Nanosphere 10-Q 2009 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 001-33775

Nanosphere, Inc.

(Exact name of registrant as specified in its charter)

Delaware	36-4339870
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
4088 Commercial Avenue	Northbrook, Illinois 60062
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(847) 400-9000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo [This requirement is currently not applicable to the registrant.]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Noþ

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of August 7, 2009 was 22,229,821.

NANOSPHERE, INC.

INDEX

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets	1
Statements of Operations	2
Statements of Cash Flows	3
Notes to Financial Statements	4-9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	16
Item 4. Controls and Procedures	16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	17
Item 1A. Risk Factors	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 4. Submission of Matters to a Vote of Security Holders	17
Item 6. Exhibits	17
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I.
FINANCIAL INFORMATION

Item 1.  Financial Statements

Nanosphere, Inc.

Balance Sheets
(Unaudited)

	June 30,			December 31,
	2009			2008
CURRENT ASSETS:
Cash and cash equivalents	$	58,237,556		$	75,356,960
Accounts receivable		360,677			385,908
Inventories		1,705,031			1,727,518
Other current assets		1,007,507			559,528
Total current assets		61,310,771			78,029,914
PROPERTY AND EQUIPMENT— Net		6,840,966			7,294,224
INTANGIBLE ASSETS — Net of accumulated amortization		1,500,677			1,443,582
OTHER ASSETS		111,824			128,190
TOTAL	$	69,764,238		$	86,895,910
CURRENT LIABILITIES:
Accounts payable	$	1,530,558		$	1,813,777
Accrued compensation		928,452			829,292
Other current liabilities		2,000,852			1,541,385
Long-term debt — current portion		5,121,386			4,818,211
Total current liabilities		9,581,248			9,002,665
LONG-TERM LIABILITIES:
Long-term debt — noncurrent portion		986,451			3,352,137
Total liabilities		10,567,699			12,354,802
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000,000 shares authorized; 22,229,596 and 22,228,696 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively		222,296			222,287
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued		—			—
Additional paid-in capital		275,465,863			274,232,825
Warrants to acquire common stock		5,423,771			5,423,771
Accumulated deficit		(221,915,391	)		(205,337,775	)
Total stockholders’ equity		59,196,539			74,541,108
TOTAL	$	69,764,238		$	86,895,910

See notes to financial statements.

1

Nanosphere, Inc.

Statements of Operations
(Unaudited)

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
	2009			2008			2009			2008
				As Adjusted						As Adjusted
				(Note 1)						(Note 1)
REVENUE:
Grant and contract revenue	$	159,497		$	—		$	159,497		$	272,612
Product sales		242,740			194,715			497,965			498,119
Total revenue		402,237			194,715			657,462			770,731
COSTS AND EXPENSES:
Cost of sales		400,312			226,176			710,483			575,605
Research and development		4,439,933			6,023,828			9,240,185			11,947,657
Sales, general, and administrative		3,693,311			3,777,507			6,820,176			7,186,405
Total costs and expenses		8,533,556			10,027,511			16,770,844			19,709,667
Loss from operations		(8,131,319	)		(9,832,796	)		(16,113,382	)		(18,938,936	)
OTHER INCOME (EXPENSE):
Foreign exchange loss		. (1,906	)		(235	)		(2,180	)		(24,645	)
Interest expense		(344,156	)		(545,591	)		(743,078	)		(1,130,628	)
Interest income		93,238			546,698			281,024			1,478,917
Total other income (expense)		(252,824	)		872			(464,234	)		323,644
NET LOSS	$	(8,384,143	)	$	(9,831,924	)	$	(16,577,616	)	$	(18,615,292	)
Net loss per common share — basic and diluted	$	(0.38	)	$	(0.44	)	$	(0.75	)	$	(0.84	)
Weighted average number of common shares outstanding — basic and diluted		22,228,884			22,202,620			22,228,790			22,197,395

See notes to financial statements.

2

Nanosphere, Inc.

Statements of Cash Flows
(Unaudited)

	Six Month Periods Ended
	June 30,
	2009			2008
				As Adjusted
				(Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,577,616	)	$	(18,615,292	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,484,784			1,265,616
Amortization of financing costs and accretion of debt discount		289,479			406,904
Loss from disposal of fixed assets		2,758			326,291
Share-based compensation		1,229,032			1,078,217
Changes in operating assets and liabilities:
Accounts receivable		25,231			(381,224	)
Inventories		(74,104	)		(658,429	)
Other current assets		(447,979	)		62,863
Accounts payable		(273,705	)		(30,160	)
Accrued and other current liabilities		730,061			(166,634	)
Net cash used in operating activities		(13,612,059	)		(16,711,848	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(814,302	)		(1,520,137	)
Investments in intangible assets		(340,000	)		(58,733	)
Net cash used in investing activities		(1,154,302	)		(1,578,870	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt		(2,335,624	)		(1,400,463	)
Payments on capital lease obligation		(21,434	)		(17,952	)
Proceeds from the issuance of common stock, net of offering expenses		—			(778,731	)
Proceeds from warrant redemptions		—			2,189
Proceeds from stock option exercises		4,050			163,310
Other		(35	)		—
Net cash used in financing activities		(2,353,043	)		(2,031,647	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(17,119,404	)		(20,322,365	)
CASH AND CASH EQUIVALENTS — Beginning of period		75,356,960			114,312,573
CASH AND CASH EQUIVALENTS — End of period	$	58,237,556		$	93,990,208
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable	$	19,175		$	527,961
License costs capitalized and included in accrued liabilities		75,000			567,000

See notes to financial statements.

