##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 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(State or other jurisdiction of 
incorporation or organization)
    
    36-4339870(I.R.S. Employer Identification No.)4088 Commercial Avenue(Address of principal executive offices)
    
    Northbrook, Illinois 60062(Zip Code)
 (847) 400-9000
 o o
  o o þ
 o þ




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##### 



NANOSPHERE, INC.
 INDEX
 Part I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Balance Sheets
    
    1Statements of
Operations
    
    2Statements of
Stockholders Deficit
    
    3Statements of Cash
Flows
    
    4Notes to Financial Statements
    
    5-19Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    20-28Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 4.
    
    Controls and Procedures
    
    29Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    30Item 1A.
    
    Risk Factors
    
    30-41Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    41-42Item 6.
    
    Exhibits
    
    42Certification of President and Chief Executive OfficerCertification of Chief Financial Officer and TreasurerCertification of President and Chief Executive OfficerCertification of Chief Financial Officer and TreasurerPress Release




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Nanosphere, Inc.
(A Development Stage Company)
 Balance Sheets
(Unaudited)
 December 31,
    
    
    September 30,2006
    
    
    2007CURRENT ASSETS:Cash and cash equivalents
    
    $
    29,112,429
    
    
    $
    18,105,934Accounts receivable
    
    
    44,816
    
    
    
    73,485Inventories
    
    
    884,849
    
    
    
    1,874,421Deferred equity financing costs
    
    
    
    
    
    
    1,946,928Other current assets
    
    
    462,858
    
    
    
    522,375Total current assets
    
    
    30,504,952
    
    
    
    22,523,143PROPERTY AND EQUIPMENT  At cost:Computer equipment and software
    
    
    730,144
    
    
    
    846,275Laboratory equipment
    
    
    2,788,164
    
    
    
    3,303,217Furniture and fixtures
    
    
    143,134
    
    
    
    251,506Leasehold improvements
    
    
    2,086,977
    
    
    
    2,235,938Manufacturing equipment
    
    
    2,056,830
    
    
    
    2,916,520Office equipment
    
    
    66,007
    
    
    
    67,068Tooling
    
    
    707,018
    
    
    
    957,326Total property and equipment  at cost
    
    
    8,578,274
    
    
    
    10,577,850Less accumulated depreciation
    
    
    (2,999,802
    )
    
    
    (4,186,301
    )Net property and equipment  at cost
    
    
    5,578,472
    
    
    
    6,391,549INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    4,865,950
    
    
    
    5,284,892OTHER ASSETS
    
    
    88,460
    
    
    
    171,736TOTAL
    
    $
    41,037,834
    
    
    $
    34,371,320CURRENT LIABILITIES:Accounts payable
    
    $
    1,499,514
    
    
    $
    2,071,595Accrued compensation
    
    
    872,508
    
    
    
    857,189Accrued license fees
    
    
    360,000
    
    
    
    406,455Accrued legal expenses
    
    
    137,088
    
    
    
    139,218Accrued financing costs
    
    
    
    
    
    
    1,928,358Other current liabilities
    
    
    270,935
    
    
    
    879,352Note payable  related party
    
    
    
    
    
    
    Long term debt  current portion
    
    
    
    
    
    
    2,494,534Lease payable  current portion
    
    
    32,444
    
    
    
    35,922Total current liabilities
    
    
    3,172,489
    
    
    
    8,812,623LONG-TERM LIABILITIES:Accrued license fees  noncurrent
    
    
    330,000
    
    
    
    Lease payable  noncurrent portion
    
    
    58,802
    
    
    
    31,121Long term debt  noncurrent portion
    
    
    
    
    
    
    8,363,649Preferred stock warrants
    
    
    1,761,533
    
    
    
    6,897,119Convertible derivative liability
    
    
    32,085,041
    
    
    
    44,582,702Total liabilities
    
    
    37,407,865
    
    
    
    68,687,214CONVERTIBLE PREFERRED STOCK:Series B Convertible Preferred Stock, $0.01 par
value; Liquidation preference of $32,832 at
September 30, 2007
    
