delivery portfolios in the world. We have extensive know how and expertise in the siRNA therapeutic space, and importantly, we have extensive delivery capabilities.

RNA interference (RNAi) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a protein of interest. Deemed to be one of the most important recent discoveries in life science with the potential to transform medicine, the discoverers of RNAi were awarded the Nobel Prize for Physiology or Medicine in 2006. Mediated by small interfering RNAs (siRNA), a class of ribonucleic acid (RNA) molecules, 20-25 nucleotides in length, RNAi-based therapeutics can leverage this natural pathway of gene silencing to potentially target and shut down specific disease causing genes.

Small molecule or antibody drugs have proven effective at inhibiting certain cell surface, intracellular, and extracellular targets. However, certain drug targets such as intranuclear genes and some proteins have proven difficult to inhibit with traditional drug-based and biologic therapeutics. Developing effective drugs for these targets would have the potential to address a very large underserved market for the treatment of many diseases. Using its potential to specifically target and silence any gene target, siRNA therapeutics may be able to address previously “undruggable” targets, unlocking the market potential of such targets.

Several classes of RNA molecules have been utilized to generate RNAi mediated gene knockdown. Canonical siRNAs are the traditionally used 20-25 nucleotide long RNA molecules that interfere with post-transcription gene expression. Meroduplex siRNAs are three stranded RNA constructs also capable of interfering with post transcription gene expression. Dicer substrates are synthetic RNA duplexes that are approximately 27 nucleotides long, and have been shown in some studies to be more potent than 21-mer siRNA with less immune stimulation. Through licenses, Arrowhead has access to all three of these technologies collectively covering a broad range of potential targets.

To date, the primary challenge to siRNA therapeutics has been delivering the fragile, often immunogenic and otherwise rapidly cleared siRNA molecules, into the cytoplasm of the cell, where RNAi activity occurs. To date, the hurdle of delivery has prevented siRNA therapeutics from reaching their full potential. Many companies have attempted to overcome the delivery challenge. Most early systems involved cholesterol conjugates or traditional liposomes. These have not yet proven optimal due to toxicity and immunogenicity when studied in clinical trials.

To address the delivery challenge, Arrowhead has assembled a leading team of researchers with extensive siRNA therapeutic know how and one of the broadest portfolios of siRNA delivery technologies available, with the potential to unlock siRNA as a therapeutic class through superior delivery, including:

No single method of delivery will be optimal for all disease areas, targets, and tissue types throughout the body. However, Arrowhead believes that these five technology platforms together represent the most comprehensive portfolio of solutions for effective delivery of therapeutic siRNA against a broad range of disease indications. We see this as transformational for Arrowhead and potentially for RNAi as a new therapeutic class of drugs. The ability to optimize delivery on a target-by-target basis is a critical tool, and we believe it positions Arrowhead as a powerful partner for biotech and pharmaceutical companies interested in developing candidates against multiple targets which may be “undruggable” by small molecule inhibitors or antibodies. We intend to use this leadership position to negotiate partnerships and collaborations as well as support our own internal pipeline of drug candidates.

The ~~Company’s~~DPC delivery system represents an elegant solution to the siRNA delivery problem, specifically designed to overcome barriers to systemic administration of siRNA. First developed by our scientists in Madison, Wisconsin, the inspiration for DPC technology came from the physical characteristics of viruses, nature’s own nanoparticles for nucleic acid delivery. Viruses are efficient at finding their target cells and delivering their nucleic acid payload to the proper cellular compartment. Key features of viruses are their small size, their overall negative surface charge, their specificity for particular cell types based on receptors unique to that cell, and their ability to disassemble and release their nucleic acid cargo to the proper cell compartment in response to cellular triggers. All of these features are incorporated into DPC technology.

DPCs are small nanoparticles, 5-20 nanometers (nm) in size, composed of an amphipathic polymer to which shielding agents such as polyethylene glycol, as well as targeting ligands are reversibly attached. In some constructs, the siRNA payload is attached to the DPC, while in other constructs, the siRNA circulates attached to a different carrier. When attached, the DPC construct protects the siRNA payload while allowing the polymer to circulate in the blood without creating undue toxicity. The targeting ligand guides the nanoparticles to the cell of interest where, together with the siRNA, it is taken up into a membrane-enclosed cellular compartment known as an endosome. The polymer is selected for its ability to lyse the endosomal membrane which releases the siRNA into the cytoplasm. There, it engages the cell’s RNAi machinery, ultimately resulting in knockdown of target gene expression. The lytic chemistry of the DPC polymeric backbone is modified, or “masked”, using proprietary chemistry. Masking of the polymer’s lytic chemistry accomplishes two ~~majority-owned Subsidiaries,~~interrelated objectives that are critical to in vivo siRNA delivery:

Dynamic Polyconjugate system and ~~licensing a variety~~mechanism of ~~nanotechnology products and applications, including anti-cancer~~siRNA delivery:

We believe our DPC technology is radically different from standard liposomal or lipid nanoparticle siRNA delivery systems used by the majority of RNAi therapeutics ~~regenerative therapeutics, advanced drug~~companies. DPCs are smaller than lipid-based systems, enabling more efficient distribution from the vasculature to the target tissue. DPCs can use targeting ligands for cell-type specific delivery, ~~technology,~~which has yet to be achieved with the lipid-based systems used in clinical development programs. The modular nature of DPCs allows each component to be optimized for higher efficacy and ~~carbon nanotube (CNT)-based transparent conductive films (TCFs). Arrowhead anticipates expanding its portfolio through selective acquisition~~lower toxicity. As a polymer-based system, DPCs are fundamentally different from lipid-based systems. This has the potential to open up an entirely new class of macromolecules to enable siRNA delivery.

Hepatocytes, the key parenchymal cells of the liver, are a particularly attractive target cell type for siRNA delivery given their central role in several infectious and metabolic diseases. Latest generation DPCs have shown high effectiveness in rats and non-human primates with ED80 (dose producing 80% knockdown of the gene of interest) values of ~0.1 mg/kg siRNA after a single dose. Increasing the dose two-fold in non-human primates results in >99% knockdown with a duration of effect of nearly 7 weeks. DPCs are also well tolerated and have single-dose therapeutic indices of >10 in non-human primates, indicating that there is a ten-fold safety margin between the effective dose and the ~~formation of new companies, as capital resources allow.~~

~~As of September 30, 2010, Arrowhead held a majority~~toxic dose. The magnitude of the ~~outstanding voting stock~~safety margin and efficiency of gene knockdown in non-human primates is, to our knowledge, unprecedented in the therapeutic RNAi field as compared to available data generated with competing delivery systems, and position DPC technology as a leading technology for siRNA delivery to liver.

Our DPC cancer delivery program is developing the optimal components for targeting DPCs to tumors. This includes identifying ligands for efficient targeting, screening polymer libraries for the most potent polymer for a given cancer cell type and enhancing tumor uptake by modulating the pharmacokinetic properties of the ~~following two operating Subsidiaries.~~

~~Arrowhead~~DPC. DPCs for several types of tumors are currently under development. Hepatocellular carcinoma (HCC) has been one of our focus areas. Gene knockdown of 40-50% has been achieved with a ~~minority ownership position~~single dose of tumor-directed DPCs in ~~each of the following early-stage nanomedicine companies:~~

~~Majority Owned Subsidiaries~~a mouse orthotopic HCC tumor model. These results equal or surpass those published with other best-in-class siRNA delivery platforms and validate our overall strategy for tumor targeted DPC delivery. Our current focus is on further improving delivery to tumors, gene knockdown efficacy and therapeutic index by optimizing individual DPC components in animal models.

Founded by Arrowhead in 2005, Calando is a clinical stage nano-biotechnology company ~~at the forefront of~~focused on RNAi ~~therapeutics. Calando has developed~~therapeutics developing RONDEL, a nanoparticle-based drug delivery system, for siRNA. ~~Calando’s platform technology is currently being tested~~In August 2011, we completed enrollment in ~~an open-label~~the Phase I ~~dose escalating clinical~~ trial of its lead siRNA candidate in oncology, CALAA-01. Initial proof of concept data showed systemic delivery of siRNA and the successful “silencing” of a widely recognized cancer gene via RNA interference (RNAi) in humans. A Phase Ib trial has been initiated to ~~systemically deliver—for what is believed to be for the first time—~~determine if a ~~siRNA drug candidate targeting cancer. The trial is progressing toward determining the primary endpoints of~~modified dosing schedule will increase patient tolerability and ~~maximum tolerated dose, while demonstrating preliminary proof-of-concept RNAi activity in some patients.~~to gather additional data.

~~Calando~~RONDEL is based on pioneering technology invented in the Chemical Engineering department of the California Institute of ~~Technology. Developed to reduce the debilitating effects of cancer treatment, Calando’s~~Technology by Dr. Mark Davis. Our proprietary molecules are designed to ~~improve the safety~~safely and ~~efficacy of cancer therapeutics.~~effectively deliver small RNAs to target cells. Currently focused on ~~siRNA and~~ oncology applications, ~~Calando’s~~Our flexible platform ~~technology~~ has the potential to be applied to a wide range of diseases beyond cancer, as well as to therapeutic classes beyond siRNA therapeutics.

~~Calando is~~We are focused on the clinical development of RONDEL^TM, ~~its siRNA delivery technology,~~ and CALAA-01, the associated drug candidate. Interim clinical results show ~~that CALAA-01 is well tolerated and has demonstrated~~ preliminary proof of RNAi activity in patients treated with the highest doses. These results represent several notable “firsts” in the field of RNAi, including first to demonstrate definitive RNAi delivery after systemic administration and first to show dose dependent accumulation in target cells. In addition, CALAA-01 has been shown to mediate specific gene inhibition in humans as evidenced by mRNA knockdown and protein knockdown in tumor biopsies.

In addition, in December 2008, ~~Calando~~we concluded a Phase I trial with ~~IT-101~~CRLX101 (formerly IT-101) using a drug candidate consisting of its delivery system and a small molecule anti cancer agent. Patients from this clinical trial reported fewer and less serious side effects with several cases of stable disease over many months of treatment. One patient with pancreatic cancer had stabilized disease for 17 months. The further development of the small molecule delivery platform and IT-101, the associated drug candidate, was licensed to Cerulean Pharma, Inc., (“Cerulean”) a private biotech company in Boston, Massachusetts in June 2009. Cerulean has since advanced CRLX101 to a Phase II clinical trial in non-small cell lung cancer.

Based on a novel polymeric sugar (linear cyclodextrin) molecule, ~~Calando’s drug delivery system~~RONDEL has been applied thus far to the delivery of two classes of therapeutics: siRNA and other oligonucleotides and small molecule drugs. The polymer is combined with the drug molecule to form a drug containing ~~nanoparticles~~nanoparticle sized larger than 10 nanometers and smaller than 100 nanometers. ~~The Company believes~~We believe that this particle size is ~~important;~~important: drug molecules ~~are typically sized~~ below 10 nanometers ~~and~~ are quickly cleared from the body in the ~~urine. Nanoparticles sized~~urine and nanoparticles larger ~~than 10 nanometers circulate longer and thus can allow administration of lower doses to patients. Nanoparticles sized smaller~~ than 100 nanometers ~~can~~are not able to escape ~~the circulatory system through the abnormally~~ leaky blood vessels that feed ~~tumors~~tumors. Nanoparticles between 10 and ~~are retained in the tumor tissue due~~100 nanometers can lead to ~~a lack of effective tumor lymphatic drainage. Preferential~~preferential accumulation in tumor tissue, where the drug can take effect, ~~leaves~~leaving other tissues ~~relatively unaffected.~~less affected. The drug delivery system has the added benefits of increasing solubility, allowing targeting of the nanoparticles, and ~~being non-immunogenic.~~having a low immune stimulatory potential.

RNA interference or “RNAi” is a naturally occurring mechanism for the regulation of gene expression that selectively inhibits the activity of, or “silences,” target genes. Discovered by scientists in 2002 who were subsequently awarded the Nobel Prize in Physiology or Medicine in 2006, RNAi has been hailed as having potential to be a tremendous breakthrough in treating diseases. Because many diseases are caused by the inappropriate activity of genes, RNAi has potential application to many serious or fatal diseases including cancer, AIDS, hepatitis C, Huntington’s disease and others. The mechanism is mediated by “small interfering RNA” known as siRNA.

One of the key challenges to using RNAi therapy has been the inability to systemically deliver siRNA in humans. “Naked” siRNA is degraded and destroyed by nucleases in the bloodstream and is not taken up by cells. ~~Calando’s~~The RONDEL^TM system is providing new hope that effective siRNA delivery can be achieved safely and economically. ~~Calando’s~~Our polymers form the foundation for ~~its~~a three-part RNAi/Oligonucleotide Nanoparticle Delivery (RONDEL) technology. The first component is the positively charged polymer that, when mixed with siRNA, binds to the negatively charged “backbone” of the siRNA. The polymer and siRNA self-assemble into nanoparticles less than 100 nm diameter that fully protect the siRNA from nuclease degradation in serum. The cyclodextrin in the polymer enables the surface of the particles to be decorated by stabilizing agents and targeting ligands. These surface modifications are formed by proprietary methods involving the cyclodextrins.

The surface-modifying agents have terminal adamantane groups that form inclusion complexes with the cyclodextrin and contain ~~poly ethylene~~polyethylene glycol (PEG) to endow the particles with properties that prevent aggregation, enhance stability and enable systemic administration. Targeting molecules can be covalently attached to the adamantane-PEG modifier, enabling the siRNA-containing particles to be targeted to tissues of interest.

CALAA-01 is a combination of RONDEL and a patented siRNA targeting the M2 subunit of ribonucleotide reductase, a clinically-validated cancer target. Ribonucleotide reductase catalyzes the conversion of ribonucleosides to deoxyribonucleosides and is necessary for DNA synthesis and replication, and thus tumor growth. The ~~siRNA,~~internally developed ~~at Calando,~~siRNA demonstrates potent anti-proliferative activity across multiple types of cancer cells. We believe the use of CALAA-01 in ~~Calando’s~~our Phase I trial, initiated in June 2008, was the first siRNA therapeutic candidate to target cancer in a human clinical study and also the first systemic delivery of an siRNA therapeutic candidate. The trial is utilizing a dose escalation protocol which appears to be nearing the highest dose in the protocol and yielding promising preliminary results. Through September 30, 2010, 18 patients were enrolled in the Phase I clinical trial out of a planned protocol of up to 36 patients.

Interim clinical results were ~~recently~~ presented at the 2010 American Society of Clinical Oncology meeting (ASCO). Data from a total of 15 patients accrued to 5 dose levels (3, 9, 18, 24, 30 mg/m²) showed that ~~CALAA-01 was well tolerated. Treatment-related~~treatment-related adverse events were mostly mild to moderate with fatigue, fever/chills, allergic, or gastrointestinal-related adverse events most frequently observed. Importantly, no changes in coagulation, liver function tests, or kidney function were observed.

Analysis of tumor biopsies from three melanoma patients showed the presence of intracellular nanoparticles in amounts that correlated with dose. Additionally, a reduction was found in both the RRM2 messenger RNA and protein levels when compared to pre-dosing tissue. Furthermore, the presence of siRNA-mediated mRNA cleavage products was confirmed by 5’-RACE, demonstrating that siRNA-mediated mRNA cleavage occurs specifically at the site predicted for an RNAi mechanism. These ~~preliminary~~ results were published in March 2010 in the scientific journalNature, citing these interim data from our Phase I trial as the first evidence of systemic delivery of siRNA, and the successful “silencing” of a widely recognized cancer gene via RNA interference in humans.

In August 2011 enrollment into the Phase I clinical trial was completed. Adverse events observed coincided with an increase in certain cytokine levels. Elevation in cytokines is consistent with an acute immune response to the natural siRNA used in CALAA-01. These reactions also appeared to be transient, such that if a patient stayed on CALAA-01, the cytokine responses often subsided. Based on these results, a Phase Ib trial was initiated using a modified dosing schedule in which patients are pretreated with a lower dose to assess whether this strategy can increase patient safety and further increase the maximum tolerated dose. Patient accrual is ongoing ~~at the University of California, Los Angeles, California and the START clinic, San Antonio, Texas~~ and additional safety and pharmacodynamic data will be forthcoming.

~~Calando plans~~We were was encouraged that the adverse events observed to ~~further develop CALAA-01~~date did not appear to be related to the RONDEL delivery system but were consistent with an innate immune response to the natural, unmodified siRNA inside. This opens the pathway to potentially overcome these symptoms by introducing strategic chemical modifications in the ~~clinic as capital resources may allow. This may include~~siRNA component in future product candidates, a Phase Ib / Phase II clinical trial in combination with traditional chemotherapeutics in cancer indications with high unmet medical need. Combination therapy is especially promising for CALAA-01, because overexpression of its cellular target, RRM2,strategy that has been ~~associated with resistance~~proven in the literature to ~~certain~~significantly suppress these types of ~~chemotherapeutics. In pre-clinical studies, CALAA-01 has shown significant synergistic activity in these cases.~~immune responses.

The other polymeric drug delivery technology, Cyclosert, was designed by Calando’s scientists for the delivery of small molecule drugs. Cyclosert provides many of the same benefits as the RONDEL system. In December 2008, Calando completed a Phase I trial with IT-101, comprised of Calando’s polymer and Camptothecin, a potent anti-cancer drug, with a positive safety profile and indications of efficacy. On June 23, 2009, Calando entered into agreements to license Cyclosert and IT-101 to Cerulean. Under the terms of the agreements, Calando granted Cerulean an exclusive royalty-bearing worldwide license to certain patent rights and know-how and transferred to Cerulean certain intellectual property related to the linear-cyclodextrin drug delivery platform and IT-101 in exchange for an initial payment of $2.4 million. Cerulean also will pay development milestone payments of up to $2.75 million if IT-101 progresses through clinical trials and receives marketing approval. If approved, Calando is also entitled to receive up to an additional $30 million in sales milestone payments, plus royalties on net sales. Under the agreements, Calando retained the rights to use the linear-cyclodextrin drug delivery platform to deliver any kind of nucleic acid including siRNA. As such, Calando retains the rights to its RONDEL platform, as well as the CALAA-01 and CALAA-02 lead drugs.

Calando used contract manufacturers to manufacture each of its product candidates and has on hand sufficient material to complete the CALAA-01 Phase I study. These materials were manufactured in accordance with a quality control and quality assurance program, including a set of standard operating procedures and specifications, designed to ensure that its products are manufactured in accordance with current Good Manufacturing Procedures, or cGMPs, and other applicable domestic and foreign regulations. Currently, Calando has no laboratory facilities and is reliant on contract R&D facilities to support its clinical trial. Along with its internal resources, Calando uses consultants to manage and monitor its clinical trial. Calando plans to continue to rely on third parties to meet these needs.

The development of CALAA-01, IT-101 and other pipeline candidates are preliminary, and there is no assurance that they will be successful. There are numerous technical, regulatory and marketing challenges that must be overcome to successfully commercialize Calando’s products, including, but not limited to the following:

It is not possible at this time to accurately determine the final cost of the development projects, the completion dates or when or if revenue will be generated. For additional information relating to the risks of developing new therapies, please see Item 1A – Risk Factors.

~~Calando controls~~We control an intellectual property portfolio of patents covering certain linear cyclodextrin polymers and related technology (the “linear cyclodextrin system”). The portfolio covers both RONDEL and Cyclosert. In June 2009, Calando sold and assigned to Cerulean certain ~~Calando owned-patents~~patents for linear cyclodextrin polymers conjugated to drugs. Additionally, Calando granted Cerulean an exclusive license under its rights to the linear cyclodextrin system to develop certain drug products. ~~Calando retained~~We retain rights to use the linear cyclodextrin system to develop drugs in which the therapeutic agent is a nucleic acid (e.g., siRNA), a second generation epothilone, tubulysin or cytolysin.

~~Calando~~We also ~~owns~~own an issued patent covering the siRNA active ingredient in CALAA-01 and has filed a patent application to cover the siRNA active ingredient of CALAA-02. ~~Calando has~~We have licensed patents from Alnylam relevant to siRNA therapeutics for CALAA-01 and CALAA-02. ~~Calando has in-licensed from R&D Biopharmaceuticals exclusive rights to second generation synthetic epothilones. Calando has~~We have out licensed to R&D Biopharmaceuticals the use of the linear cyclodextrin system for delivering tubulysin and cytolysin as well as second generation synthetic epothilone drugs. The RNAi and nanoparticle drug delivery patent landscape is complex and rapidly evolving. As such, ~~Calando~~we may need to obtain additional patent licenses prior to commercialization of its lead drug candidates.

Despite advances in drug discovery, pharmaceutical firms remain challenged by getting the right compound to the right place in the human body, where it can maximize its effect. Additionally, over the next decade, multiple “blockbuster” pharmaceuticals will go off patent, resulting in a significant loss to the pharmaceutical industry as generic versions of these drugs enter the market. Patent expiration coupled with a challenging drug discovery environment, and continued problems with late stage trial failures has left pharmaceutical pipelines thin. In response, the industry has pursued reformulation of existing or previously failed compounds using new drug delivery technology to expand pipelines and prolong patent life. effect while minimizing side effects.

second leading cause of death in the United States and accounts for approximately one in every four deaths. The National Institutes of Health has estimated the direct medical cost of cancer to be in excess of $74 billion per year. Dose limiting toxicity, poor tissue specificity, and large effective distribution are major restrictive factors in effective cancer chemotherapy. Consequently, complete tumor response is not often achieved in patients receiving chemotherapy alone. We believe that this offers a potentially significant opportunity for firms developing technologies to more effectively deliver anti-cancer agents to malignant cells.

~~Calando~~ According to Decision Resources, the global market for oncology therapeutics is ~~engaged~~expected to grow from $57 billion in 2007 to $85 billion in 2013, which is approximately twice the ~~rapidly changing business~~pace of the broader market for pharmaceuticals with a CAGR of 10.8% through 2013 versus 4.6% for all pharmaceuticals. This growth is driven by high unmet medical need for new cancer therapeutics, a high price premium generated by novel drugs to treat conditions with few other available options, and insurers willing to reimburse at high prices for novel therapies due to lack of alternative therapies. Additionally, the shift towards transforming cancer into a chronic illness by management with long term suppressive therapies bodes well for oncology companies developing ~~treatments~~drugs that will require lifelong maintenance therapy versus the old line chemotherapy cyclic therapy. There is ample opportunity for ~~human disease~~novel therapeutics in cancer. siRNA may provide new therapeutics through the ~~regulation of gene expression and delivery of proprietary novel cancer therapies. Competition in these fields is intense as other companies are developing therapies similar~~ability to ~~our nanoparticle drug delivery systems, and targeting patient populations that are similar to the patient populations that are targeted~~knockdown targets previously “undruggable” by Calando. A number of companies are pursuing research and development programs relating to the emerging area of cancer therapies using nanoparticle conjugates and RNA interference. A number of these companies have filed patent applications in these areas. It is difficult to predict whether any of these companies will be successful in obtaining patent protection, whether the patent protection sought will address important aspects of the technology and to what extent these companies will be successful in their RNA interference efforts. New competitors may arise and we may not be aware of all competitors in this space. A number of Calando’s competitors are more established and have greater resources than Calando. Furthermore, even if Calando is successful in developing commercial products, it is possible that competitors will achieve greater market acceptance.

Systemic delivery of siRNA and other oligonucleotide therapeutics has proven critical for the success of all nucleic acid therapeutics. Naturally, multiple firms have recognized the problem of systemic siRNA delivery as a significant opportunity and other firms are developing products in this space. Companies developing siRNA delivery products include but are not limited to Alnylam, Merck, Novartis, Tekmira, RXi Pharmaceuticals, Benitec, Quark Pharmaceuticals, Marina Biotech, Isis Pharmaceuticals and Silence Therapeutics. Additionally, many academic groups are developing and may seek to commercialize siRNA delivery technologies.monoclonal antibodies or small molecule drugs.

Christopher Anzalone, Ph.D., is the CEO of Calando. ~~Dr. Anzalone is also the CEO of Arrowhead, Nanotope and Leonardo.~~ Thomas Schluep, Sc.D., is the Chief Scientific Officer (CSO) of Calando.

Calando’s Board of Directors consists of R. Bruce Stewart, Executive Chairman of Arrowhead, Christopher Anzalone, CEO and director of Arrowhead, Nanotope and Leonardo, Dr. Bruce Given, COO of Arrowhead, and Edward W. Frykman, a member of the Arrowhead Board. Dr. ~~Bruce Given and Dr.~~ Mostafa Analoui ~~are~~is an independent Board ~~members.~~member.

As of September 30, ~~2010, there were no full time employees at Calando. Two former employees~~2011, Arrowhead owned approximately 79% of ~~Calando have been hired by Arrowhead~~Calando’s outstanding common stock and ~~focus~~74% on ~~managing Calando’s ongoing clinical trial.~~a fully diluted basis.

~~Unidym~~We founded Ablaris, a nanomedicine company, to commercialize a new class of fat-targeting drugs for the obesity and diabetes markets. Obesity is a ~~leader in carbon nanotube-based transparent, conductive films (TCFs)~~prevalent metabolic disorder associated with an increased risk of type 2 diabetes, hypertension, cardiovascular diseases, stroke and cancers. Additionally, obese individuals suffer from associated psychological effects such as anxiety and

depression. Non-pharmacological management of obesity, including diet changes and exercise, is first line treatment; gastrointestinal bypass or gastric banding procedures offer alternative options for treatment of severe obesity after less drastic options have failed. These surgical procedures have significant associated risks, including death. Additionally, with the exception of the gastric bypass operation, diet and exercise are often insufficient to normalize body weight and prevent the diseases associated with obesity, due to the difficulty experienced by most adhering to a strict dietary and exercise regimen. Thus, safe and effective drugs are needed for the ~~electronics industry. TCFs~~treatment of obesity and related disorders.

Seventy two million Americans are classified as obese, over one-third of the U.S. adult population, according to the Centers for Disease Control (CDC). US healthcare costs for obesity were estimated to be $147 billion in 2009 and are accelerating rapidly (Finkelstein, et al. Health Affairs 2009, 28(5), w822). An industry forecaster, Global Data, estimates that the $1.1 billion worldwide market (2009) for anti-obesity drugs could double to $2 billion by 2017, with projected annual growth rate of 7 percent. “The increasing patient population and high unmet need in terms of safety and efficacy will be the primary drivers of this growth.” (GlobalData, “Anti-Obesity Therapeutics - Pipeline Assessment and Market Forecasts to 2017”).

Despite the size of the potential market, obesity remains a ~~critical component~~large and growing unmet medical need. It has been over a decade since the FDA has approved a new weight loss drug. In 2010, the FDA declined to approve three new drugs for weight loss indications, Orexigen Therapeutics Inc.’s Contrave^TM, Arena Pharmaceuticals Inc.’s lorcaserin and Vivus Inc.’s Qnexa^TM, due to various safety concerns. Theratechnologies Inc’s drug tesamorelin was approved in ~~devices~~2010 to reduce visceral adipose tissue, but only for a narrow indication in HIV-infected patients with lipodystrophy, not as a broad weight-loss drug. Arrowhead has been keenly interested in the obesity market, but has been careful to identify a platform and target indications where we believe we can deliver a balance of patient benefit and a safety profile that would be acceptable to the FDA and other regulatory authorities.

Ablaris’ lead compound, Adipotide™, targets a receptor expressed by the endothelial cells lining the blood vessels of white adipose (fat) tissue. This targeting ligand was discovered usingin vivo phage display, a technique in which a randomly generated library of peptides was injected into an animal, and sequences that homed to white fat were isolated and amplified. The targeting ligand was then fused to an antimicrobial agent designed to cause cell death (apoptosis). This apoptosis-inducing peptidomimetic has not been shown to have an effect on mammalian cells in systemic circulation, but it induces cell death once internalized by selectively targeted cells by disrupting their mitochondrial membranes. Because fat requires a continuous turnover of new capillaries to supply oxygen and maintain its storage capacity, targeted destruction of these blood vessels leads to the gradual resorption of fat and correspondingly dramatic weight loss in treated animals. This technology was developed by Drs. Wadih Arap and Renata Pasqualini at the MD Anderson Cancer Center in Houston, Texas. In December 2010, we obtained an exclusive world-wide license for its use in weight-loss and obesity-related metabolic conditions, including diabetes.

Preclinical studies of the drug in rodent models were first reported in the highly respected, peer-reviewed journalNature Medicinein 2004. These studies showed obese mice lost over 30% of their body weight after only one month of daily, subcutaneous injection of the Adipotide™ treatment. These results were confirmed by an independent laboratory and reported in the journalDiabetes in 2010. However, a major hurdle in the development of weight-loss drugs is the significant differences in the physiological and metabolic regulation of food intake and energy expenditure between rodents and primates. To address this challenge, Drs. Arap and Pasqualini, in collaboration with Ablaris, carried out extensive studies of adipotide therapy in three species of non-human primates. These studies were reported in the journalScience Translational Medicinein November 2011. In spontaneously obese rhesus monkeys, a 28-day course of Adipotide™ treatment caused a 7-15% total body weight loss with a corresponding 27% average reduction in abdominal fat. Importantly, weight loss was shown to be primarily in the form of fat loss and not fluid loss or muscle wasting. Insulin resistance, a key risk factor for diabetes, rapidly improved in the obese monkeys during Adipotide™ treatment. Lean monkeys treated with Adipotide™ did not lose weight, indicating that the mechanism of action may be selective for obese animals. The drug was well-tolerated in monkeys, with minimal side-effects at the therapeutic dose. Recently, researchers at MD Anderson have validated the existence and function of the receptor targeted by Adipotide™ in humans— a result which was published in theProceedings of the National Academy of Sciencesin October 2011, which we believe bodes well for clinical translation of this therapeutic strategy.

Most weight loss drugs in clinical development target the central nervous system (CNS), acting on the brain to increase metabolic energy expenditure and/or decrease food intake through regulatory pathways for appetite and satiety. Because these pathways can have other wide-ranging functions, many weight-loss drugs have failed due to psychological or cardiovascular

side-effects. By targeting the fat vasculature directly, rather than indirectly through the CNS, we believe that Adipotide™ may avoid these negative side effects. Along with our collaborators at MD Anderson, we have focused initially on narrower indications where a rapid reduction of abdominal fat may elicit a near-term benefit in reduction of morbidity and mortality. We believe that this approach may offer a more rapid and cost-effective path to market, if the drug is shown in human clinical trials to be safe and effective.

MD Anderson has filed an Investigational New Drug (IND) application for a first-in-man, Phase I evaluation of Adipotide™ (also known as Prohibitin TP-01) in obese men with castrate-resistant prostate cancer. White adipose tissue is known to produce hormones that promote prostate cancer growth. The goal of the Phase I clinical trial is to determine the maximum tolerated dose (MTD) and assess the safety of Adipotide™ in humans. Follow-on studies will determine if decreasing fat can slow the growth of prostate cancer. Responding to a response from the FDA, MD Anderson has submitted additional information, and pending a favorable response the study will begin enrollment soon thereafter. The study is being sponsored and funded by MD Anderson, and Ablaris is not responsible for any of the associated direct costs.

In addition to our lead compound, Adipotide™ the company is actively pursuing development of novel follow-on compounds in the adipotide-class. Given that the dosing regimen used in preclinical studies (daily subcutaneous injection for 28 days) may not be optimal in the clinical setting, our efforts are focused on altering the pharmacokinetics of the drug to enable other formulations and treatment regimes, such as ~~touch panels, displays,~~a sustained release formulation for once-weekly injection or long-term sub-dermal implant. Moreover, because long-term use needs to be anticipated for regulatory approval of a weight-loss drug, our pipeline development is also focused on broadening the therapeutic index of Adipotide™, through both enhanced ligand-receptor interactions (increased potency) and ~~thin-film solar cells. For example, both touch panels~~altered renal clearance (decreased toxicity). These efforts have already identified several new lead candidates, which have shown similar efficacy to the original compound with reduced renal toxicity. These compounds are covered by pending patents applications and LCDs typically employ two TCF layers per device. Unidym’s TCFs offer substantial advantages over the incumbent technology, indium-based metal oxides, including: improved durability, lower processing costs, and lower overall cost structure.

Unidym’s products are based on electronics-grade carbon nanotubes (CNTs), a class of molecules with multiple unique properties. For instance, some varieties conduct electricity better than copper, are stronger than steel, and may be synthesized in bulk quantities. In 2005, the CNT field was highly fragmented, and Arrowhead sought to consolidate the intellectual property for the technology in an effort to create a dominant position in high value CNTs. As a result of licensing from universities and acquisitions of three CNT-related companies, Unidym owns or has exclusive license to a large portfolio of over 100 key CNT-related patents and patent applications. The Company believes Unidym holds foundational intellectual property surrounding high value electronics-grade CNT manufacturing and processing. With this strong patent portfolio and significant experience applying this technology to electronics markets, Unidym is beginning to make modest sales of its TCF film to device manufacturers and believes that it is well-positioned to increase sales in 2011. Unidym’s management team is focused on customer interaction to optimize its products to meet customer specifications with a goal of generating product sales for touch screens in the near term.

Unidym has several ongoing programs with various partners to incorporate its transparent conductive films into touch panels and displays. In 2010, a leading Japanese touch panel maker demonstrated three dimensional touch panels, based on Unidym’s films, at the premier displays conference in North America, the Society of Informational Display. Unidym also announced new joint development agreements with Tokyo Electron to develop and commercialize manufacturing equipment for printable CNT-based displays and solar cellsdeveloped by Ablaris independently, as well as, ~~Guardian Industries~~with our collaborators at MD Anderson. Efforts will continue to ~~develop~~optimize these pipeline candidates in 2012. Ablaris anticipates filing an IND application on a selected lead candidate in 2013. Additional candidates focused on diabetes-related indications are in also in development.