3

Nanosphere, Inc.

Notes to Financial Statements

As of June 30, 2009 and December 31, 2008, and

For the Three and Six Month Periods Ended June 30, 2009 and 2008

(Unaudited)

1. Description of Business

Nanosphere, Inc. (the “Company”) develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost, and highly sensitive genomic and protein testing on a single platform.

Basis of Presentation— The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Therefore, these financial statements should be read in conjunction with the Company’s most recent audited financial statements for the year ended December 31, 2008 and notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations expected for the full year.

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $221.9 million, and has funded those losses primarily through the sale and issuance of equity securities and secondarily through the issuance of debt and research and development contracts.

Use of Estimates— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to inventories, plant and equipment, intangible assets, service revenue and stock-based compensation. Actual results could differ from those estimates.

Change in Method of Accounting for Patent Costs— In the third quarter of fiscal year 2008 and effective July 1, 2008, the Company elected to change its method of accounting for external patent-related costs. Prior to the change, the Company expensed as incurred all internal patent-related costs and capitalized external patent-related costs. Capitalized patent-related costs incurred in connection with approved patents were previously recorded as intangible assets at cost less accumulated amortization and were amortized over the patents’ estimated useful lives beginning upon the patent grant date. Costs capitalized were written off upon patent abandonment or expiration. Under the new method of accounting, all patent-related costs are expensed as incurred. All patent-related costs, including amortization expense for capitalized patent-related costs were, and will continue to be, classified as research and development expenses in the Company’s statements of operations.

The Company believes that this change is preferable because it will result in consistent treatment for related costs regardless of source, that is, under the new method both internal and external costs associated with patents are expensed as incurred. In addition, the Company believes that this change will provide greater comparability of the Company’s financial results with other companies in its industry as the Company believes that expensing all patent-related costs as incurred is the predominant practice in the industry.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”, the change in accounting principle has been retrospectively applied to all prior periods presented herein. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. As a result of the accounting change, the accumulated deficit increased from $105.9 million to $109.0 million as of January 1, 2007.

The following tables summarize the impact of the change in accounting principle on the previously issued statement of operations for the three and six month periods ended June 30, 2008 and statement of cash flows for the six month period ended June 30, 2008.

	Three Month Period Ended June 30, 2008
	As Originally Reported			As Adjusted			Effect of Change
Statement of Operations
Research and development	$	6,028,926		$	6,023,828		$	(5,098	)
Total costs and expenses	$	10,032,609		$	10,027,511		$	(5,098	)
Loss from operations	$	(9,837,894	)	$	(9,832,796	)	$	5,098
Net loss	$	(9,837,022	)	$	(9,831,924	)	$	5,098
Net loss per common share — basic and diluted	$	(0.44	)	$	(0.44	)	$	—

4

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

	Six Month Period Ended June 30, 2008
	As Originally Reported			As Adjusted			Effect of Change
Statement of Operations
Research and development	$	11,871,121		$	11,947,657		$	76,536
Total costs and expenses	$	19,633,131		$	19,709,667		$	76,536
Loss from operations	$	(18,862,400	)	$	(18,938,936	)	$	(76,536	)
Net loss	$	(18,538,756	)	$	(18,615,292	)	$	(76,536	)
Net loss per common share — basic and diluted	$	(0.84	)	$	(0.84	)	$	—

	Six Month Period Ended June 30, 2008
	As Originally Reported			As Adjusted			Effect of Change
Statement of Cash Flows
Cash Flows From Operating Activities:
Net loss	$	(18,538,756	)	$	(18,615,292	)	$	(76,536	)
Depreciation and amortization	$	1,310,785		$	1,265,616		$	(45,169	)
Accounts payable	$	(27,130	)	$	(30,160	)	$	(3,030	)
Accrued and other current liabilities	$	(188,630	)	$	(166,634	)	$	21,996
Net cash used in operating activities	$	(16,609,109	)	$	(16,711,848	)	$	(102,739	)
Cash Flows From Investing Activities:
Investments in intangible assets	$	(161,472	)	$	(58,733	)	$	102,739
Net cash used in investing activities	$	(1,681,609	)	$	(1,578,870	)	$	102,739
Noncash Investing and Financing Activities:
Patent and license costs capitalized and included in accrued liabilities	$	597,000		$	567,000		$	(30,000	)

2. Net Loss Per Common Share

Basic and diluted net loss per common share have been calculated in accordance with SFAS No. 128, “Earnings Per Share”, for the three and six month periods ended June 30, 2009 and 2008. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

The computations of diluted net loss per common share for the three and six month periods ended June 30, 2009 and 2008 did not include the effects of the following options to acquire common stock and common stock warrants as the inclusion of these securities would have been antidilutive.

