Nanosphere 10-Q 2009 Q3 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 September 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 incorporation or organization)	(I.R.S. Employer Identification No.)
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).o Yeso No [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 November 2, 2009 was 27,649,131.

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	17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 6. Exhibits	19
Exhibit 10.1
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)

	September 30,			December 31,
	2009			2008
CURRENT ASSETS:
Cash and cash equivalents	$	50,296,154		$	75,356,960
Accounts receivable		201,764			385,908
Inventories		1,544,165			1,727,518
Other current assets		1,515,200			559,528
Total current assets		53,557,283			78,029,914
PROPERTY AND EQUIPMENT— Net		6,429,522			7,294,224
INTANGIBLE ASSETS — Net of accumulated amortization		1,460,913			1,443,582
OTHER ASSETS		103,641			128,190
TOTAL	$	61,551,359		$	86,895,910
CURRENT LIABILITIES:
Accounts payable	$	2,083,355		$	1,813,777
Accrued compensation		943,730			829,292
Other current liabilities		1,902,134			1,541,385
Long-term debt — current portion		4,993,122			4,818,211
Total current liabilities		9,922,341			9,002,665
LONG-TERM LIABILITIES:
Long-term debt — noncurrent portion		—			3,352,137
Total liabilities		9,922,341			12,354,802
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000,000 shares authorized; 22,238,921 and 22,228,696 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively		222,389			222,287
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued		—			—
Additional paid-in capital		276,140,610			274,232,825
Warrants to acquire common stock		5,423,771			5,423,771
Accumulated deficit		(230,157,752	)		(205,337,775	)
Total stockholders’ equity		51,629,018			74,541,108
TOTAL	$	61,551,359		$	86,895,910

See notes to financial statements.

1

Nanosphere, Inc.

Statements of Operations
(Unaudited)

	Three Month Periods Ended						Nine Month Periods Ended
	September 30,						September 30,
	2009			2008			2009			2008
REVENUE:
Grant and contract revenue	$	422,300		$	73,459		$	581,797		$	346,071
Product sales		306,717			209,772			804,682			707,891
Total revenue		729,017			283,231			1,386,479			1,053,962
COSTS AND EXPENSES:
Cost of sales		587,901			246,128			1,298,384			821,733
Research and development		4,618,001			5,683,346			13,858,186			17,631,003
Sales, general, and administrative		3,519,404			3,376,807			10,339,580			10,563,212
Total costs and expenses		8,725,306			9,306,281			25,496,150			29,015,948
Loss from operations		(7,996,289	)		(9,023,050	)		(24,109,671	)		(27,961,986	)
OTHER INCOME (EXPENSE):
Foreign exchange gain (loss)		(338	)		1,347			(2,518	)		(23,298	)
Interest expense		(287,185	)		(499,836	)		(1,030,263	)		(1,630,464	)
Interest income		41,451			495,067			322,475			1,973,984
Total other income (expense)		(246,072	)		(3,422	)		(710,306	)		320,222
NET LOSS	$	(8,242,361	)	$	(9,026,472	)	$	(24,819,977	)	$	(27,641,764	)
Net loss per common share — basic and diluted	$	(0.37	)	$	(0.41	)	$	(1.12	)	$	(1.24	)
Weighted average number of common shares outstanding — basic and diluted		22,232,621			22,228,539			22,230,070			22,207,843

See notes to financial statements.

2

Nanosphere, Inc.

Statements of Cash Flows
(Unaudited)

	Nine Month Periods Ended
	September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(24,819,977	)	$	(27,641,764	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,220,847			2,142,214
Amortization of financing costs and accretion of debt discount		405,305			592,040
Loss from write off-of intangible assets		—			245,134
Loss from disposal of fixed assets		2,758			326,291
Share-based compensation		1,861,910			1,649,151
Changes in operating assets and liabilities:
Accounts receivable		184,144			(375,886	)
Inventories		42,199			(269,612	)
Other current assets		(955,672	)		306,643
Accounts payable		198,968			(484,303	)
Accrued and other current liabilities		646,621			(629,438	)
Net cash used in operating activities		(20,212,897	)		(24,139,530	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(974,470	)		(2,904,855	)
Investments in intangible assets		(340,000	)		(400,732	)
Net cash used in investing activities		(1,314,470	)		(3,305,587	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt		(3,557,982	)		(2,482,383	)
Payments on capital lease obligation		(21,434	)		(30,545	)
Proceeds from the issuance of common stock, net of offering expenses		—			(778,731	)
Proceeds from warrant redemptions		—			2,189
Proceeds from stock option exercises		46,012			164,210
Other		(35	)		—
Net cash used in financing activities		(3,533,439	)		(3,125,260	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(25,060,806	)		(30,570,377	)
CASH AND CASH EQUIVALENTS — Beginning of period		75,356,960			114,312,573
CASH AND CASH EQUIVALENTS — End of period	$	50,296,154		$	83,742,196
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable	$	99,299		$	117,534
License costs capitalized and included in accrued liabilities		75,000			225,000