Clinical, Manufacturing and ~~commercialize CNT coated glass products. Unidym also continued~~R&D Operations

Good Manufacturing Practices (GMP) production of our lead compound, Adipotide™, has been carried out on a multi-gram scale by a leading manufacturer of pharmaceutical-grade peptides. The production and packaging of a sufficient quantity of material for the planned Phase I clinical study is complete. The site for the study and Institutional Review Board (IRB) approval of the clinical protocol are in place. Process development, stability studies and GLP bioanalytical assay development work are completed and ready for scale-up which would allow transfer to ~~collaborate with Samsung Electronics~~a commercial manufacturer if Adipotide progresses into late stage trials. Given the similarity in ~~CNT-based displays and Nippon Kayaku in CNT-based solar cells.~~

In addition to these efforts in Unidym’s core focus of electronics, Unidym is seeking to leverage its broad intellectual property portfolio in other areas through its licensing and other collaborative programs. To date, ~~Unidym~~our R&D efforts have been carried out by academic laboratories through sponsored research agreements and by contract research organizations (CROs), with management oversight by Arrowhead personnel. This has ~~out-licensed its intellectual property~~enabled us to maintain a ~~number~~lean operation with no dedicated laboratory personnel. The initial clinical trial of ~~different companies, including Samsung, Ensysce Biosciences, Nexeon Medsystems, DuPont, Nano-C, Nano-Lab, Torrey Pines, Continental Carbon,~~Adipotide™ in prostate cancer is being sponsored and ~~several other companies.~~

~~Production~~will be run entirely by MD Anderson Cancer Center, with no direct management responsibilities for Ablaris. As we move toward clinical testing of ~~Carbon Nanotube-Based Transparent Conductive Films~~

~~Unidym’s film production model involves in-house pilot production~~Ablaris’ pipeline compounds in 2012 and ~~outsourced supply of larger volumes of~~2013, the company may develop a ~~proprietary grade of CNTs, formulation of those CNTs into a coating ink,~~management plan to enable in house sponsorship and then shipment of that ink to an outsourced coating partner or customer for deposition. To conserve cash and pursue a strategy designed to yield revenues in the short term, Unidym is exploring partnerships or outsourcing within this supply chain.

Unidym has in-house deposition or coating equipment which is used for the deposition of CNTs onto plastic or glass substrates in sample quantities. Unidym has also tested production samples from several coating subcontractors. The use of outsourced coating partners for its touch panel films would take advantage of the substantial excess capacity left in the coating industry by the decrease in demand for photographic film. Unidym expects that, given the abundanceoversight of these ~~subcontractors and the availability of cost effective subcontract capacity, there will be no need to bring production capacity in-house in the near term.~~studies.

Unidym has historically produced carbon nanotubes in-house. In line with its strategy to reduce costs and work with manufacturing partners, in May 2009, Unidym transferred a portion of its assets for CNT production to CCNI, a manufacturer of CNTs and carbon black, has been working with CCNI and other vendors for the production of Unidym’s CNT supply needs. Unidym anticipates retaining some limited in-house CNT production capability for product improvements and as a second source of supply. Unidym plans to manufacture CNT inks and is negotiating with potential partners to manufacture and sell films to customers.

Unidym generated revenue from sales of thin films, sales of CNTs and sales of CNT-based ink in fiscal 2010. Future revenue is expected to be generated through direct product sales and license deals into relatively consolidated industries. In addition, Unidym has taken advantage of its extensive metrology equipment and excess space to create a small incubator for start-ups to defray a portion of the costs for its Sunnyvale facility. In the near term, Unidym does not expect to generate enough revenue to self-fund its operations. Unidym expects to continue to generate revenues through direct sales of its HIPCO-grade CNTs.

Unidym faces competition from a number of start-ups and established companies in its target markets. In the electronics industry, there are a number of start-up or private companies that are focused on the application or production of nanotubes including Automate, C-Nano, Eikos, Nantero and Southwest Nanotechnologies. More established companies with announced CNT programs include Brewer Sciences, DuPont, Honeywell, Samsung, Sumitomo and Toray. There are also potential competitors who are pursuing alternative nanotech-based approaches to the markets served by Unidym, including the start-up Cambrios and large Japanese companies such as Fujitsu.

Unidym controls an intellectual property portfolio containing over 100 foreign and domestic patents and patent applications. The portfolio contains patent claims directed to fundamental carbon nanotube compositions of matter, as well as carbon nanotube synthesis, purification, dispersion and functionalization. Furthermore, the portfolio contains claims to the use of carbon nanotubes in many different application areas including fibers, electronics, composite materials, energy storage/generation, medical devices and drug delivery. Some patents and patent applications are owned by Unidym (or co-owned with partners such as Continental Carbon and Tokyo Electron), but most are exclusively licensed from institutions such as Rice University, Georgia Tech, Clemson, SUNY, and California Institute of Technology (Caltech). Under its agreement with Clemson, Unidym has an exclusive license to U.S. Patents 7,265,174 and 7,750,071, which we believe have the earliest priority date of any patent claiming transparent, conductive films comprised of carbon nanotubes. Under its agreement with Caltech, Unidym has the right to sublicense U.S. Patent 5,424,054, which is the basic patent claiming small diameter nanotube composition of matter. Unidym also has the right to license an IP portfolio related to modified fullerene for non-therapeutic fields of use. A material portion of Unidym’s intellectual property portfolio is exclusively licensed from Rice University. If the sum of Unidym’s debts, liabilities and other obligations is greater than all of Unidym’s assets at fair valuation or if Unidym is generally not paying its debts, liabilities and other obligations as they come due; the Rice license will terminate and Unidym may lose rights to critical intellectual property.

~~Mark Tilley, Ph.D~~Christopher Anzalone, PhD., is the CEO of ~~Unidym. Dr. Tilley joined the Company after a nine-year tenure at DSM N.V., a $12 billion Netherlands-based specialty performance materials~~Ablaris. James Hulvat, Ph.D. is Director, Research and life sciences company. During his tenure, he worked in DSM’s venturing arm, led marketing and technical teams, and built a nano-enabled flat panel displays materials business that was acquired by Japan Synthetic Rubber in 2005. Dr. Tilley also co-founded Kriya Materials BV, a venture capital backed nano-materials and coatings company based in the Netherlands. Dr. Tilley has held marketing and R&D positions at SDC Coatings, a joint venture founded by Dow Corning and Pilkington Glass, Valspar and GE Plastics where he started his career at their Corporate R&D center as a Senior Scientist. He holds a BS degree in Chemistry from the University of Manchester Institute of Science and Technology in Manchester, UK, a Ph.D. from North Dakota State University in Fargo, and a M.B.A from Pepperdine University.

~~Unidym’s~~Development. Ablaris’ Board of Directors ~~is comprised~~consists of ~~Mark Tilley,~~ Christopher Anzalone, CEO ~~and director~~ of ~~each~~ Arrowhead, ~~Calando, Nanotope and Leonardo,~~R. Bruce Stewart, Executive Chairman of Arrowhead, Edward W. Frykman and Charles ~~McKenney, both Arrowhead directors. Independent directors are Dr. Bob Gower, former CEO~~McKenney. Each director of ~~CNI, Ray McLaughlin, former CFO~~Ablaris is also a director of ~~CNI, and Malcolm Gillis, former President~~Arrowhead.

~~Minority Investments~~2011, Arrowhead owned approximately 64% of the common stock of Ablaris on a primary and fully diluted basis.

Nanotope is a regenerative medicine company developing a suite of nanotechnology-based products customized to regenerate specific tissues: including neuronal, bone and cartilaginous tissues. Arrowhead has an approximately 23% ownership interest in Nanotope.

Nanotope’s product candidates are based on a platform technology licensed from Northwestern University. The company continued its successful efforts in 2011 to expand intellectual property protection on compounds of interest, with 20 issued patents and ~~vascular soft tissues. Its~~more than 60 pending patent applications in the U.S., E.U., Japan, and select other countries in key markets worldwide.

Nanotope operates a small research facility at the Illinois Science & Technology Park in Skokie, Illinois, employing three full-time scientists on its R&D efforts. In addition, Nanotope researchers collaborate with multiple academic laboratories and commercial research organizations to advance the company’s lead and pipeline compounds.

Nanotope’s first lead clinical ~~candidates are focused on~~candidate is directed to regenerating neurons and inhibiting scar tissue formation following traumatic spinal cord injury (SCI);. This product is based on a peptide-amphiphile nanofiber scaffold developed by Dr. Samuel Stupp (Materials Science) and Dr. Jack Kessler (Neurology) at Northwestern University. This scaffold is designed to elicit a biological response from neural progenitor cells, suppressing scar-forming astrogliosis and promoting neurite extension and neuron regeneration. Efficacy has been demonstrated in vitro and in vivo in published studies using rodent models of spinal cord injury. Nanotope continues its manufacturing process and formulation development efforts, and selection of optimal candidates from a series of new lead compounds screened in 2011. This screening culminated in additional rodent studies, to be completed in 2012. If these studies are successful, Nanotope anticipates selecting a single SCI candidate to take forward into GLP toxicology studies to support an IND application in late 2012 or 2013.

Nanotope’s second lead clinical candidate is directed to restoring cartilage in joints damaged due to injury or osteoarthritis; and accelerating wound healing in poorly vascularized, ischemic tissue associated with diabetes and peripheral artery disease (PAD). Nanotope and its partners have demonstrated the efficacy of these lead compounds in multiple animal models. Importantly, theosteoarthritis. The company’s therapeutic platform consists of a synthetic, fully degradable, customizable gel ~~scaffolds~~scaffold that dodoes not involve the use of embryonic stem cells. Instead, the ~~products work~~product works with ~~surviving~~endogenous cells in the patient’s ~~body~~bone marrow to spur ~~tissue~~hyaline-like regeneration. ~~In October 2010,~~ Nanotope ~~entered into an agreement with~~and its partners at Northwestern University, Dr. Ramille Shah (Orthopedics) and Dr. Samuel Stupp (Materials Science) have demonstrated the efficacy of the cartilage repair scaffold in a rabbit model. Nanotope’s cartilage regeneration technology is currently under a license to Smith & Nephew, ~~plc group to further develop its cartilage regeneration product for human healthcare markets. Smith & Nephew is~~ a global medical technology company with leadership positions in Orthopedics; including Reconstruction, Trauma and Clinical therapies; Endoscopy; including Sports Medicine; and Advanced Wound Management. This represents Nanotope’s first commercial transaction and demonstrates the company’s commitment to bring technological innovations in regenerative medicine to the clinical market.

In addition to these lead therapeutic candidates, Nanotope maintains an active pipeline of peptide-based compounds of interest for other areas. In 2011, Dr. Stupp’s laboratory at Northwestern published 11 peer-reviewed papers reporting discovery efforts related to peptide amphiphiles. Two new candidates were in-licensed by Nanotope and will undergo further development efforts in 2012: a VEGF-mimetic peptide amphiphile for ischemic tissue revascularization, and a group of compounds for bone regeneration, where efforts have focused in particular on spinal fusion indications.

Nanotope was co-founded by Arrowhead’s ~~CEO,~~Chief Executive Officer, Dr. Christopher Anzalone, ~~through the Benet Group, now dissolved, a private investment entity solely owned and managed by Dr. Anzalone. Dr. Anzalone~~who owns approximately 14.2% of Nanotope’s outstanding voting securities. Dr. Anzalone does not hold options, warrants or any other rights to acquire securities of Nanotope. Dr. Anzalone has the right to appoint a representative to the Board of Directors of Nanotope. Dr. Anzalone currently serves on the Nanotope Board in a seat reserved for Nanotope’s CEO and another individual holds the seat designated by Dr. Anzalone. Dr. Anzalone has served as President and Chief Executive Officer of Nanotope since its formation and continues to serve in these capacities. Dr. Anzalone has not received any compensation for his work on behalf of Nanotope since joining the Company on December 1, 2007. Dr. Anzalone has also waived his right to any unpaid compensation accrued for work done on behalf of Nanotope before he joined the Company. Arrowhead allocates a small portion of Dr. Anzalone’s salary, as well as a small portion of other administrative and finance personnel costs, to Nanotope.

Leonardo is a drug delivery company that employs a novel multi-stage drug delivery mechanism aimed at dramatically increasing targeting efficiency of pharmaceuticals. Arrowhead has an approximately 5% ownership interest in Leonardo. Leonardo’s silicon microparticulate technology involves transporting a therapeutic agent past multiple biological barriers using multiple carriers, each optimized for a specific barrier. Leonardo’s proprietary primary vehicles are designed to preferentially accumulate at tumor vasculature. Secondary carriers are then released from the primary carriers that are designed to accumulate around tumor cells and release their therapeutic payloads. Animal testing suggests that Leonardo’s platform enables significantly increased targeting and also provides sustained release. During ~~2010,~~2011, Leonardo received ~~an initial~~the second tranche of $1.25 million of an overall $2.5 million award from the State of Texas Emerging Technology Fund. Leonardo is currently focused on scaling up a commercializable manufacturing process and broadening the demonstrated areas where the technology delivers value. Arrowhead is interested in increasing its stake in Leonardo if the opportunity arises, Arrowhead has the capital resources, and Leonardo’s technology development continues to move forward.

Like Nanotope, Leonardo was co-founded by the Company’s Chief Executive Officer, Dr. Christopher Anzalone. Dr. Anzalone owns approximately 16% of the outstanding stock of Leonardo. Dr. Anzalone does not hold options, warrants or any other rights to acquire securities of Leonardo. Dr. Anzalone has the right to appoint a representative to the Board of Directors of Leonardo and Dr. Anzalone currently serves on the Leonardo Board. Dr. Anzalone has served as President and Chief Executive Officer of Leonardo since its formation until February 2010 when a new CEO, Dr. Bruce Given, was hired. Dr. Anzalone has not received any compensation for his work on behalf of Leonardo since joining the Company on December 1, 2007. Dr. Anzalone has also waived his right to any unpaid compensation accrued for work done on behalf of Leonardo before he joined the Company.

Dr. Mauro Ferrari, who joined Arrowhead’s Board of Directors in August 2010, is also a co-founder of Leonardo and personally or in family trust owns approximately 23% of the outstanding stock of Leonardo and serves on the Leonardo Board of Directors. Dr. Bruce Given joined Arrowhead as Chief Operating Officer in October 2011. He continues to serve as Leonardo’s CEO. While he no longer receives direct compensation from Leonardo, Arrowhead is reimbursed as part of a services agreement, which includes other general and administrative services. Dr. Given was granted 200,000 shares of Leonardo common stock upon joining as CEO in 2010. Arrowhead allocates a small portion of Dr. Anzalone’s salary, as well as a small portion of other administrative and finance personnel costs, to Leonardo.

~~Since inception,~~ Arrowhead is focused in the rapidly changing business of developing treatments for human disease through the regulation of gene expression and delivery of proprietary novel cancer therapies. Competition in these fields is intense as other companies are developing therapies similar to our nanoparticle drug delivery systems, and targeting patient populations that are similar to the patient populations that we are targeting. A number of companies are pursuing research and development programs relating to the emerging area of cancer therapies using nanoparticle conjugates and RNA interference. A number of these companies have filed patent applications in these areas. It is difficult to predict whether any of these companies will be successful in obtaining patent protection, whether the patent protection sought will address important aspects of the technology and to what extent these companies will be successful in their RNA interference efforts. New competitors may arise and we may not be aware of all competitors in this space. A number of our competitors are more established and have greater resources than we do. Furthermore, even if we are successful in developing commercial products, it is possible that competitors will achieve greater market acceptance.

Systemic delivery of siRNA and other oligonucleotide therapeutics has ~~worked with some~~proven critical for the success of all nucleic acid therapeutics. Naturally, multiple firms have recognized the problem of systemic siRNA delivery as a significant opportunity and other firms are developing products in this space. Some of the most ~~outstanding~~significant companies developing siRNA delivery products include Alnylam Pharmaceuticals, Inc., Marina Biotech, Inc., Tacere Therapeutics, Inc., Benitec Limited, OPKO Health, Inc., Silence Therapeutics plc, Quark Pharmaceuticals, Inc., Rosetta Genomics Ltd., Lorus Therapeutics, Inc., Tekmira Pharmaceuticals Corporation, Regulus Therapeutics Inc., and Santaris Pharma A/S, as well as a number of large pharmaceutical companies such as Merck & Co. Inc. and Novartis AG. Additionally, many academic ~~institutions~~groups are developing and may seek to commercialize siRNA delivery technologies.

Research and development expenses consist of costs incurred in identifying, developing and testing our product programs. These expenses consist primarily of salaries and related expenses for personnel, license fees, consulting fees, contract research and manufacturing, and the costs of laboratory equipment and facilities. Research and development expense for 2011 was $3.2 million, compared with $0.5 million in 2010.

Governmental authorities in the ~~country, including~~U.S. and other countries extensively regulate the ~~Caltech, Stanford University, Duke University~~research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of drugs and biologic products. All of our foreseeable product candidates are expected to be regulated as drug products.

In the U.S., the FDA regulates drug products under the Federal Food, Drug and Cosmetic Act (the “FDCA”), and other laws within the Public Health Service Act. Failure to comply with applicable U.S. requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecutions. Before our drug products are marketed they must be approved by the FDA. The steps required before a novel drug product is approved by the FDA include: (1) pre-clinical laboratory, animal, and formulation tests; (2) submission to the

FDA of an Investigational New Drug Application (“IND”) for human clinical testing, which must become effective before human clinical trials may begin; (3) adequate and well-controlled clinical trials to establish the safety and effectiveness of the product for each indication for which approval is sought; (4) submission to the FDA of a New Drug Application (“NDA”); (5) satisfactory completion of a FDA inspection of the manufacturing facility or facilities at which the drug product is produced to assess compliance with cGMP; and FDA review and finally (6) approval of an NDA.

Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. The results of the pre-clinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions, such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the ~~University~~FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. There can be no assurance that submission of ~~Florida,~~an IND will result in ~~critical areas~~FDA authorization to commence clinical trials. Once an IND is in effect, each clinical trial to be conducted under the IND must be submitted to the FDA, which may or may not allow the trial to proceed.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified physician-investigators and healthcare personnel. Clinical trials are typically conducted in three defined phases, but the phases may overlap or be combined. Phase 1 usually involves the initial administration of the investigational drug or biologic product to healthy individuals to evaluate its safety, dosage tolerance and pharmacodynamics. Phase 2 usually involves trials in a limited patient population, with the disease or condition for which the test material is being developed, to evaluate dosage tolerance and appropriate dosage; identify possible adverse side effects and safety risks; and preliminarily evaluate the effectiveness of the drug or biologic for specific indications. Phase 3 trials usually further evaluate effectiveness and test further for safety by administering the drug or biologic candidate in its final form in an expanded patient population. Our product development partners, the FDA, or we may suspend clinical trials at any time on various grounds, including any situation where we believe that patients are being exposed to an unacceptable health risk or are obtaining no medical benefit from the test material.

Assuming successful completion of the required clinical testing, the results of the pre-clinical trials and the clinical trials, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. Before approving an application, the FDA will usually inspect the facilities where the product is manufactured, and will not approve the product unless cGMP compliance is satisfactory. If the FDA determines the NDA is not acceptable, the FDA may outline the deficiencies in the NDA and often will request additional information. If the FDA approves the NDA, certain changes to the approved product, such as ~~stem cell research, carbon electronics~~adding new indications, manufacturing changes or additional labeling claims are subject to further FDA review and ~~molecular diagnostics. This~~approval. The testing and approval process requires substantial time, effort and financial resources, and we cannot be sure that any approval will be granted on a timely basis, if at all. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for this type of disease or condition will be recovered from sales in the U.S. for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. If a product that has ~~provided~~orphan drug designation subsequently receives the ~~Company~~first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other application to market the same drug for the same indication, except in very limited circumstances, for seven years.

In addition, regardless of the type of approval, we and our partners are required to comply with a ~~deep network in the academic community, insight into cutting edge technologies~~number of FDA requirements both before and ~~a world class scientific advisory board. Through these partnerships, Arrowhead has gained access~~after approval. For example, we are required to ~~exclusive rights that have formed the basis for the Company’s subsidiaries~~report certain adverse reactions and minority investments and has leveraged university resources to further develop and test technology in a highly cost effective way. The collaborations with academic scientists have included technology licenses and options to license technology, sponsored research, donationsproduction problems, if any, to the ~~labs of individual scientists~~FDA, and ~~use of university facilities that are made available~~ to ~~development stage companies.~~comply with certain requirements concerning advertising and promotion for our products. In prior years, Arrowhead devoted significant capital resources to sponsored research. As the Subsidiaries have matured, the Company has decreased its reliance on sponsored research for technology developmentaddition, quality control and sponsored research expense has decreased. As of September 30, 2010, Arrowhead had one active sponsored research agreement at Duke University through Unidym. Depending on capital resources, Arrowhead is likely tomanufacturing procedures must continue to ~~invest~~conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money and effort in ~~nanoscience research~~all areas of regulatory compliance, including production and ~~development through sponsored research agreements at universities.~~quality control to comply with cGMP. In addition, discovery of problems, such as safety problems, may result in changes in labeling or restrictions on a product manufacturer or NDA holder, including removal of the product from the market.

WeYou should carefully consider the risks discussed below and all of the other information contained in this report in evaluating us and an investment in our securities. If any of the following risks and uncertainties should occur, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our Common Stock could decline. Additionally, we note that we are a development stage company and we have ~~limited historical operations.~~accrued net losses annually since inception. We urge you to consider our likelihood of success and prospects in light of the risks, expenses and difficulties frequently encountered by entities at similar stages of development.

The following is a summary of certain risks we face. They are not the only risks we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations. The trading price of our common stock could decline due to the occurrence of any of these risks, and investors could lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in our other filings with the Securities and Exchange Commission.

We have a history of net losses, and we expect to continue to incur net losses and man not achieve or maintain profitability.

We have incurred net losses since our inception, including net losses of $3.5 million for the year ended September 30, 2011 and a cumulative net loss since inception of approximately $131.5 million. We expect that our operating losses will continue as we fund our drug development and discovery efforts. To achieve profitability, we must, either directly or through licensing and/or partnering relationships, successfully develop and obtain regulatory approval for a drug candidate and effectively manufacture, market and sell any drugs we successfully develop. Even if we successfully commercialize drug candidates that receive regulatory approval, we may not be able to realize revenues at a level that would allow us to achieve or sustain profitability. Accordingly, we may never generate significant revenue and, even if we do generate significant revenue, we may never achieve profitability.

Our plan of operations is to provide substantial amounts of development funding and financial support to our subsidiaries over an extended period of time. ~~The Company adopted~~With the recent acquisition of Roche’s RNAi business, including a research facility in Madison, Wisconsin and new employees, our use of cash ~~conservation strategy that reduced corporate expenses and scaled back our financial support for our two major subsidiaries, Unidym and Calando. This has influenced Unidym’s decision~~is expected to ~~engage partners for its capital-intensive bulk CNT manufacturing and concentrate its resources on the development of CNT inks and CNT-based film products, and Calando’s decision~~substantially increase compared to curtail internal R&D efforts for its drug delivery platforms and clinical candidates and seek partners for future development of its drug candidates. Management continues operate under a plan to conserve cash resources while selectively investing in near-term opportunities. The Company’s management anticipates that the Companyrecent historical periods. We will ~~be able to satisfy the cash requirements of its operations through at least the next twelve months with current cash resources.~~

~~However, we may~~ need to obtain additional capital to further our development efforts, and we intend to seek additional capital by out-licensing technology, ~~selling one or more of our subsidiaries,~~ securing funded partnerships, conducting one or more private ~~placements~~or public offerings of equity securities of the Company or our subsidiaries, ~~selling additional securities in a registered public offering,~~ or through a combination of one or more of such financing alternatives. However, there can be no assurance that we will be successful in any of these endeavors or, if we are successful, that such transactions will be accomplished on favorable terms. If we are unable to obtain additional capital, we will ~~implement additional cash saving measures,~~need to curtail our operations in order to preserve working capital, which could materially harm our business and our ability to achieve cash flow in the future, including delaying or reducing implementation of certain aspects of our plan of operations. Even if we are successful in obtaining additional capital, because we and each subsidiary are separate entities, it could be difficult or impossible to allocate funds in a way that meets the needs of all entities. Although we anticipate that the Company will be able to satisfy the cash requirements of its operations through at least the next twelve months with current cash resources, we may be unable to obtain long-term funding and our near-term expenses could be greater than projected.

The current financial market conditions may exacerbate certain risks affecting our business.

~~Neither the Company nor our subsidiaries~~We do not yet generate substantial revenue, and our operations and research and development activities have been primarily funded to date through the sale of Company securities and securities of our ~~subsidiaries. Current~~Subsidiaries. The global financial markets are volatile and those market conditions, as well as possible concerns over the value of the U.S. dollar denominated investments, may impair our ability to raise the capital we ~~need.~~require. If we are unable to secure additional cash resources from the sale of securities or other sources, it could become necessary to ~~further~~ slow ~~interrupt~~ or ~~close down~~suspend development efforts. In addition, we may have to ~~make additional reductions in~~reduce expenses, ~~at the Company,~~ which could impair our ability to manage our ~~business and our subsidiaries.~~business. Even if investment capital is available to us, the terms may be onerous. If ~~investment~~outside capital is ~~needed~~invested directly into a subsidiary and ~~available to Unidym and/or Calando and the Company~~Arrowhead does not have the funds to make a pro rata investment, our ownership interest could be diluted. The sale of additional ~~Company~~Arrowhead stock ~~to fund operations~~ could result in significant dilution to stockholders.

The ~~strategy for eventual~~potential monetization of our ~~subsidiaries will likely depend on our ability to exit our~~Subsidiaries through an ownership position ~~in each subsidiary~~might not occur in an orderly manner. Exit opportunities could include an initial public offering (“IPO”) for the subsidiary or acquisition of the subsidiary by another company. During the recent economic recession, companies have been adopting conservative acquisition strategies and, even if there is interest, ~~they~~we may not be able to ~~acquire~~sell our ~~subsidiaries~~Subsidiaries on terms that are attractive to us. These factors could reduce the realizable return on our investment if we are able to sell a subsidiary. Additionally, the market for IPOs continues to be ~~very limited,~~unpredictable, which limits public exit opportunities for our ~~subsidiaries.~~

~~We may not be able to maintain our listing on the NASDAQ Capital Market.~~

Our Common Stock trades on the NASDAQ Capital Market, which has certain compliance requirements for continued listing of common stock. In the past, we have been subject to delisting procedures due to a drop in the price of our Common Stock. If our minimum closing bid price per share falls below $1.00 for a period of 30 consecutive trading days in the future, we may again be subject to delisting procedures. We must also meet additional continued listing requirements contained in NASDAQ Marketplace Rule 5550(b), which requires that we have (1) a minimum of $2,500,000 in stockholders’ equity, (2) $35,000,000 market value of listed securities held by non-affiliates or (3) $500,000 of net income from continuing operations for the most recently completed fiscal year (or two of the three most recently completed fiscal years). As of December 20, 2010, based on our closing price as of that day, the market value of our securities held by non-affiliates was approximately $65,000,000.

As of the close of business on December 8, 2010, our Common Stock had a closing bid price of $0.90 per share, and has had a bid price of less than $1.00 for 30 consecutive days. Accordingly, on December 8, 2010, we received a deficiency letter from the NASDAQ Stock Market indicating that, based on the Company’s closing bid price for the last 30 consecutive business days, the Company does not comply with the minimum bid price of $1.00 per as set forth in NASDAQ Marketplace Rule 5550(a)(2).

In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), the Company has a grace period of 180 calendar days, or until June 6, 2011 to regain compliance with the minimum closing bid price requirement for continued listing. In order to regain compliance, the minimum closing price per share of the Company’s common stock must be at least $1.00 for a minimum of ten consecutive business days. In the event the Company does not regain compliance by June 6, 2011, the Company may be afforded an additional 180 day compliance period, provided it demonstrates that it meets all other applicable standards for initial listing on the NASDAQ Capital Market (except the bid price requirement). If the Company fails to regain compliance after the second grace period, the Company’s stock will be subject to delisting by NASDAQ.

Delisting could reduce the ability of our shareholders to purchase or sell shares as quickly and as easily as they have done historically. For instance, failure to obtain listing on another market or exchange may make it more difficult for traders to sell our securities. Broker-dealers may be less willing or able to sell or make a market in our Common Stock. Not maintaining our NASDAQ Capital Market listing may (among other effects):

~~We have debt on our consolidated balance sheet, which could have consequences if we were unable to repay the principal or interest due~~

Calando has a $500,000 unsecured convertible promissory note outstanding. The note bears 10% interest accrued annually, matured in November 2010 and is payable upon demand. The note is payable at two times face value in certain events, including, among other things, the license of Calando’s siRNA delivery system. An amendment to extend the note is currently being negotiated, however if the note is not extended, the Company has the ability and intent to repay this note. However, if Calando is unable to meet its obligations to the bearer of the note, Arrowhead may also not be in a position to lend Calando sufficient cash to pay such demand note. Unless other sources of financing become available, this could result in Calando’s insolvency.

Our subsidiaries have entered into technology license agreements with third parties that require us to satisfy obligations to keep them effective and, if these agreements are terminated, our technology and our business would be seriously and adversely affected.

Through our subsidiaries, we have entered into exclusive, long-term license agreements with Rice University, California Institute of Technology, Alnylam Pharmaceuticals, Inc. and other entities to incorporate their proprietary technologies into our proposed products. These license agreements require us to pay royalties and satisfy other conditions, including conditions related to the commercialization of the licensed technology. We cannot give any assurance that we will successfully incorporate these technologies into marketable products or, if we do, whether sales will be sufficient to recover the amounts that we are obligated to pay to the licensors. Failure by us to satisfy our obligations under these agreements, including the solvency requirements set forth in our license agreement with Rice university, may result in the modification of the terms of the licenses, such as by rendering them non-exclusive, or may give our licensors the right to terminate their respective agreement with us, which would limit our ability to implement our current business plan and harm our business and financial condition.

~~We are a development stage company and our success is subject to the substantial risks inherent in the establishment of new business ventures.~~

The implementation of our business strategy is still in the development stage. We currently own majority interests in two subsidiary companies, investments in two early-stage biotech companies and, through Unidym, one university research project at Duke University. Our business and operations should be considered to be in the development stage and subject to all of the risks inherent in the establishment of a new business venture. Accordingly, our intended business and operations may not prove to be successful in the near future, if at all. Any future success that we might enjoy will depend upon many factors, several of which may be beyond our control, or which cannot be predicted at this time, and which could have a material adverse effect upon our financial condition, business prospects and operations, and the value of an investment in the Company.

~~Calando may be unable to find additional partners to license its technologies.~~

As part of our cash conservation strategy that scales back our financial support for Calando at this time, Calando has closed its laboratory facilities, eliminated its technical employees and has shifted its focus to licensing its technologies to partners. Currently, Calando has one licensing partner, but there can be no assurance that Calando will be able to find additional partners to license its technologies upon terms favorable to Calando.

~~If Calando licenses its technologies, it will lose a considerable amount of control over its intellectual property and may not receive adequate licensing revenues in exchange.~~

The business model of our subsidiaries has historically been to develop new nanotechnologies and to exploit the intellectual property created through the research and development process to develop commercially successful products. Calando has licensed a portion of its technology to Cerulean Pharma, Inc. and intends to pursue further licensing arrangements with other companies. A significant portion of the potential value from these licenses is tied to the achievement of the development and sales milestones, which we cannot control. As Calando licenses its technology to other companies, it will lose control over certain of the technologies it licenses and will be unable to control the development and commercialization of its technologies, which could result in the failure to achieve performance milestones that would represent a significant portion of the total value of any license transaction. In addition, Calando’s licensees may not be successful in the further commercialization of Calando’s technologies and anticipated revenues from such license agreements may be less than expected or may not be paid at all.

~~There are substantial risks inherent in attempting to commercialize new technological applications, and, as a result, we may not be able to successfully develop nanotechnology for commercial use.~~

The Company finances research and development of nanotechnology, which is a new and unproven field. Our scientists and engineers are working on developing technology in various stages. However, such technology’s commercial feasibility and acceptance is unknown. Scientific research and development requires significant amounts of capital and takes a long time to reach commercial viability, if at all. To date, our research and development projects have not produced commercially viable applications, and may never do so. During the research and development process, we may experience technological barriers that we may be unable to overcome. For example, our scientists must determine how to design and develop nanotechnology applications for potential products designed by third parties for use in cost-effective manufacturing processes. Because of these uncertainties, it is possible that none of our potential applications will be successfully developed. If we are unable to successfully develop nanotechnology applications for commercial use, we will be unable to generate revenue or build a sustainable or profitable business.Subsidiaries.

Because we have not generated significant revenues to cover our operating expenses, we are dependent on raising additional capital from investors or lenders.

To date, we have only generated a small amount of ~~revenue as a result of our current plan of operations.~~revenue. Given our strategy of financing new and unproven technology research, there iscan be no assurance we ~~would~~will ever generate significant ~~revenues.~~revenue. Our revenue-producing opportunities depend on liquidity events within our ~~subsidiaries,~~Subsidiaries, such as a sale of the ~~subsidiary,~~Subsidiary, licensing transaction or initial public offering. We cannot be certain that we will be able to create a liquidity event for any of our ~~subsidiaries~~Subsidiaries and, even if we are able to, we cannot be certain of the timing or the potential proceeds to Arrowhead as a stockholder. Accordingly, our revenue prospects are uncertain and we must plan to finance our operations through the sales of equity securities or debt financing. If we are unable to continue raising operating capital from these sources, we may be forced to curtail or cease our operations.

We will need to achieve commercial acceptance of our applications to generate revenues and achieve profitability.

Even if our research and development ~~yields~~efforts yield technologically feasible applications, we may not successfully develop commercial products which would take years to study in human clinical trials prior to regulatory approval, and, even if ~~we do,~~successfully developed, we may not do so on a timely basis. ~~Even if our research efforts are technologically successful, it could take several years before~~During this ~~technology will be commercially viable. During this~~development period, superior competitive technologies may be introduced ~~or customer needs may change,~~ which could diminish or extinguish the potential commercial uses for our ~~applications. Because nanotechnology is an emerging field,~~drug candidates. Additionally, the degree to which ~~potential~~patients and consumers will adopt ~~nanotechnology-enabled products~~any product we develop is uncertain. We cannot predict ~~when~~whether significant commercial market acceptance for ~~nanotechnology-enabled~~our products, if approved, will ever develop, ~~if at all,~~ and we cannot reliably estimate the projected size of any such potential market. ~~If markets fail to accept nanotechnology-enabled products, we may not be able to generate revenues from the commercial application of our technologies.~~ Our revenue growth and achievement of profitability will depend substantially on our ability to introduce new technological applications to manufacturers for products accepted by customers. If we are unable to cost-effectively achieve acceptance of our technology among ~~original equipment manufacturers~~the medical establishment and ~~customers,~~patients, or if the associated products do not achieve wide market acceptance, our business will be materially and adversely affected.