    
    25,396
    
    
    
    25,396Series C Convertible Preferred Stock, $0.01 par
value; Liquidation preference of $6,968,675 at
September 30, 2007
    
    
    6,030,003
    
    
    
    6,030,003Series C-2 Convertible Preferred Stock, $0.01 par
value; Liquidation preference of $47,794,091 at
September 30, 2007
    
    
    47,037,902
    
    
    
    49,140,111Series D Convertible Preferred Stock, $0.01 par
value; Liquidation preference of $62,376,967 at
September 30, 2007
    
    
    55,774,739
    
    
    
    60,442,890Total Convertible Preferred Stock
    
    
    108,868,040
    
    
    
    115,638,400STOCKHOLDERS DEFICIT:Common stock, $0.01 par value; 450,000,000 shares authorized at
December 31, 2006 and September
30, 2007
    
    
    92,580
    
    
    
    92,580Additional paid-in capital
    
    
    2,051,126
    
    
    
    3,374,617Note receivable from chief executive officer
    
    
    (1,440,000
    )
    
    
    Deficit accumulated during the development stage
    
    
    (105,941,777
    )
    
    
    (153,421,491
    )Total stockholders deficit
    
    
    (105,238,071
    )
    
    
    (149,954,294
    )TOTAL
    
    $
    41,037,834
    
    
    $
    34,371,320
  1




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
 Period FromThree Month
    
    
    Three Month
    
    
    Nine Month
    
    
    Nine Month
    
    
    December 30, 1999Period Ended
    
    
    Period Ended
    
    
    Period Ended
    
    
    Period Ended
    
    
    (Date of Incorporation)September 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,
    
    
    Through2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    September 30, 2007REVENUE:Grant and contract revenue
    
    $
    379,494
    
    
    $
    192,880
    
    
    $
    818,006
    
    
    $
    919,383
    
    
    $
    8,680,137Product sales
    
    
    89,030
    
    
    
    6,125
    
    
    
    116,660
    
    
    
    59,795
    
    
    
    358,325Total revenue
    
    
    468,524
    
    
    
    199,005
    
    
    
    934,666
    
    
    
    979,178
    
    
    
    9,038,462COSTS AND EXPENSES:Cost of product sales
    
    
    31,049
    
    
    
    2,844
    
    
    
    31,049
    
    
    
    21,211
    
    
    
    193,830Research and development
    
    
    4,134,451
    
    
    
    5,674,390
    
    
    
    12,009,047
    
    
    
    15,893,437
    
    
    
    73,263,861Sales, general, and administrative
    
    
    1,443,795
    
    
    
    4,429,214
    
    
    
    4,107,726
    
    
    
    9,685,797
    
    
    
    28,984,949Total costs and expenses
    
    
    5,609,295
    
    
    
    10,106,448
    
    
    
    16,147,822
    
    
    
    25,600,445
    
    
    
    102,442,640Loss from operations
    
    
    (5,140,771
    )
    
    
    (9,907,443
    )
    
    
    (15,213,156
    )
    
    
    (24,621,267
    )
    
    
    (93,404,178
    )OTHER INCOME (EXPENSE):Change in fair value of
convertible derivative liability
    
    
    
    
    
    
    (11,888,721
    )
    
    
    (2,916,822
    )
    
    
    (11,888,721
    )
    
    
    (14,805,543
    )Change in fair value of preferred
stock warrants
    
    
    7,053
    
    
    
    (4,858,974
    )
    
    
    (237,051
    )
    
    
    (5,135,586
    )
    
    
    (5,272,615
    )Foreign exchange loss
    
    
    
    
    
    
    (27,175
    )
    
    
    
    
    
    
    (40,945
    )
    
    
    (40,945
    )Interest expense  related party
    
    
    
    
    
    
    
    
    
    
    (146,550
    )
    
    
    
    
    
    
    (388,804
    )Interest expense
    
    
    (1,879
    )
    
    
    (572,772
    )
    
    
    (3,464
    )
    
