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0000879407 arwr:IssuedToPurchaseInsertTherapeuticsShareAtThirtyNineDollarsAndEightyCentsPerShareMember 2005-09-30 0000879407 arwr:IssuedForMarketableSecuritiesAtTenDollarPerUnitMember 2004-09-30 0000879407 arwr:IssuedForCashAtTenDollarPerUnitMember 2004-09-30 0000879407 arwr:IssuedForCashAtFifteenDollarPerUnitMember 2004-09-30 0000879407 arwr:IssuedAsStockIssuanceCostAtFifteenDollarPerUnitMember 2004-09-30 0000879407 arwr:IssuedAsGiftForTenDollarAndNinetyCentsPerShareMember 2004-09-30 0000879407 arwr:IssuedForCashAtZeroPointZeroOneDollarsPerUnitMember 2003-09-30 0000879407 arwr:IssuedForCashAtTenDollarPerUnitMember 2003-09-30 iso4217:USD xbrli:shares iso4217:USD xbrli:shares 10 0.01 10.9 15 15 10 10 39.8 59.1 48.8 38.4 35 51.7 57.8 37.7 18 28.3 29.5 21.8 21.9 27.2 5.5 5.2 3 6.3 13.12 3.8 4 3.8 3.7 7375000 964000 200000 5574 636699 2850000 200000 1562.5 <div> Unless otherwise noted, (1) the term "Arrowhead" refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms 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<div> NOTE 2. ACQUISITION On October 21, 2011, the Company entered into a Stock and Asset Purchase Agreement (the "RNAi Purchase Agreement") with 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. ("Roche Madison") and (ii) the intellectual property rights then 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 stock 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 stock 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 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 notice of the Candidate it proposes to out-license and 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 regulatory approval. The potential payments range from $2,500,000 to $6,000,000 per milestone. The following table summarizes the estimated fair values at the date of acquisition:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="81%"> </td> <td valign="bottom" width="7%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Current assets</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">        432,709</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Property and equipment</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">7,215,206</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Intangible assets</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,090,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Other noncurrent assets</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">6,264</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Current liabilities</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(414,122</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr><td valign="top"> Noncurrent liabilities</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(1,570,072</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr bgcolor="#cceeff"><td valign="bottom"> Gain on purchase</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" align="right">(1,576,106)</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="bottom"> Total purchase consideration</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 3px double;" valign="bottom">$</td> <td style="border-bottom: #000000 3px double;" valign="bottom" align="right">     5,183,879</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> The purchase consideration was composed of the following:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="83%"> </td> <td valign="bottom" width="4%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Promissory note due Roche</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">          50,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Shares issued to Roche</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">4,147,830</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Shares to be issued to Roche</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">674,188</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="bottom"> Top-up shares</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" align="right">311,861</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="bottom"> Total purchase consideration</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 3px double;" valign="bottom">$</td> <td style="border-bottom: #000000 3px double;" valign="bottom" align="right">5,183,879</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> In-Process Research & Development (IPR&D) Intangible assets include IPR&D, which represents the estimated fair value assigned to research and development projects acquired in a purchased business combination, which at the time of acquisition have not reached technological feasibility and had no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. Impairment of Indefinite-Lived IPR&D We review amounts capitalized as in-process research and development for impairment at least annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the event the carrying value of the assets are not expected to be recovered, the assets are written down to their estimated fair values. We continue to test our indefinite-lived IPR&D assets for potential impairment until the projects are completed or abandoned. </div>

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<div> NOTE 5. NOTES PAYABLE 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. 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. </div>