We have debt on our consolidated balance sheet through our subsidiary, Calando, which could have negative consequences if we were unable to repay the principal or interest due.

Calando has a $500,000 unsecured convertible promissory note outstanding. The note bears 10% interest accrued annually, and matures in November 2013. The note is payable at two times face value at maturity and upon the occurrence of certain events, including, the license of Calando’s siRNA delivery system. If Calando is unable to meet its obligations to the bearer of the note, Arrowhead may not be in a position to lend Calando sufficient cash to pay such demand note. Unless other sources of financing become available, this could result in Calando’s insolvency.

Our Subsidiaries are party into technology license agreements with third parties that require us to satisfy obligations to keep them effective and, if these agreements are terminated, our technology and our business would be seriously and adversely affected.

Through our Subsidiaries, we are party into exclusive, long-term license agreements with California Institute of Technology, Alnylam Pharmaceuticals, Inc. and other entities to incorporate their proprietary technologies into our proposed products. These license agreements require us to pay royalties and satisfy other conditions, including conditions in some cases related to the commercialization of the licensed technology. We may not be able to successfully incorporate these technologies into marketable products or, if we do, whether sales will be sufficient to recover the amounts that we are obligated to pay to the licensors. Failure by us to satisfy our obligations under these agreements may result in the modification of the terms of the licenses, such as by rendering them non-exclusive, or may give our licensors the right to terminate their respective agreement with us, which would limit our ability to implement our current business plan and harm our business and financial condition.

We are focused on technology related to new and improved pharmaceutical candidates. Product candidates that appear promising in the early phases of development, such as in early animal and human clinical trials, often fail to reach the market for a number of reasons, such as:

For example, the positive pre-clinical results studying Adipotide in animals may not be replicated in human clinical studies or that this drug candidate may be found to be unsafe in humans. Additionally, clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which often delays, limits, or prevents further clinical development or regulatory approvals of potential products. Clinical trials can take years to complete, including the process of study design, clinical site selection and the enrollment of patients. As a result, we can experience significant delays in completing clinical studies, which can increase the cost of developing a drug candidate. If our drug candidates are not successful in human clinical trials, we may be forced to curtail or abandon certain development programs and if we experience significant delays in commencing or completing our clinical studies, we could suffer from significant cost overruns, which could negatively affect our capital resources and our ability to complete these studies.

We may be unable to attract revenue-generating collaborations with other pharmaceutical and biotech companies to advance our drug candidates.

Our business strategy includes collaborations with other pharmaceutical and biotech companies to provide funding and therapeutic siRNA candidates to which we can apply our various siRNA delivery technologies. We may not be able to attract such partners, and even if we are able to enter into such partnerships, the terms may be less favorable than anticipated. Further, entering into partnership agreements may limit our commercialization options and/or require us to share revenues and profits with our partners.

We may lose a considerable amount of control over our intellectual property and may not receive anticipated revenues in strategic transactions involving our Subsidiaries, particularly where the consideration is contingent on the achievement of development or sales milestones.

Our business model has been to develop new technologies and to exploit the intellectual property created through the research and development process to develop commercially successful products. Calando has licensed a portion of its technology to Cerulean Pharma, Inc. and we intend to pursue licensing arrangements with other companies. A significant portion of the potential value from these licenses is tied to the achievement of the development and sales milestones, which we cannot control. Similarly, the majority of the consideration, up to $140 million, potentially payable by Wisepower in connection with our sale of Unidym is tied to the achievement of commercialization milestones, over which we cannot exercise control. Although Wisepower and Cerulean are required to use certain minimum efforts to achieve the post-closing milestones, we cannot control whether they actually achieve these milestones. If the acquirers fail to achieve performance milestones, we may not receive a significant portion of the total value of any sale, license or other strategic transaction.

There are substantial risks inherent in attempting to commercialize new technological applications, and, as a result, we may not be able to successfully develop nanotechnology for commercial use.

Much of the Company research and development efforts involve nanotechnology and RNAi, which are largely unproven technologies. Our scientists and engineers are working on developing technology in various stages. However, such technology’s commercial feasibility and acceptance are unknown. Scientific research and development requires significant amounts of capital and takes a long time to reach commercial viability, if at all. To date, our research and development projects have not produced commercially viable applications, and may never do so. During the research and development process, we may experience technological barriers that we may be unable to overcome. Because of these uncertainties, it is possible that none of our potential applications will be successfully developed. If we are unable to successfully develop nanotechnology applications for commercial use, we will be unable to generate revenue or build a sustainable or profitable business.

We will need to establish additional relationships with strategic and development partners to fully develop and market our products.

We do not possess all of the resources necessary to develop and commercialize products that may result from our technologies on a mass scale. Unless we expand our product development capacity and enhance our internal marketing capability, we will need to make appropriate arrangements with strategic partners to develop and commercialize current and future products. If we do not find appropriate partners, or if our existing arrangements or future agreements are not successful, our ability to develop and commercialize products could be adversely affected. Even if we are able to find collaborative partners, the overall success of the development and commercialization of product candidates in those programs will depend largely on the efforts of other parties and is beyond our control. In addition, in the event we pursue our commercialization strategy through collaboration, there are a variety of technical, business and legal risks, including:

The occurrence of any of the above ~~risks~~events or other related events not foreseen by us could impair our ability to generate revenues and harm our business and financial condition.

We need to retain a controlling interest, by ownership, contract or otherwise, in Unidym and Calando in order to avoid potentially being deemed an investment company under the Investment Company Act of 1940.

Companies that have more than 100 U.S. stockholders or are publicly traded in the U.S. or are, or hold themselves out as being, engaged primarily in the business of investing, reinvesting or trading in securities are subject to regulation under the Investment Company Act of 1940. Unless a substantial part of our assets consists of, and a substantial part of our income is derived from, interests in majority-owned subsidiaries and companies that we primarily control, whether by contract or otherwise, we may be required to register and become subject to regulation under the Investment Company Act. Because Investment Company Act regulation is, for the most part, inconsistent with our strategy of actively managing and operating our portfolio companies, a requirement to operate our business as a registered investment company would restrict our operations and require additional resources for compliance.

~~If we are deemed to be, and are required to register as, an investment company, we will be forced to comply with substantive requirements under the Investment Company Act, including:~~

~~In order to avoid regulation under the Investment Company Act, we may choose to make additional pro rata investments in Unidym and Calando to maintain a controlling interest.~~

~~Nanotechnology-enabled products are new and may be viewed as being harmful to human health or the environment.~~

There is public concern regarding the human health, environmental and ethical implications of nanotechnology that could impede market acceptance of products developed through these means. Nanotechnology-enabled products could be composed of materials such as carbon, silicon, silicon carbide, germanium, gallium arsenide, gallium nitride, cadmium selenide or indium phosphide, which may prove to be unsafe or harmful to human health or to the environment because of the size, shape or composition of the nanostructures. For this reason, these nanostructures may prove to present risks to human health or the environment that are different from and greater than the better understood risks that may be presented by the constituent materials in non-nanoscale forms. Because of the potential, but at this point unknown, risks associated with certain nanomaterials, government authorities in the U.S. or individual states, and foreign government authorities could, for social or other purposes, prohibit or regulate the use of some or all nanotechnologies. The U.S. Environmental Protection Agency has in that regard recently taken steps towards regulation of the manufacture and use of certain nanotechnology-enabled materials, including those containing carbon nanotubes or nanosilver. Further, the U.S. National Academy of Sciences/National Research Council concluded that the U.S. government needs to develop a more robust and coordinated plan for addressing the potential environmental, health, and safety risks of nanomaterials. The regulation and

limitation of the kinds of materials used in or used to develop nanotechnology-enabled products, or the regulation of the products themselves, could halt or delay the commercialization of nanotechnology-enabled products or substantially increase the cost, which will impair our ability to achieve revenue from the license of nanotechnology applications.

We may not be able to effectively secure first-tier ~~research and development projects~~technologies when competing against other ~~ventures.~~investors.

Our ~~business plan requires~~success may require that we ~~identify and successfully~~ acquire ~~promising~~new or complimentary technologies. However, we compete with a substantial number of other companies that ~~fund early-stage, scientific research at universities to secure rights to promising technologies.~~may also compete for technologies we desire. In addition, many venture capital firms and other institutional investors, as well as other pharmaceutical and biotech companies, invest in companies seeking to commercialize various types of emerging technologies. Many of these companies have greater financial, scientific and commercial resources than us. Therefore, we may not be able to secure the ~~opportunity to finance first-tier research and commercialization projects.~~technologies we desire. Furthermore, should any commercial undertaking by us prove to be successful, there can be no assurance competitors with greater financial resources will not offer competitive products and/or technologies.

We rely on outside sources for various components and processes for our products.

We rely on third parties for various components and processes for our products. While we try to have at least two sources for each component and process, we may not be able to achieve multiple sourcing because there may be no acceptable second source, other companies may choose not to work with us, or the component or process sought may be so new that a second source does not exist, or does not exist on acceptable terms. In addition, due to the continued tightening of global credit markets, there may be a disruption or delay in the performance of our third-party contractors, suppliers or collaborators. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected. Therefore, it is possible that our business plans will have to be slowed down or stopped completely at times due to our inability to obtain required raw materials, components and outsourced processes at an acceptable cost, if at all, or to get a timely response from vendors.

We must overcome the many obstacles associated with integrating and operating varying business ventures to succeed.

Our model to integrate and oversee the strategic direction of various ~~subsidiaries~~Subsidiaries and research and development projects presents many risks, including:

If we are unable to timely and efficiently design and integrate administrative and operational support for our ~~subsidiaries,~~Subsidiaries, we may be unable to manage projects effectively, which could adversely affect our ability to meet our business objectives and the value of an investment in the Company could decline.

In addition, consummating acquisitions and taking advantage of strategic relationships could adversely impact our cash position, and dilute stockholder interests, for many reasons, including:

Our success depends on the attraction and retention of senior management and scientists with relevant expertise.

Our future success will depend to a significant extent on the continued services of our key employees, including Dr. Anzalone, our ~~CEO. In addition, we rely on several key executives to manage each of~~President and Chief Executive Officer, Kenneth Myszkowski, our ~~subsidiaries.~~Chief Financial Officer and Bruce Given, our Chief Operating Officer. We do not maintain key man life insurance for any of our executives. Our ability to execute our strategy also will depend on our ability to continue to attract and retain qualified scientists ~~sales, marketing~~ and additional managerial personnel. If we are unable to find, hire and retain qualified individuals, we could have difficulty implementing our business plan in a timely manner, or at all. We may need to terminate additional employees, including senior management and technical employees, or such employees may seek other employment which may result in the loss of valuable know-how and ~~that~~ development efforts could be negatively affected.

Members of our senior management team and Board may have a conflict of interest in also serving as officers and/or directors of our ~~subsidiaries.~~Subsidiaries.

While we expect that our officers and directors who also serve as officers and/or directors of our ~~subsidiaries~~Subsidiaries will comply with their fiduciary duties owed to our stockholders, they may have conflicting fiduciary obligations to our stockholders and the minority stockholders of our ~~subsidiaries.~~Subsidiaries. Specifically, Dr. Anzalone, our ~~CEO~~President and ~~President,~~CEO, is the founder, CEO and a board member ~~of each~~ of Nanotope, a regenerative medicine company in which the Company owns a 23% ~~interest, and~~interest. Further, Dr. Anzalone as well as Dr. Mauro Ferrari, an Arrowhead board member, are board members of Leonardo, a drug delivery company

in which ~~the Company~~Arrowhead owns a ~~4.9%~~5% interest. Dr. Anzalone owns a noncontrolling interest in the stock of ~~each~~Nanotope. Drs. Anzalone and Ferrari own a noncontrolling interest in Leonardo. Douglass Given, a member of ~~Nanotope and Leonardo.~~our board of directors, is the brother of Bruce Given. To the extent that any of our directors choose to recuse themselves from particular Board actions to avoid a conflict of interest, the other members of our Board of Directors will have a greater influence on such decisions.

~~Our efforts pertaining~~We face uncertainty related to healthcare reform, pricing and reimbursement, which could reduce our revenue.

In the United States, President Obama signed in March 2010 the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, “PPACA”), which is expected to substantially change the way health care is financed by both governmental and private payers. PPACA provides for changes to extend medical benefits to those

who currently lack insurance coverage, encourages improvements in the quality of health care items and services, and significantly impacts the U.S. pharmaceutical industry ~~are subject~~in a number of ways, further listed below. By extending coverage to ~~additional risks.~~

~~Our subsidiary, Calando,~~a larger population, PPACA may substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes, as well as ~~minority investments Nanotope~~other changes that may be made as part of deficit and ~~Leonardo, are focused on technology related~~debt reduction efforts in Congress, could entail modifications to ~~new~~the existing system of private payers and ~~improved pharmaceutical candidates. Drug development is time consuming, expensive~~government programs, such as Medicare, Medicaid and ~~risky. Even~~State Children’s Health Insurance Program, as well as the creation of a government-sponsored healthcare insurance source, or some combination of both. Such restructuring of the coverage of medical care in the United States could impact the extent of reimbursement for prescribed drugs, including our product candidates, ~~that appear promising in~~biopharmaceuticals, and medical devices. Some of the ~~early phases of development, such as in early animal and human clinical trials, often fail to reach the market for a number of reasons, such as:~~specific PPACA provisions, among other things:

~~Clinical trial results~~If future reimbursement for approved product candidates, if any, is substantially less than we project, or rebate obligations associated with them are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which often delays, limits, or prevents further clinical development or regulatory approvals of potential products. Additionally, clinical trials can take years to complete site selection and the enrollment of patients. If the subsidiaries’ technology is not cost effective or if the associated drug products do not achieve wide market acceptance, the value of a subsidiary wouldsubstantially increased, our business could be materially and adversely ~~affected.~~impacted.

~~Any drugs developed by our subsidiaries may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby harming our business.~~

~~Increasing expenditures for healthcare have been the subject~~Sales of considerable public attention in the U.S. Both private and government entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would affect changes in the U.S. healthcare system have been introduced or proposed in Congress and in some state legislatures, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.

~~The ability of Calando and our minority investments, Nanotope and Leonardo, to market products successfully (either on their own or in partnership with other companies)~~any approved drug candidate will depend in part on the ~~extent to which~~availability of coverage and reimbursement from third-party payers ~~are willing to reimburse patients for the costs of their products~~such as government insurance programs, including Medicare and ~~related treatments. These third-party payers include government authorities,~~Medicaid, private health insurers, health maintenance organizations and other ~~organizations, such~~health care related organizations. Accordingly, coverage and reimbursement may be uncertain. Adoption of any drug candidate by the medical community may be limited if third-party payers will not offer coverage. Cost control initiatives may decrease coverage and payment levels for any new drug and, in turn, the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payers. Any denial of private or government payer coverage or inadequate reimbursement could harm our business and reduce our revenue.

In addition, both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care, as ~~health maintenance organizations. Third party payers are increasingly challenging~~well as hold public hearings on these matters, which has resulted in certain private companies dropping the prices of their drugs. Further federal and state proposals and healthcare reforms are likely, which could limit the prices that can be charged for ~~medical products~~the product candidates that we develop and ~~services. In addition, the trend toward managed healthcare and government insurance programs could~~may further limit our commercial opportunity. There may be future changes that result in ~~lower prices~~reductions in current coverage and ~~reduced demand~~reimbursement levels for ~~the products of these companies. Cost containment measures instituted by healthcare providers~~our product candidates, if approved and ~~any general healthcare reform could affect their ability to sell products~~commercialized, and ~~may have a material adverse effect on them, thereby diminishing the value of the Company’s interest in these subsidiaries or any anticipated milestone or royalty payments. We~~we cannot predict the ~~effect~~scope of any future ~~legislation~~changes or ~~regulation concerning~~ the ~~healthcare industry and third party coverage and reimbursement~~impact that those changes would have on our ~~business.~~operations.

There may be a difference in the investment valuations that we used when making initial and subsequent investments in our ~~subsidiaries~~Subsidiaries and minority investments and actual market values.

Our investments in our ~~subsidiaries~~Subsidiaries and noncontrolling interests were the result of negotiation with subsidiary management and equity holders, and the investment valuations may not always have been independently verified. Traditional methods used by independent valuation analysts include a discounted cash flow analysis and a comparable company analysis. We have not generated a positive cash flow to date and do not expect to generate significant cash flow in the near future. Additionally, we believe that ~~there exist~~ few comparable public companies exist to provide meaningful valuation comparisons. Accordingly, we have not always sought independent valuation analysis in connection with our investments and may have invested in our various holdings at higher or lower valuations than an independent source would have recommended. There may be no correlation between the investment valuations that we used over the years for our investments and the actual market values. If we should eventually sell all or a part of any of our consolidated business or that of a subsidiary, the ultimate sale price may be for a value substantially different than previously determined by us, which could materially and adversely impair the value of our Common Stock.

~~If Unidym is unable to raise additional cash or pay its debts, Unidym may lose rights to critical intellectual property.~~

Unidym is required to meet certain financial covenants pursuant its Rice University license agreement. The Rice license includes financial covenants tested quarterly for compliance. If Unidym fails to meet the financial covenants, the Rice license may terminate. If this should happen, the value of Unidym’s intellectual property portfolio would be significantly and adversely affected and Unidym would likely lose patent protection for its products and licensing opportunities for the majority of its CNT intellectual portfolio.

Our ability to protect our patents and other proprietary rights is uncertain, exposing us to the possible loss of competitive advantage.

Our ~~subsidiaries~~Subsidiaries have licensed rights to pending patents and have filed and will continue to file patent applications. The researchers sponsored by us may also file patent applications that we choose to license. If a particular patent is not granted, the value of the invention described in the patent would be diminished. Further, even if these patents are granted, they may be difficult to enforce. Even if successful, efforts to enforce our patent rights could be expensive, distracting for management, cause our patents to be invalidated, and frustrate commercialization of products. Additionally, even if patents are issued and are enforceable, others may independently develop similar, superior or parallel technologies to any technology developed by us, or our technology may prove to infringe upon patents or rights owned by others. Thus, the patents held by or licensed to us may not afford us any meaningful competitive advantage. If we are unable to derive value from our licensed or owned intellectual property, the value of your investment may decline.

Our ability to develop and commercialize products will depend on our ability to enforce our intellectual property rights and operate without infringing the proprietary rights of third parties.

Our ability ~~and the ability of our subsidiaries~~ to develop and commercialize products based on ~~their respective~~our patent portfolios will depend, in part, on our ability ~~and the ability of our subsidiaries~~ to enforce those patents and operate without infringing the proprietary rights of third parties. ~~There can~~We cannot be ~~no assurance~~certain that any patents that may issue from patent applications owned or licensed by us ~~or any of our subsidiaries~~ will provide sufficient protection to conduct our respective businesses as presently conducted or as proposed to be conducted, or that we ~~or our subsidiaries~~ will remain free from infringement claims by third parties. In particular, there can be no assurance that we will be successful enforcing our rights in the intellectual property that we acquired in the Roche RNAi acquisition.

We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products.

Because the nanotechnology intellectual property landscape is rapidly evolving and interdisciplinary, it is difficult to conclusively assess our freedom to operate without infringing on third party rights. However, we are currently aware of certain patent rights held by third parties that, if found to be valid and enforceable, could be alleged to render one or more of our business lines infringing. If a claim should be brought and is successful, we may be required to pay substantial damages, be forced to abandon any affected business lines and/or seek a license from the patent holder. In addition, any patent infringement claims brought against us, ~~or our subsidiaries,~~ whether or not successful, may cause us to incur significant expenses and divert the attention of our management and key personnel from other business concerns. These could negatively affect our results of operations and prospects. ~~There can also~~We cannot be ~~no assurance~~certain that patents owned or licensed by us or our ~~subsidiaries~~Subsidiaries will not be challenged by others.

In addition, if our potential products infringe the intellectual property rights of third parties, these third parties may assert infringement claims against our customers, and we may be required to indemnify our customers for any damages they suffer as a result of these claims. The claims may require us to initiate or defend protracted and costly litigation on behalf of customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be unable to continue selling such products.

~~The~~Our technology licensed ~~by our subsidiaries~~ from various third parties may be subject to government rights and retained rights of the originating research institutions.

We license technology from Caltech, ~~Rice University,~~ and other universities and companies. Our licensors may have obligations to government agencies or universities. Under their agreements, a government agency or university may obtain certain rights over the technology that we have developed and licensed, including the right to require that a compulsory license be granted to one or more third parties selected by the government agency.

In addition, our collaborators often retain certain rights under their agreements with us, including the right to use the underlying technology for noncommercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and scholarly disclosures of information relating to the technology. It is difficult to monitor whether our collaborators limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse.

Our corporate compliance program cannot guarantee that we are in compliance with all applicable federal and state regulations.

Our operations, including our research and development and our commercialization efforts, such as clinical trials, manufacturing and distribution, are subject to extensive federal and state regulation. While we have developed and instituted a corporate compliance program, we cannot be assured that the Company or our employees are, or will be in compliance with all potentially applicable federal and state regulations or laws. If we fail to comply with any of these regulations or laws, a range of actions could result, including, but not limited to, the termination of clinical trials, the failure to approve a commercialized product, significant fines, sanctions, or litigation, any of which could harm our business and financial condition.

~~If export controls affecting our products are expanded, our business will be adversely affected.~~

The federal government regulates the sale and shipment of numerous technologies by U.S. companies to foreign countries. Our subsidiaries may develop products that might be useful for military and antiterrorism activities. Accordingly, federal government export regulations could restrict sales of these products in other countries. If the federal government places burdensome export controls on our technology or products, our business would be materially and adversely affected. If the federal government determines that we have not complied with the applicable export regulations, we may face penalties in the form of fines or other punishment.

Stockholder equity interest may be substantially diluted in any additional financing.

Our certificate of incorporation authorizes the issuance of 145,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, on such terms and at such prices as our Board of Directors may determine. AsAdjusted for the 1 for 10 stock split that was implemented on November 17, 2011, as of September 30, ~~2010, 71,720,137~~2011, we had 8,642,286 shares of Common Stock ~~and no shares of Preferred Stock were~~ issued and outstanding. As of September 30, 2010, 8,123,338 shares were reserved for issuance upon exercise of outstanding options. As of September 30, 2010, there were warrants outstanding to purchase 25,672,595 shares of Common Stock. The issuance of additional securities in financing transactions by us or through the exercise of options or warrants will dilute the equity interests of our existing stockholders, perhaps substantially, and might result in dilution in the tangible net book value of a share of our Common Stock, depending upon the price and other terms on which the additional shares are issued.

Our Common Stock price has fluctuated significantly over the last several years and may continue to do so in the future, without regard to our results of operations and prospects.

Because we are a development stage company, there are few objective metrics by which our progress may be measured. Consequently, we expect that the market price of our Common Stock will likely continue to fluctuate significantly. We domay not ~~expect to~~ generate substantial revenue from the license or sale of our ~~nanotechnology~~technology for several years, if at all. In the absence of product revenue as a measure of our operating performance, we anticipate that investors and market analysts will assess our performance by considering factors such as:

We will not have control over many of these factors but expect that they may influence our stock price. As a result, our stock price may be volatile and ~~any extreme fluctuations in the market price of our Common Stock~~ could result in the loss of all or part of your investment. Additionally, in the past, when the market price of a stock has been volatile, holders of that stock have often initiated securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

The market for purchases and sales of our Common Stock may be very limited, and the sale of a limited number of shares could cause the price to fall sharply.

Although our Common Stock is listed for trading on the NASDAQ Capital Market, historically our securities ~~historically were~~have been relatively thinly traded. Investor trading ~~pattern~~patterns could serve to exacerbate the volatility of the price of the stock. For example, mandatory sales of our Common Stock by institutional holders could be triggered if an investment in our Common Stock no longer satisfies their investment standards and guidelines. Accordingly, it may be difficult to sell shares of our Common Stock quickly without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the stock.

If securities or industry analysts do not publish research reports about our business or if they make adverse recommendations regarding an investment in our stock, our stock price and trading volume may decline.

The trading market for our Common Stock ~~will~~can be influenced by the research and reports that industry or securities analysts publish about our business. We do not currently have and may never obtain research coverage by industry or securities analysts. Investors have many investment opportunities and may limit their investments to companies that receive coverage from analysts. If no industry or securities analysts commence coverage of the Company, the trading price of our stock could be negatively impacted. In

the event we obtain industry or security analyst coverage, if one or more of the analysts downgrade our stock or comment negatively on our prospects, our stock price ~~would likely~~may decline. If one or more of these analysts cease to cover our industry or us or fails to publish reports about the Company regularly, our Common Stock could lose visibility in the financial markets, which could also cause our stock price or trading volume to decline.

The market price of our Common Stock may be adversely affected by the sale of shares by our management or founding stockholders.

Sales of our Common Stock by our officers, directors and founding stockholders could adversely and unpredictably affect the price of those securities. Additionally, the price of our Common Stock could be affected even by the potential for sales by these persons. We cannot predict the effect that any future sales of our Common Stock, or the potential for those sales, will have on our share price. Furthermore, due to relatively low trading volume of our stock, should one or more large stockholders seek to sell a significant portion of ~~its~~their stock in a short period of time, the price of our stock may decline.

~~We may be the target of securities class action litigation due to future stock price volatility.~~

In the past, when the market price of a stock has been volatile, holders of that stock have often initiated securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

We will not distribute cash to our stockholders unless and until we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. The time frame for that is ~~inherently~~ unpredictable and ~~you~~investors should not ~~plan on it occurring~~expect dividends in the near future, if at all.

Our Board of Directors has the authority to issue shares of “blank check” preferred stock, which may make an acquisition of the Company by another company more difficult.

We have adopted and may in the future adopt certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of the Company that a holder of our Common Stock might consider in its best interest. Specifically, our Board of Directors, without further action by our stockholders, currently has the authority to issue up to 5,000,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred). Such preferred stock may have rights, including economic rights, senior to our Common Stock.

~~Our~~At September 30, 2011, we had one outstanding lease for our corporate headquarters, which is located in Pasadena, ~~California, and Unidym operates from a facility in Sunnyvale,~~ California. The Company does not own any real property. The following table summarizes the company’s leased facilities:

On October 21, 2011, Arrowhead acquired the RNAi operations from Roche, including its research facility in Madison, Wisconsin. The following table summarizes the information on that leased facility:

Our Common Stock is traded on the NASDAQ Stock Market under the symbol “ARWR”. The following table sets forth the high and low sales prices for a share of the Company’s Common Stock during each period indicated. On November 17, 2011, the Company effected a 1 for 10 reverse stock split. The share prices in the table below are shown on a post-split basis.


	Fiscal Year Ended September 30,								Fiscal Year Ended September 30,
	2010				2009				2011				2010
	High		Low		High		Low		High		Low		High		Low
1st Quarter	$	0.70	$	0.51	$	1.78	$	0.77	$	11.00	$	8.30	$	7.00	$	5.10
2nd Quarter		1.17		0.51		1.20		0.36		10.00		6.00		11.70		5.10
3rd Quarter		1.85		1.03		0.70		0.40		7.00		4.30		18.50		10.30
4th Quarter		1.17		0.85		0.71		0.31		5.90		3.70		11.70		8.50

At December ~~13, 2010,~~15, 2011, an aggregate of ~~71,806,694~~10,525,941 shares of the Company’s Common Stock were issued and outstanding, and were owned by ~~279~~280 stockholders of record, based on information provided by the Company’s transfer agent.

The Company has never paid dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future.

The disclosure required under this item related to equity compensation plans is incorporated by reference from Item 12, under the caption “Equity Compensation Plan Information” in this Annual Report on Form 10-K.

All information under this Item has been previously reported on our Current Reports on Form 8-K.

We did not repurchase any shares of our Common Stock during fiscal ~~2010~~2011 or fiscal ~~2009.~~2010.

As a “Smaller Reporting Company,” we are not required to provide this information.

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, ~~formerly known as InterActive Group, Inc.,~~ (2) the terms the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers collectively to Arrowhead Madison Inc. (“Madison”) , Calando Pharmaceuticals, Inc. (“Calando”), ~~Unidym,~~, Ablaris Therapeutics, Inc. (“~~Unidym”~~Ablaris”), Agonn Systems, Inc. (“Agonn”), and Tego Biosciences Corporation (“Tego”) as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”) and ~~(4)~~Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, and (5) the term “Common Stock” refers to Arrowhead’s Common Stock and the term “stockholder(s)” refers to the holders of Arrowhead Common Stock.

Arrowhead Research Corporation is a ~~development stage nanotechnology holding~~nanomedicine company ~~with an emphasis in nanomedicine. Since our inception, we have incurred significant losses as we fund our investments in early stage technologies. Historically,~~developing innovative therapies at the interface of biology and nanoengineering to cure disease and improve human health. Arrowhead has ~~relied upon issuances~~one of ~~capital stock~~the most advanced and broadest technology platforms for therapeutics based on RNA interference (RNAi), including access to ~~raise capital to fund operations,~~five different RNAi delivery systems and ~~we expect to continue to seek such investment going forward. Calando is currently conducting a Phase I clinical trial~~the three primary small interfering RNA (siRNA) structures in commercial development for ~~its lead drug candidate, CALAA-01, an~~RNAi therapeutics. This broad technology platform enables optimization of siRNA therapeutic candidates for delivery based on ~~RONDEL, Calando’s proprietary~~ siRNA ~~delivery system technology. We expect continued development~~chemistry, tissue type, disease state, and target [gene] and siRNA type and chemistry on a target-by-target basis. Arrowhead is leveraging its in ~~RONDEL~~house R&D expertise and ~~CALAA-01,~~capabilities, as well as ~~investing in future drug~~a broad intellectual property portfolio for RNAi therapeutics, to attract development partnerships with other pharmaceutical and biotech companies committed to bringing RNAi therapeutics to market, as well as continuing the preclinical and clinical development its own clinical candidates. ~~Arrowhead does not intend to independently fund clinical trials through submission~~Arrowhead’s non-RNAi development programs include a unique therapeutic candidate that shows promise for the treatment of ~~a New Drug Application~~obesity and advanced bioactive materials for ~~FDA approval, and is working to employ its partnering strategies intended to decrease costs and maximize~~ the ~~Company’s ability to bring products to market. Arrowhead has been focused on entering strategic partnering agreements for continued development~~regeneration of ~~Calando and Unidym.~~injured tissues.

Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the United States in the preparation of our Consolidated Financial Statements. We evaluate our estimates and judgments on an ongoing basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our consolidated financial statements and require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements. For further information, seeNote 1, Organization and Significant Accounting Policies, to our Consolidated Financial Statements which outlines our application of significant accounting policies and new accounting standards.

Revenue from product sales are recorded when persuasive evidence of an arrangement exists, title has passed and delivery has occurred, a price is fixed and determinable, and collection is reasonably assured.

We may generate revenue from ~~product sales,~~ technology licenses, collaborative research and development arrangements, research grants and ~~research grants.~~product sales. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, and various milestone and future product royalty or profit-sharing payments.

Revenue associated with ~~up-front license fees and~~ research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. Revenue from ~~substantive~~up-front license fees, milestones and ~~future~~ product royalties isare recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.

We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that our assumptions about the useful lives of these assets are no longer appropriate. If impairment is indicated, recoverability is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

We recognize stock-based compensation expense based on the grant date fair value using the Black-Scholes options pricing model, which requires us to make assumptions regarding certain variables including the risk-free interest rate, expected stock price volatility, and the expected life of the award. The assumptions used in calculating stock-based compensation expense represent management’s best estimates, but these estimates involve inherent uncertainties, and if factors change or the Company used different assumptions, its stock-based compensation expense could be materially different in the future.

We account for warrants and other derivative financial instruments as either equity or assets/liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as additional paid-in capital on our consolidated

balance sheet and no further adjustments to their valuation are made. Some of our warrants were determined to be ineligible for equity classification because of provisions that may result in an adjustment to their exercise price. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as assets or liabilities are recorded on our consolidated balance sheet at their fair value on the date of issuance and are revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. We estimate the fair value of these assets/liabilities using option pricing models that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life and risk-free interest rate. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of our derivatives liabilities is the Company’s stock price. For example, a 50% change in the value of the Company’s stock price would affect the value of the derivative liability by approximately ~~$1.4~~$0.5 million to ~~$1.5~~$0.6 million, depending on other inputs.

Intellectual property consists of patents and patent applications internally developed, licensed from universities or other third parties or obtained through acquisition. Patents and patent applications are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, and any impairment ~~found~~ is ~~written off.~~recorded. Licensed or internally developed patents are amortized over the life of the patent. Purchased patents are amortized over three years.

As of November 17, 2011, the Company effected a 1 for 10 reverse stock split (the “Reverse Stock Split”). As a result of the reverse stock split, each ten shares of the Company’s Common Stock issued and outstanding immediately prior to the reverse split was combined into one share of Common Stock. Also, as a result of the Reverse Stock Split, the per share exercise price of, and the number of shares of Common Stock underlying outstanding Company stock options, warrants, Series A Preferred and any Common Stock based equity grants outstanding immediately prior to the reverse stock split was proportionally adjusted, based on the one-for-ten split ratio, in accordance with the terms of such options, warrants or other Common Stock based equity grants as the case may be. No fractional shares of Common Stock were issued in connection with the reverse split. Stockholders will instead receive cash payment in lieu of any fractional shares. Unless otherwise noted, all share and per share amounts in these have been retrospectively adjusted to reflect the reverse stock split.

The Company had a net loss of $3.5 million for the year ended September 30, 2011, compared to a net loss of $7.0 million for the year ended September 30, 2010, ~~compared to a net loss of $19.3 million for the year ended September 30, 2009,~~ a decrease of ~~$12.3~~$3.5 million.

