879407--12/15/2008--ARROWHEAD_RESEARCH

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{stock, price, operating}

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{regulation, government, change}

{acquisition, growth, future}

{capital, credit, financial}

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{debt, indebtedness, cash}

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{cost, regulation, environmental}

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{customer, product, revenue}

Risks Related to Our Financial Condition We do not have sufficient cash reserves to fund our activities at their current pace for the next fiscal year. The current financial market conditions may exacerbate certain risks affecting our business. 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. If Unidym is unable to raise additional cash, Unidym may lose rights to critical intellectual property. We have debt on our balance sheet, which could have consequences if we were unable to repay the principal or interest due. The costs to fund the operations of our Subsidiaries are difficult to predict, and our anticipated expenditures in support of our Subsidiaries may increase for a variety of reasons. Risks Related to Our Business Model and Company We are a development stage company and our success is subject to the substantial risks inherent in the establishment of a new business venture. The costs and effect of consolidating Unidym s facilities and operations are difficult to predict and could be substantial. There are substantial inherent risks in attempting to commercialize new technological applications, and, as a result, we may not be able to successfully develop nanotechnology for commercial use. We have not generated significant revenues and our business model does not predict significant revenues in the foreseeable future. We will need to achieve commercial acceptance of our applications to generate revenues and achieve profitability. We may be unable to scale up our manufacturing processes in a cost effective way. We will need to establish additional relationships with strategic and development partners to fully develop and market our products. Arrowhead will need to retain a controlling interest, by ownership, contract or otherwise, in Calando and Unidym in order to avoid being deemed an investment company under the Investment Company Act of 1940. Nanotechnology-enabled products are new and may be viewed as being harmful to human health or the environment. We may not be able to effectively secure first-tier research and development projects when competing against other ventures. We rely on outside sources for various components and processes for our products. We must overcome the many obstacles associated with integrating and operating varying business ventures to succeed. Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results. Our success depends on the attraction and retention of senior management and scientists with relevant expertise. 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. Our research and product development efforts pertaining to the pharmaceutical industry are subject to additional risks. 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. There may be a difference in the investment valuations that we used when making initial and subsequent investments in our Subsidiaries and Minority Investments and actual market values. Risks Related to Our Intellectual Property Our ability to protect our patents and other proprietary rights is uncertain, exposing us to the possible loss of competitive advantage. 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. We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products. The technology licensed by our Subsidiaries from various third parties may be subject to government rights and retained rights of the originating research institutions. Risks Related to Regulation of Our Products We will need approval from governmental authorities in the United States and other countries to successfully realize commercial value from our activities. Our corporate compliance program cannot guarantee that we are in compliance with all applicable federal and state regulations. If export controls affecting our products are expanded, our business will be adversely affected. Risks Related to our Stock Stockholder equity interest may be substantially diluted in additional financings. Our common stock price has fluctuated significantly during fiscal 2005, 2006, 2007, and 2008 and may continue to do so in the future. 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. 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 market price of our common stock may be adversely affected by the sale of shares by our management or founding stockholders. We may be the target of securities class action litigation due to future stock price volatility. We do not intend to declare cash dividends on our common stock. Our board of directors has the authority to issue shares of blank check preferred stock, which may make an acquisition of our company by another company more difficult.

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879407--12/15/2008--ARROWHEAD_RESEARCH_CORP