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<div> NOTE 8. STOCK-BASED COMPENSATION Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, 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 965,860 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 December 31, 2011, there were options granted and outstanding to purchase 153,200 and 936,813 shares of Common Stock under the 2000 Stock Option Plan and the 2004 Equity Incentive Plan, respectively. During the three months ended December 31, 2011, 370,500 options were granted under the 2004 Equity Incentive Plan. All share and per share data in this footnote has been adjusted to reflect the 1 for 10 reverse stock split effected on November 17, 2011. The following tables summarize information about stock options:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="92%" align="center"> <tr><td width="63%"> </td> <td valign="bottom" width="4%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="4%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="4%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="4%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Number of Options Outstanding</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Weighted- Average Exercise Price Per Share</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Weighted- Average Remaining Contractual Term</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Aggregate Intrinsic Value</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Balance At September 30, 2010</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">812,334</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">10.62</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td valign="top"> Granted</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">20,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">5.86</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cancelled</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(100,539</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">21.32</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td valign="top"> Exercised</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(2,699</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">5.10</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Balance At September 30, 2011</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">729,096</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">9.03</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td valign="top"> Granted</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">370,500</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">4.67</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cancelled</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(5,000</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">29.10</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td valign="top"> Exercised</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(4,583</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">5.20</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Balance At December 31, 2011</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,090,013</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">7.46</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">7.8 years</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr><td valign="top"> Exercisable At December 31, 2011</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">608,400</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">8.80</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">6.5 years</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> Stock-based compensation expense for the three months ended December 31, 2011 and 2010 was $251,878 and $397,667, respectively. For the three months ended December 31, 2011 and 2010, $0 and $27,519, respectively, of this expense is included in discontinued 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 three months ended December 31, 2011 is estimated at $1,289,000. The aggregate fair value of options granted by Calando during the three months ended December 31, 2011 is estimated at $33,690. No Arrowhead or Calando options were issued during the three months ended December 31, 2010. The intrinsic value of the options exercised during the three months ended December 31, 2011 was $0; no options were exercised during the three months ended December 31, 2010. As of December 31, 2011, the pre-tax compensation expense for all unvested stock options at Arrowhead in the amount of approximately $2,071,985 will be recognized in our results of operations over a weighted average period of 3.3 years. As of December 31, 2011, the pre-tax compensation expense for all unvested stock options at Calando in the amount of approximately $92,625 will be recognized in our results of operations over a weighted average period of 3.0 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:     <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="76%" align="center"> <tr><td width="74%"> </td> <td valign="bottom" width="5%"> </td> <td> </td> <td valign="bottom" width="5%"> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="3" align="center">Three Months Ended December 31,</td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" align="center">2011</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" align="center">2010</td></tr> <tr bgcolor="#cceeff"><td valign="top"> Dividend yield</td> <td valign="bottom">  </td> <td valign="bottom" align="center">—  </td> <td valign="bottom">  </td> <td valign="bottom" align="center">—  </td></tr> <tr><td valign="top"> Risk-free interest rate</td> <td valign="bottom">  </td> <td valign="bottom" nowrap="nowrap" align="center">0.9% to 1.7%</td> <td valign="bottom">  </td> <td valign="bottom" nowrap="nowrap" align="center">N/A</td></tr> <tr bgcolor="#cceeff"><td valign="top"> Volatility</td> <td valign="bottom">  </td> <td valign="bottom" align="center">100%</td> <td valign="bottom">  </td> <td valign="bottom" align="center">N/A</td></tr> <tr><td valign="top"> Expected life (in years)</td> <td valign="bottom">  </td> <td valign="bottom" align="center">6.25</td> <td valign="bottom">  </td> <td valign="bottom" align="center">N/A</td></tr> <tr bgcolor="#cceeff"><td valign="top"> Weighted average grant date fair value per share of options granted</td> <td valign="bottom">  </td> <td valign="bottom" align="center">$3.68</td> <td valign="bottom">  </td> <td valign="bottom" align="center">N/A</td></tr></table> The dividend yield is zero as the Company currently does not pay a dividend. The risk-free interest rate is based on the U.S. Treasury bond. Volatility is estimated based on volatility average of the Company's Common Stock price. </div>