The ~~decrease~~change in the ~~fiscal 2010 net loss versus the fiscal 2009~~ net loss was the result of a number of factors. ~~During the second half of fiscal 2009 several cost reduction initiatives were undertaken to streamline operations and reduce costs. The number of employees~~Arrowhead divested Unidym in January 2011, accordingly, losses incurred at ~~Arrowhead and its Subsidiaries~~Unidym decreased from ~~an average~~fiscal 2010 to fiscal 2011. During fiscal 2010, losses from Unidym were $3 million, compared to income in fiscal 2011 of ~~43 employees~~$1.4 million, resulting in a change of $4.4 million. The income from discontinued operations in fiscal 2011 was driven by revenue of $4.7 million primarily from a license agreement with Samsung prior to the disposal of Unidym. Additionally, during fiscal ~~2009 to an average~~2011, Arrowhead recognized a gain from the disposal of ~~19 employees during fiscal 2010. Altogether, research~~Unidym of $3.9 million. These variances were somewhat offset by the inclusion of Ablaris, which was acquired in December 2010, including a one-time license fee of $2 million and ~~development costs decreased $7.8 million,~~other Ablaris operating expenses of approximately $0.6 million. Other variances included higher general and administrative ~~costs decreased~~expenses of $1.4 million, consulting costs decreased $0.9 million, salary and salary-related costs decreased $2.6 million, and stock-based compensation decreased $1.1 million. Additionally, there was a non-cash gain of $1.8 million related to a derivative liability recorded in association with the June 2010 equity issuance (see Note 11 to the accompanying consolidated financial statements). These decreased expenses were partially offset by a decrease in revenue of $3.1 million.

Unidym began a cost reduction program during fiscal 2009 and reduced its operating expenses to a level which continued into fiscal 2010. Prior to 2009, Unidym was pursuing a business plan based on building a vertically integrated company that would manufacture both carbon nanotubes and carbon nanotube films. Due to the changes in the economic environment in late 2008, Unidym changed its manufacturing strategy to focus on the use of outside manufacturing availability rather than expand its internal capabilities. In line with this strategy, Unidym closed its Texas operations in January 2009, and reduced its Texas workforce. Unidym consolidated its Northern California operations into one facility in 2009 and also decreased the number of management and technical staff. This resulted in a reduction in personnel and other costs later in the year, and such cost reductions were maintained into 2010. Development costs at Unidym have been substantially reduced and the pace of development will depend on the cash resources and partnership opportunities available to Unidym.

~~Calando also reduced expenses in fiscal 2009~~primarily due to a change in business strategy. Rather than incur the significant expense of running multiple clinical trials, Calando decided to seek partners for further development of its technology. Beginning in fiscal 2008 and continuing into fiscal 2009, Calando reduced its management and technical staff culminating with the closure of its lab facility in Pasadena, California in June 2009 after a partnership for one of its drug delivery technologies and its associated clinical candidate was signed, significantly reducing its costs. In fiscal 2008, the Phase I trial for CALAA-01 was initiated, and in fiscal 2009, significant expense was incurred for manufacture of the components for CALAA-02, preparation for an IND for CALAA-02 and the continuation of Calando’s clinical trials. Expenses in fiscal 2010 were primarilycosts related to the ~~Phase I clinical trials related~~acquisition of Roche Madison which was completed in October 2011. Other income/expense was unfavorable by $0.5 million primarily due to ~~CALAA-01, but were somewhat limited as~~ the ~~accrual of patients was suspended for several months in 2010 as Calando developed a new stability assay. The enrollment of patients~~change in the ~~CALAA-01 clinical trial resumed in May 2010 and was in progress at~~value of derivative liabilities as compared to the ~~end of fiscal 2010. Continued clinical and preclinical development of Calando’s drug candidates will depend on the cash resources available to Calando.~~prior year.

The Company generated revenue of ~~$620,000 and $3,758,000 for~~$296,000 during the ~~years~~year ended September 30, ~~2010 and 2009, respectively. The revenue for~~2011. Revenues were not recognized in the year ended September 30, 2010, as revenues previously recognized by Unidym are classified as a part of discontinued operations. The revenue in 2011 was primarily related to Unidym’s sale of carbon nanotubes, CNT inks and CNT films, which accounted for approximately $415,000 in revenue. Revenue from license fees and royalties, primarily from Unidym, were $155,000, and other revenue was $50,000. These revenue compare to fiscal 2009 revenue which consisted of a license fee of $1,750,000 related to the license of IT-101 from Calando to Cerulean, the sale of approximately $678,000 in IT-101 inventory to Cerulean, $203,000 from grants to fund research for the development of carbon nanotube applications, $503,000 from license fees

applicable to Unidym technology, $602,000 from the sale and delivery of carbon nanotubes to third parties and $37,000 of collaboration services revenue. The primary reason for the reduction in revenue in fiscal 2010 is that the Company did not enter into any significant partnership agreements in 2010.qualifying therapeutic discovery grant received by Calando.

The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. For purposes of comparison, the amounts for the years ended September 30, ~~2010~~2011 and ~~2009~~2010 are shown in the table below.

Salary & Wage Expenses - Fiscal ~~2010~~2011 compared to Fiscal ~~2009~~2010

Arrowhead employs management, administrative and technical ~~staff at the Arrowhead corporate offices and the Subsidiaries.~~staff. Salary and wage expense consists of salary, benefits, and non-cash charges related to equity-based compensation from the issuance of stock options. Salary and benefits are allocated to two major categories: general and administrative compensation expense and research and development compensation expense depending on the primary activities of each employee. The following table provides details of salary and related expenses for fiscal ~~2010~~2011 and fiscal ~~2009.~~2010.


	Year Ended		% of Expense			Year Ended		% of Expense			Increase (Decrease)						Twelve Months Ended		% of Expense			Twelve Months Ended		% of Expense			Increase (Decrease)
	September 30, 2010		Category			September 30, 2009		Category			$			%			September 30, 2011		Category			September 30, 2010		Category			$		%
G&A—compensation-related	$	1,451		34	%	$	2,852		36	%	$	(1,401	)		-49	%	$	1,143		81	%	$	910		79	%	$	233		26	%
Stock-based compensation		1,582		37	%		2,676		33	%		(1,094	)		-41	%
R&D—compensation-related		1,265		29	%		2,482		31	%		(1,217	)		-49	%		265		19	%		236		21	%		29		12	%

Total	$	4,298		100	%	$	8,010		100	%	$	(3,712	)		-46	%	$	1,408		100	%	$	1,146		100	%	$	262		23	%

~~The Company reduced~~During the ~~number of employees across all its entities during fiscal 2009. Arrowhead and its subsidiaries employed 19 people at~~year ended September 30, ~~2009,~~2011, G&A compensation expense increased $233,000. The prior year included a ~~reduction~~nonrecurring charge of ~~48 employees~~certain general and administrative expenses to the Company’s minority investment companies, Nanotope and Leonardo, for which the Company provides management services. This charge served to decrease the Company’s consolidated salary costs during ~~fiscal 2009. During fiscal 2010,~~ the year ended September 30, 2010. Arrowhead’s management headcount has remained relatively ~~flat, but cost reductions were realized for~~constant over the past year. R&D compensation related costs remained relatively constant during the year and on a ~~full year in 2010,~~year-to-date basis, as compared to ~~a partial year~~the prior periods. With the addition of personnel in Arrowhead’s newly acquired Madison facility, salary and wage expenses are expected to increase sharply in fiscal ~~2009. The employee reductions resulted from the change in business strategy at both Unidym and Calando as described above.~~2012.

Research and development (R&D) compensation-related expense decreased in fiscal 2010 compared to fiscal 2009 due primarily to Unidym’s reduction in research scientists and process engineers and the closure of Unidym’s Texas facility. Calando has also reduced laboratory personnel in connection with its decision in 2009 to license its small molecule platform and associated drug candidate and close its laboratory facility. Two Calando employees have been retained to manage the CALAA-01 clinical study and to facilitate the partnership arrangements for Calando’s technology.

Stock-based compensation is a non-cash charge related to grant-date fair value of stock options, which is recognized over the vesting period. During fiscal year 2009, the number of options outstanding decreased as a result of options being cancelled following employee terminations. Also, in July 2009, 4,005,000 options issued to officers, directors and certain employees were cancelled to facilitate a financing by the Company in the fourth quarter of fiscal 2009. In total, 5.6 million stock options were cancelled in fiscal 2009. These options had a weighted average exercise price of $3.88, and reduced expense considerably. During fiscal 2010, 5.3 million options were granted at a weighted average exercise price of $0.68, and a correspondingly lower fair value resulted in lower compensation expense in fiscal 2010.

General & Administrative Expenses – Fiscal ~~2010~~2011 compared to Fiscal ~~2009~~2010

The following table provides details of our general and administrative expenses for the fiscal years ~~2010~~2011 and ~~2009.~~2010.


	Year Ended		% of Expense			Year Ended		% of Expense			Increase (Decrease)						Twelve Months Ended		% of Expense			Twelve Months Ended		% of Expense			Increase (Decrease)
	September 30, 2010		Category			September 30, 2009		Category			$			%			September 30, 2011		Category			September 30, 2010		Category			$			%
Professional/outside services	$	1,445		45	%	$	2,217		49	%	$	(772	)		-35	%	$	2,384		63	%	$	1,199		49	%	$	1,185			99	%
Recruiting/relocation		18		1	%		32		1	%		(14	)		-44	%
Patent expense		401		13	%		652		14	%		(251	)		-38	%		604		16	%		352		14	%		252			72	%
Facilities and related		278		9	%		281		6	%		(3	)		-1	%		168		4	%		278		11	%		(110	)		-40	%
Travel		240		8	%		387		8	%		(147	)		-38	%		201		5	%		161		6	%		40			25	%
Business insurance		267		8	%		414		9	%		(147	)		-36	%		194		5	%		182		7	%		12			7	%
Depreciation		85		3	%		132		3	%		(47	)		-36	%		26		1	%		35		1	%		(9	)		-26	%
Communication and technology		138		4	%		197		4	%		(59	)		-30	%		96		3	%		105		4	%		(9	)		-9	%
Office expenses		107		3	%		168		4	%		(61	)		-36	%		54		1	%		65		3	%		(11	)		-17	%
Other		204		6	%		87		2	%		117			134	%		95		2	%		114		5	%		(19	)		-17	%

Total	$	3,183		100	%	$	4,567		100	%	$	(1,384	)		-30	%	$	3,822		100	%	$	2,491		100	%	$	1,331			53	%

Professional/outside services include legal, accounting and other outside services retained by Arrowhead and its subsidiaries. All periods include normally occurring legal and accounting expenses related to SEC compliance and other corporate matters. Professional/outside services expense was ~~$1,445,000~~$2,384,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$2,217,000~~$1,199,000 in the comparable prior period. The ~~decrease~~increase in professional fees primarily relates to ~~a reduction in expenses at Arrowhead due to lower~~the legal costs, consulting services and ~~printing fees, and lower fees at Calando, primarily due~~other outside costs associated to the ~~non-recurrence~~acquisition of ~~expenses associated with a financing~~Roche’s RNAi assets and facility in the prior period. Additionally, the prior year included certain legal fees related to the licensing of IT-101 at Calando, which were not repeated. These reductions were somewhat offset by higher costs related to NASDAQ fees associated with increased shares outstanding.Madison, Wisconsin.

~~Recruiting/relocation fees were $18,000~~Patent expense was $604,000 during the year ended September 30, ~~2010,~~2011, compared to $32,000 in the comparable prior period. Recruiting/relocation fees during in fiscal 2010 were related to relocation fees at Arrowhead, while costs in the prior year primarily related to relocation costs at Unidym. Recruiting and relocation expense in both periods was relatively insignificant as the company has not been actively recruiting new employees. These costs will vary depending on hiring needs of the Company.

~~Patent expense was $401,000 during the year ended September 30, 2010, compared to $652,000~~$352,000 in the comparable prior period. During the year ended September 30, ~~2010,~~2011, patent expense ~~decreased at all entities with majority of the reduction relating to Calando and Unidym, which decreased $74,000 and $88,000 respectively. Patent expense during the year ended September 30, 2009~~ was primarily related to fees paid to patent ~~costs at Calando~~counsel for the maintenance of ~~$320,000 prior~~Calando’s intellectual properties portfolio. The increase is primarily due to ~~the license agreements to Cerulean, and $237,000 at Unidym for patent~~increased costs related to ~~Nanoconduction, which were not repeated.~~foreign patent filings. The Company expects to continue to invest in patent protection as the Company extends and maintains protection for its current portfolios and files new patent applications as its product applications are improved. ~~The cost will vary depending on the needs of the Company.~~

Facilities and related expense within general and administrative expenses primarily relate to rental costs associated with the Company’s headquarters in Pasadena, California. ~~As there were no significant changes~~Facilities expense decreased due to reduction in the company’s rental expense because its lease ~~during fiscal 2010, expenses did not change significantly.~~for its corporate headquarters expired. Temporarily, the Company is occupying a smaller and less expensive office space, and is in negotiations for a new corporate office facility.

Travel expense was ~~$240,000~~$201,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$387,000~~$161,000 in the comparable prior period. Travel expense includes ~~recurring~~ expenses related to travel by Company personnel tofor operational business meetings at other company locations, and ~~from Company locations in Pasadena and Northern California. Travel expense is also incurred as the Company pursues~~for other business initiatives and collaborations throughout the world with other companies, and for marketing, investor relations, fund raising and public relations purposes. ~~During the year ended September 30, 2010,~~The increase in travel ~~expense decreased $147,000, compared~~relates primarily to the ~~year ended September 30, 2009, primarily due to a reduction of~~ travel costs ~~at Unidym of $142,000~~associated with due diligence related to the ~~reduction~~acquisition of Roche’s RNAi assets and facility in the number of employees, mainly as a result of the closure of its Texas facility. Travel expenses can fluctuate from quarter to quarter and from year to year depending on current projects and activities.Madison, Wisconsin.

Business insurance expense was ~~$267,000~~$194,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$414,000~~$182,000 in the comparable prior period. ~~The decrease in~~During the ~~cost~~prior year, the company received a refund of ~~business~~$55,000 for its insurance ~~is primarily~~carrier related to ~~a refund received~~clinical trial program premium coverage after an insurance audit. The company also experienced rate decreases in ~~June 2010 of $55,000 at Calando related to an adjustment in clinical~~its Directors and Officers insurance costs from a previous year based on the number of enrolled patients. Also, business insurance is lower due to generally lower rates in insurance markets and a reduction in coverage for clinical trials with the termination of the Phase II clinical study for IT-101, and the reduction in the number of facilities at Unidym requiring insurance. This expense can fluctuate as a result of changes in the market and the status of clinical trials and other business operations.coverage.

Depreciation expense was ~~$85,000~~$26,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$132,000~~$35,000 in the comparable prior period. The decrease in depreciation expense is related primarily ~~related~~ to the ~~closure of~~assets that were fully depreciated during the ~~Calando facility in 2009 and the disposal of the related fixtures, furniture and equipment.~~year.

Communication and technology expense was ~~$138,000~~$96,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$197,000~~$105,000 in the comparable prior period. The decrease in communication and technology cost is due to lower technology consulting expense ~~at Unidym due to the closure of its Texas facility,~~ and ~~generally~~ lower telephone and software maintenance cost at Arrowhead and Calando.

Office expense was ~~$107,000~~$54,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$168,000~~$65,000 in the comparable prior period. The ~~reduction~~decrease in office expense is primarily ~~related~~relates to the ~~closing~~reduction of office costs after the company moved to a smaller temporary facility that provides certain amenities as part of the ~~facilities and the reduction in employees.~~lease.

Research and Development Expenses – Fiscal ~~2010~~2011 compared to Fiscal ~~2009~~2010

Most of Arrowhead’s R&D expenses for fiscal ~~2010~~2011 and fiscal ~~2009~~2010 were related to research and development activities by Arrowhead’s Subsidiaries. The following table provides details of R&D expenses for fiscal ~~2010~~2011 and ~~2009:~~2010:

Outside lab and services expense was ~~$215,000~~$776,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$3,950,000~~$199,000 in the comparable prior period. The ~~decrease~~majority of ~~$3,735,000 during~~ the ~~year is primarily~~increase was related to ~~the curtailment of certain outside~~Calando. Outside lab services ~~at Calando~~ and contract services were higher in fiscal 2011 to a lesser extent, reduction of costs at Unidym. The reduction at Calando was a result of the advanced state of the IT-101 Phase I clinical trial, the decision to close the IT-101 Phase II clinical trials in connection with the agreement with Cerulean, completion of preparatory work for the CALAA-01 Phase I clinical trial and the suspension of development efforts for CALAA-02. During fiscal 2009, process development and preclinical expenses for Calando’s drug candidate CALAA-02, together withsupport the clinical trial ~~expenses for CALAA-01 (Phase I)~~taking place. In the previous year, the clinical trial had lower enrollment and ~~IT-101 (Phase I and II) totaled approximately $2.9 million. However,~~thus incurred lower cost. In addition, the ~~expenses were significantly reduced by June 30, 2009 when the Calando facility~~company experienced outside costs related to its new subsidiary, Ablaris, which was closed. Unidym’s R&D expenses are also declining as a result of streamlining its R&D effort and the closure of its production facility in Texas. Unidym continues to focus on the production and sale of CNT-based inks and is seeking to establish partnerships for both CNT production and coating of film. Outside laboratory & contract services expenses will continue to fluctuate depending upon where a particular project is in its development, approval or trial process.

Licensing fees, milestones and royalties consist primarily of amounts paid by Unidym under the terms of its license agreement with Rice University and Calando for the license for siRNA targets from Alnylam, and licensing arrangements with Caltech. This expense decreased primarily due to reduced fees owed to Caltech, and also due to the nonrepeat of other one-time fees from fiscal 2009.

In fiscal 2009, purchased In-Process R&D expense resulted from the exchange of Arrowhead stock for Unidym stock. As a result of these exchanges, Arrowhead increased its ownership position in Unidym. The purchased in-process research and development expense equals the estimated fair value of the Arrowhead stock issued to purchase Unidym shares from Unidym’s minority shareholders. Arrowhead’s purchase of the Unidym shares is accounted for as an additional Investment in Subsidiaries by Arrowhead. However, the additional investment by Arrowhead does not result in a corresponding increase in Unidym’s asset or capital accounts. The additional investment was expensed in consolidation as purchased in-process research and development in accordance with guidance by the FASB. This determination was made in light of the risks inherentoperating in the technical development and the uncertainty of acceptance of Unidym’s products. Effective October 1, 2009, with the Company’s adoption of new guidance issued by the FASB, such transactions are no longer expensed, but are recorded as a part of equity.prior year.

~~Laboratory supplies and services~~Consulting expense was ~~$9,000~~$440,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$295,000~~$326,000 in the comparable prior period. ~~Laboratory supplies~~The primary reason for the increase in consulting expense is due to technical consulting costs related to the company’s new subsidiary, Ablaris Therapeutics, Inc. and ~~services consist primarily of materials, supplies and services consumed in~~ the ~~laboratory. The decrease in laboratory supplies and services~~costs associated with new scientific advisory board members.

License, royalty & milestone expense was ~~due to a reduction of $223,000 at Unidym due to the closure of the Texas facility, and a reduction of $60,000 at Calando due to the closure of its laboratory.~~

~~Facilities expense was $391,000~~$2,045,000 during the year ended September 30, ~~2010,~~2011, compared to ~~$1,225,000~~($2,000) in the comparable prior period. The ~~decrease in facilities related~~licensing fees, royalty and milestones expenses ~~primarily related to the closure of Unidym’s Texas facilities and Menlo Park, California facility, as well as Calando’s lab facility.~~

~~Sponsored research expense was $33,000~~ during the year ~~ended September 30, 2010, compared~~reflect to ~~$195,000~~$2 million in ~~the comparable prior period. Sponsored research expense decreased the year ended September 30, 2010, as compared~~licensing fees paid to ~~the prior year, due to lower funding to the research project at Duke~~ University ~~the only sponsored research agreement currently in place.~~

~~Depreciation expense was $254,000 during the year ended September 30, 2010, compared to $476,000 in the comparable prior period. The decrease in depreciation expense is primarily due to the disposal~~ of ~~laboratory equipment and leasehold improvements~~Texas M.D. Anderson Cancer Center related to ~~closure of Unidym’s~~a Patent and ~~Calando’s laboratory facilities~~Technology License Agreement entered into in ~~fiscal 2009.~~

~~The table below sets forth the approximate amount of Arrowhead’s cash expenses for research and development projects at each Subsidiary for the periods described below.~~

~~For fiscal 2010, consulting fees~~ and related ~~travel totaled approximately $514,000. Fiscal 2009 consulting fees were $1,461,000, $945,000 of which related~~ to Calando and was primarily related to consulting for clinical trials which was significantly reduced in fiscal 2010. With the completion of the Phase II trial for IT-101 and its ultimate licensing to a third party for development, consulting for clinical studies has decreased significantly. Consulting expense at Unidym decreased by $154,000 primarily due to elimination of consultants associated with the closure of the Texas facility.Ablaris.

Other income ~~increased~~decreased from ~~$416,000~~$1,521,000 in fiscal ~~2009~~2010 to ~~$1,418,000~~$1,045,000 in fiscal ~~2010.~~2011. The main reason for the ~~increase~~decrease in other income was due to ~~a gain recorded on~~ the change in the value of derivative ~~liabilities. This was driven by a decrease~~liabilities, which contributed $1.8 million to other income in fiscal 2010, compared to $1.1 million in fiscal 2011. The change in the value of the derivative ~~liabilities~~is related to warrants issued in June 2010, that contain antidilution protection (see Note 11 – Fair Value Measurements & Derivative Instruments)~~. These warrants decreased~~, somewhat offset by the change in ~~value between~~ the ~~date of their issuance and September 30, 2010 primarily due to the decrease in Arrowhead stock price which resulted in a lower fair~~ value of the derivative ~~liability and~~asset related to a ~~gain~~convertible bond, the value of ~~$1.7 million~~which is affected by the price of the underlying equity security. Also contributing to other income/expense was the change in value of marketable securities, which decreased in value by $261,000 during the ~~year ended September 30, 2010. This gain was partially offset by~~year. The Company also recorded other income of $250,000 in 2011 related to an insurance claim paid during the ~~non-recurrence of a one-time gain from the sale of our equity interests in Ensysce BioSciences, Inc., which occurred in fiscal 2009.~~year.

As a development stage company, Arrowhead has historically financed its operations through the sale of securities of Arrowhead and its Subsidiaries. ~~Development~~Research and development activities ~~at our Subsidiaries, in particular Calando and Unidym, has~~have required significant capital investment since the Company’s inception, ~~in 2003~~ and isare expected to continue to require significant cash investment in fiscal ~~2011 to continue development.~~2012.

At September 30, ~~2010, Arrowhead~~2011, the Company had cash on hand of approximately ~~$6.8 million on a consolidated basis.~~$7.5 million. Cash and cash equivalents increased during ~~the 2010~~ fiscal ~~year~~2011 by ~~$4.8~~$660,000 to $7.5 million toat September 30, 2011 from $6.8 million at September 30, ~~2010 from $2.0 million at September 30, 2009.~~2010.

Cash used in operating activities was ~~$7.6~~$7.7 million, which represents the on-going expenses of Arrowhead and its Subsidiaries. Cash outlays were primarily composed of the following: salary and payroll-related costs were ~~$2.7~~$1.9 million, general and administrative costs were ~~$3.0~~$3.2 million, research and development costs were ~~$0.9 million and consulting costs were $0.6~~$2.8 million. ~~Approximately $0.4 million was used in the funding of working capital, primarily due to the reduction of accounts payable balances. Finally,~~ $0.7 million was used to fund operating expenses at Arrowhead’s two minority interest companies, Nanotope and Leonardo. It is expected that these funds will be repaid, or converted to equity in the future. Cash expenses were partially offset by cash received from revenues of ~~$0.7~~$0.3 million, proceeds from an insurance claim of $0.3 million, and other cash flow of $0.3 million.

Cash used in investing activities was $0.2 million, primarily related to cash received from the sale of investment of $1.5 million, offset by $1.7 million of cash which was divested with the sale of Unidym.

Cash provided by financing activities of $6.2 million includes $1.7 million received from outside investors for an investment in Ablaris, $4.6 million equity investment from the sale of Common Stock, and $0.1 million from the exercise of stock options.

Cash provided from financing activities was $12.0 million. As further described below, there were two significant equity financings during fiscal 2010 with total net proceeds of $11.1 million. In addition, warrants were exercised during the year which yielded proceeds of $1.1 million. Proceeds from financing activities also include $0.6 million related to cash investments in Unidym. Finally, payments on capital lease obligations were $0.7 million.

~~Cash flow from~~ discontinued operations was ~~$0.4~~$2.3 million, ~~related~~representing the cash flow from Unidym, which was sold in January 2011.

On October 21, 2011, Arrowhead completed the acquisition of certain RNAi assets from Hoffmann-La Roche Inc. and F Hoffmann-La Roche Ltd., including intellectual property and a research and development facility based in Madison, Wisconsin. At the time of the acquisition, the facility had 41 employees. Due to the costs associated with the facility, including personnel costs, rent, research and development expenses, and other costs, it is expected that cash expenses will increase significantly in 2012 and beyond as the Company accelerates its preclinical and clinical development efforts.

On September 30, 2011, the Company entered into Subscription Agreements with certain accredited investors pursuant to which the Company agreed to issue and sell an aggregate of 1,458,917 shares of Common Stock, $0.001 par value per share, at a purchase price of $3.80 per share. The aggregate purchase price paid by the Purchasers for the shares of Common Stock was $5,543,885, which includes $193,885 of fees paid in stock. The closing of the sale of the ~~Company’s intellectual property assets~~shares occurred on September 30, 2011. Additionally, on October 5, 2011, a second closing under the same terms occurred resulting in the issuance of ~~Tego Biosciences to Luna Innovations Inc. The Company’s operation~~138,157 additional shares of ~~Tego has ceased, however~~Common Stock for proceeds of $525,000.

On October 20, 2011, the ~~asset~~Company and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”) entered into a $15 million purchase agreement (the “Purchase Agreement”), together with ~~Luna Innovations, Inc. allows for~~a registration rights agreement, whereby LPC agreed to purchase up to $15 million of Common Stock, subject to certain ~~royalties and milestone payments.~~

~~The Company’s strategic plan includes focusing on near~~limitations, from time to time during the three-year term ~~revenue opportunities, conserving cash and seeking sources~~ of ~~new capital. To execute this plan,~~the Purchase Agreement. Additionally, the Company agreed to file a registration statement with the U.S. Securities & Exchange Commission (“SEC”) covering the resale of the shares that have been or may be issued to LPC under the Purchase Agreement. Upon the occurrence of certain events, including the SEC declaring effective the registration statement related to the resale of such shares, the Company will have the right, in its sole discretion, over a 36-month period to sell up to $15 million of Common Stock (subject to certain limitations) to LPC, depending on certain conditions as set forth in the Purchase Agreement.

On October 21, 2011 and October 24, 2011, the Company entered into Subscription Agreements with certain accredited investors, pursuant to which the Company agreed to issue and sell an aggregate of 1,015 shares of Series A Preferred Convertible Stock, $0.001 par value per share, at a purchase price of $1,000 per share. The aggregate purchase price paid by the Series A Purchasers for the shares of Series A Preferred is $1,015,000. Upon receipt of stockholder approval, each share of Series A Preferred will automatically convert into 263.158 shares of Common Stock, subject to a 19.99% beneficial ownership conversion limit. The Company intends to seek ~~to accomplish one or more~~stockholder approval for the conversion of the ~~following on favorable terms:~~Series A Preferred Stock at the out-license of technology, sale of a subsidiary, sale of non-core assets, funded joint development or partnership arrangements and sale of securities. The Company is actively involved in discussions with third parties regarding several of these alternatives. However, until such time as one or more of these efforts can be accomplished,2012 Annual Meeting.

On October 21, 2011, the Company ~~will continue~~entered into a Subscription Agreement with a single accredited investor, pursuant to ~~conserve~~which the Company agreed to issue and sell an aggregate of 675,000 shares of Common Stock, $0.001 par value per share, at a purchase price of $3.70 per share. The aggregate purchase price for the shares of Common Stock was $2,497,500.

~~The~~on hand and operating plan at September 30, 2011, additional sources of financing since September 30, 2011 and other sources of liquidity, as described above, the Company’s management anticipates that the Company will be able to satisfy the cash requirements of its operations through at least the next twelve ~~months with current cash resources. The~~months. However, the Company anticipates that further equity financings, and/or asset sales and license agreements will be necessary to continue to fund operations in the future.

On December 11, 2009, the Company sold an aggregate of 5,083,430 units in a private placement transaction with accredited investors. Each unit consisted of one share of Arrowhead Common Stock and a warrant to purchase an additional share of Common Stock exercisable at $0.509 per share. The unit price was $0.634, based upon the closing bid price on the Company’s Common Stock on December 11, 2009, which was $0.509, plus $0.125 for the purchase of the warrant. The warrants became exercisable on June 12, 2010 and remain exercisable until December 11, 2014. The redemption feature provided for in the warrants has been met and may be called for redemption by the Company beginning on December 12, 2010. Gross proceeds of the offering were approximately $3.2 million.

On June 17, 2010, the Company executed definitive agreements for a private placement offering with certain institutional and accredited investors, by which the Company sold 6,592,989 units consisting of one share of the Company’s common stock and a warrant to purchase 0.5 shares of Common Stock, exercisable at $1.65 per share. The unit price was $1.312 per unit. The warrants become exercisable on December 22, 2010 and remain exercisable until December 22, 2015. The Company received gross proceeds of approximately $8.7 million, and net proceeds of approximately $7.9 million, after deduction of placement agent commissions and offering fees and expenses.

As of September 30, ~~2010,~~2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As a “Smaller Reporting Company,” we are not required to provide this information.

The information required by this item is included in Item 15 of this Annual Report Form 10-K.

Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”) have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our ~~chief executive officer~~Chief Executive Officer and ~~chief financial officer~~Chief Financial Officer where appropriate, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles in the United States. This process includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management’s Assessment of the Effectiveness of our Internal Control over Financial Reporting

Management has evaluated the effectiveness of our internal control over financial reporting as of September 30, ~~2010.~~2011. In conducting its evaluation, management used the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under such framework, management has concluded that our internal control over financial reporting was effective as of September 30, ~~2010.~~2011.

There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year ended September 30, ~~2010,~~2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The names and ages of our directors serving as of ~~September 30, 2010~~December 15, 2011 are provided below. Directors are elected annually for a one year term. Biographical information regarding these officers is set forth under the following table.

Dr. Christopher Anzalone has been President, Chief Executive Officer and Director of the Company since December 1, 2007. In 2005, Dr. Anzalone formed and served as CEO of the Benet Group LLC, private equity firm focused on creating and building new nano-biotechnology companies from university-generated science. While at The Benet Group, Dr. Anzalone was founding CEO in two portfolio companies, Nanotope Inc., a tissue regeneration company, and Leonardo Biosystems Inc., a cancer drug delivery company. Dr. Anzalone remains CEO and director of Nanotope. Dr. Anzalone is a director of Arrowhead’s wholly-owned subsidiary, Arrowhead Madison Inc., majority-owned subsidiaries, Calando Pharmaceuticals, Inc., Ablaris Therapeutics, Inc., and Tego Biosciences Corporation and minority investment, Leonardo Biosystems, Inc. Prior to his tenure at Benet Group, from 1999 until 2003, he was a partner at the Washington, DC-based private equity firm Galway Partners, LLC, where he was in charge of sourcing, structuring, and building new business ventures and was founding CEO of NanoInk, Inc., a leading nanolithography company. Dr. Anzalone holds a Ph.D. in Biology from UCLA and a B.A. in Government from Lawrence University. We believe Dr. Anzalone’s qualifications to serve on the Board include his deep understanding of the business through his role as Chief Executive Officer; in addition Dr. Anzalone has extensive experience in nanotechnology, biotechnology, company-building and venture capital.

R. Bruce Stewart has been Executive Chairman of the Board of the Company since December 1, 2007. Mr. Stewart was Arrowhead’s Chief Executive Officer and Chairman of the Board of the Company from January 2004 to November 30, 2007. Mr. Stewart was the Chairman of the Board of Arrowhead’s predecessor company since its inception in May 2003 and devoted much of his time from early in 2003 to development of its plan of operations. Mr. Stewart is a director of Arrowhead’s majority-owned subsidiaries Calando Pharmaceuticals, Inc., Ablaris Therapeutics, Inc., and Tego Biosciences Corporation. Mr. Stewart founded Acacia Research Corporation in March 1991, and was employed by Acacia Research Corporation in various capacities until January 2003, serving as its President from inception through January 1997, Chairman until April 2000, and as a senior advisor until January 2003. We believe Mr. Stewart’s qualifications to serve on the Board includes his long tenure as Chief Executive Officer and as a member of the Board during which time he gained an extensive understanding of the Company’s operations, strategy and finances, as well as his extensive experience in the field of finance.

Dr. Mauro Ferrariwas appointed to the Arrowhead Board of Directors in 2010. Dr. Ferrari is the President and CEO of The Methodist Hospital Research Institute (TMHRI). He is also the President of The Alliance for NanoHealth. Dr. Ferrari is a director of Arrowhead’s minority investment, Leonardo Biosystems, Inc. Dr. Ferrari is an internationally recognized expert in nanomedicine and biomedical nanotechnology. Prior to assuming leadership of TMHRI, Dr. Ferrari was Professor and Chairman of The Department of NanoMedicine and Biomedical Engineering at The University of Texas Health Science Center at Houston, Professor of Experimental Therapeutics at the MD Anderson Cancer Center, Adjunct Professor of Bioengineering at Rice University, and Adjoint Professor of Biomedical Engineering at the University of Texas in Austin. His previous academic appointments include professorships at UC Berkeley and Ohio State University.