	Three and six month periods ended June 30,
	2009		2008
Stock options		3,559,900		3,368,919
Common stock warrants		1,300,119		1,300,119
		4,860,019		4,669,038

3. Intangible Assets

Intangible assets, consisting of purchased intellectual property, as of June 30, 2009 and December 31, 2008 comprise the following:

	June 30, 2009							December 31, 2008
			Accumulated							Accumulated
	Cost		Amortization			Net		Cost		Amortization			Net
Intellectual property — licenses	$	2,067,043	$	(566,366	)	$	1,500,677	$	1,877,043	$	(433,461	)	$	1,443,582

Amortization expense for intangible assets amounted to $50,016 and $132,905 for the three and six month periods ended June 30, 2009, respectively, and to $84,302 and $168,608 for the three and six month periods ended June 30, 2008, respectively. Estimated future amortization expense is as follows:

Years Ending December 31
2009 (Period from July 1 to December 31)	$	67,161
2010		134,322
2011		134,322
2012		134,322
2013		134,322
Thereafter		566,728

5

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

Licenses are amortized from the date of the U.S. Food and Drug Administration (the “FDA”) clearance of products associated with the licensed technology and such amortization continues over the remaining life of the license. The future amortization expense reflected above is based on licenses related to products cleared by the FDA as of June 30, 2009. The amortization period related to $0.3 million of licenses is not known as the diagnostic test products associated with the licensed technology have not been cleared by the FDA and, accordingly, amortization has not begun and no expense associated with the licenses is included in the table above.

4. Related Party Transactions

Robert Letsinger and Chad Mirkin, co-founders of the Company, provide contracted research and development services to the Company, which are reimbursed based upon negotiated contract rates. The Company incurred expenses of $37,500 and $75,000 for these services in each of the three and six month periods ended June 30, 2009 and 2008.

In 2006, the Company entered into a license agreement with Northwestern University, which provides the Company with an exclusive license to certain patents and patent applications that are based on inventions developed in the laboratory of Robert Letsinger or Chad Mirkin and related to nanotechnology and biobarcode technology. The Company has an obligation to pay Northwestern University a royalty at a rate that is a percentage of the gross profits of licensed products, subject to certain adjustments. The Company’s obligation for payments to Northwestern pursuant to this agreement began on January 1, 2007.

Pursuant to the Company’s Amended and Restated Registration Rights Agreement dated as of April 12, 2006, the Company has granted the following demand registration rights to Mr. Mark Slezak and Ms. Sheli Rosenberg, who are members of the Company’s board of directors, AOQ Trust, Alfa-Tech, LLC, Lurie Investment Fund, LLC, Lurie Investments, Inc. and their respective affiliates, and Bain Capital Venture Fund 2005, L.P., Brookside Capital Partners Fund, L.P., and their respective affiliates and other stockholders. Mr. William P. Moffitt, III, the Company’s chief executive officer and a member of the Company’s board of directors, and Chad Mirkin, a member of the Company’s board of directors, are parties to the Amended and Restated Registration Rights Agreement, but do not have the right to demand registration. Currently, the following is applicable:

• Long-Form Registrations. Stockholders holding at least 20% of the then outstanding shares of the Company’s common stock that are subject to the registration rights agreement, which the Company refers to as registrable securities, have the right to demand that the Company file a registration statement under the Securities Act on Form S-1 or any similar long-form registration covering their registrable securities. However, the Company is not obligated to file a long-form registration statement on more than three occasions upon the request of the Company’s stockholders.

• Short-Form Registrations. Stockholders holding at least 10% of the then outstanding registrable securities have the right to demand that the Company file a registration statement on Form S-3 or any similar short-form registration covering their registrable securities, provided that such short-form registration is then available to the Company under applicable law. Such stockholders are entitled to request an unlimited number of short-form registrations, but the Company is not obligated to effect more than two short-form registrations during any twelve month period.

5. Equity Incentive Plan

The Company’s board of directors has adopted and the shareholders have approved the Nanosphere 2000 Equity Incentive Plan and the Nanosphere 2007 Long-Term Incentive Plan. The plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Company’s common stock at the date of grant with ten year contractual terms. Certain employee options vest ratably over four years of service, while other employee options vest after seven years of service but provide for accelerated vesting contingent upon the achievement of various company-wide performance goals, such as decreasing time to market for new products and entering into corporate collaborations (as defined in the option grant agreements). For these “accelerated vesting” options, 20-25% of the granted option shares will vest upon the achievement of each of four or five milestones as defined in the option grant agreements, with any remaining unvested options vesting on the seven year anniversary of the option grant dates. Approximately 36% of the options granted and outstanding contain “accelerated vesting” provisions.

6

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

The fair values of the Company’s option awards granted during the six month period ended June 30, 2009 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

	2009
Expected dividend yield		0	%
Expected volatility		62	%
Risk free interest rate		2.26	%
Weighted-average expected option life	6.37 years
Estimated weighted-average fair value on the date of grant based on the above assumptions	$	2.76
Estimated forfeiture rate for unvested options		0.6	%

Expected volatility is based on calculated stock volatilities for publicly traded companies in the same industry and general stage of development as the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grants for periods consistent with the expected life of the option. The expected life of options granted is derived from the average of the vesting period and the term of the option as defined in the plans, following the guidance in SEC Staff Accounting Bulletin No. 107 and 110, as the Company has a limited history of employees exercising their stock options and therefore cannot reasonably determine the expected life assumption based on its own historical data. Total compensation cost recognized was $624,461 and $1,229,032 in the three and six month periods ended June 30, 2009, respectively, and $548,505 and $1,078,217 for the three and six month periods ending June 30, 2008, respectively.

As of June 30, 2009, the total compensation cost not yet recognized related to the nonvested awards is approximately $6.4 million, which amount is expected to be recognized over the next three years, which is a weighted average term, without taking into account any potential acceleration of vesting that might occur as discussed above because the milestone events that would trigger acceleration are not yet deemed probable. While the Company does not have a formally established policy, as a practice the Company has delivered newly issued shares of its common stock upon the exercise of stock options.