4708588

-42838194

1574994

-220

-47546782

1574994

-220

<div> NOTE 4. DISCONTINUED OPERATIONS Unidym, Inc. Founded by Arrowhead in 2005, Unidym is developing electronic applications of carbon nanotubes. In line with the Company's strategy to 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 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 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 in the Company's Consolidated Statement of Cash Flows. Potential future cash flows as discussed above will also be reflected as a part of cash flows from discontinued operations. Tego Biosciences, Inc. On April 20, 2007, Tego, a wholly-owned subsidiary of Arrowhead, acquired the assets of C Sixty, Inc., a Texas-based company developing protective products based on the anti-oxidant properties of fullerenes. In December 2009, Tego completed the sale of all of its intellectual property assets to Luna Innovations, Inc. The consideration included an upfront purchase price of $350,000 and reimbursements of patent and license expenses of $80,000, as well as contingent payments based on milestones and royalties for each fullerene product developed by Luna and covered by Tego 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 as discussed above will be reflected as a part of cash flows from discontinued operations in the Company's Consolidated Statements of Cash Flows. </div>

195649

637691

1649748

1543220

<div> NOTE 3. INVESTMENT IN SUBSIDIARIES Calando Pharmaceuticals, Inc. (formerly known as Insert Therapeutics, Inc. "Insert") Calando is a clinical stage RNAi delivery company. 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. 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 is due November 26, 2013; see Note 4 for further information. In fiscal 2010, Arrowhead issued 122,000 shares of its Common Stock in exchange for shares of Calando common stock, with several minority stockholders of Calando. In conjunction with this exchange, Arrowhead also issued 26,400 warrants to purchase Arrowhead Common Stock in exchange for 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 December 31, 2011, Calando owed to Arrowhead $1,252,796 under a series of 10% simple interest notes and advances. It is expected that these loans will either be repaid or converted to equity in the future. The balance of the notes and advances is eliminated in consolidation. As of December 31, 2011, Arrowhead owned 79% of the outstanding shares of Calando and 74% on a fully diluted basis. Ablaris Therapeutics, Inc. Ablaris was formed and began operations in the first quarter of fiscal 2011 based on the license 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 December 31, 2011, Arrowhead owned 64% of the outstanding shares of Ablaris and 64% on a fully diluted basis. Nanotope, Inc. Nanotope is developing advanced nanomaterials for the treatment of spinal cord injuries, cartilage regeneration and wound healing. As of December 31, 2011, Arrowhead owned 23% of the outstanding shares of Nanotope, and 19% on a fully diluted basis. Arrowhead accounts for its investment in Nanotope using the equity method of accounting. As of December 31, 2011, Nanotope owed to Arrowhead $1.6 million, which Arrowhead has included in other receivables. It is expected that this indebtedness will be repaid or converted to equity. Summarized financial information for Nanotope, Inc. is as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="76%" align="center"> <tr><td width="64%"> </td> <td valign="bottom" width="13%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="13%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">December 31, 2011</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">September 30, 2011</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Current assets</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">63,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">21,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Non-current assets</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">74,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">85,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Liabilities</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,749,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,255,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Equity</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(1,612,000</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(1,149,000</td> <td valign="bottom" nowrap="nowrap">) </td></tr></table>   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="76%" align="center"> <tr><td width="61%"> </td> <td valign="bottom" width="15%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="15%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom" colspan="2" align="center">For the three months ended</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" colspan="2" align="center">For the three months ended</td> <td valign="bottom"> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">December 31, 2011</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">December 31, 2010</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Revenue</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">495,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Operating expenses</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">438,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">275,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Net Income (Loss)</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(463,000</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">212,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table>     <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="76%" align="center"> <tr><td width="60%"> </td> <td valign="bottom" width="13%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="13%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom" colspan="2" align="center">For the three months ended</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" colspan="2" align="center">For the three months ended</td> <td valign="bottom"> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">December 31, 2011</td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">December 31, 2010</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cash flows provided by (used in) operating activities</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">(318,000</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom">$</td> <td valign="bottom" align="right">294,000</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Cash flows used in investing activities</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(5,000</td> <td valign="bottom" nowrap="nowrap">) </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(15,000</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cash flows provided by financing activities</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">358,000</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> Leonardo Biosystems, Inc. Leonardo is developing a drug-delivery platform technology based on novel methods of designing porous silicon microparticles that selectively accumulate in tumor vasculature. Arrowhead accounts for its investment in Leonardo using the cost method of accounting. As of December 31, 2011, Leonardo owed to Arrowhead $456,000, included in other receivables, which is expected to be repaid or converted to equity. As of December 31, 2011, Arrowhead's ownership interest in Leonardo was 5%. </div>