    
    (1,396,520
    )
    
    
    (1,404,026
    )Interest income
    
    
    505,010
    
    
    
    286,654
    
    
    
    988,765
    
    
    
    1,045,087
    
    
    
    2,953,236Total other income (expense)
    
    
    510,184
    
    
    
    (17,060,988
    )
    
    
    (2,315,122
    )
    
    
    (17,416,685
    )
    
    
    (18,958,697
    )NET LOSS
    
    
    (4,630,587
    )
    
    
    (26,968,431
    )
    
    
    (17,528,278
    )
    
    
    (42,037,952
    )
    
    
    (112,362,875
    )Accumulated convertible preferred
stock dividends
    
    
    (1,531,329
    )
    
    
    (1,652,493
    )
    
    
    (2,882,262
    )
    
    
    (4,832,822
    )
    
    
    (9,656,952
    )Convertible preferred stock
redemption value adjustment
    
    
    
    
    
    
    
    
    
    
    (17,737,544
    )
    
    
    (608,940
    )
    
    
    (31,401,664
    )NET LOSS ATTRIBUTABLE TO COMMON
STOCK
    
    $
    (6,161,916
    )
    
    $
    (28,620,924
    )
    
    $
    (38,148,084
    )
    
    $
    (47,479,714
    )
    
    $
    (153,421,491
    )Net loss per common share 
basic and diluted
    
    $
    (6.61
    )
    
    $
    (30.69
    )
    
    $
    (45.32
    )
    
    $
    (50.91
    )Weighted average number of common
shares outstanding  basic and
diluted
    
    
    932,564
    
    
    
    932,646
    
    
    
    841,824
    
    
    
    932,646
  2




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
Statements of Stockholders Deficit
(Unaudited)
 Note
    
    
    DeficitReceivable
    
    
    AccumulatedAdditional
    
    
    From Chief
    
    
    During theCommon Stock
    
    
    Paid-In
    
    
    Executive
    
    
    DevelopmentShares
    
    
    Par Value
    
    
    Capital
    
    
    Officer
    
    
    Stage
    
    
    TotalBALANCE  December 30, 1999
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock upon incorporation
    
    
    606,000
    
    
    
    12,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,036Issuance of common stock in exchange for a
license
    
    
    3,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options on common stock
(since incorporation)
    
    
    1,551
    
    
    
    248
    
    
    
    25,951
    
    
    
    
    
    
    
    
    
    
    
    26,199Issuance of dividends on Series A
Convertible Preferred Stock (since
incorporation)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (410,539
    )
    
    
    (410,539
    )Net loss (since incorporation)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,956,131
    )
    
    
    (19,956,131
    )BALANCE  December 31, 2003
    
    
    611,466
    
    
    
    12,284
    
    
    
    25,951
    
    
    
    
    
    
    
    (20,366,670
    )
    
    
    (20,328,435
    )Share-based compensation related to stock
options
    
    
    
    
    
    
    
    
    
    
    38,308
    
    
    
    
    
    
    
    
    
    
    
    38,308Convertible preferred stock redemption
value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,156,393
    )
    
    
    (10,156,393
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,901,911
    )
    
    
    (10,901,911
    )BALANCE  December 31, 2004
    
    
    611,466
    
    
    
    12,284
    
    
    
    64,259
    
    
    
    
    
    
    
    (41,424,974
    )
    
    
    (41,348,431
    )Exercise of stock options on common stock
    
    
    250
    
    
    
    63
    
    
    
    1,812
    
    
    
    
    
    
    
    
    
    
    
    1,875Share-based compensation related to stock
options
    
    
    
    
    
    
    
    
    
    
    219,353
    
    
    
    
    
    
    
    
    
    
    
    219,353Convertible preferred stock redemption
value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,898,787
    )
    
    
    (2,898,787
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,935,300
    )
    
    
    (15,935,300
    )BALANCE  December 31, 2005
    
    
    611,716
    
    
    
    12,347
    
    
    
    285,424
    
    
    
    
    
    
    