See notes to financial statements.

3

Nanosphere, Inc.

Notes to Financial Statements
As of September 30, 2009 and December 31, 2008, and
For the Three and Nine Month Periods Ended September 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, as amended by Amendment No. 1 thereto on Form 10-K/A. 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 $230.2 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.

In July 2009, the Company 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.

2. Net Loss Per Common Share

Basic and diluted net loss per common share have been calculated in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance on earnings per share for the three and nine month periods ended September 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 nine month periods ended September 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 Nine Months Ended
	September 30
	2009		2008
Stock options		3,588,405		3,368,062
Common stock warrants		1,300,119		1,300,119
		4,888,524		4,668,181

3. Intangible Assets

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

	September 30, 2009							December 31, 2008
			Accumulated							Accumulated
	Cost		Amortization			Net		Cost		Amortization			Net
Intellectual property — licenses	$	2,067,043	$	(606,130	)	$	1,460,913	$	1,877,043	$	(433,461	)	$	1,443,582

4

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

Amortization expense for intangible assets amounted to $39,763 and $172,669 for the three and nine month periods ended September 30, 2009, respectively, and to $91,720 and $260,328 for the three and nine month periods ended September 30, 2008, respectively. Estimated future amortization expense is as follows:

Years Ending December 31
2009 (Period from October 1 to December 31)	$	39,763
2010		159,053
2011		150,719
2012		139,810
2013		136,174
Thereafter		583,394

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 September 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 $112,500 for these services in each of the three and nine month periods ended September 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 agreement between the Company and certain of its stockholders, 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 this 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.

5

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

5. Equity Incentive Plan

The Company’s board of directors has adopted and the shareholders have approved the Nanosphere 2000 Equity Incentive Plan (the “2000 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.

The fair values of the Company’s option awards granted during the nine month period ended September 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		2.34	%
Weighted-average expected option life	6.35 years
Estimated weighted-average fair value on the date of grant based on the above assumptions	$	3.05
Estimated forfeiture rate for unvested options		2.2	%

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 $632, 878 and $1,861,910 in the three and nine month periods ended September 30, 2009, respectively, and $570,935 and $1,649,151 for the three and nine month periods ending September 30, 2008, respectively.

As of September 30, 2009, the total compensation cost not yet recognized related to the nonvested awards is approximately $6.0 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 September 30, 2009, and for nine 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		274,899		$	5.35
Exercised		(10,225	)	$	4.50
Expired		(3,387	)	$	7.65
Forfeited		(35,603	)	$	5.97
Outstanding — September 30, 2009		3,588,405		$	5.66		7.38	$	8,011,920
Exercisable — September 30, 2009		1,285,340		$	5.96		6.84	$	2,862,112
Vested and Expected to Vest — September 30, 2009		3,482,464		$	5.66		7.37	$	7,775,029

6

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

Included in the number of options outstanding at September 30, 2009 are 1,287,646 options with a weighted average exercise price of $4.65 per share and accelerated vesting provisions based on the criteria mentioned above. During the third quarter of 2009, one of the five milestones as defined in the 2000 Plan were achieved. As a result, 20% of the outstanding options under the 2000 Plan with accelerated vesting provisions were vested as of September 30, 2009. The total fair value of shares vested during the three and nine month periods ended September 30, 2009 was $253,894 and $1,954,800, respectively, and was $91,916 and $1,202,292 for the three and nine month periods ended September 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 September 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. Stockholders’ Equity

As of September 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 September 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 September 30, 2009 will increase to $17.50 per share in April 2010.