<div> NOTE 9. FAIR VALUE MEASUREMENTS & DERIVATIVE INSTRUMENTS 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 December 31, 2011 and September 30, 2011 for assets and liabilities measured at fair value on a recurring basis: December 31, 2011:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="92%" align="center"> <tr><td width="61%"> </td> <td valign="bottom" width="3%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="3%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="3%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="3%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level I</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level II</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level III</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Total</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cash and cash equivalents</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">6,773,126</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">6,773,126</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Marketable securities</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">71,828</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">71,828</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Derivative assets</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">160,125</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">160,125</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Derivative liabilities</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">1,010,883</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">1.010,883</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td height="16"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td></tr> <tr><td valign="top"> September 30, 2011:</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td height="16"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td> <td height="16" colspan="4"> </td></tr> <tr><td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level I</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level II</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Level III</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Total</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Cash and cash equivalents</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">7,507,389</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">7,507,389</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Marketable securities</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">634,585</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">634,585</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Derivative assets</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">161,125</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">161,125</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Derivative liabilities</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">944,980</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">944,980</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> 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 as of 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, and the fair value at December 31, 2011 was $6,811. The loss from the change in value of the derivative asset, net of the derivative liability, for the three months ended December 31, 2011 was $957, and is reflected in the change in value of derivatives in the Company's consolidated statement of operations.   During the three months ended December 31, 2011, the Company recorded a loss from the change in fair value of the derivative asset, net of $957. The assumptions used in valuing the derivative asset as of December 31, 2011 were as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="86%"> </td> <td valign="bottom" width="6%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Risk free interest rate</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">0.25%</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Expected life</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">2.0 Years</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Dividend yield</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">none</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Volatility</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">72%</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> The following is a reconciliation of the derivative asset for the three months ended December 31, 2011:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr style="line-height: 0pt; visibility: hidden; color: white;"><td width="83%"> </td> <td valign="bottom" width="6%"> </td> <td> </td> <td nowrap="nowrap">0000000</td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at October 1, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">    161,125</td> <td valign="bottom" nowrap="nowrap"> </td></tr> <tr><td valign="top"> Receipt of instruments</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Decrease in value</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(1,000</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr><td valign="top"> Net settlements</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr><td height="8"> </td> <td height="8" colspan="4"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at December 31, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">    160,125</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> As part of the equity financing on June 17, 2010, Arrowhead issued warrants to acquire up to 329,649 shares of Common Stock (the "Warrants") which contain a mechanism to adjust the strike price. Under 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 three months ended December 31, 2011, the Company recorded a loss from the change in fair value of the derivative liability of $67,836. The assumptions used in valuing the derivative liability as of December 31, 2011 were as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="86%"> </td> <td valign="bottom" width="6%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Risk free interest rate</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">0.8%</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Expected life</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">4.0 Years</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Dividend yield</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">none</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Volatility</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">100%</td> <td valign="bottom" nowrap="nowrap">  </td></tr></table> The following is a reconciliation of the derivative liability related to these warrants through December 31, 2011:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr style="line-height: 0pt; visibility: hidden; color: white;"><td width="87%"> </td> <td valign="bottom" width="5%"> </td> <td> </td> <td nowrap="nowrap">000000000</td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at September 30, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">907,233</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Receipt of instruments</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Change in value</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">67,836</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Net settlements</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at September 30, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">975,069</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> In conjunction with the 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 0.06 Arrowhead shares (as adjusted for a subsequent reverse stock split). This ratio declines to 0.04 in the second year, 0.03 in the third year and 0.02 in the fourth year. In the fifth year and beyond the exchange ratio is 0.01. Exchange rights for 675,000 Ablaris shares were sold during the year ended September 30, 2011, and remain outstanding at December 31, 2011. The exchange rights are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the exchange rights 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 exchange rights is estimated at the end of each reporting period and the change in 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 three months ended December 31, 2011, the Company recorded a gain from the change in fair value of the derivative liability of $29,875. The assumptions used in valuing the derivative liability as of December 31, 2011 were as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="86%"> </td> <td valign="bottom" width="6%"> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Risk free interest rate</td> <td valign="bottom">  </td> <td valign="bottom">0.8%</td></tr> <tr><td valign="top"> Expected life</td> <td valign="bottom">  </td> <td valign="bottom">6.0 Years</td></tr> <tr bgcolor="#cceeff"><td valign="top"> Dividend yield</td> <td valign="bottom">  </td> <td valign="bottom">none</td></tr> <tr><td valign="top"> Volatility</td> <td valign="bottom">  </td> <td valign="bottom">100%</td></tr></table>   The following is a reconciliation of the derivative liability related to these exchange rights through December 31, 2011:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="85%"> </td> <td valign="bottom" width="6%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at September 30, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">   30,892</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> Receipt of instruments</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Change in value</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(1,889</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr><td valign="top"> Net settlements</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">—  </td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Value at December 31, 2011</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">   29,003</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> The carrying amounts of the Company's other financial instruments, which include accounts receivable, accounts payable, and accrued expenses approximate their respective fair values due to the relatively short-term nature of these instruments. </div>