    (60,259,061
    )
    
    
    (59,961,290
    )Issuance of common stock on March 16, 2006
at $4.50 per share in exchange for a note
receivable
    
    
    320,000
    
    
    
    80,000
    
    
    
    1,360,000
    
    
    
    (1,440,000
    )Exercise of stock options on common stock
    
    
    930
    
    
    
    233
    
    
    
    6,742
    
    
    
    
    
    
    
    
    
    
    
    6,975Share-based compensation related to stock
options
    
    
    
    
    
    
    
    
    
    
    398,960
    
    
    
    
    
    
    
    
    
    
    
    398,960Undeclared and unpaid 6% dividends, earned
in 2006 on Series C-2 and Series D
Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,413,591
    )
    
    
    (4,413,591
    )Convertible preferred stock redemption
value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,737,544
    )
    
    
    (17,737,544
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,531,581
    )
    
    
    (23,531,581
    )BALANCE  December 31, 2006
    
    
    932,646
    
    
    
    92,580
    
    
    
    2,051,126
    
    
    
    (1,440,000
    )
    
    
    (105,941,777
    )
    
    
    (105,238,071
    )Share-based compensation related to stock
options
    
    
    
    
    
    
    
    
    
    
    1,232,751
    
    
    
    
    
    
    
    
    
    
    
    1,232,751Interest received on note receivable from
chief executive officer
    
    
    
    
    
    
    
    
    
    
    90,740
    
    
    
    
    
    
    
    
    
    
    
    90,740Proceeds from note receivable from chief
executive officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,440,000
    
    
    
    
    
    
    
    1,440,000Undeclared and unpaid 6% dividends, earned
on Series C-2 and Series D Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,832,822
    )
    
    
    (4,832,822
    )Convertible preferred stock redemption
value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608,940
    )
    
    
    (608,940
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,037,952
    )
    
    
    (42,037,952
    )BALANCE  September 30, 2007
    
    
    932,646
    
    
    $
    92,580
    
    
    $
    3,374,617
    
    
    $
    
    
    
    $
    (153,421,491
    )
    
    $
    (149,954,294
    )
  3




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
 Period FromNine Month
    
    
    Nine Month
    
    
    December 30, 1999Period Ended
    
    
    Period Ended
    
    
    (Date of Incorporation)September 30,
    
    
    September 30,
    
    
    Through2006
    
    
    2007
    
    
    September 30, 2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (17,528,278
    )
    
    $
    (42,037,952
    )
    
    $
    (112,362,875
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    936,654
    
    
    
    1,275,936
    
    
    
    4,379,056Amortization of financing costs and accretion of debt discount
    
    
    
    
    
    
    470,702
    
    
    
    470,702Loss from write-off of intangible assets
    
    
    
    
    
    
    206,683
    
    
    
    505,606Share-based compensation
    
    
    297,883
    
    
    
    1,232,751
    
    
    
    1,889,372Change in fair value of preferred stock warrants
    
    
    237,051
    
    
    
    5,135,586
    
    
    
    5,272,615Change in fair value of convertible derivative liability
    
    
    2,916,822
    
    
    
    11,888,721
    
    
    
    14,805,543Changes in operating assets and liabilities:Accounts receivable
    
    
    183,255
    
    
    
    (28,669
    )
    
    
    (73,485
    )Inventories
    
    
    (968,648
    )
    
    
    (989,572
    )
    
    
    (1,874,421
    )Other current assets
    
    
    (485,763
    )
    
    
    (59,517
    )
    
    
    (576,269
    )Other assets
    
    
    (10,000
    )
    
    
    10,830
    
    
    
    (77,630
    )Accounts payable
    
    
    86,002
    
    
    
    464,622
    
    
    
    1,597,725Accrued and other current liabilities
    
    
    916,351
    
    
    
    610,932
    
    
    
    2,001,530Net cash used in operating activities
    
    
    (13,418,671
    )
    
    
    (21,818,947
    )
    
    
    (84,042,531
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from investment maturities
    
    
    1,047
    
    
    
    
    