8. Leases

The Company’s existing operating lease for its office and laboratory space expires in May 2010. On August 28, 2009, the Company executed a lease renewal which commences in June 2010 and ends in May 2014. Under the terms of the lease renewal, the Company has two successive three year options to renew the lease, and the Company has the right of first refusal to lease additional space within the facility.

Rent and operating expenses associated with the office and laboratory space were $117,073 and $322,131 for the three and nine month periods ended September 30, 2009, respectively, and $172,453 and $509,150 for the three and nine month periods ended September 30, 2008, respectively.

Annual future minimum obligations for the operating leases as of September 30, 2009, are as follows:

	Operating
Years Ending December 31	Lease
2009 (Period from October 1 to December 31)	$	130,580
2010		465,595
2011		426,643
2012		438,921
2013		451,198
Thereafter		190,131
Total minimum lease payments	$	2,103,068

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.

7

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

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 $279,002 and $1,005,041 for the three and nine month periods ended September 30, 2009, respectively, which includes $107,643 and $380,756 of discount amortization. Interest expense on debt was $490,186 and $1,601,310 for the three and nine month periods ended September 30, 2008, respectively, which includes $176,953 and $567,490 of discount amortization respectively. Cash interest paid on this debt was $183,854 and $660,656 for the three and nine month periods ended September 30, 2009, respectively, and $342,292 and $1,059,195 for the three and nine month periods ended September 30, 2008, respectively. The fair value of the debt at September 30, 2009 is $5.4 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 the FASB’s accounting guidance on fair value measurements.

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

2009 (October 1 to December 31)	$	1,260,229
2010		3,917,293
	$	5,177,522

10. Supplemental Financial Information

Inventories:	September 30, 2009		December 31, 2008
Work-in-process component parts	$	847,675	$	1,068,840
Finished goods		696,490		658,678
Total	$	1,544,165	$	1,727,518

Property and Equipment — Net:	September 30, 2009			December 31, 2008
Total property and equipment — at cost	$	15,687,006		$	14,516,371
Less accumulated depreciation		(9,257,484	)		(7,222,147	)
Property and equipment — net	$	6,429.522		$	7,294,224

Other Current Liabilities:	September 30, 2009		December 31, 2008
Accrued clinical trial expenses	$	921,063	$	266,135
All other		981,071		1,275,250
Total	$	1,902,134	$	1,541,385

11. New Accounting Standards

Effective January 1, 2008, the Company adopted new accounting guidance on fair value measurements. The new guidance 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. It was effective for certain financial assets and liabilities beginning January 1, 2008. The Company adopted the provisions of the new accounting guidance 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 new accounting guidance on the determination of the useful life of intangible assets. The new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The Company adopted this new guidance on January 1, 2009 which resulted in no financial impact.

8

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

In April 2009, the FASB issued revised guidance requiring disclosures about fair value of financial instruments, currently provided annually, to be included in interim financial statements. The Company adopted the accounting guidance during the second quarter of fiscal 2009 and has included the required disclosures in these financial statements.

In May 2009, the FASB issued new accounting and disclosure guidance for events that occur subsequent to the balance sheet date but before the date that 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 November 5, 2009, the date on which the financial statements were issued.

In June 2009, the FASB issued authoritative guidance which replaced the previous hierarchy of generally accepted accounting principles (“GAAP”) and establishes the FASB Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. This guidance modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. This guidance was effective for the Company as of September 30, 2009. The adoption of this guidance did not impact the Company’s financial statements since the FASB Codification is not intended to change or alter existing GAAP.

In October 2009, the FASB issued authoritative guidance that amends existing guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenue based on those separate deliverables. The guidance is expected to result in more multiple-deliverable arrangements being separable than under current guidance. This guidance is effective for the Company beginning on January 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements. The Company is currently assessing the impact this guidance may have on its financial statements.

12. Subsequent Events

On October 9, 2009, the Company received 510(k) clearance for its second generation respiratory panel and the Verigene SP System. The Verigene SP instrument automates sample preparation, which should significantly reduce laboratory technician time required to perform this molecular test. The Company also believes 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 October 21, 2009, the Company completed an underwritten public offering (the “Offering”) of 5,405,000 shares (the “Shares”) of its common stock at a public offering price of $7.00 per share. The Company received net proceeds of approximately $35.3 million from the Offering after deducting underwriting discounts and commissions and offering expenses and anticipates using the proceeds from the Offering for general corporate purposes and working capital. The Shares were issued pursuant to the Company’s effective shelf registration statement on Form S-3 which authorizes the issuance of common stock, warrants, preferred stock, stock purchase contracts or stock purchase units, under which $62.2 million of such securities are available for future issuance.