From 2003 to 2005, he served as Special Expert on Nanotechnology and Eminent Scholar at The National Cancer Institute, where he led in the development of the NCI’s program in Nanotechnology, which remains the largest program in NanoMedicine in the world. Dr. Ferrari has been serving as the Editor-in-Chief for “Biomedical Microdevices: BioMEMS and Biomedical Nanotechnology” since 1997. We believe Dr. Ferrari’s qualifications to serve on the Board include his extensive training and experience in the fields of nanotechnology, biotechnology and biomedical applications. Dr. Ferrari has significant technical training, several academic appointments and numerous published articles and patents. Additionally, Dr. Ferrari has extensive experience in developmental stage organizations having founded several startup companies.

Edward W. Frykman has been a director of the Company since January 2004. Mr. Frykman was an Account Executive with Crowell, Weedon & Co., a position he held from 1992 until 2008 when he retired. Before his service at Crowell, Weedon & Co., Mr. Frykman served as Senior Vice President of L.H. Friend & Co. Both Crowell Weedon & Co. and L.H. Friend & Co. are

investment brokerage firms located in Southern California. In addition, Mr. Frykman was a Senior Account Executive with Shearson Lehman Hutton, where he served as the Manager of the Los Angeles Regional Retail Office of E. F. Hutton & Co. Mr. Frykman was a director in Arrowhead’s predecessor company since its inception in May 2003 until January 2004, when he became a director of the Company. Mr. Frykman is also a director of Acacia Research Corporation, a publicly-held corporation based in Newport Beach, California. Mr. Frykman is a director of Arrowhead’s majority-owned subsidiaries Calando Pharmaceuticals, Inc., Ablaris Therapeutics, Inc., and Tego Biosciences Corporation. We believe Mr. Frykman’s qualifications to serve on the Board include his long tenure as a member of the Board which enabled Mr. Frykman to gain a deep understanding of the company’s operations, strategy and finances. Mr. Frykman also has extensive experience in the fields of finance and public company oversight.

Dr. Douglass Given~~, MD, PhD, MBA,~~has been a director of the company since November 2010. He is an Investment Partner at Bay City Capital and has been with the firm since October 2000. He was formerly Chief Executive Officer and a director of NeoRx, Corporate Sr. Vice President and Chief Technical Officer of Mallinckrodt, and Chief Executive Officer and a director of Progenitor and Mercator Genetics. He held positions as Vice President at Schering Plough Research Institute, Vice President at Monsanto/G.D. Searle Research Laboratories, and Medical Advisor at Lilly Research Laboratories. Dr. Given is the Chairman of VIA Pharmaceuticals, and Chairman of Vivaldi Biosciences. He is Chairman of the Visiting Committee to the Division of Biological Sciences and the Pritzker School of Medicine at the University of Chicago, a member of the Johns Hopkins Bloomberg School of Public Health Advisory Board, and a member of the Harvard School of Public Health AIDS Initiative International Advisory Council.

Dr. Given holds an MD with honors and a PhD from the University of Chicago, and an MBA from the Wharton School, University of Pennsylvania. He was a fellow in Internal Medicine and Infectious Diseases at Harvard Medical School and Massachusetts General Hospital. We believe Dr. Given’s qualifications to serve on the Board include his extensive experience in finance and business transactions, particularly investments in the life sciences industry as well as directorship roles in start-up biotechnology companies. Dr. Given also has significant leadership roles, including CEO and Senior Vice President, at several large pharmaceutical companies. Dr. Douglass Given is a brother of Dr. Bruce Given, our chief operating officer.

Charles P. McKenneyhas been a director of the Company since April 2004. Mr. McKenney has maintained a government affairs law practice in Pasadena, California since 1989, representing businesses and organizations in their relations with state and local government regarding their obligations under state and local land use and trade practices laws. From 1973 through 1989, he served as Attorney for Corporate Government Affairs for Sears, Roebuck and Co., helping organize and carry out Sears’s western state and local government relations programs. Mr. McKenney has served two terms on the Pasadena, California, City Council as well as on several city boards and committees, including three city Charter Reform Task Forces. Mr. McKenney is a director of Arrowhead’s majority-owned subsidiaries Calando Pharmaceuticals, Inc., Ablaris Therapeutics, Inc., and Tego Biosciences Corporation. We believe Mr. McKenney’s qualifications to serve on the Board include his long tenure as a member of the Board resulting in a deep understanding inof the Company’s operations, strategy and finances. Mr. McKenney also has extensive experience providing strategic legal and advisory services to developmental stage organizations.

Dr. Michael S. Perry was appointed to the Company’s Board of Directors on December 19, 2011. Dr. Perry has been a Venture Partner with Bay City Capital LLP since 2005. Dr. Perry was appointed President and Chief Medical Officer of Poniard Pharmaceuticals, a Bay City Capital portfolio company (NASDAQ: PARD) in 2010. He also currently serves as a member of the board of directors of AmpliPhi Biosciences Corporation (APHB.PK). He was Chief Development Officer at VIA Pharmaceuticals, Inc., a publicly held drug development company, from April 2005 until May 2009. Prior thereto, he served as Chairman and Chief Executive Officer of Extropy Pharmaceuticals, Inc., a privately held pediatric specialty pharmaceutical company, from June 2003 to April 2005. From 2002 to 2003, Dr. Perry served as President and Chief Executive Officer of Pharsight Corporation, a publicly held software and consulting services firm. From 2000 to 2002, Dr. Perry served as Global Head of Research and Development for Baxter BioScience. From 1997 to 2000, Dr. Perry was President and Chief Executive Officer of both SyStemix Inc. and Genetic Therapy Inc., two wholly owned subsidiaries of Novartis Corp., and from 1994 to 1997, he was Vice President of Regulatory Affairs for Novartis Pharma (previously Sandoz Pharmaceuticals). Prior to 1994, Dr. Perry held various management positions with Syntex Corporation, Schering-Plough Corporation and BioResearch Laboratries, Inc. Dr. Perry holds a Doctor of Veterinary Medicine, a Ph.D. in Biomedical Pharmacology and a B.Sc. in Physics from the University of Guelph, Ontario, Canada. He is a graduate of the International Management Program at Harvard Business School. We believe Dr. Perry’s qualifications to serve on the board include his medical expertise and his extensive experience in preclinical and clinical drug development, including executive level leadership roles in several publicly held biotech companies.

The names and ages of our executive officers and the positions held by each as of December 15, 2011 are as follows:

Kenneth A. Myszkowski, Chief Financial Officer, joined Arrowhead in 2009. Prior to joining Arrowhead, Mr. Myszkowski served as the corporate controller for Broadwind Energy, a public energy company which provides products and services to the wind energy industry. Previous to his position at Broadwind, Mr. Myszkowski was controller for Epcor USA, the U.S. headquarters for Epcor Utilities, Inc., a public energy company. Prior to Epcor, Mr. Myszkowski was controller for two start-up ventures: NanoInk, specializing in Dip Pen Nanolithography, a nanofabrication technology, and Delphion, which provided on-line tools for intellectual property research. Mr. Myszkowski also held several corporate roles at FMC Corporation, and Premark International, both Fortune 500 conglomerates. He began his career in the audit practice of Arthur Andersen & Co. in Chicago, Illinois. Mr. Myszkowski received his undergraduate degree from the University of Illinois, and his MBA from the University of Chicago Booth School of Business. He is a certified public accountant.

~~Mark Tilley,~~Dr. Bruce Given, Chief Operating Officer, joined Arrowhead in 2011. Since October 1, 2009, Dr. Given has been a director of the Company’s subsidiary, Calando Pharmaceuticals, Inc., and since February 1, 2010, Dr. Given has been Chief Executive Officer of Leonardo Biosystems, Inc., a company in which Arrowhead holds a minority equity interest. Dr. Given has been a member of the Board of Directors for ICON, plc. since 2007, and Chairman of the Board of Directors since 2010. Dr. Given served as the President and Chief Executive Officer, ~~Unidym, a majority-owned subsidiary of the Company. Prior to joining Arrowhead, he spent 9 years at DSM N.V.; a Netherlands-based specialty performance materials~~ and ~~life sciences company. Most recently, he served~~ as Senior Investment Manager with DSM’s Corporate Venturing Arm and served on the boards of CreAgri, Novomer, Van Technologies, Harland Medical Systems and InMat. Prior to his work with DSM Ventures, Dr. Tilley was Vice President of Research and Business Development for DSM Desotech, an operating division of DSM that is the global market leader in fiber optic coatings and stereo lithographic resins. During his tenure, he led marketing and technical teams, and built a nano-enabled flat panel displays materials business that was acquired by JSR in 2005. Dr. Tilley also co-founded Kriya Materials B.V., a venture capital backed nano-materials and coatings company based in the Netherlands.

~~John Miller,~~ Vice President, Business Development joined Arrowhead in May 2004 and has been instrumental in monitoring the intellectual property landscape and licensing patents held by Arrowhead and its subsidiaries, as well as identifying and developing new business ideas for Arrowhead. Mr. Miller founded NanoPolaris (now Unidym) and guided its development through the acquisition of three nanotechnology companies. Prior to joining the Company, from 2002 until 2004, Mr. Miller was a founder and Managing Editor of Nanotechnology Law & Business, a peer-reviewed, quarterly journal. He has published various articles on legal and policy issues in nanotechnology and co-authored The Handbook of Nanotechnology Business, Policy, and Intellectual Property Law (John Wiley, 2004). John is a member of the ~~California bar~~Board of Directors of Encysive Pharmaceuticals, an R&D-based commercial pharmaceutical company, roles he held from 2002 through 2007. Subsequent to his tenure at Encysive until present, Dr. Given has been President of Bruce Given Consulting, a firm that provides consulting services to biotech companies. Prior to his tenure at Encysive, Dr. Given held several senior executive roles at Johnson and ~~federal courts~~Johnson, Sandoz Pharmaceuticals, and Schering-Plough. Dr. Given obtained his bachelor of sciences degree from Colorado State University, graduating Phi Beta Kappa. He received his M.D. degree with honors from the University of Chicago, Pritzker School of Medicine and completed his medical training at the University of Chicago and at Brigham and Women’s Hospital in ~~the Northern District~~Boston, where he was a Clinical Fellow at Harvard Medical School. He is board certified in internal medicine and endocrinology and metabolism and has authored 33 scientific publications. Dr. Bruce Given is a brother of ~~California. He graduated Order~~Dr. Douglass Given, a director of the ~~Coif from Stanford Law School.~~company.

Under Section 16(a) of the Securities Exchange Act of 1934, the Company’s directors and officers and its significant stockholders (defined by statute as stockholders beneficially owning more than ten percent (10%) of the Common Stock) are required to file with the SEC and the Company reports of ownership, and changes in ownership, of common stock. Based solely on a review of the reports received by it, the Company believes that, during the fiscal year ended September 30, ~~2010,~~2011, all of its officers, directors and significant stockholders complied with all applicable filing requirements under Section 16(a) except as follows: Form 3 for Ken Myszkowski was not filed timely to report his initial ownership position when he was appointed Chief Financial Officer of the Company, and Form 4s for Edward W. Frykman, Leroy T. Rahn and Charles P. McKenney were not filed timely for automatic director grants on June 16, 2010..

We have adopted a code of conduct that applies to our Chief Executive Officer, Chief Financial Officer, and to all of our other officers, directors and employees. The code of conduct is available at the Corporate Governance section of the Investor Relations page on our website at www.arrowheadresearch.com. Any waivers from or amendments to the code of conduct, if any, will be posted on our website.

The Audit Committee of the Board is currently comprised of three directors and operates under a written charter adopted by the Board. The members of the Audit Committee are Edward W. Frykman, Charles P. McKenney and ~~Douglass Given.~~Mauro Ferrari. All members of the Audit Committee are “independent,” as defined in Rule 10A-3 under the Exchange Act and Rule 4200(a)(14) of the NASDAQ Marketplace Rules, and financially literate. The Board has determined that Mr. Frykman is an “audit committee financial expert” in accordance with the applicable regulations.

The following table summarizes compensation paid, awarded or earned for services rendered during fiscal ~~2010~~2011 and fiscal ~~2009~~2010 by our Chief Executive Officer, and Kenneth Myszkowski, our ~~two most highly paid~~other executive ~~officers~~officer serving the Company as of September 30, ~~2010.~~2011. We refer to those persons collectively as our “Named Executive Officers”.

Additional disclosure related to executive compensation required by Item 11 is hereby incorporated by reference from the information under the caption “Executive Compensation” contained our definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.

The following table provides information, with respect to the Named Executive Officers, concerning the Outstanding Equity Awards of the Company’s stock as of September 30, ~~2010.~~2011. Note that the information in Item 11 reflect the adjustment related to the 1 for 10 reverse stock split which occurred on November 17, 2011.


	Option Awards (1)
	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date
Christopher Anzalone		2,500		—		21.30		6/11/2018
		100,117		12,532		5.10		10/8/2019
		42,243		14,081		5.20		3/4/2020
		10,416		36,458		9.90		8/16/2020
Ken Myszkowski		10,676		14,323		7.00		11/16/19
		6,000		2,000		5.20		3/4/2020
		3,250		8,750		9.90		8/16/2020

Directors who are also employees of the Company receive no separate compensation from the Company for their service as members of the Board. Non-employee directors currently receive a cash retainer of $20,000 per year. Additionally, non-employee directors who have served on the Board for at least six months receive an automatic grant of non-qualified stock options to purchase ~~40,000~~4,000 shares of ~~common stock~~Common Stock upon re-election each year. Based on the policies of their current employers, Dr. ~~Ferrari has~~Perry and Dr. Given have waived ~~his~~their right to cash compensation and ~~has~~have waived ~~his~~their right to received stock option grants. The following table sets forth the total compensation paid to our ~~non-employee~~ directors in fiscal ~~2010.~~2011.


Name	Fee Earned or Paid in Cash ($) (1)		Option Awards ($) (2) (3)		Total ($)		Fee Earned or Paid in Cash ($) (1)		Option Awards ($) (2) (3)		Total ($)
Bruce Stewart (4)							$	—	$	—	$	—
Edward Frykman	$	20,000	$	37,718	$	57,718	$	20,000	$	15,020	$	35,020
Leroy Rahn (4)	$	20,000	$	37,718	$	57,718
Charles McKenney	$	20,000	$	40,181	$	60,181	$	20,000	$	15,020	$	35,020
Mauro Ferrari	$	—	$	35,771	$	35,771	$	—	$	—	$	—
Douglass Given ~~(5)~~	$	—	$	—	$	—	$	—	$	—	$	—

The following table sets forth the beneficial ownership of the Company’s Common Stock as of November 30, ~~2010,~~2011, by (i) each of the named executive officers named in the table under “Executive Compensation and Related Information,” (ii) each director, (iii) all current directors and executive officers as a group, and (iv) the ~~sole holder~~holders of greater than 5% of our total shares outstanding known to us. ~~The~~Unless otherwise specified in the footnotes to the table below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where applicable and the address of each stockholder is c/o Arrowhead Research Corporation, ~~201~~225 South Lake Avenue, Suite ~~703,~~300, Pasadena, California 91101. All information in Item 12 has been adjusted to reflect the 1 for 10 reverse stock split which was effected on November 17, 2011.

The following table provides information as of September 30, ~~2010~~2011 with respect to shares of our Common Stock that may be issued under our equity compensation plans. On November 17, 2011, the Company effected a 1 for 10 reverse stock split. The share data in the table below are listed on a post-split basis.


	Equity Compensation Plan Information						Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)		8,123,338	$	1.06		3,140,097
Equity compensation plans approved by security holders(1)								729,096	$	9.03		394,548
Equity compensation plans not approved by security holders		N/A		N/A		—		N/A		N/A		—

Total		8,123,338				3,140,097		729,096				394,548

AAs of September 30, 2011, a majority of the members of the Board are independent directors, as defined by the NASDAQ Marketplace Rules. The Board has determined that all of the Company’s directors are independent, except Mr. Stewart, the Company’s Executive Chairman and former Chief Executive Officer, and Dr. Anzalone, the Company’s Chief Executive Officer. Effective upon the hiring of Dr. Bruce Given as the Company’s Chief Operating Officer on October 26, 2011, Dr. Doug Given is no longer considered an independent director under Nasdaq Marketplace Rules. With the appointment of Michael Perry as a member of the Company’s Board of Directors and Audit Committee on December 19, 2011, a majority of independent directors was restored and compliance with Nasdaq’s Marketplace Rules was regained. Dr. Perry was also appointed to each of the Compensation and Nominating Committees concurrent with his appointment. Independent directors do not receive consulting, legal or other fees from the Company, other than Board compensation.

Nanotope and Leonardo were co-founded by the Company’s President and Chief Executive Officer, Dr. Christopher Anzalone, ~~through The Benet Group, since dissolved, and Dr. Anzalone~~who beneficially owns approximately 14.2% and 15.9% of the outstanding voting securities of Nanotope and Leonardo, respectively. Dr. Anzalone does not hold options, warrants or any other rights to acquire securities of Nanotope or Leonardo. Dr. Anzalone has the right to appoint a representative to the Board of Directors of each Nanotope and Leonardo. Dr. Anzalone is serving as the President and Chief Executive Officer of Nanotope. Dr. Anzalone has not received any compensation for his work on behalf of Nanotope or Leonardo since joining the Company on December 1, 2007.

On December 11, 2009, the Company sold an aggregate of 5,083,430 units in a private placement transaction with accredited investors. Each unit consisted of one share of Arrowhead Common Stock and a warrant to purchase an additional share of Common Stock exercisable at $0.509 per share. The unit price was $0.634, based upon the closing bid price on the Company’s Common Stock on December 11, 2009, which was $0.509, plus $0.125 for the purchase of the warrant, Dr. Anzalone, Arrowhead’s President and CEO, participated in this transaction on the same terms, investing $100,000.

During fiscal ~~2010,~~2011, a portion of Arrowhead employee salary costs, including Dr. Anzalone’s salary and administrative overhead, was charged to Nanotope and Leonardo for management and administrative services provided by Arrowhead to Nanotope and Leonardo. During fiscal ~~2010,~~2011, the charge for services provided to Nanotope and Leonardo were ~~$166,204~~$313,282 and ~~$250,190,~~$168,403, respectively. In addition, Arrowhead made cash advances to Nanotope of ~~$300,000~~$432,502 and to Leonardo of $100,000 during fiscal ~~2010.~~2011. The majority of the balance due Arrowhead is expected to be repaid in cash or converted to equity in fiscal ~~2011.~~2012. In addition, the Bruce Given, Chief Operating Officer and CEO of Leonardo, Bruce Given, is the brother of Doug Given, a member of Arrowhead’s Board of ~~Directors;~~Directors. Doug Given has no financial interest in Leonardo.

In August 2010, the Company retained Mr. Vincent Anzalone, the brother of Arrowhead’s Chief Executive Officer, as a consultant for the Company, focusing on business development and market analysis. Mr. Vincent Anzalone was paid $20,000 during the fiscal year ended September 30, 2010, and $120,000 during the fiscal year ended September 30, 2011. Since October 1, 2011 through the date of this filing, December 20, 2011, Mr. Vincent Anzalone was paid $30,000.

The Audit Committee regularly reviews and determines whether specific projects or expenditures with our independent auditors, Rose, Snyder & Jacobs (RS&J), may potentially affect their independence. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by RS&J. Pre-approval is generally provided by the Audit Committee for up to one year, detailed to the particular service or category of services to be rendered and is generally subject to a specific budget. The Audit Committee may also pre-approve additional services of specific engagements on a case-by-case basis. All engagements of our independent registered public accounting firm in ~~2010~~2011 and ~~2009~~2010 were pre-approved by the audit committee.

The following table sets forth the aggregate fees invoiced by RS&J for the fiscal years ended September 30, ~~2010,~~2011, and September 30, ~~2009:~~2010:


	Year Ended September 30,				Year Ended September 30,
	2010		2009		2011		2010
Audit fees (1)	$	126,200	$	117,000	$	116,200	$	126,200
Audit-related fees (2)		76,300		43,500		16,150		76,300
Tax fees (3)		47,050		56,900		20,085		47,050
All other fees (4)		—		57,500

Total	$	249,550	$	364,900	$	152,435	$	249,550

See Index to Financial Statements and Schedule on page F-1. All other schedules are omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

The following exhibits are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K:


Exhibit		~~4.9~~Incorporated by Reference Herein
Number	Description	Form	Date
4.8	Form of Warrant to Purchase Common Stock, dated June ~~2010. (21)~~2010	Current Report on Form 8-K, as Exhibit 4.1	June 18, 2010

4.9	Form of Registration Rights Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 20, 2011	Current Report on Form 8-K, as Exhibit 10.2	October 26, 2011

4.10	Form of Registration Rights Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011*

4.11	Form of Warrant to Purchase Shares of Capital Stock of Arrowhead Research Corporation expiring September 16, ~~2015. (23)~~2015	Current Report on Form 8-K, as Exhibit 4.1	September 22, 2010

~~4.11~~ 4.12	Form of Common Stock ~~Certificate. (9)~~Certificate	Amendment No. 2 to Registration Statement on Form S-1, as Exhibit 4.7	September 11, 2009

4.13	Form of Series A Preferred Stock Certificate*

10.1**	Arrowhead Research Corporation (fka InterActive, Inc.) 2000 Stock Option ~~Plan. (1)~~Plan	Schedule 14C, as Exhibit D	December 22, 2000

10.2**	Arrowhead Research Corporation 2004 Equity Incentive Plan, as ~~amended. (24)~~amended	Schedule 14C, as Annex A	April 30, 2010

10.3**	Executive Incentive Plan, adopted December 12, ~~2006. (11)~~2006	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.11	December 14, 2006

10.4**	Compensation Policy for Non-Employee Directors, as ~~amended. (11)~~amended	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.12	December 14, 2006

10.5**	Severance Agreement ~~dated May 24, 2007~~ by and between Arrowhead and R. Bruce ~~Stewart. (8)~~Stewart, dated May 24, 2007	Current Report on Form 8-K, as Exhibit 10.1	May 30, 2007

10.6**	Amendment to Severance Agreement between Arrowhead and R. Bruce Stewart, effective May 12, ~~2009. (18)~~2009	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 10.6	December 22, 2009

10.7**	Employment Agreement between Arrowhead and Dr. Christopher Anzalone, dated June 11, ~~2008. (12)~~2008	Current Report on Form 8-K, as Exhibit 10.1	June 13, 2008

10.8**	Amendment to Employment Agreement between Arrowhead and Dr. Christopher Anzalone, effective May 12, ~~2009. (18)~~2009	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 10.8	December 22, 2009

10.9	Insert Therapeutics, Inc. Amended and Restated Investors’ Rights Agreement, dated April 17, ~~2008. (13)~~2008	Current Report on Form 8-K, as Exhibit 10.3	April 23, 2008

10.10	Second Amended and Restated Investors’ Rights Agreement, ~~dated as of July 23, 2008,~~ by and between Nanotope, ~~Inc.~~Inc and the Investors and Stockholders listed ~~therein. (14)~~therein, dated July 23, 2008	Current Report on Form 8-K, as Exhibit 10.2	July 25, 2008

10.11	Form of Unsecured Convertible Promissory Note Agreement, dated November 26, ~~2008. (15)~~

~~10.12~~ 2008	~~Exchange Agreement dated February 25, 2009 by and among Arrowhead and several holders of Unidym, Inc. Series A Preferred Stock. (16)~~

~~10.13~~ Current Report on Form 8-K, as Exhibit 10.1	~~Form of Subscription Agreement dated July 17, 2009 and August 6, 2009. (4)~~December 3, 2008



Exhibit		~~10.14~~Incorporated by Reference Herein
Number	Description	Form	Date

10.12	Platform Agreement by and between Calando Pharmaceuticals, Inc and Cerulean Pharma Inc., dated as of June 23, 2009 †	Form 10-Q for the quarter ended June 30, 2009, as Exhibit 10.1	August 10, 2009

10.13	IT-101 Agreement by and between Calando Pharmaceuticals, ~~Inc.~~Inc and Cerulean Pharma, Inc.~~† (17)~~

~~10.15~~	~~IT-101 Agreement,~~, dated as of June 23, 2009†	Form 10-Q for the quarter ended June 30, 2009, ~~by and between Calando Pharmaceuticals, Inc. and Cerulean Pharma, Inc.† (17)~~as Exhibit 10.2	August 10, 2009

~~10.16~~ 10.14	~~IP Transfer and Waiver~~Asset Purchase Agreement ~~dated as of June 25, 2009, by and~~ between ~~Unidym,~~Tego BioSciences, Inc. and ~~TEL Venture Capital. (17)~~Luna Innovations, Inc., dated November 13, 2009	Form 10-Q for the quarter ended December 31, 2009 as Exhibit 10.1	February 11, 2010

~~10.17~~ 10.15	~~Subscription~~Form of Exchange Agreement ~~for Series C-1 Preferred Stock, dated as of June 25, 2009, by and~~ between Arrowhead Research Corporation and ~~Unidym, Inc. (17)~~several investors, dated September 28, 2009	Form 10-Q for the quarter ended December 31, 2009, as Exhibit 10.2	February 11, 2010

~~10.18~~	~~Exchange Agreement, dated as of June 25, 2009, by and between Arrowhead Research Corporation and TEL Venture Capital. (17)~~

~~10.19~~ 10.16	~~Subscription Agreement for Series C-1 Preferred Stock, dated as of July 30, 2009, by and between Arrowhead Research Corporation and Unidym, Inc. (17)~~

~~10.20~~	~~Form of Subscription Agreement, dated as of September 30, 2009, by and between Arrowhead Research Corporation and Unidym, Inc. (18)~~

~~10.21~~	~~Second Amended and Restated Investors’ Rights Agreement among Unidym, Inc., Investors and the stockholders party thereto, dated September 30, 2009. (18)~~

~~10.22~~	Form of Subscription Agreement between Arrowhead Research Corporation and certain investors, dated December 11, ~~2009. (19)~~ 2009	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 10.24	December 22, 2009

10.2310.17*	Amendment to Employment Agreement between Arrowhead and R. Bruce Stewart, effective May 27, ~~2010. (20)~~2010	Current Report on Form 8-K, as Exhibit 10.1	May 28, 2010

~~10.24~~ 10.18	Form of Subscription Agreement between Arrowhead and certain ~~Investors,~~investors, dated June 17, ~~2010. (21)~~2010	Current Report on Form 8-K, as Exhibit 10.2	June 18, 2010

~~10.25~~	~~Series D Preferred Stock Purchase Agreement between Arrowhead and Unidym, Inc., dated June 29, 2010. (22)~~

~~10.26~~ 10.19	Form of Exchange Agreement between Arrowhead and certain stockholders, dated September 16, ~~2010. (23)~~2010	Current Report on Form 8-K, as Exhibit 10.1	September 22, 2010

10.20	License and Enforcement Agreement between Unidym, Inc. and Samsung Electronics Co., Ltd., dated December 2010	Form 10-Q for the quarter ended December 31, 2010, as Exhibit 10.1	February 10, 2011

10.21	CNT Production Patent License Agreement between Unidym, Inc. and Samsung Electronics Co., Ltd., dated December 2010	Form 10-Q for the quarter ended December 31, 2010, as Exhibit 10.2	February 10, 2011

10.22	Intellectual Property Purchase and Business Cooperation Agreement between Unidym, Inc. and Samsung Electronics Co., Ltd., dated December 2010	Form 10-Q for the quarter ended December 31, 2010, as Exhibit 10.3	February 10, 2011

10.23	Patent and Technology License Agreement between Arrowhead Research Corporation and the Board of Regents of The University of Texas System, dated December 14, 2010	Form 10-Q for the quarter ended December 31, 2010, as Exhibit 10.4	February 10, 2011

10.24	Form of Series A Preferred Stock Purchase Agreement among Ablaris Therapeutics Inc. and certain investors, dated January 2011	Form 10-Q for the quarter ended March 31, 2011, as Exhibit 10.2	May 12, 2011

10.25	Stock Purchase Agreement between Arrowhead Research Corporation and Calando Pharmaceuticals, Inc., dated January 10, 2011	Form 10-Q for the quarter ended March 31, 2011, as Exhibit 10.1	May 12, 2011


Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date

10.26	Agreement and Plan of Merger among Wisepower Co., Ltd., Unicycle Acquisition Corp, Unidym, Inc. and Arrowhead Research Corporation, dated January 17, 2011	Current Report on Form 8-K, as Exhibit 10.1	January 21, 2011

10.27	Stock Purchase Agreement between Wisepower Co., Ltd. and Arrowhead Research Corporation, dated January 17, 2011	Current Report on Form 8-K, as Exhibit 10.2	January 21, 2011

10.28	Bond Purchase Agreement between Wisepower Co., Ltd. and Arrowhead Research Corporation, dated January 17, 2011	Current Report on Form 8-K, as Exhibit 10.3	January 21, 2011

10.29	Form of Subscription Agreement between Arrowhead Research Corporation and certain Investors, dated September 2011	Current Report on Form 8-K, as Exhibit 10.1	October 6, 2011
10.30	Form of Series A Subscription Agreement between Arrowhead Research Corporation and certain investors	Current Report on Form 8-K, as Exhibit 10.3	October 26, 2011

10.31	Form of Purchase Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 20, 2011	Current Report on Form 8-K, as Exhibit 10.1	October 26, 2011

10.32	Form of Common Stock Subscription Agreement between Arrowhead Research Corporation certain Investors, dated October 21, 2011	Current Report on Form 8-K, as Exhibit 10.4	October 26, 2011

10.33	Non-Exclusive License Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011*†

10.34	Form of Investor Subscription Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 24, 2011	Current Report on Form 8-K, as Exhibit 10.1	October 27, 2011

10.35	License and Collaboration Agreement, dated July 8, 2007* †

10.36	Collaboration Agreement by and among Alnylam Pharmaceuticals, Inc. and F. Hofmann-La Roche Ltd and Hoffman-La Roche Inc., dated October 29, 2009* †

21.1	List of Subsidiaries.Subsidiaries

23.1	Consent of Independent Public Registered Accounting Firm.Firm

24.1	Power of Attorney (contained on signature page)

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*


Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1	Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2	Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS	XBRL Instance Document*

101.SCH	XBRL Schema Document*

101.CAL	XBRL Calculation Linkbase Document*

101.LAB	XBRL Label Linkbase Document*

101.PRE	XBRL Presentation Linkbase Document*

101.DEF	XBRL Definition Linkbase Document*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

~~(7)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on September 11, 2008.~~

~~(8)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on May 30, 2007.~~

~~(9)~~

~~Incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-1, filed by the registrant on September 11, 2009.~~

~~(10)~~

~~Incorporated by reference from the definitive Schedule 14C filed by registrant on September 4, 2009.~~

~~(11)~~

~~Incorporated by reference from the Annual Report on Form 10-K, filed by the registrant on December 14, 2006.~~

~~(12)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on June 13, 2008.~~

~~(13)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on April 23, 2008.~~

~~(14)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on July 25, 2008.~~

~~(15)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on December 3, 2008.~~

~~(16)~~

~~Incorporated by reference from the Quarterly Report on Form 10-Q, filed by the registrant on May 15, 2009.~~

~~(17)~~

~~Incorporated by reference from the Quarterly Report on Form 10-Q, filed by the registrant on August 10, 2009.~~

~~(18)~~

~~Incorporated by reference from the Annual Report on Form 10-K, filed by the registrant on December 22, 2009.~~

~~(19)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on April 27, 2010.~~

~~(20)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on May 28, 2010.~~

~~(21)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on June 18, 2010.~~

~~(22)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on July 2, 2010.~~

~~(23)~~

~~Incorporated by reference from the Current Report on Form 8-K, filed by the registrant on September 22, 2010~~

~~(24)~~

~~Incorporated by reference from the Schedule 14C, filed by the registrant on April 30, 2010.~~

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this ~~22nd~~20th day of December ~~2010.~~2011.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

As a result of the change in control resulting from the stock exchange transaction (the “Share Exchange”) with the owners of Arrowhead Research Corporation, a California corporation (“ARC”), the financial statements of the Company are deemed to be the historical financial statements of ARC.

We have audited the accompanying consolidated balance sheets of Arrowhead Research Corporation (a Delaware corporation) and Subsidiaries (the “Company”) as of September 30, ~~2010~~2011 and ~~2009~~2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended September 30, ~~2010,~~2011, and ~~2009~~2010 and for the period from May 7, 2003 (inception) through September 30, ~~2010.~~2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrowhead Research Corporation and Subsidiaries as of September 30, ~~2010~~2011 and ~~2009,~~2010, and the consolidated results of their operations and their cash flows for the years ended September 30, ~~2010~~2011 and ~~2009,~~2010, and for the period from May 7, 2003 (inception) through September 30, ~~2010~~2011 in conformity with accounting principles generally accepted in the United States of America.