    
    
    53,894Purchases of property and equipment
    
    
    (1,172,221
    )
    
    
    (1,876,758
    )
    
    
    (10,129,280
    )Investments in intangible assets
    
    
    (1,672,366
    )
    
    
    (1,029,670
    )
    
    
    (5,382,227
    )Net cash used in investing activities
    
    
    (2,843,540
    )
    
    
    (2,906,428
    )
    
    
    (15,457,613
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from related party notes payable
    
    
    1,320,148
    
    
    
    
    
    
    
    6,339,210Proceeds from issuance of debt
    
    
    
    
    
    
    12,500,000
    
    
    
    12,500,000Repayment of long term debt
    
    
    
    
    
    
    (154,522
    )
    
    
    (154,522
    )Payments on capital lease obligation
    
    
    (14,286
    )
    
    
    (24,203
    )
    
    
    (50,642
    )Proceeds from principle and interest on CEO note receivable
    
    
    
    
    
    
    1,530,740
    
    
    
    1,530,740Deferred financing fees
    
    
    
    
    
    
    (114,565
    )
    
    
    (114,565
    )Stock issuance costs
    
    
    
    
    
    
    (18,570
    )
    
    
    (18,570
    )Proceeds from the issuance of common stock
    
    
    6,975
    
    
    
    
    
    
    
    47,085Proceeds from the issuance of Series A Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    3,008,357Proceeds from the issuance of Series B Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    5,375,001Proceeds from the issuance of Series C Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    15,000,000Proceeds from the issuance of Series C-2 Convertible Preferred
Stock
    
    
    
    
    
    
    
    
    
    
    27,350,087Proceeds from the issuance of Series D Convertible Preferred Stock
    
    
    46,793,897
    
    
    
    
    
    
    
    46,793,897Net cash provided by financing activities
    
    
    48,106,734
    
    
    
    13,718,880
    
    
    
    117,606,078NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    31,844,523
    
    
    
    (11,006,495
    )
    
    
    18,105,934CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    3,641,338
    
    
    
    29,112,429CASH AND CASH EQUIVALENTS  End of period
    
    $
    35,485,861
    
    
    $
    18,105,934
    
    
    $
    18,105,934NONCASH INVESTING AND FINANCING ACTIVITIES:Equipment acquired under capital lease
    
    $
    117,685
    
    
    $
    
    
    
    $
    117,685Capital expenditures included in accounts payable
    
    
    402,334
    
    
    
    220,497
    
    
    
    220,497Capital expenditures included in accrued liabilities
    
    
    
    
    
    
    110,387
    
    
    
    110,387Patent costs capitalized and included in accounts payable
    
    
    170,822
    
    
    
    253,372
    
    
    
    253,372Patent and license costs capitalized and included in accrued
liabilities
    
    
    65,000
    
    
    
    347,654
    
    
    
    347,654Common stock issued for note payable  related party
    
    
    1,440,000
    
    
    
    
    
    
    
    1,440,000Payment of Series A Convertible Preferred Stock dividends in
additional shares of Series A Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    410,539Accumulated dividends on Series C-2 and Series D Convertible
Preferred Stock  undeclared and unpaid
    
    
    2,882,262
    
    
    
    4,832,822
    
    
    
    9,246,413Conversion of related party notes payable and accrued interest of
$204,335, into Series C-2 Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    7,212,156Conversion of related party notes payable and accrued interest of
$177,358 into Series D Convertible Preferred Stock
    
    
    6,516,568
    
    
    
    
    
    
    
    6,516,568Equity offering transaction costs included in deferred equity
financing costs and accrued financing costs
    
    
    
    
    
    
    1,928,358
    
    
    
    1,928,358
  4




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Financial Statements
As of December 31, 2006 and September 30, 2007, and
For the three and nine month periods ended September 30, 2006 and 2007 and
for the Cumulative Period From December 30, 1999
(Date of Incorporation) Through September 30, 2007
(Unaudited)
 1. Description of Business
 Accounting and Reporting by Development
Stage Enterprises
 Basis of Presentation
   2. Summary of Significant Accounting Policies
 Cash and Cash Equivalents
 Receivables
 Inventories
 Property and Equipment
 Computers and office equipment
    