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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, 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. 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 one 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.

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.

On October 9, 2009, we received 510(k) clearance of our second generation respiratory panel and the Verigene SP System. 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. We plan to submit additional FDA applications for each of our previously 510(k) cleared assays to allow their use on the new Verigene SP.

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 and severity of myocardial infarction or heart attack and acute coronary syndrome. We have completed the necessary clinical trials and expect to submit the 510(k) application to the FDA in 2009. We are also enrolling 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 2C19 pharmacogenetic test for a patient’s metabolism of clopidogrel, an ultra-sensitive prostate-specific antigen (“PSA”) for diagnosis of the recurrence of prostate cancer and a connective tissue panel including tests for rheumatoid arthritis and lupus. We are also investigating new biomarkers where our ultra-sensitive protein detection technology may enable earlier detection or more accurate monitoring 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 $24.8 million for the nine month period ended September 30, 2009. As of September 30, 2009, we had an accumulated deficit of $230.2 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. On October 21, 2009, we completed an underwritten public offering raising net proceeds of $35.3 million which is discussed in the “Liquidity and Capital Resources” section.

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Financial Operations Overview

Revenue

Product sales revenue is derived from the sale or lease of the Verigene System, including cartridges and related products sold to research laboratories and hospitals. Grant and contract revenue 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 grants and contracts. However, the Company recently completed development of certain custom pharmacogenetic assays to be used in conjunction with the clinical trials associated with new therapeutic drugs for a major pharmaceutical company. 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 manufacturing overhead costs incurred to produce Verigene cartridges and instruments, as well as royalties on product sales, amortization of purchased intellectual property relevant to products available for sale and depreciation of instrument leases and rentals. Costs associated with custom assay development contracts also include labor associated with assay development, validation and testing.

Research and Development Expenses

Research and development expenses primarily include all costs incurred during the development of the Verigene System and assays, and the expenses associated with fulfilling our development obligations related to the United States government contracts and grants. Such expenses include salaries and benefits for research and development personnel, consulting 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.

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

Revenues

Revenues were $0.7 million for the three month period ended September 30, 2009, as compared to $0.3 million for the three month period ended September 30, 2008. Product sales were $0.3 million for the three month period ended September 30, 2009 as compared to $0.2 million for the same period in 2008. The three month period ended September 30, 2009 also included $0.4 million of service revenue related primarily to the assay development contract with a major pharmaceutical company described earlier.

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Cost of Sales

Cost of sales was $0.6 million for the three month period ended September 30, 2009 and $0.2 million for the three month period ended September 30, 2008. The $0.4 million increase in cost of sales for the three month period ended September 30, 2009 resulted from the assay development revenue associated with the contracts with a major pharmaceutical company described earlier and the increase in product sales. 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 $4.6 million for the three month period ended September 30, 2009, from $5.7 million for the three month period ended September 30, 2008. The $1.1 million decrease in research and development expenses for the three month period ended September 30, 2009 consists primarily of $0.4 million in staffing and $0.3 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. Most of the remaining decrease relates to a $0.2 million impairment charge in 2008 associated with licensed technology which the Company does not plan to commercialize.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased slightly from $3.4 million for the three month period ended September 30, 2008 to $3.5 million for the three month period ended September 30, 2009. The $0.1 million increase in sales, general and administrative expenses for the three months ended September 30, 2009 consists primarily of a $0.4 million increase in clinical trial expenses associated with the FAST-TRAC cTnI study intended to create market differentiation for this assay, partially offset by a decrease due to the completion of the initial implementation of our Sarbanes-Oxley compliance program.

Interest Expense

Interest expense was $0.3 million for the three month period ended September 30, 2009, as compared to $0.5 million for the three months ended September 30, 2008. The decrease in interest expense for the three months ended September 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 decreased by $0.5 million for the three month period ended September 30, 2009 as compared to the same period in 2008. The decrease in interest income during the three months ended September 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 for the three-month period ended September 30, 2009 as compared to the same period in 2008.