A summary of option activity under the plans as of June 30, 2009, and for six month period then ended is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value of Options
Outstanding — January 1, 2009		3,362,721		$	5.68
Granted		233,399		$	4.85
Exercised		(900	)	$	4.50
Expired		(2,557	)	$	8.11
Forfeited		(32,763	)	$	5.59
Outstanding — June 30, 2009		3,559,900		$	5.63		7.60	$	1,221,885
Exercisable — June 30, 2009		1,197,129		$	6.04		7.14	$	422,275
Vested and Expected to Vest — June 30, 2009		3,451,213		$	5.63		7.59	$	1,185,103

Included in the number of options outstanding at June 30, 2009 are 1,291,386 options with a weighted average exercise price of $4.66 per share and accelerated vesting provisions based on the criteria mentioned above. None of the milestones which would accelerate vesting have occurred; therefore the related options are not exercisable as of June 30, 2009. The total fair value of shares vested during the three and six month periods ended June 30, 2009 was $1,119,284 and $1,700,906, respectively, and was $1,078,616 and $1,110,376 for the three and six month periods ended June 30, 2008, respectively.

6. License Agreements

The Company has entered into several nonexclusive license agreements with various companies covering certain technologies which are embedded in the Company’s diagnostic instruments and diagnostic test products. As of June 30, 2009, the Company has paid aggregate initial license fees of $2.2 million for these licenses, and has agreed to pay a percentage of net sales as royalties, in percentage amounts ranging from 1.0% to 12.0%. Certain of the license agreements have minimum annual royalty payments, and the sums of such minimum payments are $201,750 in 2009, $173,750 in 2010, $178,750 in 2011, $186,250 in 2012, $210,000 in 2013 and are $30,000 to $220,000 annually thereafter through the dates the respective licenses terminate. These licenses expire at various times, corresponding to the subject patents expirations, which currently range from 2009 to 2025.

7

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

7. Stockholders’ Equity

As of June 30, 2009 and December 31, 2008, there were outstanding warrants to acquire 1,300,119 shares of common stock. The expiration dates of the warrants outstanding at June 30, 2009 are as follows:

Class of Stock for	Number of		Expiration
which the Warrant is Exercisable	Warrants		Date
Common — exercise price of $15.32 per share		1,135,194	April 2011
Common — exercise price of $8.75 per share		164,925	April 2013

The exercise price on the common stock warrants with an exercise price of $15.32 per share at June 30, 2009 will increase to $17.50 per share in April 2010.

8. Leases

The Company has an operating lease agreement expiring in May 2010 for its office and laboratory space. Rent and operating expenses associated with the office and laboratory space were $134,240 and $205,059 for the three and six month periods ended June 30, 2009, respectively, and $169,142 and $336,696 for the three and six month periods ended June 30, 2008, respectively.

Annual future minimum obligations for the operating lease as of June 30, 2009, are as follows:

	Operating
Years Ending December 31	Lease
2009 (Period from July 1 to December 31)	$	261,160
2010		220,898
Total minimum lease payments	$	482,058

9. Long-Term Debt

In February 2007, the Company entered into two loan and security agreements, with commitments for debt financing with Venture Lending & Leasing IV, Inc., and Venture Lending & Leasing V, Inc. The Company borrowed $12.5 million under these agreements in February 2007. The Company was required to pay interest at a fixed annual rate of 12.5%, and a minimal amount of principal, for the initial twelve month period. For the following thirty months, the annual interest rate is fixed at 10.0%. Notes issued pursuant to this commitment are secured by a first security lien on all of the Company’s assets including intellectual property. In connection with the execution of the commitment and the initial note issuance under these agreements, the Company issued to the lenders 5,535,824 shares of the Company’s Series D Convertible Preferred Stock.

The $12.5 million of proceeds received were allocated to debt and the Series D Convertible Preferred Stock based on their fair values at the borrowing date with $1.9 million allocated to Series D Convertible Preferred Stock and the remaining $10.6 million allocated to debt. The discount on the debt of $1.9 million results in an effective interest rate on the debt of 21% and the discount will be amortized to interest expense over the term of the debt following the interest method. Interest expense on this debt was $335,973 and $726,039 for the three and six month periods ended June 30, 2009, respectively, which includes $127,507 and $273,113 of discount amortization. Interest expense on debt was $536,484 and $1,111,124 for the three and six month periods ended June 30, 2008, respectively, which includes $190,407 and $390,537 of discount amortization respectively. Cash interest paid on this debt was $220,587 and $476,802 for the three and six month periods ended June 30, 2009, respectively, and $356,805 and $734,903 for the three and six month periods ended June 30, 2008, respectively. The fair value of the debt at June 30, 2009 is $6.6 million, which was derived by applying an income approach to determine the present value of forecasted debt payments as required under the debt agreements. To determine the appropriate yield by which to discount the cash flow payments, the Company relied upon observable inputs of yields for securities with comparable risk and return profiles, which are Level 2 measurements under SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).

Aggregate annual principal payments on long-term debt are as follows:

2009 (July 1 to December 31)	$	2,482,587
2010		3,917,293
	$	6,399,880

8

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

10. Supplemental Financial Information

	June 30, 2009		December 31, 2008
Inventories:
Work-in-process component parts	$	905,879	$	1,068,840
Finished goods		799,152		658,678
Total	$	1,705,031	$	1,727,518

	June 30, 2009			December 31, 2008
Property and Equipment — Net:
Total property and equipment — at cost	$	15,402,151		$	14,516,371
Less accumulated depreciation		(8,561,185	)		(7,222,147	)
Property and equipment — net	$	6,840,966		$	7,294,224

	June 30, 2009		December 31, 2008
Other Current Liabilities:
Accrued clinical trial expenses	$	606,744	$	266,135
All other		1,394,108		1,275,250
Total	$	2,000,852	$	1,541,385

11. New Accounting Standards

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157 related to financial assets and financial liabilities. SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. The Company adopted the provisions of SFAS No. 157 related to nonfinancial assets and nonfinancial liabilities effective January 1, 2009, and such adoption had no material impact on the Company’s financial statements.