    3 yearsEngineering and laboratory equipment, including tooling
    
    5 yearsFurniture and fixtures
    
    7 yearsManufacturing equipment
    
    7 yearsLeasehold improvements
    
    7 years
 5




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
  Intangible Assets
 Deferred Financing Costs
 Impairment of Long-Lived Assets
 Use of Estimates
 Revenue Recognition
  Research and Development Costs
 Income Taxes Accounting for Income Taxes
 6




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
  Accounting for Uncertainty in Income Taxes
 Share-Based Compensation Share-Based
Payment
 Fair Value of Financial Instruments
 Preferred Stock
 New Accounting Standards Issued Not Yet Adopted
 Net Loss Per Common Share  Earnings Per Share,
  Three and nine month periodsended September 30,2006
    
    2007Stock options
    
    
    857,728
    
    
    
    3,251,548Convertible preferred stock
    
    
    12,069,968
    
    
    
    12,291,401Convertible preferred stock warrants
    
    
    1,445,997
    
    
    
    1,445,99714,373,693
    
    
    
    16,988,946
 7




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
 3. Intangible Assets
  December 31, 2006
    
    
    September 30, 2007Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    Value
    
    
    AmortizationIntellectual property
 licenses
    
    $
    1,796,359
    
    
    $
    
    
    
    $
    1,821,682
    
    
    $
    Patents
    
    
    3,172,335
    
    
    
    (102,744
    )
    
    
    3,655,391
    
    
    
    (192,181
    )Total
    
    $
    4,968,694
    
    
    $
    (102,744
    )
    
    $
    5,477,073
    
    
    $
    (192,181
    )
  Years Ending December 312007 (Period from October 1 to December 31)
    
    $
    111,8952008
    
    
    447,5802009
    
    
    304,5882010
    
    
    232,1952011
    
    
    232,195
    4. Related Party Transactions
    8




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
   5. Equity Incentive Plan
     2004
    
    2005
    
    2006
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    75
    %
    
    
    80
    %
    
    
    85
    %
    
    
    77
    %Risk free interest rate
    
    
    3.94
    
    
    
    4.13
    
    
    
    4.82
    
    
    
    4.51Weighted-average expected option life
    
    6.3 years
    
    
    7.5 years
    
    
    8.4 years
    
    
    7.0 yearsEstimated weighted-average fair value
on the date of grant based on the above assumptions
    
    $
    1.24
    
    
    $
    2.28
    
    
    $
    2.56
    
    
    $
    3.31Estimated forfeiture rate for unvested options
    
    
    N/A
    
    
    
    12.5
    %
    
    
    12.5
    %
    
    
    4.6
    %
  9




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2007
    
    
    860,728
    
    
    $
    6.25Granted
    
    
    2,388,820
    
    
    $
    4.50ExercisedForfeited
    
    
    (4,800
    )
    
    $
    4.75Outstanding  September 30, 2007
    
    
    3,244,748
    
    
    $
    4.98
    
    
    
    9.03
    
    
    $
    30,059,290Exercisable  September 30, 2007
    
    
    444,435
    
    
    $
    7.90
    
    
    
    7.02
    
    
    $
    3,503,567Vested and Expected to Vest  September 30, 2007
    
    
    3,102,896
    
    
    $
    5.00
    
    
    
    8.96
    
    
    $
    28,711,696
   Weighted AverageNumber of
    
    
    Grant DateNonvested Options
    
    Options
    
    
    Fair ValueNonvested at January 1, 2007
    
    
    618,952
    
    
    $
    2.25Granted
    
    
    2,388,820
    
    
    
    3.31Vested
    
    
    (202,959
    )
    
    
    2.87Forfeited
    
    
    (4,500
    )
    