Nine month Period Ended September 30, 2009 Compared to the Nine month Period Ended September 30, 2008

Revenues

Revenues were $1.4 million for the nine month period ended September 30, 2009, as compared to $1.1 million for the nine month period ended September 30, 2008. Product sales were $0.8 million for the nine month period ended September 30, 2009 as compared to $0.7 million for the same period in 2008. The nine month period ended September 30, 2009 also included a $0.5 million increase in service revenue related to custom assay development contracts, partially offset by a $0.3 million decrease in United States government contracts and grants.

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Cost of Sales

For the nine month period ended September 30, 2009, cost of sales was $1.3 million and the September 30, 2008 cost of sales was $0.8 million. The $0.5 million increase in cost of sales for the nine month period ended September 30, 2009 resulted from the assay development revenue associated with the contracts with a major pharmaceutical company described earlier and the increase in product sales.

Research and Development Expenses

Research and development expenses decreased to $13.9 million for the nine month period ended September 30, 2009, from $17.6 million for the nine month period ended September 30, 2008. The $3.7 million decrease in research and development expenses for the nine month period ended September 30, 2009 consists primarily of $1.6 million in prototype materials spending and $1.4 million in staffing. The materials reduction was primarily related to the completion of the initial investment in Verigene SP development activities. The staffing reductions were driven by our increased focus on core research and development projects. Most of the remaining decrease relates to a $0.3 million loss on disposal of fixed assets in 2008 that resulted from our upgrade to more scalable manufacturing and development equipment, as well as a $0.2 million impairment of intangible assets described earlier.

Sales, General and Administrative Expenses

Sales, general and administrative expenses decreased to $10.3 million for the nine month period ended September 30, 2009 from $10.6 million for the nine month period ended September 30, 2008. The $0.3 million decrease in sales, general and administrative expenses for the nine months ended September 30, 2009 versus September 30, 2008 consists primarily of a $0.8 million decrease in the completion of the initial implementation of our Sarbanes-Oxley compliance program, partially offset by a $0.5 million increase in sales and marketing expenses driven primarily by the ramp up of the FAST-TRAC clinical trial intended to create market differentiation for the cTnI assay.

Interest Expense

Interest expense was $1.0 million for the nine month period ended September 30, 2009, as compared to $1.6 million for the nine month period ended September 30, 2008. The decrease in interest expense for the nine months ended September 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 $2.0 million for the nine month periods ended September 30, 2009 and 2008, respectively. The decrease in interest income during the nine months ended September 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 for the nine month period ended September 30, 2009 as compared to the same period in 2008.

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.

On October 21, 2009, the Company completed an underwritten public offering (the “Offering”) of 5,405,000 shares (the “Shares”) of its common stock at a public offering price of $7.00 per share. The Company received net proceeds of approximately $35.3 million from the Offering after deducting underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from the Offering for general corporate purposes and working capital. The Shares were issued pursuant to the Company’s effective shelf registration statement on Form S-3 which authorizes the issuance of common stock, warrants, preferred stock, stock purchase contracts or stock purchase units, under which $62.2 million of such securities are available for future issuance.

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Since our inception, we have generated revenues from the sale of the Verigene System, including cartridges and related products, to our initial clinical customers, research laboratories and government agencies that are far below our operating expenses. As a result, we have incurred significant losses and, as of September 30, 2009, we had an accumulated deficit of approximately $230.2 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 in the 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 marginally 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 FDA-cleared products. We anticipate that our cash and cash equivalents (including proceeds from the Offering) will be sufficient to cover our operating and investing activities as well as our debt interest and principal obligations for the next two to three years.

We currently offer our customers an option to lease the Verigene System for a period of up to five years and we recover the cost of these leased systems over the term of the lease. To date, our aggregate upfront investment in systems rented to customers has not been material. However, we may need to increase investment in such systems to support future product placements under leasing agreements. We have established a relationship with a third party financing company which will provide our customers with an alternative financing option for their leased equipment. This arrangement will help mitigate the demand on our capital resources, for customers electing a third party lease option, by allowing us to recover the cost of such systems immediately instead of over several years.

As of September 30, 2009, we had $50.3 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 $20.2 million for the nine months ended September 30, 2009 as compared to $24.1 million for the nine months ended September 30, 2008. The decrease in cash used was primarily due to a reduction in research and development expenses of $3.7 million for the nine months ended September 30, 2009 as compared to the same period in 2008.