In April 2008, the FASB issued Final FASB Staff Position (“FSP”), FAS 142-3, “Determination of the Useful Life of Intangible Assets”,which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company adopted this FSP on January 1, 2009. There was no financial impact as a result of the adoption of this FSP.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”), which requires an entity to provide the annual disclosures required by SFAS No. 107,“Disclosures about Fair Value of Financial Instruments”, in its interim consolidated financial statements. The Company adopted FSP 107-1 during the second quarter of fiscal 2009 and has included the required disclosures in these financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company’s management has evaluated its subsequent events for disclosure in this quarterly filing on Form 10-Q through August 11, 2009, the date on which the Financial Statements were issued,

12. Subsequent Events

In July 2009 Nanosphere was named as a defendant in a lawsuit filed by Eppendorf AG alleging patent infringement. The Company intends to vigorously defend this case as it believes that the claims lack merit. The Company believes that the resolution to these proceedings will not have a material adverse effect on the Company’s financial position, liquidity or future operations. The Company has not recorded any significant reserves related to this case.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report onForm 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about us and our industry that involve substantial risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report onForm 10-Q regarding our strategy, future operations, future financial position, future net sales, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors.

These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report onForm 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after any statement is made or to conform these statements to actual results. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report onForm 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2008 and elsewhere in this Quarterly Report onForm 10-Q.

Business Overview

Nanosphere develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost and highly sensitive genomic and protein testing on a single platform. Our proprietary nanoparticle technology simplifies molecular diagnostic testing, provides the ability to run multiple tests simultaneously on the same sample and has the potential to run a broad menu of tests to be performed on a single platform. We have developed or are currently developing diagnostic tests for markers which reveal the existence of a variety of medical conditions including cancer, cardiovascular, respiratory, autoimmune, neurodegenerative and infectious diseases, as well as for pharmacogenomics. Pharmacogenomics is an emerging subset of human genetic testing which correlates gene expression or mutation with a drug’s efficacy or toxicity. These tests play a key role in the advancement of personalized medicine, where drug therapies and dosing are guided by each patient’s genetic makeup. There is a growing demand on laboratories to implement molecular diagnostic testing, but the cost and complexity of existing technologies and the need for specialized personnel and facilities have limited the number of laboratories with these capabilities. The Verigene System’s ease of use, rapid turnaround times, relatively low cost and ability to support a broad test menu simplify work flow and reduce costs for laboratories already performing molecular diagnostic testing and allow a broader range of laboratories, including those operated by local hospitals, to perform these tests. Our ability to detect proteins, which is at least 100 times more sensitive than current technologies, may enable earlier detection of and intervention in diseases associated with known biomarkers as well as the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We are focused on the clinical diagnostics market and may seek opportunities either directly or through partnerships to commercialize our technologies in other markets.

We received 510(k) clearance from the United States Food and Drug Administration (“FDA”) for commercial sale of the Verigene System in the second half of 2007. At that time, we also received clearance for two diagnostic tests. The first test is a warfarin metabolism assay, which is a pharmacogenomic test to determine how an individual metabolizes the drug warfarin, including Coumadin, the most-prescribed oral anticoagulant in North America and Europe. The second test is a hyper-coagulation assay, one of the highest volume human genetic tests currently performed, to determine an individual’s risk for the development of blood clots, which can lead to stroke, pulmonary embolism and deep vein thrombosis. We have established a direct sales organization within the United States and are focusing our initial commercial efforts on the hospital-based laboratory market.

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On May 1, 2009, the Company received 510(k) clearance from the FDA for the commercial sale of its respiratory panel that detects the presence of influenza A and B as well as respiratory syncitial virus (“RSV”) A and B. Influenza is commonly known as the seasonal flu and RSV is a respiratory virus that infects the lungs and breathing passages. RSV is the most common cause of bronchitis and pneumonia in children under the age of 1 and has become a significant concern for older adults. Our respiratory panel provides physicians with a highly accurate, fast determination of which virus is present which helps guide the most appropriate treatment therapy. Most of the respiratory tests currently on the market take days to generate a result, because they depend on culturing, or do not provide a reliable result, because they are rapid tests which lack specificity.

We are completing clinical trials and expect to file an application to the FDA for 510(k) clearance of our respiratory panel on our Verigene SP instrument during the third quarter of 2009. The Verigene SP instrument automates sample preparation, which should significantly reduce laboratory technician time required to perform this molecular test. We also believe that this assay offers a simple to use molecular test for diagnosing respiratory infections and the flu, while providing improved specificity over currently available rapid tests.

On July 24, 2009 we received 510(k) clearance from the FDA for our cystic fibrosis test that enables molecular laboratories to perform prenatal screening and diagnostic confirmations through identification of the number of copies of each of the 23 most common gene mutations recognized by the American College of Obstetricians and Gynecologists as markers for cystic fibrosis.