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<div> NOTE 7. LEASES In 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 December 31, 2011. On October 21, 2011, Arrowhead acquired the RNAi operations from Roche, including its research facility in Madison, Wisconsin. Its lease expires on February 28, 2019; monthly rental expense is approximately $20,000, and monthly payments under a capitalized lease are approximately $21,000. Other monthly rental expenses include common area maintenance, real estate taxes and utilities, which increase total monthly expenditures to approximately $72,000. Facility and equipment rent expense for the three months ended December 31, 2011 and 2010 was $90,000 and $41,000, respectively. From inception to date, rent expense was $3,735,485. Rent expense related to Unidym, until its disposal in January 2011, is included as a part of income/loss from discontinued operations. As of December 31, 2011, future minimum lease payments under capitalized leases are as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="85%"> </td> <td valign="bottom" width="6%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2012</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">256,846</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2013</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">256,846</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2014</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">256,846</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2015</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">256,846</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2016</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">256,846</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2017 and thereafter</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">556,499</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Less interest</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">(186,804</td> <td valign="bottom" nowrap="nowrap">) </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr><td valign="top"> Principal</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,653,925</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Less current portion</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">209,555</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr><td valign="top"> Noncurrent portion</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">1,444,370</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> As of December 31, 2011, future minimum lease payments under operating leases are as follows:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="68%" align="center"> <tr><td width="85%"> </td> <td valign="bottom" width="5%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2012</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom">$225,954</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2013</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">231,581</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2014</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">237,242</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2015</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">243,252</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> 2016</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">249,333</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> 2017 and thereafter</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">561,077</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> Total</td> <td valign="bottom">  </td> <td valign="bottom">$</td> <td valign="bottom" align="right">1,738,439</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td></tr></table> </div>