Net cash used in investing activities was $1.3 million for the nine months ended September 30, 2009 as compared to $3.3 million for the nine months ended September 30, 2008. Investments in property and equipment decreased $1.9 million during the nine months ended September 30, 2009 due to the significant spending in 2008 to scale-up manufacturing for the commencement of product commercialization activities.

Net cash used in financing activities increased to $3.5 million for the nine months ended September 30, 2009 as compared to $3.1 million for the nine months ended September 30, 2008. Repayments of long-term debt increased $1.1 million for the nine months ended September 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 nine month period ended September 30, 2009 was a reduction in stock issuance expenses; approximately $0.8 million of IPO transaction expenses were paid during the nine month period ended September 30, 2008.

While we anticipate that our capital resources will be sufficient to meet our estimated needs over the next two to three years, 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.

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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

On August 28, 2009, the Company executed a lease renewal which commences on June 1, 2010 and ends on May 31, 2014. Base rent on the lease renewal will range from $34,957 per month for the first twelve months of the lease to $38,026 per month for the final twelve months of the lease renewal. The Company will also pay as additional rent its proportionate share of real estate taxes and operating expenses, which include all costs of operating, maintaining, replacing and repairing the leased facility. Except for this lease, our commitments have not changed materially 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 September 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 nine month period ended September 30, 2009 by $457,221.

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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 September 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 September 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. However, we added the following risk factor to our registration statement on Form S-3 as filed with the Securities and Exchange Commission on September 11, 2009:

Our 2007 Long-Term Incentive Plan includes an automatic share replenishment, or “evergreen,” provision that, unless our board of directors takes action to the contrary, will automatically increase the number of shares of our common stock reserved for issuance under this plan each year. Issuances of awards under this evergreen provision would cause further dilution to existing stockholders.

In March 2007 our board of directors adopted and our shareholders approved our 2007 Long-Term Incentive Plan (the “2007 Plan”). The 2007 Plan authorizes the grant of stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. The total awards originally authorized under the 2007 Plan was 4,106,009 shares, plus up to an additional 773,591 shares of common stock that will become available in the event that awards made under our 2000 Equity Incentive Plan expire, are forfeited or cancelled, plus an annual increase in the number of shares pursuant to the evergreen provision equal to the least of: 900,000 shares of common stock; 4.0% of our outstanding shares of common stock as of fiscal year end (889,147 shares at December 31, 2008); and an amount determined by the board of directors.

At December 31, 2008, there were 22,228,696 outstanding shares of our common stock. In addition, there were outstanding options to purchase 3,362,721 shares of our common stock, of which 2,830,821 were in the money based on our December 31, 2008 closing stock price. None of these outstanding options are covered by shares authorized pursuant to the evergreen provision. Pursuant to the evergreen provision, an additional 889,147 shares of our common stock were authorized for issuance under the 2007 Plan as of January 1, 2009. Collectively, the outstanding shares as of December 31, 2008, the in-the-money options and warrants as of December 31, 2008 and the additional shares authorized on January 1, 2009 pursuant to the evergreen provision were 25,948,664 (the “Adjusted Outstanding Shares”).

On January 1, 2010, January 1, 2011 and January 1, 2012, a maximum of 900,000 additional shares per year may be authorized under our 2007 Plan as a result of this evergreen provision. If the maximum number of shares under the evergreen provision were to be authorized and issued, the future shares issued under the evergreen provision would result in an approximate 10% increase in the Adjusted Outstanding Shares as of December 31, 2008.

The evergreen provision of the 2007 Plan will increase the likelihood that we will not request existing stockholders to authorize additional shares for issuance under the 2007 Plan or a new plan. However, other factors, such as a material increase in the number of our award-eligible employees, or competitive conditions to attract or keep valuable employees, may affect the likelihood of our requesting stockholders to authorize additional shares under this plan or a new plan. The issuance, perception that issuance may occur, or exercise of these options may have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.

Item 2. Unregistered Sales of Securities and Use of Proceeds

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

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Item 6. Exhibits, Financial Statement Schedules

Exhibit Number		Exhibit Description
	10.1	Second Amended and Restated Registration Rights Agreement *
	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

19

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: November 5, 2009
	By:	/s/ Roger Moody
		Roger Moody
		Chief Financial Officer and Treasurer
Date: November 5, 2009

EXHIBIT INDEX

Exhibit Number		Exhibit Description
	10.1	Second Amended and Restated Registration Rights Agreement *
	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