In the first quarter of 2009, we filed ade novo510(k) submission for a hereditary hemochromatosis (“HFE”) genetic test. Mutations in the HFE gene are associated with hemochromatosis, which is the leading cause of iron overload disease, a systematic iron build up that can eventually adversely affect the heart, liver, pancreas, joints and pituitary gland. Untreated, hemochromatosis can be fatal. Once detected, hemochromatosis is easily treated. Approximately one in every 250 people of European descent has the disease and one in eight is a carrier of at least one of the recessive gene mutations. There are currently no FDA-cleared tests on the market to detect these mutations of the HFE gene.

The first ultra-sensitive protein test we plan to commercialize is for cardiac troponin I (“cTnI”), which is the gold standard biomarker for diagnosis of the occurrence of myocardial infarction or heart attack and acute coronary syndrome. We are completing the necessary clinical trials and anticipate submitting the 510(k) application to the FDA in 2009. We have also begun to enroll patients in an international prospective study named FAST-TRAC, which is designed to support and further demonstrate the clinical utility of this assay.

In addition, we currently have research and development efforts underway for additional genetic, infectious disease and protein tests. Our test development pipeline includes a blood infection screening assay, a human papillomavirus (“HPV”) assay for cervical cancer screening, an ultra-sensitive prostate-specific antigen (“PSA”) for diagnosis of recurrent prostate cancer and both rheumatoid factor (“RF”) and anti-cyclic citrullinated peptide (“Anti-CCP”) tests for the detection of rheumatoid arthritis. We are also investigating new biomarkers where our ultra-sensitive protein detection technology may enable earlier detection of a broad range of other diseases.

Our technology is broadly applicable beyond the clinical diagnostic market in both research and industrial applications. The Verigene System is also used in research laboratories supporting collaborations and independent research in areas including ovarian cancer, mad cow disease and HIV. We are currently working with the FDA on a joint research program to develop an H5N1 avian flu assay. We have developed and delivered a biosecurity platform for the detection of various bioterrorism agents to the Technical Support Working Group, an agency affiliated with the U.S. Department of Defense.

Since our inception we have incurred net losses each year, and we expect to continue to incur losses for the foreseeable future. Our net loss was $8.4 million and $16.6 million for the three and six month period ended June 30, 2009. As of June 30, 2009, we had an accumulated deficit of $221.9 million. Our operations to date have been funded principally through capital contributions from investors in our initial public offering of common stock, and prior thereto in our convertible preferred stock, which was converted to common stock in 2007.

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Financial Operations Overview

Change in Method of Accounting for Patent Costs

In the third quarter of fiscal year 2008 and effective July 1, 2008, the Company elected to change its method of accounting for external patent-related costs. Prior to the change, the Company expensed as incurred all internal patent-related costs and capitalized external patent-related costs. Capitalized patent-related costs incurred in connection with approved patents were previously recorded as intangible assets at cost less accumulated amortization and were amortized over the patents’ estimated useful lives beginning upon the patent grant date. Costs capitalized were written off upon patent abandonment or expiration. Under the new method of accounting, all patent-related costs are expensed as incurred. All patent-related costs, including amortization expense for capitalized patent-related costs were, and will continue to be, classified as research and development expenses in the Company’s statements of operations.

The Company believes that this change is preferable because it will result in consistent treatment for related costs regardless of source, that is, under the new method both internal and external costs associated with patents are expensed as incurred. In addition, the Company believes that this change will provide greater comparability of the Company’s financial results with other companies in its industry as the Company believes that expensing all patent-related costs as incurred is the predominant practice in the industry.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”, the change in accounting principle has been retrospectively applied to all prior periods presented herein. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. As a result of the accounting change, the accumulated deficit increased from $105.9 million to $109.0 million as of January 1, 2007.

Revenue

Product sales are derived from the sale or lease of the Verigene System, including cartridges and related products sold to research laboratories and hospitals. Revenue also consists of funds received under contracts and government grants, including funds for the reimbursement of certain research and development expenses. Our market efforts are primarily focused on driving product sales rather than government grants and contracts. However, Nanosphere was recently selected by a major pharmaceutical company to develop a custom pharmacogenomic assay to be used in conjunction with the clinical trials associated with a new therapeutic drug. We will continue to be opportunistic with regard to future contract and grant opportunities.

Cost of Sales

Cost of sales represents the cost of materials, direct labor and other overhead costs associated with manufacturing, delivering and selling the Verigene System, including cartridges and related products, as well as royalties on product sales and amortization of purchased intellectual property relevant to products available for sale. Costs associated with commercial contracts, including cartridges, instruments, materials and labor are also included in cost of sales.

Research and Development Expenses

Research and development expenses primarily include all expenses related to the development of the Verigene System and assays, and the expenses associated with fulfilling our obligations related to the United States government contracts and grants. Such expenses include salaries and benefits for research and development personnel, contract services, materials, patent-related costs and other expenses. We expense all research and development costs in the periods in which they are incurred. We expect research and development expenses to remain approximately flat as we continue to develop future generations of the Verigene System, and additional genomic and protein tests.

Sales, General and Administrative Expenses

Sales, general and administrative expenses principally include compensation for employees in our sales, customer service, marketing, management and administrative functions. We also include professional services, facilities, technology, communications and administrative expenses in sales, general and administrative. The professional services costs primarily consist of legal and accounting costs. We expect sales and marketing expenses to continue to increase in the future as a result of anticipated growth in our sales and customer support functions to support growth in our product sales. We expect general and administrative expenses to remain approximately flat for the foreseeable future.

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Interest Income

Interest income principally includes interest earned on our excess cash balances. Such balances are primarily invested in money market and bank checking accounts at major financial institutions. We anticipate that interest income will continue to decline as capital reserves are consumed by operating losses and working capital. Recent declines in interest rates will also contribute to reduced interest income for the foreseeable future.