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254275

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-420

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<div> NOTE 1. ORGANIZATION AND BASIS OF PRESENTAION Nature of Business and Going Concern 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 for RNAi therapeutics. This broad technology platform enables optimization of siRNA therapeutic candidates for delivery based on siRNA chemistry, tissue type, disease state, 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 of its own clinical candidates. Arrowhead's non-RNAi development programs include a unique therapeutic candidate that shows promise for the treatment of obesity and advanced bioactive materials for the regeneration of injured tissues. Arrowhead operates a wholly-owned subsidiary, Arrowhead Madison, which is focused on the development of RNAi therapeutics, two majority owned subsidiaries, Calando, a leader in delivering small interfering RNAs for gene silencing, and Ablaris, an anti-obesity therapeutics company, and has minority investments in Nanotope, a regenerative medicine company and Leonardo, a multistage drug delivery company. Liquidity Arrowhead has historically financed its operations through the sale of securities of Arrowhead and its Subsidiaries. Development activities have required significant capital investment since the Company's inception and we expect our current portfolio companies to continue to require cash investment in fiscal 2012 and beyond to continue development. At December 31, 2011, the Company had $6.8 million in cash to fund operations. During the quarter ended December 31, 2011, the Company's cash position decreased by $0.7 million. The Company received cash from the issuance of equity of $1.5 million, cash from the sale of its remaining holdings of stock in Wisepower Co. Ltd of $0.5 million, and cash collections from revenue of $0.2 million. The company had cash outflow of $2.9 million related to its continuing operating activities. As a result of the sale of Unidym in January 2011, 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. During the quarter ended December 31, 2011, the Company sold its remaining stock in Wisepower. The convertible bond with a face value of $2.5 million, is convertible into Wisepower common stock as of 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. Based on financings in September and October 2011, the Company has subscriptions receivable of $3.9 million, which is expected to be collected over the next several months. In September 2011, the Company entered into an equity line facility whereby it has the ability to draw capital up to $15 million, and expects to draw upon the facility in fiscal 2012, depending on cash needs and market conditions. 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.   Based upon the Company's cash on hand, other sources of liquidity, as described above, and based upon the Company's operating plan, 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. 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. Basis of Presentation and Principles of Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The September 30, 2011 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended September 30, 2011. The consolidated financial statements of the Company include the accounts of Arrowhead and its wholly-owned and majority-owned Subsidiaries. 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. Arrowhead sold its interests in Unidym and Tego in 2011 and 2009, respectively. 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. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. 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. Actual results could differ from those estimates. Recently Issued Accounting Standards 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 was adopted effective October 1, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements. 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 have a material impact on 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. 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 in fiscal year 2011. We have adopted this guidance in the financial statements presented herein, which did not impact our consolidated financial position or results of operations. </div>

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<div> NOTE 10. RELATED PARTY TRANSACTIONS 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. As part of a private placement equity offering on December 11, 2009, 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, $120,000 during the fiscal year ended September 30, 2011, and $30,000 during the three months ended December 31, 2011. </div>