	September 30, 2010			September 30, 2009			September 30, 2011			September 30, 2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	6,847,162		$	2,020,224		$	7,507,389		$	6,847,162
Trade receivable, net of allowance for doubtful accounts of $90,789 at September 30, 2010 and $30,789 at September 30, 2009		58,864			144,148
Trade receivable, net of allowance for doubtful accounts of $90,789 at September 30, 2010								—			58,864
Other receivables		871,819			3,109			1,608,382			871,819
Prepaid expenses		239,097			316,074
Other current assets		114,833			—
Prepaid expenses and other current assets								110,818			353,930
Marketable securities								634,585			—

TOTAL CURRENT ASSETS		8,131,775			2,483,555			9,861,174			8,131,775

PROPERTY AND EQUIPMENT
Computers, office equipment and furniture		335,784			374,991			285,266			335,784
Research equipment		752,850			932,683			3,515			752,850
Software		150,445			150,445			77,020			150,445
Leasehold improvements		78,594			94,317			—			78,594

		1,317,673			1,552,436			365,801			1,317,673
Less: Accumulated depreciation and amortization		(1,176,404	)		(1,025,392	)		(340,364	)		(1,176,404	)

NET PROPERTY AND EQUIPMENT		141,269			527,044
PROPERTY AND EQUIPMENT, NET								25,437			141,269

OTHER ASSETS
Rent deposit		34,735			109,648			—			34,735
Patents		2,046,836			2,362,460			1,731,211			2,046,836
Note Receivable, net								2,272,868			—
Derivative asset								161,125			—
Investment in Nanotope Inc., equity basis		1,812,927			2,032,467			1,649,748			1,812,927
Investment in Leonardo Biosystems Inc., at cost		187,000			187,000			187,000			187,000

TOTAL OTHER ASSETS		4,081,498			4,691,575			6,001,952			4,081,498


TOTAL ASSETS	$	12,354,542		$	7,702,174		$	15,888,563		$	12,354,542

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	681,563		$	1,013,281		$	576,809		$	681,563
Accrued expenses		471,236			420,077			864,511			494,736
Accrued payroll and benefits		191,425			160,846			195,649			191,425
Accrued severance		23,500			23,500
Capital lease obligation		—			726,534
Derivative liability		2,408,522			—
Derivative liabilities								944,980			2,408,522
Note payable		500,000			—			—			500,000

TOTAL CURRENT LIABILITIES		4,276,246			2,344,238			2,581,949			4,276,246

LONG-TERM LIABILITIES
Other non-current liabilities								135,660			—
Note payable		—			500,000			606,786			—

TOTAL LONG-TERM LIABILITIES		—			500,000			742,446			—

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Arrowhead Research Corporation shareholders’ equity:
Arrowhead Research Corporation stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding		—			—			—			—
Common stock, $0.001 par value; 145,000,000 shares authorized; 71,720,137 and 56,411,774 shares issued and outstanding as of September 30, 2010 and September 30, 2009, respectively		71,735			56,428
Common stock, $0.001 par value; 145,000,000 shares authorized; 8,642,286 and 7,172,014 shares issued and outstanding as of September 30, 2011 and September 30, 2010, respectively								86,423			71,735
Additional paid-in capital		119,716,834			110,070,327			127,476,435			119,716,834
Subscription receivable		—			(300,000	)		(900,000	)		—
Accumulated deficit during the development stage		(110,742,867	)		(104,968,819	)		(113,871,752	)		(110,742,867	)

Total Arrowhead Research Corporation stockholders’ equity		9,045,702			4,857,936			12,791,106			9,045,702
Noncontrolling interest		(967,406	)		—			(226,938	)		(967,406	)

TOTAL STOCKHOLDERS’ EQUITY		8,078,296			4,857,936			12,564,168			8,078,296


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	12,354,542		$	7,702,174		$	15,888,563		$	12,354,542

The accompanying notes are an integral part of these consolidated financial statements.


	Year Ended September 30,						May 7, 2003 (Inception) to September 30, 2010			Year Ended September 30,						May 7, 2003 (Inception) to September 30, 2011
	2010			2009			May 7, 2003 (Inception) to September 30, 2010			2011			2010			May 7, 2003 (Inception) to September 30, 2011
REVENUE	$	620,097		$	3,758,147		$	8,127,736		$	296,139		$	—		$	3,991,959

OPERATING EXPENSES
Salaries		4,297,930			8,010,099			44,332,468			1,408,366			1,146,394			19,977,209
Consulting		514,041			1,461,351			8,346,198
General and administrative expenses		3,183,077			4,567,091			26,247,904			3,821,550			2,490,725			25,590,815
Research and development		1,111,473			8,892,516			54,731,631			3,277,760			529,601			40,428,729
Stock-based compensation											1,376,921			1,424,293			12,340,064
Patent amortization		315,625			387,095			2,102,091			241,808			241,808			1,781,944

TOTAL OPERATING EXPENSES		9,422,146			23,318,152			135,760,292			10,126,405			5,832,821			100,118,761

OPERATING LOSS		(8,802,049	)		(19,560,005	)		(127,632,556	)		(9,830,266	)		(5,832,821	)		(96,126,802	)

OTHER INCOME (EXPENSE)
Loss on equity of investments - Nanotope		(219,540	)		(225,804	)		(560,073	)		(163,180	)		(219,540	)		(723,253	)
Gain on sale of stock in subsidiary		—			—			2,292,800			—			—			2,292,800
Gain on sale of equity of investments - Ensysce		—			700,000			700,000
Gain/(loss) on sale of fixed assets, net		10,881			(77,374	)		(66,493	)		—			1,772			(127,088	)
Realized and unrealized gain in marketable securities		—			—			382,264
Realized and unrealized gain (loss) on marketable securities											(261,219	)		—			121,045
Interest income (expense), net		(48,025	)		(155,560	)		2,761,930			86,530			(22,783	)		2,714,478
Change in value of derivative liability		1,761,385			—			1,761,385
Change in value of derivatives											1,133,127			1,761,385			2,894,512
Other income		(87,032	)		174,253			90,858			250,000			—			250,000

TOTAL OTHER INCOME		1,417,669			415,515			7,362,671
TOTAL OTHER INCOME (EXPENSE)											1,045,258			1,520,834			7,422,494

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES											(8,785,008	)		(4,311,987	)		(88,704,308	)
Provision for income taxes											—			—			—

LOSS FROM CONTINUING OPERATIONS		(7,384,380	)		(19,144,490	)		(120,269,885	)		(8,785,008	)		(4,311,987	)		(88,704,308	)
Income (loss) from discontinued operations											1,373,396			(2,645,051	)		(47,546,562	)
Gain on disposal of discontinued operations											3,919,213			—			4,708,588

Gain/(loss) from discontinued operations		(2,658	)		(163,962	)		(7,567,525	)
Gain/(loss) on disposal of discontinued operations		430,000			—			789,375

INCOME (LOSS) FROM DISCONTINUED OPERATIONS		427,342			(163,962	)		(6,778,150	)

Provision for income taxes		—			—			(1,600	)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS											5,292,609			(2,645,051	)		(42,837,974	)

NET LOSS		(6,957,038	)		(19,308,452	)		(127,049,635	)		(3,492,399	)		(6,957,038	)		(131,542,282	)
Less: Net loss attributable to noncontrolling interests		1,182,990			60			16,470,728
Net (income) loss attributable to noncontrolling interests											363,514			1,182,990			17,834,490

NET LOSS ATTRIBUTABLE TO ARROWHEAD	$	(5,774,048	)	$	(19,308,392	)	$	(110,578,907	)	$	(3,128,885	)	$	(5,774,048	)	$	(113,707,792	)

Earnings per share - basic and diluted:
Loss from continuing operations attributable to Arrowhead common shareholders	$	(0.10	)	$	(0.43	)
Income from discontinued operations attributable to Arrowhead common shareholders		0.01			—
Earnings per share - basic:
Income (loss) from continuing operations attributable to Arrowhead common shareholders										$	(1.18	)	$	(0.49	)
Income (loss) from discontinued operations attributable to Arrowhead common shareholders											0.74			(0.41	)

Net loss attributable to Arrowhead shareholders	$	(0.09	)	$	(0.43	)				$	(0.44	)	$	(0.90	)

Weighted average shares outstanding - basic and diluted		64,342,448			45,169,015
Weighted average shares outstanding											7,181,121			6,434,245

Earnings per share - diluted:
Income (loss) from continuing operations attributable to Arrowhead common shareholders										$	(1.08	)	$	(0.49	)
Income (loss) from discontinued operations attributable to Arrowhead common shareholders											0.68			(0.41	)

Net loss attributable to Arrowhead shareholders										$	(0.40	)	$	(0.90	)

Weighted average shares outstanding											7,830,407			6,434,245

The accompanying notes are an integral part of these consolidated financial statements.


	Common Stock				Additional Paid-in Capital			Subscription Receivable			Accumulated Deficit during the Development Stage				Noncontrolling interest			Totals			Common Stock				Additional Paid-in Capital			Subscription Receivable			Accumulated Deficit during the Development Stage			Noncontrolling interest			Totals
	Shares		Amount		Additional Paid-in Capital						Accumulated Deficit during the Development Stage			Shares				Totals			Amount				Additional Paid-in Capital			Subscription Receivable			Accumulated Deficit during the Development Stage			Noncontrolling interest			Totals
Initial Issuance of Stock:								Subscription Receivable
Common stock & warrants issued for cash @ $0.001 per unit		3,000,000	$	3,000	$	—		$	—		$	—			Noncontrolling interest	$	—		$	3,000
Common stock & warrants issued for cash @ $1.00 per unit		1,680,000		1,680		1,678,320			—			—				—			1,680,000
Common stock & warrants issued for cash @ $0.01 per unit																						300,000	$	3,000	$	—		$	—		$	—		$	—		$	3,000
Common stock & warrants issued for cash @ $10.00 per unit																						168,000		1,680		1,678,320			—			—			—			1,680,000
Stock issuance cost charged to additional paid-in capital		—		—		(168,000	)		—			—				—			(168,000	)		—		—		(168,000	)		—			—			—			(168,000	)
Net loss for period from inception to September 30, 2003		—		—		—			—			(95,238	)			—			(95,238	)		—		—		—			—			(95,238	)		—			(95,238	)

Balance at September 30, 2003		4,680,000		4,680		1,510,320			—			(95,238	)			—			1,419,762			468,000		4,680		1,510,320			—			(95,238	)		—			1,419,762
Exercise of stock options		75,000		75		14,925			—			—				—			15,000			7,500		75		14,925			—			—			—			15,000
Common stock & warrants issued for cash @ $1.00 per unit		475,000		475		474,525			—			—				—			475,000
Common stock & warrants issued for marketable securities @ $1.00 per unit		500,000		500		499,500			—			—				—			500,000
Common stock & warrants issued for cash @ $10.00 per unit																						47,500		475		474,525			—			—			—			475,000
Common stock & warrants issued for marketable securities @ $10.00 per unit																						50,000		500		499,500			—			—			—			500,000
Stock issuance cost charged to additional paid-in capital		—		—		(96,500	)		—			—				—			(96,500	)		—		—		(96,500	)		—			—			—			(96,500	)
Common stock and warrants issued for cash @ $1.50 per unit		6,608,788		6,609		9,906,573			—			—				—			9,913,182
Common stock and warrants issued for cash @ $15.00 per unit																						660,879		6,609		9,906,573			—			—			—			9,913,182
Common stock issued in reverse acquisition		705,529		706		(151,175	)		—			—				—			(150,469	)		70,553		706		(151,175	)		—			—			—			(150,469	)
Common stock issued as a gift for $1.09 per share		150,000		163		162,587			—			—				—			162,750
Common stock and warrants issued as stock issuance cost @ $1.50 per unit		356,229		356		533,988			—			—				—			534,344
Common stock issued as a gift for $10.90 per share																						15,000		163		162,587			—			—			—			162,750
Common stock and warrants issued as stock issuance cost @ $15.00 per unit																						35,623		356		533,988			—			—			—			534,344
Stock issuance cost charged to additional paid-in capital		—		—		(991,318	)		—			—				—			(991,318	)		—		—		(991,318	)		—			—			—			(991,318	)
Exercise of stock option @ $0.20 per share		75,000		75		14,925			—			—				—			15,000
Exercise of stock options @ $1.00 per share		6,000		6		5,994			—			—				—			6,000
Exercise of stock option @ $2.00 per share																						7,500		75		14,925			—			—			—			15,000
Exercise of stock options @ $10.00 per share																						600		6		5,994			—			—			—			6,000
Stock-based compensation		—		—		175,653			—			—				—			175,653			—		—		175,653			—			—			—			175,653
Net loss for the year ended September 30, 2004		—		—		—			—			(2,528,954	)			1,777,699			(751,255	)		—		—		—��			—			(2,528,954	)		1,777,699			(751,255	)

Balance at September 30, 2004		13,631,546		13,645		12,059,997			—			(2,624,192	)			1,777,699			11,227,149			1,363,155		13,645		12,059,997			—			(2,624,192	)		1,777,699			11,227,149
Exercise of warrants @ $1.50 per share		13,812,888		13,813		20,705,522			—			—				—			20,719,335
Exercise of stock options @ $1.00 per share		25,000		25		24,975			—			—				—			25,000
Common stock issued to purchase Insert Therapeutics share @ $3.98 per share		502,260		502		1,999,498			—			—							2,000,000
Exercise of warrants @ $15.00 per share																						1,381,289		13,813		20,705,522			—			—			—			20,719,335
Exercise of stock options @ $10.00 per share																						2,500		25		24,975			—			—			—			25,000
Common stock issued to purchase Insert Therapeutics share @ $39.80 per share																						50,226		502		1,999,498			—			—						2,000,000
Common stock issued for services		12,500		12		49,988			—			—				—			50,000			1,250		12		49,988			—			—			—			50,000
Stock-based compensation		—		—		508,513			—			—				—			508,513			—		—		508,513			—			—			—			508,513
Change in percentage of ownership in subsidiary		—		—		230,087			—			—				—			230,087			—		—		230,087			—			—			—			230,087
Net loss for the year ended September 30, 2005		—		—		—			—			(6,854,918	)			121,491			(6,733,427	)		—		—		—			—			(6,854,918	)		121,491			(6,733,427	)

Balance at September 30, 2005		27,984,194		27,997		35,578,580			—			(9,479,110	)			1,899,190			28,026,657			2,798,419		27,997		35,578,580			—			(9,479,110	)		1,899,190			28,026,657
Exercise of stock options		115,794		116		341,421			—			—				—			341,537			11,579		116		341,421			—			—			—			341,537
Common stock issued @ $4.88 per share		204,854		205		999,795			—			—				—			1,000,000
Common stock issued @ $3.84 per share		15,000		15		57,585			—			—				—			57,600
Common stock issued @ $3.50 per share		5,590,000		5,590		19,539,410			—			—				—			19,545,000
Common stock issued @ $5.91 per share		25,364		25		149,975			—			—				—			150,000
Common stock issued to purchase Calando Pharmaceuticals, Inc. @ $5.17 per share		208,382		208		1,077,125			—			—				—			1,077,333
Common stock issued @ $48.80 per share																						20,485		205		999,795			—			—			—			1,000,000
Common stock issued @ $38.40 per share																						1,500		15		57,585			—			—			—			57,600
Common stock issued @ $35.00 per share																						559,000		5,590		19,539,410			—			—			—			19,545,000
Common stock issued @ $59.10 per share																						2,536		25		149,975			—			—			—			150,000
Common stock issued to purchase Calando Pharmaceuticals, Inc. @ $51.70 per share																						20,838		208		1,077,125			—			—			—			1,077,333
Stock-based compensation		—		—		1,369,478			—			—				—			1,369,478			—		—		1,369,478			—			—			—			1,369,478
Net loss for the year ended September 30, 2006		—		—		—			—			(18,997,209	)			(964,752	)		(19,961,961	)		—		—		—			—			(18,997,209	)		(964,752	)		(19,961,961	)

Balance at September 30, 2006		34,143,588		34,156		59,113,369			—			(28,476,319	)			934,438			31,605,644			3,414,359		34,156		59,113,369			—			(28,476,319	)		934,438			31,605,644
Exercise of stock options		186,164		186		434,541			—			—				—			434,727			18,616		186		434,541			—			—			—			434,727
Common stock issued @ $5.78 per share, net		2,849,446		2,849		15,149,366			—			—				—			15,152,215
Common stock issued @ $57.80 per share, net																						284,945		2,849		15,149,366			—			—			—			15,152,215
Arrowhead’s increase in proportionate share of Insert Therapeutics’ equity		—		—		2,401,394			—			—				—			2,401,394			—		—		2,401,394			—			—			—			2,401,394
Common stock issued for purchase of Carbon Nanotechnologies, Inc. @ $3.77 per share		1,431,222		1,431		5,398,569			—			—				—			5,400,000
Common stock issued for purchase of Carbon Nanotechnologies, Inc. @ $37.70 per share																						143,122		1,431		5,398,569			—			—			—			5,400,000
Stock-based compensation		—		—		2,175,544			—			—				—			2,175,544			—		—		2,175,544			—			—			—			2,175,544
Net loss for the year ended September 30, 2007		—		—		—			—			(29,931,118	)			(781,829	)		(30,712,947	)		—		—		—			—			(29,931,118	)		(781,829	)		(30,712,947	)

Balance at September 30, 2007		38,610,420		38,622		84,672,783			—			(58,407,437	)			152,609			26,456,577			3,861,042		38,622		84,672,783			—			(58,407,437	)		152,609			26,456,577
Exercise of stock options		105,357		106		289,921			—			—				—			290,027			10,536		106		289,921			—			—			—			290,027
Common stock issued at approximately $1.80 per share, net		3,863,989		3,867		6,956,718			—			—				—			6,960,585
Common stock issued at approximately $18.00 per share, net																						386,399		3,867		6,956,718			—			—			—			6,960,585
Arrowhead’s increase in proportionate share of Unidym’s equity		—		—		1,720,962			—			—				—			1,720,962			—		—		1,720,962			—			—			—			1,720,962
Common stock issued @ $2.72 per share to Rice University		50,000		50		135,950			—			—				—			136,000
Common stock issued @ $2.83 per share to purchase shares of Unidym, Inc.		70,547		71		199,929			—			—				—			200,000
Common stock issued @ $2.95 per share to purchase MASA Energy, LLC		105,049		105		309,895			—			—				—			310,000
Common stock issued @ $2.19 per share to Unidym for the acquisition of Nanoconduction		114,155		114		249,886			—			—				—			250,000
Common stock issued @ $2.18 per share		15,000		15		32,685			—			—				—			32,700
Common stock issued @ $27.20 per share to Rice University																						5,000		50		135,950			—			—			—			136,000
Common stock issued @ $28.30 per share to purchase shares of Unidym, Inc.																						7,055		71		199,929			—			—			—			200,000
Common stock issued @ $29.50per share to purchase MASA Energy, LLC																						10,505		105		309,895			—			—			—			310,000
Common stock issued @ $21.90 per share to Unidym for the acquisition of Nanoconduction																						11,416		114		249,886			—			—			—			250,000
Common stock issued @ $21.80 per share																						1,500		15		32,685			—			—			—			32,700
Stock-based compensation		—		—		3,187,397			—			—				—			3,187,397			—		—		3,187,397			—			—			—			3,187,397
Net loss for the year ended September 30, 2008		—		—		—			—			(27,089,030	)			(152,609	)		(27,241,639	)		—		—		—			—			(27,089,030	)		(152,609	)		(27,241,639	)

Balance at September 30, 2008		42,934,517		42,950		97,756,126			—			(85,496,467	)			—			12,302,609			4,293,452		42,950		97,756,126			—			(85,496,467	)		—			12,302,609
Common Stock issued @ $0.55 per share to Unidym stockholder in exchange for Unidym’s shares		2,058,393		2,059		1,131,617			—			—				—			1,133,676
Common Stock issued @ $0.52 per share to TEL Ventures in exchange for Unidym’s shares		2,222,222		2,222		1,156,111			—			—				—			1,158,333
Common Stock issued @ $5.50 per share to Unidym stockholder in exchange for Unidym’s shares																						205,839		2,059		1,131,617			—			—			—			1,133,676
Common Stock issued @ $5.20 per share to TEL Ventures in exchange for Unidym’s shares																						222,222		2,222		1,156,111			—			—			—			1,158,333
Reclassification of former Unidym mezzanine debt to equity		—		—		2,000,000			—			—				—			2,000,000			—		—		2,000,000			—			—			—			2,000,000
Arrowhead’s increase in proportionate share of Calando’s equity		—		—		2,120,250			—			—				—			2,120,250			—		—		2,120,250			—			—			—			2,120,250
Common stock issued @ $0.30 per share		9,196,642		9,197		2,749,796			—			—				—			2,758,993
Change in percentage of ownership in subsidiary		—		—		16,297			—			—				—			16,297
Common stock issued @ $3.00 per share																						919,664		9,197		2,749,796			—			—			—			2,758,993
Change in percentage ownership in subsidiary																						—		—		16,297			—			—			—			16,297
Stock-based compensation		—		—		2,676,170			—			—				—			2,676,170			—		—		2,676,170			—			—			—			2,676,170
Issuance of Series D Preferred Stock for Subscription in Unidym		—		—		300,000			(300,000	)		—				—			—
Issuance of Preferred Stock for Subscription in Unidym																						—		—		300,000			(300,000	)		—			—			—
Amortization of discount on Unidym Series D Preferred Stock		—		—		163,960			—			(163,960	)			—			—			—		—		163,960			—			(163,960	)		—			—
Net loss for the year ended September 30, 2009		—		—		—			—			(19,308,392	)			—			(19,308,392	)		—		—		—			—			(19,308,392	)		—			(19,308,392	)

Balance at September 30, 2009		56,411,774		56,428		110,070,327			(300,000	)		(104,968,819	)			—			4,857,936			5,641,177		56,428		110,070,327			(300,000	)		(104,968,819	)		—			4,857,936
Exercise of stock options		6,875		7		7,624			—			—				—			7,631			688		7		7,624			—			—			—			7,631
Issuance of Series D Preferred Stock for Subscription in Unidym		—		—		—			300,000			—				—			300,000
Issuance of Preferred Stock for Subscription in Unidym																						—		—		—			300,000			—			—			300,000
Issuance of Unidym’s common stock to minority shareholders		—		—		245,345			—			—				54,655			300,000			—		—		245,345			—			—			54,655			300,000
Common stock issued @ $0.63 per share		5,083,430		5,083		3,217,813			—			—				—			3,222,896
Common stock issued @ $1.312 per share		6,592,989		6,593		3,692,078			—			—				—			3,698,671
Common stock issued @ $6.30 per share																						508,343		5,083		3,217,813			—			—			—			3,222,896
Common stock issued @ $13.12 per share																						659,299		6,593		3,692,078			—			—			—			3,698,671
Common Stock issued to Calando stockholders in exchange for Calando’s shares		1,220,000		1,220		(160,667	)		—			—				159,447			—			122,000		1,220		(160,667	)		—			—			159,447			—
Common Stock issued to Unidym stockholders in exchange for Unidym’s shares		153,176		153		(1,435	)		—			—				1,282			—			15,318		153		(1,435	)		—			—			1,282			—
Stock-based compensation		—		—		1,582,149			—			—				—			1,582,149			—		—		1,582,149			—			—			—			1,582,149
Exercise of warrants		2,251,893		2,251		1,063,600			—			—				200			1,066,051			225,189		2,251		1,063,600			—			—			200			1,066,051
Net loss for the year ended September 30, 2010		—		—		—			—			(5,774,048	)			(1,182,990	)		(6,957,038	)		—		—		—			—			(5,774,048	)		(1,182,990	)		(6,957,038	)

Balance at September 30, 2010		71,720,137	$	71,735	$	119,716,834		$	—		$	(110,742,867	)		$	(967,406	)	$	8,078,296			7,172,014		71,735		119,716,834			—			(110,742,867	)		(967,406	)		8,078,296
Exercise of warrants																						8,656		87		43,192			—			—			—			43,279
Exercise of stock options																						2,700		27		13,857			—			—			—			13,884
Divestiture of Unidym																						—		—		—			—			—			254,275			254,275
Issuance of preferred stock in subsidiary																						—		—		1,618,509			—			—			—			1,618,509
Change in percentage of ownership in subsidiary																						—		—		(849,707	)		—			—			849,707			—
Stock-based compensation																						—		—		1,404,640			—			—			—			1,404,640
Common stock issued @ $3.80 per share																						1,458,917		14,574		4,629,110			—			—			—			4,643,684
Issuance of Common Stock for Subscription																										900,000			(900,000	)								—
Net loss for the year ended September 30, 2011																						—		—		—			—			(3,128,885	)		(363,514	)		(3,492,399	)

Balance at September 30, 2011																						8,642,286	$	86,423	$	127,476,435		$	(900,000	)	$	(113,871,752	)	$	(226,938	)		12,564,168

The accompanying notes are an integral part of these consolidated financial statements.


	Year ended September 30,									Year ended September 30,						May 7, 2003 (Date of inception) to Septemper 30, 2011
	2010			2009			May 7, 2003 (Date of inception) to September 30, 2010			2011			2010			May 7, 2003 (Date of inception) to Septemper 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(6,957,038	)	$	(19,308,452	)	$	(127,049,635	)
Plus: Net loss attributable to noncontrolling interests		1,182,990			60			16,470,728
Net income (loss)										$	(3,492,399	)	$	(6,957,038	)	$	(131,542,282	)
Net (income) loss attributable to nonconrolling interests											363,514			1,182,990			17,834,490

Net loss attributable to Arrowhead		(5,774,048	)		(19,308,392	)		(110,578,907	)		(3,128,885	)		(5,774,048	)		(113,707,792	)
(Income)/loss from discontinued operation		(427,342	)		163,962			6,779,750
Realized and unrealized gain on investment		—			(700,000	)		(1,082,263	)
Gain from sale of subsidiary		—			—			(306,344	)
(Gain)/loss on disposal of fixed assets		(10,881	)		77,374			66,493
Stock issued as gift to Caltech		—			—			162,750
Stock issued as gift to Rice University		—			—			136,000
(Income) loss from discontinued operations											(5,292,609	)		2,645,051			42,837,974
Realized and unrealized (gain) loss on investments											261,218			—			(821,045	)
(Gain) loss from sale of subsidiary											—			—			(306,344	)
Loss on sale/donation of fixed assets											—			—			127,088
Stock issued as gift											—			—			298,750
Stock issued for professional services		—			—			232,700			193,885			—			442,882
Stock issued for in-process research and development		—			—			13,166,347			—			—			13,166,347
Change in percentage of ownership in subsidiary		—			16,297			16,297
Change in value of derivative liability		(1,761,385	)		—			(1,761,385	)
Change in value of derivatives											(1,133,127	)		(1,761,385	)		(2,894,512	)
Purchased in-process research and development - Nanoconduction		—			2,292,009			2,685,208			—			—			2,685,208
Stock-based compensation		1,582,149			2,676,170			11,674,904			1,376,921			1,424,293			12,340,064
Depreciation and amortization		654,689			994,604			5,392,334			267,977			277,650			5,660,311
Amortization (accretion) of note discounts, net											(7,938	)		—			(7,938	)
Gain on sale of stock in subsidiary		—			—			(2,292,800	)		—			—			(2,292,800	)
Non-cash loss from equity investment		219,540			225,804			560,073
Non-cash (gain) loss from equity investment											163,180			219,540			723,253
Noncontrolling interest		(1,182,990	)		(60	)		(17,470,916	)		(363,514	)		(1,182,990	)		(17,834,490	)
Gain on renegotiation of accrued severance		—			(726,500	)		(726,500	)		—			—			(726,500	)
(Increase) decrease of cash flow from:
Changes in operating assets and liabilities:
Receivables		85,282			(60,658	)		(62,815	)		—			—			(62,815	)
Other receivables		(868,710	)		—			(868,710	)		(736,253	)		(872,128	)		(1,604,963	)
Other prepaid expenses		76,978			64,859			(241,574	)
Prepaid expenses											99,006			110,152			(142,568	)
Other current assets		(114,833	)		—			(114,833	)		18,473			(114,833	)		(96,360	)
Deposits		74,913			144,641			(36,795	)		—			60,105			(36,795	)
Accounts payable		(331,718	)		(328,659	)		47,694			157,079			(203,253	)		206,434
Accrued expenses		51,158			(326,536	)		81,699			452,843			110,873			534,540
Accrued severance and other liabilities		30,579			(318,448	)		958,614			15,751			7,556			974,365

NET CASH USED IN OPERATING ACTIVITIES OF CONTINUING OPERATIONS		(7,696,619	)		(15,113,533	)		(93,582,979	)		(7,655,993	)		(5,053,417	)		(60,537,706	)

CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS:
Purchase of marketable securities - US Treasury Bills		—			—			(18,575,915	)		—			—			(18,575,915	)
Purchase of property and equipment		(5,407	)		(40,245	)		(3,555,925	)		(9,674	)		—			(3,565,599	)
Purchase of MASA Energy, LLC		—			—			(250,000	)		—			—			(250,000	)
Minority equity investment		—			—			(2,000,000	)		—			—			(2,000,000	)
Cash paid for interest in Nanotechnica		—			—			(4,000,000	)
Cash paid for interest in Aonex		—			—			(5,000,000	)
Cash paid for interest in Insert		—			—			(10,150,000	)		—			—			(10,150,000	)
Cash paid for interest in Calando		—			(800,000	)		(8,800,000	)
Cash paid for interest in Unidym		—			(2,137,003	)		(14,138,003	)
Cash paid/obtained for interest in Tego		—			1,700,000			(801,000	)
Cash obtained from interest in Nanotechnica		—			—			4,000,000
Cash obtained from interest in Aonex		—			—			5,001,250
Cash obtained from interest in Insert		—			—			10,529,594			—			—			10,529,594
Cash obtained from interest in Calando		—			800,000			8,800,000
Cash obtained from interest in Unidym		—			2,137,003			14,138,003
Cash paid/obtained from interest in Tego		—			(1,700,000	)		801,000
Proceeds from sale of marketable securities - US Treasury Bills		—			—			18,888,265			—			—			18,888,265
Proceeds from sale of investments		—			700,000			1,269,913			1,534,687			—			2,804,600
Proceeds from sale of subsidiary (net)		—			—			359,375
Proceeds from sale of subsidiaries											—			—			359,375
Proceeds from sale of fixed assets		63,000			79,375			142,375			—			—			142,375
Payment for patents		—			—			(303,440	)		—			—			(303,440	)
Restricted cash		—			—			50,773			—			—			50,773
Cash transferred in sale of subsidiary											(1,700,398	)		—			(1,700,398	)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS		57,593			739,130			(3,593,735	)
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS											(175,385	)		—			(3,770,370	)
CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS:
Payments of capital leases		(726,534	)		(810,456	)		(1,677,000	)
Proceeds from issuance of Calando debt		—			2,516,467			2,516,467			—			—			2,516,467
Proceeds from sale of stock in subsidiary		600,000			2,000,000			19,175,168			1,718,932			—			20,894,100
Proceeds from issuance of common stock and warrants, net		12,165,156			2,758,993			90,787,391			4,507,389			12,165,156			95,294,780

NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS		12,038,622			6,465,004			110,802,026			6,226,321			12,165,156			118,705,347

Cash flows from discontinued operations:
Operating cash flows		(2,658	)		(163,962	)		(7,567,525	)		2,265,284			(2,645,860	)		(46,003,507	)
Investing cash flows		430,000			—			789,375			—			487,593			790,625
Financing cash flows											—			(126,534	)		(1,677,000	)

Net cash provided by (used in) discontinued operations:		427,342			(163,962	)		(6,778,150	)		2,265,284			(2,284,801	)		(46,889,882	)

NET INCREASE (DECREASE) IN CASH		4,826,938			(8,073,361	)		6,847,162
NET INCREASE IN CASH											660,227			4,826,938			7,507,389

CASH AT BEGINNING OF PERIOD		2,020,224			10,093,585			—			6,847,162			2,020,224			—

CASH AT END OF PERIOD	$	6,847,162		$	2,020,224		$	6,847,162		$	7,507,389		$	6,847,162		$	7,507,389

Supplementary disclosures:
Interest paid	$	26,905		$	88,267		$	125,419		$	105,000		$	—		$	230,419
Taxes paid										$	742,500		$	—		$	742,500

The accompanying notes are an integral part of these consolidated financial statements.

All Arrowhead share amounts have been adjusted to reflect the 1 for 10 reverse stock split effected on November 17, 2011.

On March 23, 2005, Arrowhead purchased 7,375,000 shares of Insert Therapeutics, Inc. common stock from two minority stockholders of Insert for ~~502,260~~50,226 newly issued shares of Arrowhead Common Stock valued at $2,000,000 based on the closing market price of Arrowhead Common Stock on NASDAQ on the date of the closing.

On March 31, 2006, Arrowhead purchased 964,000 shares of Calando Pharmaceuticals, Inc. common stock from minority stockholders of Calando for $1,928,000 consisting of ~~208,382~~20,838 newly issued shares of Arrowhead Common Stock valued at $1,077,333 plus $850,667 in cash. The ~~208,382~~20,838 shares of Arrowhead Common Stock were valued based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 20, 2007, Arrowhead purchased the Series E Preferred Stock of Carbon Nanotechnologies, Inc. in exchange for ~~1,431,222~~143,122 shares of Arrowhead Common Stock with an estimated fair market value of $5,400,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to March 24, 2007, as set forth in the Agreement and Plan of Merger among Unidym, Carbon Nanotechnologies, Inc., Arrowhead, and others.

On April 23, 2008, Arrowhead purchased 200,000 shares of the Common Stock of Unidym Inc., in exchange for ~~70,547~~7,054 shares of Arrowhead Common Stock with an estimated fair market value of $200,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 29, 2008, Arrowhead purchased all of the membership units of MASA Energy, LLC for $560,000. The purchase price consisted of ~~105,049~~10,504 shares of Arrowhead Common Stock with an estimated fair market value of $310,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing, plus $250,000 in cash.

On August 8, 2008, Unidym acquired all of the outstanding stock of Nanoconduction, Inc. in exchange for ~~114,115~~11,411 shares of Arrowhead stock with an estimated fair market value of $250,000.

On June 11, 2009, Arrowhead issued ~~1,324,625~~132,462 shares of Common Stock with an estimated fair market value of $688,802 in exchange for an equal number of Series A Preferred Stock of Unidym, with minority stockholders of Unidym.

On June 25, 2009, Arrowhead issued ~~1,944,444~~194,444 shares of Common Stock with an estimated fair market value of $972,222 in exchange for an equal number of Series C Preferred Stock of Unidym, with a minority stockholder of Unidym.

On September 22, 2009, Arrowhead issued ~~91,495~~9,149 shares of Common Stock with an estimated fair market value of $46,662 in exchange for an equal number of Series A Preferred Stock of Unidym with a minority stockholder of Unidym.

On September 28, 2009, Arrowhead issued ~~642,273~~64,227 shares of Common Stock with an estimated fair market value of $398,209 in exchange for 5,574 shares of Series A Preferred Stock and 636,699 shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

On September 30, 2009, Arrowhead issued ~~277,778~~27,777 shares of Common Stock with an estimated fair market value of $186,111 in exchange for an equal number of Series C-1 Preferred Stock of Unidym, with a minority stockholder of Unidym.

In October and November 2009, Arrowhead issued ~~153,176~~15,317 shares of Common Stock with an estimated fair market value of $47,485 in exchange for an equal number of shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

In October and November 2009, Arrowhead issued ~~1,140,000~~114,000 shares of Common Stock with an estimated fair market value of $706,800 in exchange for 2,850,000 shares of ~~Calando~~Calando’s common stock, with several minority stockholders of Calando. In conjunction with the exchange, Arrowhead also issued ~~240,000~~24,000 Warrants to purchase Arrowhead Common Stock in exchange for 600,000 Warrants to purchase Calando common stock.