Interest Expense

Interest expense includes the interest charges related to our debt, including non-cash interest expense relating to the amortization of debt discount and issue costs.

Three month Period Ended June 30, 2009 Compared to the Three month Period Ended June 30, 2008

Revenues

Revenues were $0.4 million for the three month period ended June 30, 2009, as compared to $0.2 million for the three month period ended June 30, 2008. Product sales were $0.2 million for each of the three month periods ended June 30, 2009 and June 30, 2008. The three month period ended June 30, 2009 also included $0.2 million of service revenue related primarily to the assay development contract with a major pharmaceutical company described earlier.

Cost of Sales

Cost of sales was $0.4 million for the three month period ended June 30, 2009 and $0.2 million for the three month period ended June 30, 2008. The $0.2 million increase in cost of sales for the three month period ended June 30, 2009 resulted from the $0.2 million increase in revenues for the same period. We have initiated several product cost reduction programs, which include initiatives to reduce the cost of materials and labor. We expect per unit material costs to decline as a result of process automation, additional multi-cavity molds and volume absorption of overhead. Per unit labor costs will be reduced through additional cartridge assembly automation, increased production lot sizes and higher overall volume. We expect to reduce cost per unit substantially as we implement these programs and as volume increases.

Research and Development Expenses

Research and development expenses decreased to $4.4 million for the three month period ended June 30, 2009, from $6.0 million for the three month period ended June 30, 2008. The $1.6 million decrease in research and development expenses for the three month period ended June 30, 2009 consists primarily of $0.7 million in staffing and $0.9 million of materials spending. The staffing reductions were driven by our increased focus on core research and development projects. The materials reduction was primarily related to the completion of the initial investment in Verigene SP development activities.

Sales, General and Administrative Expenses

Sales, general and administrative expenses decreased slightly from $3.8 million for the three month period ended June 30, 2008 to $3.7 million for the three month period ended June 30, 2009. The $0.1 million decrease in sales, general and administrative expenses for the three months ended June 30, 2009 versus June 30, 2008 consists primarily of a $0.2 million decrease due to the completion of the initial implementation of our Sarbanes-Oxley compliance program, partially offset by an increase in clinical trial expenses associated with the FAST-TRAC cTnI study.

Interest Expense

Interest expense was $0.3 million for the three month period ended June 30, 2009, as compared to $0.5 million for the three months ended June 30, 2008. The decrease in interest expense for the three months ended June 30, 2009 resulted from a decrease in the scheduled amortization, which includes increased principal and lower interest, in accordance with the loan and security agreements.

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Interest Income

Interest income was $0.1 million and $0.5 million for the three month period ended June 30, 2009 and 2008, respectively. The decrease in interest income during the three months ended June 30, 2009 resulted from a lower average cash balance during this period as compared to the same period in 2008. In addition, interest rates declined significantly during the three-month period ended June 30, 2009 as compared to the same period in 2008.

Six month Period Ended June 30, 2009 Compared to the Six month Period Ended June 30, 2008

Revenues

Revenues were $0.7 million for the six month period ended June 30, 2009, as compared to $0.8 million for the six month period ended June 30, 2008. Product sales were flat at $0.5 million for each of the six month periods ended June 30, 2009 and June 30, 2008. The six month period ended June 30, 2009 also included $0.2 million of service revenue related primarily to the assay development contract with a major pharmaceutical company described earlier.

Cost of Sales

For the six month period ended June 30, 2009, cost of sales was $0.7 million and the June 30, 2008 cost of sales was $0.6 million.

Research and Development Expenses

Research and development expenses decreased to $9.2 million for the six month period ended June 30, 2009, from $11.9 million for the six month period ended June 30, 2008. The $2.7 million decrease in research and development expenses for the six month period ended June 30, 2009 consists primarily of $1.0 million in staffing and $1.3 million in materials spending. The staffing reductions were driven by our increased focus on core research and development projects. The materials reduction was primarily related to the completion of the initial investment in Verigene SP development activities. Most of the remaining decrease relates to the $0.3 million loss on disposal of fixed assets in 2008 that resulted from our upgrade to more scalable manufacturing and development equipment.

Sales, General and Administrative Expenses

Sales, general and administrative expenses decreased to $6.8 million for the six month period ended June 30, 2009 from $7.2 million for the six month period ended June 30, 2008. The $0.4 million decrease in sales, general and administrative expenses for the six months ended June 30, 2009 versus June 30, 2008 consists primarily of a $0.7 million decrease in the completion of the initial implementation of our Sarbanes-Oxley compliance program, partially offset by a $0.3 million increase in sales and marketing expenses.

Interest Expense

Interest expense was $0.7 million for the six month period ended June 30, 2009, as compared to $1.1 million for the six month period ended June 30, 2008. The decrease in interest expense for the six months ended June 30, 2009 resulted from a decrease in the scheduled amortization, which includes increased principal and lower interest, in accordance with the loan and security agreements.

Interest Income

Interest income was $0.3 million and $1.5 million for the six month periods ended June 30, 2009 and 2008, respectively. The decrease in interest income during the six months ended June 30, 2009 resulted from a lower average cash balance during this period as compared to the same period in 2008. In addition, interest rates declined significantly during the six month period ended June 30, 2009 as compared to the same period in 2008.