    
    4.57Nonvested at September 30, 2007
    
    
    2,800,313
    
    
    $
    3.10
 6. Income Taxes
   10




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
  December 31,
    
    
    September 30,2006
    
    
    2007Deferred tax assets/(liabilities):Net operating losses
    
    $
    25,120,442
    
    
    $
    33,989,080Research and development credits
    
    
    4,263,902
    
    
    
    5,294,408Depreciation on property and equipment
    
    
    (391,640
    )
    
    
    (170,243
    )Amortization of intangible assets
    
    
    (1,288
    )
    
    
    15,67328,991,416
    
    
    
    39,128,918Less valuation allowance
    
    
    (28,991,416
    )
    
    
    (39,128,918
    )Deferred tax asset  net
    
    $
    
    
    
    $
    
  Three and Nine Month PeriodsEnded September 30,2006
    
    2007(unaudited)
    
    (unaudited)Tax provision at the statutory federal rate
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal income tax benefit
    
    
    4.0
    %
    
    
    4.0
    %Valuation allowance
    
    
    (38.0
    )%
    
    
    (38.0
    )%0
    %
    
    
    0
    %
 7. License Agreements
     11




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
    8. Convertible Preferred Stock
 Series A Convertible Preferred Stock
 Series B Convertible Preferred Stock
 Series C Convertible Preferred Stock
 Series C-2 Convertible Preferred Stock
 12




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
 Series D Convertible Preferred Stock
  Rights and Privileges on Convertible Preferred Stock
    Series B, C, C-2 and D Convertible Preferred Stock
 Voting
 Conversion
 13




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
  Dividends
  Liquidation
   14




---



##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
   TotalConvertiblePreferredSeries A
    
    
    Series B
    
    
    Series C
    
    
    Series C-2
    
    
    Series D
    
    
    StockIssuance of 4,328,571 shares of Series A Convertible Preferred Stock on January 18, 2000
    
    $
    2,005,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,005,571Exercise of warrant for 2,164,287 shares of Series A Convertible Preferred Stock on March 13, 2001
    
    
    1,002,786
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,002,786Issuance of 886,125 shares of Series A Convertible Preferred Stock as dividends on Series A Convertible Preferred Stock
    
    
    410,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410,539Issuance of 3,486,395 shares of Series B Convertible Preferred Stock on March 13, 2001
    
    
    
    
    
    $
    5,125,001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,125,001Issuance of 113,122 shares of Series B Convertible Preferred Stock on February 13, 2002
    
    
    
    
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Issuance of 25,000,000 shares of Series C Convertible Preferred Stock on November 6, 2002
    
    
    
    
    
    
    
    
    
    $
    15,000,000
    
    
    
    
    
    
    
    
    
    
    
    15,000,000Issuance of 34,891,877 shares of Series C-2 Convertible Preferred Stock on September 2, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,212,156less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,489,188
    )
    
    
    
    
    
    
    8,722,968Issuance of 14,263,364 shares of Series C-2 Convertible Preferred Stock on September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,992,178less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,426,337
    )
    
    
    
    
    
    
    3,565,841Conversion of 7,378,983 shares of Series A Convertible Preferred Stock into 9,767,665 shares of Series C-2 Convertible
Preferred Stock in September 2004
    
    
    (3,418,896
    )
    
    
    
    
    
    
    
    
    
    
    3,418,896less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (976,766
    )
    
    
    
    
    
    
    (976,766
    )Conversion of 3,582,510 shares of Series B Convertible Preferred Stock into 15,285,714 shares of Series C-2
Convertible Preferred Stock in September 2004
    
    
    
    
    
    
    (5,349,605
    )
    
    
    
    
    
    
    5,349,605less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,528,571
    )
    
    
    
    
    
    
    (1,528,571
    )Conversion of 14,949,993 shares of Series C Convertible Preferred Stock into 25,628,558 shares of Series C-2
Convertible Preferred Stock in September 2004
    
    
    
    
    
    
    
    
    
    
    (8,969,997
    )
    
    
    8,969,997less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,562,856
    )
    
    
    
    
    
    
    (2,562,856
    )Redemption value adjustment, September 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,983,718
    