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<div> NOTE 6. STOCKHOLDERS' EQUITY At December 31, 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 $0.01, 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 herein reflects an adjustment for the reverse stock split. At December 31, 2011, 10,530,524 shares of Common Stock were outstanding, and 1,015 shares of Preferred Stock were outstanding. At December 31, 2011, 153,200 shares and 965,860 shares were reserved for issuance upon exercise of options granted under Arrowhead's 2000 Stock Option Plan and 2004 Equity Incentive Plan, respectively. 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, cash proceeds in the first three months of fiscal 2012 were $1.4 million, and the balance is expected to be received in 2012. On October 4, 2011, the Company completed a second closing to the private placement stock issuance of September 30, 2011, upon which the Company sold 138,158 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 a $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 U.S. Securities & Exchange Commission covering the resale of the shares that may be issued to LPC under the Purchase Agreement. After the SEC declares 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 (the "Series A Purchasers"), 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 stockholder approval for the conversion of the Series A Preferred Stock at the 2012 Annual Meeting. Set forth below is a summary of the respective rights, preferences, and privileges of and the restrictions on the Series A Shares. Summary of Rights, Preferences, and Privileges of Series A Shares Ranking. The Series A Shares will, with respect to rights upon liquidation, dissolution, or winding up of the Company, rank senior to the Company's common stock and any class or series of Company capital stock hereafter created which does not provide that such shares of capital stock rank on parity with or senior to the Series A Shares as to rights on liquidation, winding-up and dissolution of the Company. Conversion Rights. Each Series A Share will be convertible, at the option of the holders thereof, into an a number of shares of the Company's common stock equal to $1,000 divided by $3.80. Holders may not convert any Series A Shares into shares of the Company's common stock if, after giving effect to such conversion, such holder would beneficially own in excess of 19.99% of the number of shares of the Company's common stock outstanding immediately after giving effect to such conversion. Dividends. Holders of Series A Shares shall be entitled to receive a cumulative dividend of 10% of the face amount of the Series A Shares per annum, which will accrue semi-annually, from the date of issue through the date the shares are eligible for conversion pursuant to the Series A Subscription Agreement, and will be paid on June 30 and December 31 of each year in preference to any dividends to be paid on the Common Stock or any junior securities. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock by reason of their ownership thereof, an amount equal to $1,000 per each Series A Share then held by holders of Series A Shares. If upon the occurrence of such event, the assets and funds distributed among the holders of the Series A Shares shall be insufficient to permit the payment of the full preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A Shares in proportion to the preferential amount each such holder is otherwise entitled to receive. Voting Rights. The Series A Shares do not have any voting rights, expect with respect to the protective provisions discussed below. Protective Provisions. So long as any shares of Series A Shares are outstanding, in addition to any other vote or approval required under the Company's Certificate of Incorporation or By-laws, as amended, the Company will not, without the consent of the holders of a majority of the outstanding shares of Series A shares, either directly or by amendment, merger, consolidation, or otherwise: (i) amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws in a manner adverse to the Series A Shares or (ii) increase the authorized number of shares of Series A Shares or issue additional shares of Series A Shares, except as may be necessary to pay dividends on the outstanding shares of Series A Shares.   On October 21, 2011, the Company entered into a Subscription Agreement with a single accredited investor, pursuant to which the Company agreed to issue and sell an aggregate of 675,000 shares of Common Stock, $0.01 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, and is expected to be received in 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 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 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. All share and per share amounts in these financial statements have been retrospectively adjusted to reflect the reverse stock split. The following table summarizes information about warrants outstanding at December 31, 2011:   <table style="border-collapse: collapse;" border="0" cellspacing="0" cellpadding="0" width="76%" align="center"> <tr><td width="67%"> </td> <td valign="bottom" width="11%"> </td> <td> </td> <td> </td> <td> </td> <td valign="bottom" width="11%"> </td> <td> </td> <td> </td> <td> </td></tr> <tr><td style="border-bottom: #000000 1px solid;" valign="bottom" nowrap="nowrap" align="center"> Exercise prices</td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Number of Warrants</td> <td valign="bottom"> </td> <td valign="bottom">  </td> <td style="border-bottom: #000000 1px solid;" valign="bottom" colspan="2" align="center">Remaining Life in  Years</td> <td valign="bottom"> </td></tr> <tr bgcolor="#cceeff"><td valign="top"> $70.60</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">94,897</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">5.4</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> $20.00</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">386,400</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1.6</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> $5.00</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">1,163,033</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">2.9</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr><td valign="top"> $5.10</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">461,024</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">2.9</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr bgcolor="#cceeff"><td valign="top"> $3.70</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">329,650</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">4.0</td> <td valign="bottom" nowrap="nowrap">  </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td> </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr><td valign="top"> Total warrants outstanding</td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom" align="right">2,435,004</td> <td valign="bottom" nowrap="nowrap">  </td> <td valign="bottom">  </td> <td valign="bottom"> </td> <td valign="bottom"> </td> <td valign="bottom"> </td></tr> <tr style="font-size: 1px;"><td valign="bottom"> </td> <td valign="bottom">  </td> <td valign="bottom">  </td> <td valign="bottom">  </td></tr></table> </div>

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