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Liquidity and Capital Resources

From our inception in December 1999 through December 31, 2008, we have received net proceeds of $102.2 million from our initial public offering, $103.9 million from the sale of convertible preferred stock and issuance of notes payable that were exchanged for convertible preferred stock, $12.5 million from our debt borrowings, and $9.2 million from grant and contract revenue. We have devoted substantially all of these funds to research and development and sales, general and administrative expenses. Since our inception, we have generated minimal revenues from the sale of the Verigene System, including cartridges and related products, to our initial clinical customers, research laboratories and government agencies. We also incurred significant losses and, as of June 30, 2009, we had an accumulated deficit of approximately $221.9 million. While we are currently in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future.

Because we recently began to commercialize our products, we do not anticipate achieving positive operating cash flow in 2009 or 2010. During this period we expect to increase spending on additional manufacturing scale-up and additions to sales and marketing personnel. Achievement of positive cash flow from operations will depend upon revenue resulting from adoption of our initial products and expansion of our FDA-cleared tests. We anticipate that our current cash and cash equivalents will be sufficient to cover our operating and investing activities as well as our debt interest and principal obligations into the second quarter of 2011.

As of June 30, 2009, we had $58.2 million in cash and cash equivalents as compared to $75.4 million at December 31, 2008. The decrease in cash and cash equivalents was principally due to the use of cash in operating activities.

Net cash used in operating activities was $13.6 million for the six months ended June 30, 2009 as compared to $16.7 million for the six months ended June 30, 2008. The decrease in cash used was primarily due to a reduction in research and development expenses of $2.7 million for the six months ended June 30, 2009 as compared to the same period in 2008.

Net cash used in investing activities was $1.2 million for the six months ended June 30, 2009 as compared to $1.6 million for the six months ended June 30, 2008. Investments in property and equipment decreased $0.7 million during the six months ended June 30, 2009 due to the significant spending in 2008 to scale-up manufacturing for the commencement of product commercialization activities. Investments in intangible assets increased $0.3 million during the six months ended June 30, 2009 due to the payment of licensing fees.

Net cash used in financing activities increased to $2.4 million for the six months ended June 30, 2009 as compared to $2.0 million for the six months ended June 30, 2008. Repayments of long-term debt increased $0.9 million for the six months ended June 30, 2009 as compared to the same period in 2008 due to the scheduled payments under the loan and security agreements. Offsetting this increase in cash used in financing activities for the six month period ended June 30, 2009 was a reduction in stock issuance expenses. As of December 31, 2007, approximately $0.8 million of transaction expenses related to our IPO were unpaid. Such expenses were paid during the six month period ended June 30, 2008.

While we anticipate that our capital resources will be sufficient to meet our estimated needs into the second quarter of 2011, we may need to increase our capital outlays and operating expenditures over the next several years as we expand our product offering, drive product adoption, further scale-up manufacturing and implement product cost savings. The amount of additional capital we may need to raise depends on many factors, including:

• the level of research and development investment required to maintain and improve our technology;

• the amount and growth rate of our revenues;

• changes in product development plans needed to address any difficulties in manufacturing or commercializing the Verigene System and enhancements to our system;

• the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

• competing technological and market developments;

• our need or decision to acquire or license complementary technologies or acquire complementary businesses; and

• changes in regulatory policies or laws that affect our operations.

15

We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter, or raise funds at favorable rates or valuations. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.

Contractual Obligations and Commitments

Other than disclosed elsewhere in this Quarterly Report, our commitments have not changed significantly from disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 26, 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing or unconsolidated special-purpose entities.

Recent Accounting Pronouncements

See Note 11 to the Financial Statements for a discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including commercial paper, money market funds and corporate debt securities. Our cash and cash equivalents through June 30, 2009 included amounts in bank checking and liquid money market accounts. As a result, we believe we have minimal interest rate risk; however, a one percentage point decrease in the average interest rate on our portfolio, if such a decrease were possible, would have reduced interest income for the six month period ended June 30, 2009 by $325,645.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2009. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009.

(b) Changes in Internal Control over Financial Reporting

There have been no material changes to the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.
OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in our Report on Form 10-K.

Item 2. Unregistered Sales of Securities and Use of Proceeds

During the three month period ended June 30, 2009, there were no sales of unregistered securities.

Item 4. Submission of Matters to a Vote of Security Holders

(a)	Our Annual Meeting of Shareholders was held on June 16, 2009.
(b)	Eight nominees of the Board of Directors were elected to serve until the next annual meeting of stockholders in 2010. The votes were as follows:

	For		Withheld
William P. Moffitt III		20,028,822		754,281
Mark Slezak		19,688,687		1,094,416
Jeffrey R. Crisan		19,820,932		962,171
Andre de Bruin		19,717,901		1,065,202
Chad A. Mirkin		19,235,227		1,547,876
James J. Nahirny		19,230,715		1,552,388
Lorin J. Randall		20,687,045		96,058
Sheli Z. Rosenberg		20,126,394		656,709

(c) The results of voting to ratify the audit committee’s selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2009 were as follows:

	For
For		20,752,045
Against		28,708
Abstain		2,350

(d) Not applicable.

Item 6. Exhibits, Financial Statement Schedules

Exhibit Number		Exhibit Description
	31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
	31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

* Filed herewith

17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NANOSPHERE, INC.
	By:	/s/ William P. Moffitt
		William P. Moffitt
		President and Chief Executive Officer
Date: August 11, 2009
	By:	/s/ Roger Moody
		Roger Moody
		Chief Financial Officer and Treasurer

Date: August 11, 2009

EXHIBIT INDEX

Exhibit Number		Exhibit Description
	31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
	31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

* Filed herewith