In February 2010, Arrowhead issued ~~80,000~~8,000 shares of Common Stock and ~~24,000~~2,400 warrants to purchase Arrowhead Common Stock, at an exercise price of ~~$0.50,~~$5.00, to several Calando shareholders, in exchange for 200,000 shares of Calando common stock and 60,000 warrants to purchase Calando common stock.

In March 2010, a warrant holder exercised ~~247,880~~24,788 warrants to purchase Arrowhead Common Stock, in a cashless exercise, whereby Arrowhead issued to the warrant holder ~~128,707~~12,870 shares of Arrowhead Common Stock.

In September 2010, Arrowhead issued warrants to purchase ~~3,906,250~~390,625 shares of Arrowhead Common Stock, at an exercise price of ~~$0.50,~~$5.00, to two Calando shareholders, in exchange for 1,562.5 shares of Series A Preferred Stock of Calando Pharmaceuticals, Inc.

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, ~~formerly known as InterActive Group, Inc.,~~ (2) the terms the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term ~~“ARC” refers to Arrowhead Research Corporation, a privately-held California corporation with which Arrowhead consummated a stock exchange transaction in January 2004, (4) the term~~ “Subsidiaries” refers collectively to Arrowhead Madison Inc. (“Madison”) , Calando Pharmaceuticals, Inc. (“Calando”), ~~Unidym,~~Ablaris Therapeutics, Inc. (“~~Unidym”~~Ablaris”), Agonn Systems, Inc. (“Agonn”),) and Tego Biosciences Corporation (“Tego”) as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”) and Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, and (5) the term “Common Stock” refers to Arrowhead’s Common Stock and the term “stockholder(s)” refers to the holders of ~~Common Stock or securities exercisable for~~Arrowhead Common Stock.

Arrowhead Research Corporation is a nanomedicine company developing innovative therapies at the interface of biology and nanoengineering to cure disease and improve human health. Arrowhead has one of the most advanced and broadest technology platforms for therapeutics based on RNA interference (RNAi), including access to five different RNAi delivery systems and the three primary small interfering RNA (siRNA) structures in commercial development ~~stage nanotechnology holding company~~for RNAi therapeutics. This broad technology platform enables optimization of siRNA therapeutic candidates for delivery based on siRNA chemistry, tissue type, disease state, and target [gene] and siRNA type and chemistry on a target-by-target basis. Arrowhead is leveraging its in house R&D expertise and capabilities, as well as a broad intellectual property portfolio for RNAi therapeutics, to attract development partnerships with other pharmaceutical and biotech companies committed to bringing RNAi therapeutics to market, as well as continuing the preclinical and clinical development its own clinical candidates. Arrowhead’s non-RNAi development programs include a unique therapeutic candidate that ~~forms, acquires,~~shows promise for the treatment of obesity and advanced bioactive materials for the regeneration of injured tissues.

Arrowhead operates ~~subsidiaries commercializing innovative nanotechnologies. By working closely with leading scientists and universities,~~a wholly-owned subsidiary, Arrowhead ~~identifies advances in nanotechnology and matches them with product development opportunities in high-growth markets. The Company~~Madison, which is ~~focusing~~focused on the ~~field~~development of ~~nanomedicine. Arrowhead has~~RNAi therapeutics, two ~~major~~majority owned subsidiaries, ~~Unidym~~Calando, a leader in delivering small interfering RNAs for gene silencing, and ~~Calando,~~Ablaris, an anti-obesity therapeutics company, and has minority investments in ~~two early-stage nanotechnology companies,~~ Nanotope, ~~Inc. (“Nanotope”)~~a regenerative medicine company and Leonardo, ~~Biosystems, Inc. (“Leonardo”).~~a multistage drug delivery company.

~~As a development stage company,~~ Arrowhead has historically financed its operations through the sale of securities of Arrowhead and its Subsidiaries. Development activities at our Subsidiaries ~~in particular Calando and Unidym,~~ has required significant capital investment since the Company’s inception ~~in 2003~~ and ~~is expected~~we expect our current portfolio companies to continue to require ~~significant~~ cash investment in fiscal ~~2011~~2012 and beyond to continue development.

At September 30, ~~2010,~~2011, the Company had $7.5 million in cash to fund operations. During the year ended September 30, 2011, the Company’s cash position increased by $0.7 million, primarily due to the issuance of Common Stock on September 30, 2011. This financing generated $6.0 million of which $4.4 million was received in fiscal 2011, while the balance is to be received in fiscal 2012. This inflow was mostly offset by operational spending at Arrowhead, Calando and Ablaris during fiscal 2011. In January 2011, Arrowhead sold its ownership interest in Unidym; therefore the cash burn associated with Unidym ceased in January 2011. As a result of the sale of Unidym, the Company received $2.5 million in stock of the acquirer, Wisepower Co. Ltd. (“Wisepower”) and a $2.5 million convertible bond from Wisepower, of which approximately $200,000 is owed to a third party, who was a minority investor in Unidym. As of September 30, 2011, the Company sold approximately 60% of the stock for approximately $1.5 million. The remaining shares were sold in October 2011, generating proceeds of $0.5 million. The convertible bond with a face value of $2.5 million, is convertible into Wisepower common stock beginning on January 17, 2012 at a price of $2.00 per share, and can be redeemed on January 17, 2013, and at which time would represent an additional source of liquidity for the company. In October 2011, the Company raised an additional $3.9 million through the issuance of preferred stock and Common Stock. The Company also entered into a facility whereby it has the ability to draw capital up to $15 million, and may do so depending on cash needs and market conditions.

Based upon the Company’s cash on hand, other sources of ~~approximately $6.8 million on a consolidated basis. Cash~~liquidity, as described above, and ~~cash equivalents increased during the 2010 fiscal year by $4.8 million to $6.8 million at September 30, 2010 from $2.0 million at September 30, 2009.~~

Cash used in operating activities was $7.6 million, which represents the on-going expenses of Arrowhead and its Subsidiaries. Cash provided from financing activities was $12.0 million. As further described below, there were two significant equity financings during fiscal 2010 with total net proceeds of $11.1 million. In addition, warrants were exercised during the year which yielded proceeds of $1.1 million. Proceeds from financing activities also include $0.6 million related to cash investments in Unidym. Finally, payments on capital lease obligations were $0.7 million. Cash flow from discontinued operations was $0.4 million, related to the sale ofbased upon the Company’s intellectual property assets of Tego Biosciences to Luna Innovations Inc. The Company’s operation of Tego has ceased, however the asset purchase agreement with Luna Innovations, Inc. allows for certain royalties and milestone payments.

~~The Company’s strategic plan includes focusing on near term revenue opportunities, conserving cash and seeking sources of new capital. To execute this~~operating plan, the Company will seek to accomplish one or more of the following on favorable terms: the out-license of technology, sale of a subsidiary, sale of non-core assets, funded joint development or partnership arrangements and sale of securities. The Company is actively involved in discussions with third parties regarding several of these alternatives. However, until such time as one or more of these efforts can be accomplished, the Company will continue to conserve cash while investing in its core operations.

~~The~~ Company’s management anticipates that the Company will be able to satisfy the cash requirements of its operations through at least the next twelve ~~months with current cash resources.~~months. The Company anticipates that further equity financings, and/or asset sales and license agreements will be necessary to continue to fund operations in the future.

Principles of Consolidation—The consolidated financial statements ~~of the Company~~ include the accounts of Arrowhead and its ~~wholly-owned~~Subsidiaries, Calando, Ablaris, Tego, Agonn, and ~~majority-owned Subsidiaries.~~until its disposition in January 2011, Unidym. Prior to April 2008, Arrowhead’s Subsidiaries included Insert Therapeutics, Inc. (“Insert”), which was merged with Calando in April 2008. The merged entity is majority-owned by Arrowhead and continues to operate under the name of Calando. ~~At September 30, 2010, other Subsidiaries included~~On January 17, 2011, Arrowhead sold its interests in Unidym ~~Tego,~~to Wisepower, and ~~Agonn. On~~on December 23, 2009, Tego completed a sale of its assets to Luna Innovations, Inc. Unidym and Tego results are included in the Income (Loss) from Discontinued Operations. Income (Loss) from Discontinued Operations also includes Aonex Technologies, Inc. (“Aonex”), sold in May 2008 and Nanotechnica, Inc. (“Nanotechnica”), dissolved in June 2005. All significant intercompany accounts and transactions are eliminated in consolidation, and noncontrolling interests are accounted for in the Company’s financial statements.

Basis of Presentation and Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include valuing the stock of the Subsidiaries, assumptions to calculate stock-based compensation expense, allowance for doubtful accounts, deferred tax asset valuation allowance, derivative assets and liabilities, noncontrolling interest and useful lives for depreciable and amortizable assets. Actual results could differ from those estimates. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included.

Cash and Cash Equivalents—The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Credit Risk—The Company extends credit to its customers in the normal course of business and generally does not require collateral or other security. The Company performs ongoing credit evaluations of its customers’ financial condition and historically has not incurred significant credit losses.

Concentration of Credit Risk—The Company maintains checking accounts for Arrowhead and separate accounts for each Subsidiary at any of three financial institutions. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. The Company has two wealth management accounts at the same financial institutions that invest in higher yield money market accounts and in government securities. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institution in which these deposits are held.

Property and Equipment—Property and equipment are recorded at cost. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term.

Intellectual Property—At September 30, ~~2010,~~2011, intellectual property consisted of patents and patent applications licensed or purchased in the gross amount of ~~$4,093,624.~~$3,349,563. The accumulated amortization of patents totaled ~~$2,046,788~~$1,618,352 at September 30, ~~2010.~~2011. Patents are amortized over three years to twenty years. The weighted average original amortization period is twelve years. The weighted average remaining amortization period is ~~eight~~seven years. Amortization is expected to be ~~$315,624 in fiscal 2011, and~~ $241,808 for fiscal years 2012, 2013, 2014, ~~and~~ 2015 and ~~$763,980~~2016, and $522,174 thereafter. Long-lived assets, such as property, equipment and intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.

Equity Investments—Arrowhead has a non-controlling equity investment in Nanotope, a privately held biotechnology company, which is recorded in Other Assets. This investment is carried at cost less Arrowhead’s proportionate share of Nanotope’s operating loss for the period since investment. Arrowhead utilizes the equity method of accounting as it owns more than 20% of the voting equity and has the ability to exercise significant influence over this company. This investment is risky as the technologies and markets for ~~technologies or~~Nanotope’s products ~~of Nanotope~~ are still in the development stage, commercially viable products may never be developed, and markets for such ~~markets~~products may never be significant. Arrowhead could lose its entire investment in Nanotope. Arrowhead monitors this investment for impairment and makes appropriate reductions in carrying value when necessary.

Minority Equity Investments—The Company’s minority equity investment in Leonardo, a privately held biotechnology company, is recorded in Other Assets. This investment is accounted for under the cost method of accounting as Arrowhead owns less than 20% of the voting equity and only has the ability to exercise nominal, not significant, influence over this company. This investment is risky as the technologies and markets for ~~technologies or~~Leonardo’s products ~~of Leonardo~~ are still in the development stage, commercially viable products may never be developed, and markets for such ~~markets~~products may never be significant. Arrowhead could lose its entire investment in Leonardo. Arrowhead monitors this investment for impairment and makes appropriate reductions in carrying value when necessary.

Noncontrolling Interests in Majority-Owned Subsidiaries—Operating losses applicable to majority-owned Calando, Ablaris and Unidym have periodically exceeded the noncontrolling interests in the equity capital of either Subsidiary. Such excess losses applicable to the noncontrolling interests have been and are borne by the Company as there is no obligation of the noncontrolling interests to fund any losses in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating losses of any Subsidiary whether wholly-owned or majority-owned. The Company allocates the noncontrolling interest’s share of net loss in excess of the noncontrolling interest’s initial investment in accordance with FASB ASC 810-10, which was effective for the Company on October 1, 2009.

When there is a change in the Company’s proportionate share of a development-stage Subsidiary resulting from additional equity transactions in a Subsidiary, the change is accounted for as an equity transaction in consolidation. To the extent that the increase in the calculated value of the Company’s interest in the equity of the Subsidiary exceeds the Company’s investment in the offering, that increase in value is referred to as the Company’s “increase in its proportionate share of the Subsidiary’s equity” and the amount is recorded as an increase in the Company’s Additional Paid-in Capital.

Revenue Recognition—Revenue from product sales are recorded when persuasive evidence of an arrangement exists, title has passed and delivery has occurred, a price is fixed and determinable, and collection is reasonably assured. We may generate revenue from product sales, technology licenses, collaborative research and development arrangements, and research grants. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding and various milestone and future product royalty or profit-sharing payments.

Revenue associated with research and development funding payments, under collaborative agreements, is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. Revenue from up-front license fees and milestones and product royalties are recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.

Cost of Goods Sold—The production of nanotubes by Unidym has been primarily for research and development activities. Therefore, the nanotubes produced are not capitalized as inventory, nor is a cost of goods sold calculated, even though some nanotubes are eventually sold to third parties.

Allowance for Doubtful Accounts—The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed.

Research and Development—Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10.

Earnings (Loss) per Share—Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options issued to employees and consultants and warrants to purchase Common Stock of the Company. ~~Dilutive earnings (loss) per share has not been presented, because the effect is anti-dilutive.~~

Stock-Based Compensation—The Company accounts for share-based compensation arrangements in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to be based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. We use historical data among other information to estimate the expected price volatility and the expected forfeiture rate.

Income Taxes—The Company accounts for income taxes under the liability method, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period.

In January 2010, the FASB issued Accounting Standards Update ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”. This guidance requires new disclosures related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The adoption of this guidance is effective for interim and annual reporting periods beginning after December 15, 2009. We have adopted this guidance in the financial statements presented herein, which did not impact our consolidated financial position or results of operations.

~~In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605,~~~~Revenue Recognition.~~ This new accounting guidance relates to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. We adopted this guidance as of January 1, 2010 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

On July 1, 2009, the FASB issued the FASB Accounting Standards Codification (the Codification). The Codification became the single source of authoritative non-governmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. The Codification eliminates the previous US GAAP hierarchy and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Codification was effective for interim and annual periods ending after September 15, 2009. The Company adopted the Codification for the year ended September 30, 2009. This guidance did not change GAAP; therefore it did not have an impact on our consolidated financial statements. References within this note and throughout our financial statements to authoritative guidance issued by the FASB are in reference to the codification.

~~Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.~~

In June 2010, the FASB issued ASU No. 2010-17,Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition. This ASU codifies the consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue Recognition.” The amendments to the Codification provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive. This guidance ~~will be~~was adopted effective ~~for the fiscal year beginning~~ October 1, 2010. The ~~Company does not expect the~~ adoption of ~~these amendments to~~this guidance did not have a material impact on ~~the~~our consolidated financial statements.

In ~~June 2009,~~January 2010, the FASB issued ~~amendments~~Accounting Standards Update ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”. This guidance requires new disclosures related to ~~the accounting rules for variable interest entities (VIEs)~~recurring and ~~for~~nonrecurring fair value measurements. The guidance requires disclosure of transfers of ~~financial~~ assets ~~codified as ASC 860-10.~~and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The ~~new~~adoption of this guidance is effective for ~~VIEs eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity~~interim and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. In addition, qualifying special purpose entities (“QSPEs”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferorannual reporting periods beginning after December 15, 2009. We have adopted this guidance in the financial statements ~~being~~ presented and/or when the transferor has continuing involvement with the transferred financial asset. This guidance is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 and for interim periods within the first annual reporting period. The Company doesherein, which did not ~~expect the adoption of these amendments to~~ have a material impact on ~~the~~our consolidated financial ~~statements.~~position or results of operations.

In ~~June~~October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605,Revenue Recognition. This new accounting guidance ~~codified as ASC 470-20, regarding accounting~~relates to the revenue recognition of multiple element arrangements. The new guidance states that, if vendor specific objective evidence or third party evidence for ~~own-share lending arrangements~~deliverables in ~~contemplation of convertible debt issuance, which changes the accounting for equity share lending arrangements on~~ an ~~entity’s own shares when executed in contemplation of~~arrangement cannot be determined, companies will be required to develop a ~~convertible debt offering. This guidance requires the share lending arrangement to be~~

~~measured at fair value and recognized as an issuance cost. These issuance costs should then be amortized as interest expense over the life~~best estimate of the ~~financing arrangement. Shares loaned under these arrangements should be excluded from computation of earnings per share. This~~selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. We adopted this guidance ~~is effective for fiscal years beginning after December 15, 2009 and requires retrospective application for all arrangements outstanding~~ as of ~~the beginning of the fiscal year.~~January 1, 2010 on a prospective basis. The ~~Company does not expect the~~ adoption of this guidance todid not have a material impact on ~~its~~our consolidated financial statements.

In October 2009, the FASB issued authoritative guidance on multiple-deliverable revenue arrangements, ASC 605-25. This guidance amends the existing criteria for separating consideration received in multiple-deliverable arrangements and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance establishes a hierarchy for determining the selling price of a deliverable which is based on vendor-specific objective evidence, third-party evidence, or management estimates. Expanded disclosures related to multiple-deliverable revenue arrangements are also required. This guidance is effective for the Company beginning fiscal year 2011. Upon adoption, the guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements, or it may be applied retrospectively. The Company does not expect the adoption ofWe have adopted this guidance ~~to have a material~~in the financial statements presented herein, which did not impact ~~on its~~our consolidated financial ~~statements.~~position or results of operations.

The consolidated financial statements for the years ended September 30, 2010 and 2009 respectively, include the accounts of Arrowhead and its Subsidiaries, Calando, Unidym, Tego and Agonn. All significant intercompany accounts and transactions are eliminated in consolidation and minority interests were accounted for in the consolidated statements of operations and the balance sheets.

Unidym, Inc. was founded by Arrowhead in 2005. Through the license of intellectual property and the acquisition of three development stage nanotechnology companies in 2006, 2007 and 2008, Unidym acquired the rights to key patents for the manufacture and application of carbon nanotubes, and is developing products with applications for the display industry. The consolidated financial statements include the results of the merged companies.

Prior to fiscal 2009, Arrowhead invested $8.3 million in Unidym and provided Arrowhead stock with an aggregate value of $5.4 million to facilitate Unidym acquisitions. In fiscal 2009, Unidym raised a total of $4.7 million through the sale of Series C-1 Preferred Stock, of which $2.7 million was invested by Arrowhead.

In fiscal 2008 and fiscal 2009, Arrowhead increased its ownership interest in Unidym through a series of stock exchanges with minority holders of Unidym. In April 2008, Arrowhead acquired 550,000 shares of Unidym common stock from a director and minority holder of Unidym in exchange for $350,000 in cash and restricted Arrowhead Common Stock valued at $200,000. In fiscal 2009, Arrowhead acquired 4.3 million shares of Unidym preferred stock in exchange for 4.3 million shares of Arrowhead Common Stock.

In September 2009, Arrowhead invested $642,000 in exchange for 2,140,000 shares of Unidym Series D Preferred Stock and a warrant to purchase 3,146,208 shares of Unidym common stock at an exercise price of $0.25 per share with an expiration date three years from the date of issuance. As a condition to this investment, each share of Series C-1 Preferred Stock was converted to six shares of Unidym Series D Preferred Stock. A minority shareholder of Unidym invested $300,000 for 1,000,000 shares of Unidym Series D Preferred Stock and 1,000,000 warrants with similar terms.

In October and November 2009, Arrowhead issued 153,176 shares of Common Stock with an estimated fair market value of $47,485 in exchange for an equal number of shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym. In June 2010, Arrowhead received 4,785,077 shares of Series D Preferred Stock of Unidym in exchange for the cancellation of $1,435,523 in accumulated operational loans by Arrowhead to Unidym.

~~As of September 30, 2010, Arrowhead owned 79% of the outstanding stock of Unidym and 64% on a fully diluted basis.~~

On April 17, 2008, Calando merged with and into Insert, with Insert as the surviving company. Prior to the merger, Arrowhead invested an aggregate of $23.2 million in Calando through equity and debt financings. As a condition of the merger, the Preferred Stock of each of Calando and Insert was converted into common stock and the loans were converted to equity. As a result of the merger, shares of Insert common stock were issued to the stockholders of the former Calando, and Insert changed its name to Calando Pharmaceuticals, Inc.

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. Subsequently, most of the Notes were converted to equity as described below. At September 30, 2011 and 2010, one Note for $500,000 remained outstanding. The Notes had a 10% interest rate and matured on November 26, 2010. The ~~Notes are~~$500,000 remaining Note is convertible into Calando common stock and can be redeemed for two times their face value plus interest in the event of a sale of ~~Calando.~~Calando or at maturity. To facilitate this investment in Calando, Arrowhead subordinated a series of 6% simple interest loans and advances totaling approximately $5.3 million of principal plus interest.

Effective June 23, 2009, to facilitate licensing transactions with a third party, holders (including Arrowhead) of an aggregate of $2.9 million of the Notes, including accrued but unpaid interest, converted the principal and accrued interest into newly authorized Calando Series A Preferred Stock. The non-voting Series A Preferred Stock has a liquidation preference of 2.5 times the Series A Original Issue Price of $1,000 per share and is convertible into common stock at a conversion price of $0.576647 per share. Arrowhead converted all of its Notes representing a principal balance of $800,000, plus accrued but unpaid interest, into 829 shares of Series A Preferred Stock. One third-party Note for $500,000 plus interest remains outstanding.

As of September 30, ~~2010,~~2011, Arrowhead had a ~~series of 6%~~10% simple-interest working ~~capital loans~~promissory note and advances outstanding to Calando totaling ~~$7,929,326, inclusive of accrued interest of $615,139,~~$907,501, which are payable upon demand.

In fiscal 2010, Arrowhead issued ~~1,220,000~~122,000 shares of its Common Stock in exchange for 3,050,000 shares of Calando common stock, with several minority stockholders of Calando. In conjunction with this exchange, Arrowhead also issued ~~240,000~~26,400 warrants to purchase Arrowhead Common Stock in exchange for ~~600,000~~660,000 warrants to purchase Calando common stock.

In January 2011, Arrowhead invested $9.1 million, through a cash investment of $1.0 million and the conversion of $8.1 million intercompany debt, acquiring newly issued Calando Series B and Series C preferred stock.

As of September 30, ~~2010,~~2011, Arrowhead owned ~~70%~~79% of the outstanding shares of Calando and 74% on a fully diluted basis.

Ablaris was formed and began operations in the first quarter of fiscal 2011 through the licensing of certain anti-obesity technology developed at the MD Anderson Cancer Center at the University of Texas. During the year ended September 30, 2011, Ablaris raised $2.9 million in cash, of which $1.3 million was invested by Arrowhead and $1.6 million was invested by outside investors, through the issuance of Series A Preferred stock.

As of September 30, 2011, Arrowhead owned 64% of the outstanding shares of Ablaris and 64% on a fully diluted basis.

Nanotope is developing advanced nanomaterials for the treatment of spinal cord injuries, cartilage regeneration and wound healing. In April 2008, Arrowhead acquired a 5.8% ownership interest in Nanotope. In July and September 2008, Arrowhead acquired 1,801,802 shares of Series B Preferred Stock of Nanotope for two payments of $1 million each, increasing Arrowhead’s ownership interest in Nanotope to approximately 23%. Since inception, Nanotope’s revenue has been negligible. Operating expenses for the twelve months ended September 30, ~~2010~~2011 were approximately ~~$975,000.~~$1,161,000. Nanotope’s net loss for the twelve months ended September 30, ~~2010~~2011 was ~~$955,000.~~$709,000. Arrowhead accounts for its investment in Nanotope using the equity method of accounting. As of September 30, ~~2010,~~2011, Nanotope had indebtedness to Arrowhead in the amount of ~~$467,000,~~$1,213,000, included in other receivables, which is expected to be repaid or converted to equity.


	September 30, 2010			September 30, 2009			September 30, 2011			September 30, 2010
Current assets	$	16,000		$	344,000		$	21,000		$	16,000
Non-current assets		130,000			176,000			85,000			130,000
Liabilities		585,000			4,000			1,255,000			585,000
Equity		(439,000	)		516,000			(1,149,000	)		(439,000	)

	For the year ended September 30, 2010			For the year ended September 30, 2009			For the year ended September 30, 2011			For the year ended September 30, 2010
Revenue	$	9,000		$	—		$	515,000		$	9,000
Operating expenses		975,000			1,038,000			1,161,000			975,000
Net Loss	$	(955,000	)	$	(1,030,000	)	$	(709,000	)	$	(955,000	)

	For the year ended September 30, 2010			For the year ended September 30, 2009			For the year ended September 30, 2011			For the year ended September 30, 2010
Cash flows used in operating activities	$	(329,000	)	$	(948,000	)	$	(705,000	)	$	(329,000	)
Cash flows used in investing activities		(7,000	)		(7,000	)		(31,000	)		(7,000	)
Cash flows provided by financing activities		—			—			746,000			—

Leonardo is developing a drug-delivery platform technology based on novel methods of designing spheroid porous silicon microparticles that selectively accumulate in tumor vasculature. In April 2008, Arrowhead acquired a 6.13% ownership interest in Leonardo. Arrowhead accounts for its investment in Leonardo using the cost method of accounting. As of September 30, ~~2010,~~2011, Leonardo had indebtedness to Arrowhead in the amount of ~~$325,000,~~$396,000, included in other receivables, which is expected to be repaid or converted to equity. As of September 30, ~~2010,~~2011, Arrowhead’s ownership interest in Leonardo was 5%.

Founded by Arrowhead ~~founded Agonn~~ in ~~May 2008~~2005, Unidym is developing electronic applications of carbon nanotubes. In line with the Company’s strategy to ~~explore, develop~~focus on nanomedicine, Arrowhead sold its ownership interest in Unidym to Wisepower in January 2011. The consideration included $5.0 million in Wisepower stock and ~~commercialize nanotechnology-based energy storage devices for electric vehicles~~bonds, a percentage of certain revenue streams, as well as contingent payments up to $140 million based on revenue milestones over a ten-year period.

In conjunction with the disposition of Unidym, the gain on the sale and ~~other large format applications. Funding for Agonn has ceased, and development efforts have been curtailed.~~the results of historical operations are recorded as discontinued operations in the Company’s Statements of Operations. Additionally, the cash flows from Unidym are reflected separately as cash flows from discontinued operations. Potential future cash flows as discussed above will be reflected as a part of cash flows from discontinued operations in the Company’s Consolidated Statements of Cash Flows.

~~NOTE 4.~~~~DISCONTINUED OPERATIONS—TEGO BIOSCIENCES CORPORATION~~Tego Biosciences, Inc.

On April 20, 2007, Tego, a wholly-owned subsidiary of Arrowhead, acquired ~~for $1,000~~ the assets of C Sixty, Inc., a Texas-based company developing protective products based on the anti-oxidant properties of fullerenes. On July 3, 2007, Arrowhead capitalized Tego with a purchase of 5,000,000 shares of Tego Series A1 Preferred Stock for $100,000. On October 25, 2007, Arrowhead purchased 15,000,000 shares of Tego Series A-2 Preferred Stock for $2.4 million. In line with Tego’s revised strategy to focus on the out-license of its technology and to reduce its internal development activities, on November 21, 2008, Tego repurchased from Arrowhead 5,000,000 shares of Tego Series A-1 Preferred Stock for $1.7 million. As of September 30, 2010, the Company had incurred approximately $1,017,000 of expenses related to Tego since its inception.

On December 23, 2009, Tego completed the sale of all of its non-cash intellectual property assets ~~(“Tego IP”)~~ to Luna Innovations, Inc. ~~(“Luna”) under the terms of the Tego-Luna Asset Purchase Agreement dated November 13, 2009 (“APA”).~~ The Tego IP includes a portfolio of Tego-owned foreign and domestic patents and patent applications. The Tego IP also includes patent licenses from Siemens AG and Washington University, St. Louis. Under the APA, Luna agreed to assume Tego’s role as licensor under a license Tego granted under the Tego IP to The Bronx Project, Inc. (“TBP”) to develop carboxyfullerenes in the field of neuronal injury (the “TBP License”). Luna also assumed Tego’s role as licensor under the exclusive license Tego granted to Arrowhead’s affiliate Unidym, under the Tego IP in the field of industrial non-pharmaceutical fullerenes.

~~Luna paid to Tego~~consideration included an upfront purchase price of $350,000 and reimbursements of patent and license expenses of $80,000. Further, under the terms of the APA, Luna will pay Tego 10% of any revenues it receives from its licensing or resale of the Tego IP. Tego shall also receive from Luna 50% of any net proceeds Luna receives from the TBP License. Tego shall receive royalties from Luna for any sales of fullerene products covered by the Tego IP,$80,000, as well as ~~clinical development~~contingent payments based on milestones ~~totaling $4.25 million~~and royalties for each fullerene product ~~it develops that is~~developed by Luna and covered by ~~the~~ Tego ~~IP.~~intellectual property.

Due to the sale of substantially all of Tego’s assets, the operations of Tego ceased and the gain on the sale and the results of historical operations are recorded as discontinued operation in the Company’s Statements of Operations. Additionally, the cash flows from Tego are reflected separately as cash flows from discontinued operations. Potential future cash flows associated with the Luna APA, as discussed above, will be reflected as a part of cash flows from discontinued operations in the Company’s Consolidated Statements of Cash Flows.

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. The Notes had a 10% interest rate and matured on November 26, 2010. Unpaid principal of the Notes and accrued but unpaid interest thereon is convertible into common stock of Calando at a conversion price of $0.576647 per share (subject to adjustment) at any time in the sole discretion of the holder. In the event Calando achieves a liquidation event as defined in the Notes, each note holder has the option to exchange the Notes for two times the then outstanding principal amount owed under the Notes plus accrued and unpaid interest thereon, or convert the outstanding principal and accrued and unpaid interest thereon into Calando common stock at the conversion price.

Except for one Note in the principal amount of $500,000, all Notes and accrued interest were converted into a total of 2,950 shares of Calando Series A Preferred Stock on June 23, 2009. The remaining Note had a 10% interest rate, matured on November 26, 2010, and was renegotiated and extended until November 26, 2013. The terms of the new note include a 10% interest rate and require two times principal payment upon certain events as defined in the note and at maturity.

At September 30, ~~2010,~~2011, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001, and 5,000,000 shares of Preferred Stock, par value $0.001. On November 17, 2011, the Company effected a reverse stock split in the ratio of 1 for 10, all share and per share data below reflects an adjustment for the reverse stock split.

At September 30, ~~2010, 71,720,137~~2011, 8,642,286 shares of Common Stock were outstanding. At September 30, ~~2010, 1,532,000~~2011, 153,200 shares and ~~9,731,435~~575,896 shares were reserved for issuance upon exercise of options granted under Arrowhead’s 2000 Stock Option Plan and 2004 Equity Incentive Plan, respectively.

On July 17, 2009 and August 6, 2009, the Company sold an aggregate of 9,196,642 units in a private placement transaction with institutional and accredited investors. Each unit consisted of one share of Arrowhead Common Stock, at a price of $0.30 per share, and a warrant to purchase an additional share of Common Stock exercisable at $0.50 per share. The warrants became exercisable on January 18, 2010 and February 7, 2010, and remain exercisable until June 30, 2014. The market conditions required for redemption provided for in the warrants has been met and the warrants are eligible for redemption by the Company. Gross proceeds of the offering were approximately $2.76 million.

On December 11, 2009, the Company sold an aggregate of ~~5,083,430~~508,343 units in a private placement transaction with accredited investors. Each unit consisted of one share of Arrowhead Common Stock and a warrant to purchase an additional share of Common Stock exercisable at ~~$0.509~~$5.09 per share. The unit price was ~~$0.634,~~$6.34, based upon the closing bid price on the Company’s Common Stock on December 11, 2009, which was ~~$0.509,~~$5.09, plus ~~$0.125~~$1.25 for the purchase of the warrant. The warrants became exercisable on June 12, 2010 and remain exercisable until December 11, 2014. The market conditions required for redemption provided for in the warrants has been met and the warrants are eligible for redemption by the Company. Gross proceeds of the offering were approximately $3.2 million.

On June 17, 2010, the Company sold an aggregate of ~~6,592,989~~659,298 units at a price of ~~$1.312~~$13.12 per unit in a registered offering to institutional and accredited investors. Each unit consisted of one share of Arrowhead Common Stock and a warrant to purchase 0.5 share of Common Stock exercisable at ~~$1.65~~$16.50 per share. The warrants contain an antidilution provision which can result in an adjustment to the exercise price under certain ~~circumstances.~~circumstances, and the current exercise price is $3.70. Gross proceeds from the offering were $8.65 million before deducting placement agent commission and other offering expenses of approximately $800,000.

On September 30, 2011, the Company sold 1,458,917 shares of Common Stock at a price of $3.80 per share. Cash proceeds received in fiscal 2011 were $4.6 million, $0.9 million are expected to be received in fiscal 2012, and $0.2 million related to a reduction in professional fees.

The following table summarizes information about warrants outstanding at September 30, ~~2010:~~2011:

AsIn April 2011, the Company’s corporate headquarters lease expired, and the Company did not exercise its renewal option. The company is currently leasing temporary offices. The temporary offices are expected to be utilized for several months at a rental rate of approximately $8,000 per month. The current rental agreement is on a month-to-month basis and there were no long-term commitments at September 30, ~~2010,~~2011. On October 21, 2011, Arrowhead acquired the ~~Company leased the following facilities:~~RNAi operations from Roche, including its research facility in Madison, Wisconsin. Its lease expires on February 28, 2019; monthly rental expense is approximately $56,500.

~~At September 30, 2010, the future minimum commitments remaining under leases are as follows:~~

Facility and equipment rent expense for the ~~years~~year ended September 30, 2011 and 2010 was $161,759 and ~~2009 was $499,221 and $1,317,696,~~$268,330, respectively. From inception to date, rent expense ~~has totaled $4,795,051. During fiscal 2010,~~was $3,645,381. Rent expense related to Unidym, ~~subleased~~until its disposal in January 2011, is included as a ~~portion~~part of the building that it occupies, and the Company received rental income, which was recorded as an offset to rental expense, in the amount of $151,000 during the year ended September 30, 2010. Minimum future rental payments in the amount of $201,000 are expected through 2011.

NOTE 8.~~COMMITMENTS AND CONTINGENCIES—SUBSIDIARIES AND SPONSORED RESEARCH~~

In exchange for the exclusive right to license technology developed in sponsored laboratories, Arrowhead has worked with universities in areas such as stem cell research, carbon electronics and molecular diagnostics. By funding university research, Arrowhead has the opportunity to ascertain the technical success at low research cost and, if warranted, continue cost effective development at the university by leveraging the already existing resources available to scientists at universities, such as laboratories and equipment and a culture that encourages the exchange of ideas. If sponsored research results in technology that appears to have commercial applications, the Company can form a subsidiary to develop the technology. Should the technology prove to be too difficult or too expensive to commercialize, Arrowhead may terminate the license agreement and return the licensed intellectual property to the university.

~~Sponsored Research expense for the years ended September 30, 2010 and 2009 was $33,428 and $195,000. As of September 30, 2010, there was one active sponsored research agreement at Unidym.~~

~~The terms of the sponsored research agreement between Unidym and Duke University (“Duke”) are summarized in the following table:~~

In fiscal 2009, the Duke sponsored research agreement was renegotiated resulting in the annual maximum cost decreasing from $191,375 to $100,000. The current contract expired on November 30, 2010, but is expected to be renewed.

Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, ~~1,532,000~~153,200 shares of Arrowhead’s Common Stock are reserved for issuance upon exercise of non-qualified stock options. No further grants can be made under the 2000 Stock Option Plan. The 2004 Equity Incentive Plan reserves ~~9,731,435~~970,443 shares for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards by the Board of Directors to employees, consultants and others. As of September 30, ~~2010,~~2011, there were options granted and outstanding to purchase ~~1,532,000~~153,200 and ~~6,591,338~~575,896 shares of Common Stock under the 2000 Stock Option Plan and the 2004 Equity Incentive Plan, respectively. During the year ended September 30, ~~2010, 5,251,750~~2011, 20,000 options were granted under the 2004 Equity Incentive Plan.

~~In connection with a private offering~~ All share and per share data in ~~fiscal 2009, directors, officers and employees of~~this footnote has been adjusted to reflect the Company agreed to forfeit options to purchase 4,005,000 shares of Common Stock with exercise prices ranging from $2.52 to $6.36. In consideration of the forfeiture of the option grants, other existing grants to purchase 450,000 shares were accelerated such that the awards became fully vested1 for 10 reverse stock split effected on ~~the one year anniversary of the date of grant. The cancellation was effective July~~November 17, ~~2009.~~2011.

~~Arrowhead Research Corporation~~


	Number of Options Outstanding			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance At September 30, 2009		290,158		$	17.35
Granted		525,175			6.88
Cancelled		(2,312	)		11.10
Exercised		(687	)		11.10

Balance At September 30, 2010		812,334			10.62
Granted		20,000			5.86
Cancelled		(100,539	)		21.32
Exercised		(2,699	)		5.10

Balance At September 30, 2011		729,096		$	9.03		7.0 years	$	—

Exercisable At September, 30, 2011		570,307		$	9.39		6.6 years	$	—

Stock-based compensation expense for the years ended September 30, 2011 and 2010 was $1,404,430 and ~~2009 was~~ $1,582,149, respectively. For the year ended September 30, 2011 and ~~$2,676,170,~~2010, $27,519 and $157,856, respectively, of this expense is included in discontinued operations, and the balance is included in Salary expense in the Company’s consolidated statements of operations. There is no income tax benefit as the company is currently operating at a loss and an actual income tax benefit may not be realized. The result of the loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The fair value of the options granted by Arrowhead for the years ended September 30, ~~2010~~2011 and ~~2009~~2010 is estimated at ~~$2,939,928~~$93,004 and ~~$258,216,~~$2,939,928, respectively. The aggregate fair value of options granted by ~~Unidym and~~ Calando for the years ended September 30, ~~2010 and 2009~~2011 is estimated at ~~$20,700 and $448,715, respectively.~~$33,870. No Calando options were issued during the year ended September 30, 2010. The intrinsic value of the options exercised during fiscal ~~2009~~2011 and ~~2008~~2010 was ~~$4,000~~$3,666 and ~~$69,000,~~$6,875, respectively.

As of September 30, ~~2010,~~2011, the pre-tax compensation expense for all unvested stock options at Arrowhead in the amount of approximately ~~$2,492,145~~$1,091,513 will be recognized in our results of operations over a weighted average period of ~~2.6~~2.4 years. As of September 30, ~~2010,~~2011, the pre-tax compensation expense for all unvested stock options at ~~Unidym and~~ Calando in the amount of approximately ~~$518,876~~$69,183 will be recognized in our results of operations over a weighted average period of ~~2.2 and 1.5 years, respectively.~~2.8 years.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. The determination of the fair value of each stock option is affected by our stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The assumptions used to value stock options are as follows:


	Year Ended September 30,				Year Ended September 30,
	2010		2009		2011		2010
Dividend yield		—		—		—		—
Risk-free interest rate		2.00% to 3.42%		2.34% to 3.03%		1.11% to 2.90%		2.00% to 3.42%
Volatility		100%		81% - 100%		100%		100%
Expected life (in years)		5 to 6.25		5 to 6		5.5 to 6.25		5 to 6.25
Weighted average grant date fair value per share of options granted		$0.56		$0.60		$4.70		$5.60

Volatility is estimated based on volatility average of the Company’s Common Stock price.

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table summarizes fair value measurements at September 30, 2010 and September 30, 2011 for assets and liabilities measured at fair value on a recurring basis:

As part of the sale of Unidym in January 2011, Arrowhead received common stock in Wisepower, originally valued at $2.5 million, $100,000 of which is due to a third party. Arrowhead has the ability to sell the shares of stock in Wisepower, subject to certain limits on volume of sales over a nine-month period ending in October 2011. During the year ended September 30, 2011, Arrowhead sold approximately 60% of the original holdings; the remaining shares had a market value of $0.6 million at September 30, 2011, and were sold for $0.5 million in October 2011. The recorded value of the stock is adjusted to fair market value based on quotations from the KOSDAQ, a Korean stock exchange, and published foreign exchange rates. Marketable securities are included as part of other current assets in the Company’s consolidated balance sheet.

As part of the sale of Unidym in January 2011, Arrowhead received a bond from Wisepower in the face amount of $2.5 million. The bond is convertible to Wisepower common stock beginning on January 17, 2012 at a price of $2.00 per share. The conversion feature is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative asset. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value of the conversion feature is recorded as a nonoperating gain/loss as change in value of derivatives in Company’s consolidated statement of operations. A portion of the bond is owed to a third party, as such the company records a derivative asset for the entire conversion feature and records a derivative liability for the portion related to the third party. The original fair value of the derivative relating to the third party was $26,310; the fair value at September 30, 2011 was $6,854. The loss from the change in value of the derivative asset, net of the derivative liability of $437,919 is reflected in the change in value of derivatives in the Company’s consolidated statement of operations.

During the year ended September 30, 2011, the Company recorded a loss from the change in fair value of the derivative asset, net of $437,919. The assumptions used in valuing the derivative asset as of September 30, 2011 were as follows:

The following is a reconciliation of the derivative asset for the year ended September 30, 2011:

As part of the equity financing on June 17, 2010, as described in Note 6,5, Arrowhead issued ~~3,296,497~~ warrants to acquire up to 329,649 shares of Common Stock (the “Warrants”) ~~that~~which contain ~~antidilution~~anti-dilution protection. Under the certain provisions of the Warrants, if, during the term of the Warrants, the Company issues Common Stock at a price lower than the exercise price of the Warrants, the exercise price of the Warrants would be reduced to the amount equal to the issuance price of the Common Stock. Because the Warrants have this feature, the Warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the Warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s

consolidated balance sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a nonoperating gain or loss in the Company’s consolidated statement of operations. During the ~~period from the issuance of the Warrants on June 17, 2010 through~~year ended September 30, ~~2010,~~2011, the Company recorded a gain from the change in fair value of the derivative liability of ~~$1,761,384.~~$1,501,289. The assumptions used in valuing the derivative liability as of September 30, ~~2010~~2011 were as follows:

~~During 2009, Arrowhead’s subsidiary, Unidym, issued Series D Preferred Stock.~~ The ~~rights~~following is a reconciliation of the ~~Preferred Stock necessitate~~derivative liability related to these warrants for through September 30, 2011:

In conjunction with the ~~presentation~~financing of Ablaris during the year ended September 30, 2011, Arrowhead sold exchange rights to certain investors whereby the investors have the right to exchange their shares of Ablaris for a prescribed number of Arrowhead shares based upon a predefined ratio. The exchange rights have a seven-year term. During the first year, the exchange right allows the holder to exchange one Ablaris share for 0.6 Arrowhead shares. This ratio declines to 0.4 in the second year, 0.3 in the third year and 0.2 in the fourth year. In the fifth year and beyond the exchange ratio is 0.1. Exchange rights for 675,000 Ablaris shares were sold during the year ended September 30, 2011, and remain outstanding at September 30, 2011. The exchange rights are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the ~~conversion feature as a liability as prescribed under ASC 815. These~~exchange rights ~~include those that protect~~on the ~~holders from decline in Unidym’s stock price, which is considered outside the control~~date of the Company. The derivative liability is marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in the statement of operations, until they are completely settled. The fair value of the conversion feature is determined each reporting periodissuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the exchange rights is ~~affected by changes~~estimated at the end of each reporting period and the change in ~~inputs to that model including our stock price, expected stock price volatility, interest rates and expected term.~~the fair value of the exchange rights is recorded as a nonoperating gain or loss in the Company’s consolidated statement of operations. During the year ended September 30, 2011, the Company recorded a gain from the change in fair value of the derivative liability of $69,758. The assumptions used in valuing the derivative liability atas of September 30, ~~2010~~2011 were as follows:

The following is a reconciliation of the derivative liability related to these exchange rights for the ~~nine months~~year ended September 30, ~~2010:~~2011:

The carrying amounts of the Company’s other financial instruments, which include accounts receivable, ~~and~~ accounts payable, and accrued expenses approximate their respective fair values due to the relatively short-term nature of these instruments.

Unidym sold 1,111,111 shares of Series C-1 Preferred Stock for cash proceeds of $2 million in a private financing transaction with TEL Ventures (“TEL”) in November 2008. In connection with the investment, TEL was granted certain contingent rights if Unidym failed to meet a cash flow requirement of $7 million and enter into a joint development agreement with TEL by June 30, 2009. If the contingencies were not satisfied, Unidym was obligated to repurchase the Series C-1 Stock for an aggregate purchase price of $2,000,000 at TEL’s option. Unidym’s contingent buy back obligations were secured by a separate security agreement between Unidym and TEL.

On June 25, 2009 the Company acquired 833,333 of TEL’s Series C-1 shares in exchange for restricted Common Stock of the Company. This transaction permanently eliminated $1,500,000 of the potential $2,000,000 put option liability. With the elimination of the put option right, $1.5 million was recorded as a reclassification of mezzanine debt to additional paid in capital on the consolidated balance sheet as of June 30, 2009, pursuant to Regulation S-X Rule 5-02.

Also on June 25, 2009, Arrowhead, Unidym and TEL entered into an IP Transfer and Waiver Agreement whereby TEL’s remaining put rights totaling $500,000 were postponed and modified and the cash flow requirement was reduced from $7 million to $1.5 million. On July 31, 2009, Unidym met the reduced cash flow requirement and the remaining buy back obligation of $500,000 was permanently waived. The remaining $500,000 was reclassified from debt to equity.

The Company utilizes the guidance issued by the FASB for accounting for income taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

For the years ended September 30, ~~2010~~2011 and ~~2009,~~2010, the Company had consolidated net book losses of ~~$6,857,038~~$3.5 million and ~~$19,308,452,~~$7.0 million, respectively. The losses result in a deferred income tax benefit ~~of approximately $7,650,000 for fiscal 2009 and $10,700,000 for fiscal 2008,~~which is offset by ~~an increase in~~a deferred tax provision for the valuation allowance for ~~the same amount for Arrowhead.~~a net deferred provision of zero. Since the Company is a development stage company, management has ~~chosen to take~~provided a 100% valuation allowance against ~~the~~its deferred tax ~~benefit~~assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets.

As of September 30, 2011, the Company has available gross federal net operating loss (NOL) carry forwards of $65.3 million and gross state NOL carry forwards of $52.1 million which expire at various dates through 2029.

As of September 30, 2011, the deferred tax assets were $25.2 million. The ~~Federal Net Operating Losses (“NOL”)~~Company has recorded a full valuation allowance of $25.2 million related to federal and state net operating loss carry forwards. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with ASC 740-10, “Accounting for ~~Arrowhead~~Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and entities consolidated for tax purposes for the past 5 fiscal years are $3,748,704 for fiscal 2009, $5,597,836 for fiscal 2008, $4,296,115 for fiscal 2007, $7,487,109 for fiscal 2006 and $2,895,883 for fiscal 2005. The California NOL’s for the last 5 fiscal years are $14,017,613 for fiscal 2009, $8,613,901 for fiscal 2008, $2,096,978 for fiscal 2007, $195,446 for fiscal 2006 and $77,216 for fiscal 2005.

~~Management~~ estimates ~~the Federal NOL for Arrowhead and entities consolidated for tax purposes, and the California NOL, for fiscal 2010, will be approximately $4.0 million to $5.0 million.~~of projected future taxable income.

The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the years ended September 30, ~~2010~~2011 and ~~2009,~~2010, respectively, and $0 for the period from May 7, 2003 (date of inception) through September 30, ~~2010.~~2011. The Company files income tax returns with the Internal Revenue Service (“IRS”), the state of California and certain other taxing jurisdictions. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for years through fiscal ~~2005,~~2006, and by the IRS for years through fiscal 2006. Our review of prior year tax positions using the criteria and provisions presented by the FASB did not result in a material impact on the Company’s financial position or results of operations.

Dr. Anzalone owns 1,395,900 shares of Nanotope, Inc. common stock or approximately 14.2% of Nanotope’s outstanding voting securities. Dr. Anzalone does not hold options, warrants or any other rights to acquire securities of Nanotope. Dr. Anzalone has the right to appoint a representative to the board of directors of Nanotope. Dr. Anzalone currently serves on the Nanotope board in a seat reserved for Nanotope’s CEO, and another individual holds the seat designated by Dr. Anzalone. Dr. Anzalone has served as President and Chief Executive Officer of Nanotope since its formation and continues to serve in these capacities. Dr. Anzalone has not received any compensation for his work on behalf of Nanotope since joining the Company on December 1, 2007. Dr. Anzalone has also waived his right to any unpaid compensation accrued for work done on behalf of Nanotope before he joined the Company.

Dr. Anzalone did not participate on behalf of the Company in the negotiations of the terms of the Nanotope Series B Preferred Stock issued to the Company and did not negotiate on behalf of Nanotope after becoming the Chief Executive Officer and President of the Company. Dr. Anzalone did respond to questions asked of him by the Company’s Board of Directors and management regarding Nanotope’s business plan, operations and the terms of the Series B Stock Purchase Agreement and ancillary agreements.

During fiscal 2009, Calando raised $2.5 million through the sale of senior unsecured convertible promissory notes (“New Notes”), to accredited investors, plus $800,000 from Arrowhead. Dr. Anzalone, Arrowhead’s President and CEO, personally participated in the offering by buying $100,000 of the New Notes.

As part of the private placement on December 11, 2009 (see Note 6. Stockholder’s Equity), Dr. Anzalone, Arrowhead’s President and CEO, personally invested $100,000.

In August 2010, the Company retained Mr. Vincent Anzalone, the brother of Arrowhead’s Chief Executive Officer, as a consultant for the Company, focusing on business development and market analysis, with a monthly remuneration of $10,000 per month. Mr. Vincent Anzalone was paid $20,000 during the fiscal year ended September 30, 2010, and $120,000 during the fiscal year ended September 30, 2011.

In January 2005, the Company began sponsoring a defined contribution 401(k) retirement savings plan covering substantially all of its employees. The Plan was administered under the “safe harbor” provision of ERISA. Under the terms of the plan, an eligible employee may elect to contribute a portion of their salary on a pre-tax basis, subject to federal statutory limitations. The plan allowed for a discretionary match in an amount up to 100% of each participant’s first 3% of compensation contributed plus 50% of each participant’s next 2% of compensation contributed.

For the years ended September 30, ~~2010~~2011 and ~~2009,~~2010, we recorded expenses under these plans of approximately ~~$14,000~~$43,000 and ~~$95,000,~~$9,000, respectively and ~~$651,000~~$448,000 since inception of the Company.

In addition to the employee benefit plans described above, the Company participates in certain customary employee benefits plans, including those which provide health and life insurance benefits to employees.

On ~~December 7, 2010, Unidym~~October 21, 2011, the Company entered into ~~three agreements~~a Stock and Asset Purchase Agreement (the “RNAi Purchase Agreement”) with ~~Samsung Electronics~~Hoffmann-La Roche Inc. and F Hoffmann-La Roche Ltd (collectively, “Roche”), pursuant to which the Company purchased from Roche (i) all of the outstanding common stock of Roche Madison Inc. (“~~Samsung”~~Roche Madison”) and (ii) the intellectual property rights currently held by Roche related to its RNAi business and identified in the RNAi Purchase Agreement (the “Transaction”). In consideration for the purchase of Roche Madison and the Roche RNAi assets, the Company issued to Roche a promissory note with a principal value of $50,000 and 901,702 shares of Common Stock (as adjusted for a subsequent reverse split). Additionally, the Company agreed that, subject to stockholder approval under the NASDAQ Marketplace Rules, the Company would issue an additional 146,562 (as adjusted for a subsequent reverse split) shares of Common Stock, plus a number of additional shares equal to 9.9% of the shares of Common Stock (or common stock equivalents) sold by the Company in capital raising transactions within one year from the closing, but only with respect to the first $3,118,615 of gross offering proceeds (the “Top-up Shares”). If the Company is prohibited from issuing the Top-up Shares due to NASDAQ Marketplace Rules, then the Company must instead pay the cash value of the Top-up Shares, based on the then-current fair value of such shares.

Pursuant to the RNAi Purchase Agreement, Roche has a right of first negotiation on certain product candidates developed by the Company and its affiliates relating to ~~Unidym’s carbon nanotube technologies~~the purchased assets. If the Company proposes to out-license, or enters into substantive negotiations to out-license, any Clinical Candidate or Existing Candidate (as such terms are defined in the RNAi Purchase Agreement), the Company must give detailed notice of the Candidate it proposes to out-license and ~~intellectual property. Under these agreements, Unidym~~negotiate exclusively and in good faith with Roche for a period of time regarding the applicable out-license. This right of first negotiation applies to all Existing Candidates and the first five Clinical Candidates for which the Company delivers notice to Roche and subsequently enters into an out-license.

In addition to the consideration paid by the Company at the closing of the Transaction, the Company is obligated to make certain royalty and milestone payments to Roche upon the occurrence of certain events. For certain product candidates that are developed by the Company or its affiliates and that are covered by a valid claim by the patent rights transferred in the Transaction for which the Company and Roche do not enter into a licensing arrangement, the Company will be obligated to pay a 3% royalty on Net Sales (as defined in the RNAi Purchase Agreement), provided that the royalty rate may be reduced or offset in certain circumstances. The obligation to pay royalties on such candidates will last until the later of (i) the expiration of the last to expire patent right related to such product candidate that was transferred in the Transaction and (ii) ten years after the first commercial sale of such product candidate.

The Company will also be obligated to make cash payments to Roche upon the achievement of various milestones, including the first regulatory approval of an Existing Candidate in certain jurisdictions and upon certain annual sales milestones for Existing Candidates that may receive ~~gross proceeds of $4,500,000, less withholding taxes and university sublicense fees and other expenses.~~regulatory approval. The potential payments range from $2,500,000 to $6,000,000 per milestone.

On ~~December 14, 2010, Arrowhead~~October 4, 2011, the Company completed a second closing to the private placement stock issuance of September 30, 2011. On October 4, 2011, the Company sold 138,157 shares of Common Stock at a price of $3.80 per share. Cash proceeds were $525,000.

On October 20, 2011, the Company and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”) entered into ana $15 million purchase agreement (the “Purchase Agreement”), together with a registration rights agreement, whereby LPC agreed to purchase up to $15 million of Common Stock, subject to certain limitations, from time to time during the three-year term of the Purchase Agreement. Additionally, the Company agreed to file a registration statement with the ~~Board of Regents~~U.S. Securities & Exchange Commission covering the resale of the ~~University~~shares that may be issued to LPC under the Purchase Agreement. After the SEC declares effective the registration statement related to the resale of ~~Texas whereby it obtained an exclusive world-wide license~~such shares, the Company will have the right, in its sole discretion, over a 36-month period to sell up to $15 million of Common Stock (subject to certain limitations) to LPC, depending on certain ~~anti-obesity technology developed by Drs. Wadih Arap and Renata Pasqualini at the MD Anderson Cancer Center. The agreement requires a one-time fee of $2 million, and annual maintenance fees, initially~~conditions as set forth in the ~~amount~~Purchase Agreement.

On October 21, 2011 and October 24, 2011, the Company entered into Subscription Agreements with certain accredited investors (the “Series A Purchasers”), pursuant to which the Company agreed to issue and sell an aggregate of ~~$50,000, rising~~1,015 shares of Series A Preferred Convertible Stock, $0.001 par value per share, at a purchase price of $1,000 per share. The aggregate purchase price to be paid by the Series A Purchasers for the shares of Series A Preferred is $1,015,000. The closing of the sale of the shares occurred on October 26, 2011.

On October 21, 2011, the Company entered into a ~~maximum annual fee~~Subscription Agreement with a single accredited investor, pursuant to which the Company agreed to issue and sell an aggregate of ~~$100,000 after five years. Milestone payments~~675,000 shares of Common Stock, $0.001 par value per share, at a purchase price of $3.70 per share. The aggregate purchase price to be paid by the purchaser for the shares of Common Stock was $2,497,500. The closing of the sale of the Common Shares is expected to occur in fiscal 2012.

As of November 17, 2011, the Company effected a 1 for 10 reverse stock split. As a result of the reverse stock split, each ten shares of the Company’s Common Stock issued and ~~royalties~~outstanding immediately prior to the reverse split was combined into one share of Common Stock. Also, as a result of the Reverse Stock Split, the per share exercise price of, and the number of shares of Common Stock underlying Company stock options, warrants, Series A Preferred and any Common Stock based equity grants outstanding immediately prior to the reverse stock split was proportionally adjusted, based on the one-for-ten split ratio, in accordance with the terms of such options, warrants or other Common Stock based equity grants as the case may ~~also be due under certain situations.~~be. No fractional shares of Common Stock were issued in connection with the reverse split. Stockholders received a cash payment in lieu of any fractional shares. Unless otherwise noted, all share and per share amounts in these financial statements have been retrospectively adjusted to reflect the reverse stock split.


Delaware		46-0408024
(State of incorporation)		(I.R.S. Employer Identification No.)


Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value		The NASDAQ Capital Market


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer ¨		Smaller Reporting Company x


PART I

ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	1012
ITEM 1B.	UNRESOLVED STAFF COMMENTS	1820
ITEM 2.	PROPERTIES	1820
ITEM 3.	LEGAL PROCEEDINGS	1920
ITEM 4.	REMOVEDAND RESERVED	1920

PART II

ITEM 5.	MARKETFORTHE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES	1921
ITEM 6.	SELECTED FINANCIAL DATA	1921
ITEM 7.	MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS	1921
ITEM 7A.	QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2627
ITEM 8.	FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA	2627
ITEM 9.	CHANGESINAND DISAGREEMENTSWITH ACCOUNTANTSON ACCOUNTINGAND FINANCIAL DISCLOSURE	2627
ITEM 9A.	CONTROLSAND PROCEDURES	2627
ITEM 9B.	OTHER INFORMATION	2728

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS,AND CORPORATE GOVERNANCE	2728
ITEM 11.	EXECUTIVE COMPENSATION	30
ITEM 12.	SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERSAND MANAGEMENTAND RELATED STOCKHOLDER MATTERS	32
ITEM 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONSAND DIRECTORS INDEPENDENCE	33
ITEM 14.	PRINCIPAL ACCOUNTANT FEESAND SERVICES	3433

PART IV

ITEM 15.	EXHIBITSAND FINANCIAL STATEMENT SCHEDULES	34

SIGNATURES		3840

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES		F-1


~~Subsidiary~~	% Ownership*			~~Technology/Product Focus~~
~~Calando Pharmaceuticals, Inc.~~		~~70.0~~	%	~~Clinical stage nano-engineered delivery of RNAi therapeutics for the treatment of cancer~~

~~Unidym, Inc.~~		~~79.0~~	%	~~Commercialization of carbon nanotube-based products for the electronics industry~~


~~Minority Investment~~	% ~~Ownership~~			~~Technology/Product Focus~~
~~Nanotope, Inc.~~		~~23.0~~	%	~~Developing nano-engineered, self-assembling, bioactive scaffolding for the regeneration of spinal cord and other tissues~~

~~Leonardo Biosystems, Inc.~~		~~4.8~~	%	~~Developing a multi-stage system to deliver anti-cancer therapeutics~~


Name	Age		Position with Arrowhead
Christopher Anzalone		4142	Chief Executive Officer & President and Director

R. Bruce Stewart		7273	Executive Chairman of the Board

Mauro Ferrari		5152	Director

Edward W. Frykman		7475	Director

Douglass Given ~~(1)~~		5859	Director

Charles P. McKenney		7273	Director

~~(1)~~	~~Douglass Given was appointed to the Board of Directors on November 23, 2010~~
Michael S. Perry			52			Director


	Number and Percentage of Shares Beneficially Owned (1)
	Shares		Percentage
5% Beneficial Owners
M. Robert Ching (2)		7,108,863		9.9	%
Executive Officers and Directors
R. Bruce Stewart (3)		1,107,794		1.5	%
Chris Anzalone (4)		1,647,376		2.3	%
Kenneth Myszkowski (5)		123,433		*
Mark Tilley (6)		174,097		*
Edward Frykman (7)		234,684		*
Charles McKenney (8)		135,300		*
Leroy Rahn (9)		164,684		*
Mauro Ferrari (10)		267,948		*
All executive officers and directors as a group (8 persons) (11)		3,855,316		5.4	%


Exhibit		Incorporated by Reference Herein
~~Exhibit~~ Number	~~Document~~ Description	Form	Date

2.1	Stock and Asset Purchase Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011*†

3.1	Certificate of Incorporation of InterActive Group, Inc., a Delaware corporation, dated February 13, 2001	Schedule 14C, as Exhibit A	December ~~15, 2000. (1)~~22, 2000

3.2	Certificate of Amendment ofto Certificate of Incorporation of InterActive Group, Inc.~~, dated December 12, 2003~~ (effecting, among other things a change in the corporation’s name to “Arrowhead Research Corporation”)~~. (2)~~, filed with the Secretary of State of the State of Delaware on January 12, 2004	Schedule 14C, as Exhibit 1	December 22, 2003

3.3	Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated January 25, ~~2005. (3)~~2005	Form 10-QSB for the quarter ended December 31, 2004, as Exhibit 3.4	February 11, 2005

3.4	Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated October 13, ~~2009. (18)~~2009	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 3.4	December 22, 2009

3.5	~~Bylaws. (1)~~Series A Certificate of Designations, dated October 25, 2011	Current Report on Form 8-K, as Exhibit 3.1	October 26, 2011

3.6	Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated November 17, 2011	Current Report on Form 8-K, as Exhibit 3.1	November 17, 2011

3.7	Bylaws	Schedule 14C, as Exhibit B	December 22, 2000

3.8	Amendment No. 1 to the Bylaws of Arrowhead Research ~~Corporation. (19)~~Corporation	Current Report on Form 8-K, as Exhibit 3.1	April 27, 2010

4.1	Form of Registration Rights Agreement, July and August ~~2009. (4)~~2009	Current Report on Form 8-K, as Exhibit 10.2	July 17, 2009

4.2	Form of Registration Rights Agreement, dated December 11, ~~2009. (18)~~2009	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 4.2	December 22, 2009

4.3	Form of Warrant to Purchase ~~Common Stock expiring January 24, 2011. (5)~~

~~4.4~~	~~Form~~Shares of Common Stock ~~Warrant~~ expiring in July and August ~~2013. (6)~~2013	Current Report on Form 8-K, as Exhibit 10.2	August 26, 2008

~~4.5~~ 4.4	Form of Common Stock Warrant expiring in September ~~2013. (7)~~2013	Current Report on Form 8-K, as Exhibit 10.2	September 11, 2008

~~4.6~~ 4.5	Form of Warrant to Purchase Capital Stock expiring June ~~2014. (4)~~2014	Current Report on Form 8-K, as Exhibit 4.1	July 17, 2009

~~4.7~~ 4.6	Form of Warrant to Purchase Capital Stock expiring December ~~11, 2014. (18)~~2014	Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 4.7	December 22, 2009

~~4.8~~ 4.7	Form of Warrant to Purchase Common Stock expiring May ~~2017. (8)~~2017	Current Report on Form 8-K, as Exhibit 4.1	May 30, 2007


ARROWHEAD RESEARCH CORPORATION

By:		/S/s/ CHRISTOPHER ANZALONE
		Christopher Anzalone
		Chief Executive Officer


Signature	Title	Date

/S/ CHRISTOPHER ANZALONE	Chief Executive Officer, President and	December ~~22, 2010~~20, 2011
Christopher Anzalone	Director (Principal Executive Officer)

/S/ KENNETH A. MYSZKOWSKI	Chief Financial Officer (Principal	December ~~22, 2010~~20, 2011
Kenneth A. Myszkowski	~~(Principal~~ Financial and Accounting Officer)

/S/ EDWARD W. FRYKMAN	Director	December ~~22, 2010~~20, 2011
Edward W. Frykman

/S/ MAURO FERRARI	Director	December ~~22, 2010~~20, 2011
Mauro Ferrari

/S/ DOUGLASS GIVEN	Director	December 22~~, 2010~~20, 2011
Douglass Given

/S/ CHARLES P. MCKENNEY	Director	December 22~~, 2010~~20, 2011
Charles P. McKenney

	Director	December 20, 2011
Michael S. Perry

/S/ R. BRUCE STEWART	Executive Chairman & Director	December 22~~, 2010~~20, 2011
R. Bruce Stewart


Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets of Arrowhead Research Corporation and Subsidiaries, September 30, ~~2010~~2011 and ~~2009~~2010			F-3
Consolidated Statements of Operations of Arrowhead Research Corporation and Subsidiaries for the years ended September 30, ~~2010~~2011 and ~~2009~~2010 and the period from May 7, 2003 (inception) through September 30, ~~2010~~2011			F-4
Consolidated Statement of Stockholders’ Equity of Arrowhead Research Corporation and Subsidiaries for the period from May 7, 2003 (inception) through September 30, ~~2010~~2011			F-5
Consolidated Statements of Cash Flows of Arrowhead Research Corporation and Subsidiaries for the years ended September 30, ~~2010~~2011 and ~~2009~~2010 and the period from May 7, 2003 (inception) through September 30, ~~2010~~2011			F-6
Notes to Consolidated Financial Statements of Arrowhead Research Corporation and Subsidiaries			~~F-8~~F-9


Exercise prices	Number of Warrants	Remaining Life in Years
$5.04	1,235,994	0.3
$7.06	948,969	6.6
$2.00	3,863,999	2.9
$0.50	11,716,892	4.2
$0.51	4,610,244	4.2
$1.65	3,296,497	5.2

Total warrants outstanding	25,672,595


Twelve months ending September 30	Facilities Leases		Equipment Leases
2011	$	461,390	$	2,268
2012	$	344,400	$	—
2013	$	356,700	$	—
2014	$	—	$	—
2015 and thereafter	$	—	$	—


Research Project	Period Covered	Total Estimated Project Cost		Annual Cost		Amount Paid as of Sept. 30, 2010		Prepaid Amt as of Sept. 30, 2010
Electrical Conductivity of Carbon Nanotubes (Dr. Jie Liu)	Dec. 1, 2007 - Nov. 30, 2010 (3 year)	$	431,641	$	100,000	$	341,882	$	0


	Level I		Level II		Level III		Total
Cash and cash equivalents	$	6,847,162	$	—	$	—	$	6,847,162
Derivative liabilities	$	—	$	—	$	2,408,522	$	2,408,522

		$2,408,522		$2,408,522		$2,408,522		$2,408,522
	Level I		Level II		Level III		Total
Cash and cash equivalents	$	6,847,162	$	—	$	—	$	6,847,162
Derivative liabilities	$	—	$	—	$	2,408,522	$	2,408,522
September 30, 2011:
	Level I		Level II		Level III		Total
Cash and cash equivalents	$	7,507,389	$	—	$	—	$	7,507,389
Marketable securities	$	634,585	$	—	$	—	$	634,585
Derivative assets	$	—	$	—	$	161,125	$	161,125
Derivative liabilities	$	—	$	—	$	944,980	$	944,980


Risk free interest rate	0.4	%
Expected life	2.3 Years
Dividend yield	none
Volatility	72	%


Value at October 1, 2010	$	—
Receipt of instruments		618,500
Decrease in value		(457,375	)
Net settlements		—

Value at September 30, 2011	$	161,125


Value at October 1, 2009	$	—
Receipt of instruments		4,169,907
Decrease in value		(1,761,385	)
Net settlements		—

Value at October 1, 2010	$	2,408,522
Receipt of instruments		—
Decrease in value		(1,501,289	)
Net settlements		—

Value at September 30, 2011	$	907,233


Risk free interest rate	11.3	%
Expected life	36.3 Years
Dividend yield	none
Volatility	30100	%


Value at October 1, 2009	$	0
Issuance of instruments		4,169,907
Decrease in value		(1,761,385	)
Net settlements		—

Value at September 30, 2010	$	2,408,522


Value at October 1, 2010	$	—
Issuance of instruments		100,650
Change in value		(69,758	)
Net settlements		—

Value at September 30, 2011	$	30,892