    
    
    
    
    
    
    9,983,718Allocation to preferred stock warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (172,675
    )Redemption value adjustment, December 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,675Issuance of 28,987,866 shares of Series C-2 Convertible Preferred Stock from June to September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,145,753
 15




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
 TotalConvertiblePreferredSeries A
    
    
    Series B
    
    
    Series C
    
    
    Series C-2
    
    
    Series D
    
    
    Stockless allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,898,787
    )
    
    
    
    
    
    
    7,246,966Redemption value adjustment, June  September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,898,787
    
    
    
    
    
    
    
    2,898,787Allocation to preferred stock warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166
    )Redemption value adjustment, March 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,166Issuance of 162,857,142 shares of Series D Convertible Preferred Stock on April 12, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,310,465less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,285,714
    )
    
    
    37,024,751Allocation to preferred stock warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,449,664
    )
    
    
    (1,449,664
    )Redemption value adjustment, June 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,735,378
    
    
    
    17,735,378Issuance of 5,535,824 shares of Series D Convertible Preferred Stock in connection with debt borrowings in February 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,937,538less allocation to convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608,940
    )
    
    
    1,328,598Redemption value adjustment, February 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608,940
    
    
    
    608,940Undeclared and unpaid dividends on
Series C-2 and Series D Convertible Preferred Stock earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,051,526
    
    
    
    5,194,887
    
    
    
    9,246,413Convertible preferred stock outstanding at September 30, 2007
    
    $
    
    
    
    $
    25,396
    
    
    $
    6,030,003
    
    
    $
    49,140,111
    
    
    $
    60,442,890
    
    
    $
    115,638,400
 Warrants
  Series of Preferred Stock to
    
    Number of
    
    
    Expirationwhich the Warrant is Exercisable
    
    Warrants
    
    
    DateSeries C
    
    
    16,666
    
    
    October 2012Series C-2
    
    
    361,759
    
    
    June 2009Series C-2
    
    
    453,526
    
    
    July 2009Series C-2
    
    
    1,423,806
    
    
    October 2012Series C-2
    
    
    1,155,197
    
    
    February 2014Series C-2
    
    
    1,542
    
    
    March 2014Series C-2
    
    
    42,857
    
    
    January 2016Series D
    
    
    28,571,431
    
    
    April 2011Series D
    
    
    4,123,131
    
    
    April 2013
 16




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
   December 31,
    
    September 30,2006
    
    2007Expected dividend yield
    
    
    6
    %
    
    
    6
    %Expected volatility
    
    
    40
    %
    
    
    61
    %Risk free interest rate
    
    
    4.70
    %
    
    
    4.07
    %Weighted-average warrant term
    
    4.7 years
    
    
    3.9 yearsEstimated weighted-average fair value
    
    $
    0.05
    
    
    $
    0.19
  9. Leases
   Operating
    
    
    CapitalYears Ending December 31
    
    Leases
    
    
    Leases2007 (Period from October 1 to December 31)
    
    $
    124,288
    
    
    $
    10,5452008
    
    
    506,473
    
    
    
    42,1802009
    
    
    519,135
    
    
    
    22,1082010
    
    
    264,425Total minimum lease payments
    
    $
    1,414,321
    
    
    
    74,833Less amounts representing interest
    
    
    
    
    
    
    (7,790
    )Net present value
    
    
    
    
    
    
    67,043Less current portion of net minimum lease payments
    
    
    
    
    
    
    (35,922
    )Long-term portion of net minimum lease payments
    
    
    
    
    
    $
    31,121
 10. Long Term Debt
  17




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
    2007 (October 1 to December 31)
    
    $
    12,1512008
    
    
    3,597,8232009
    
    
    4,818,2112010
    
    
    3,917,293$
    12,345,478
 11. Subsequent Events
     18




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Consolidated Financial Statements (Unaudited)  (Continued)
   19




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements about us and our
industry that involve substantial risks and uncertainties. All statements, other than statements of
historical facts, included in this Quarterly Report on Form 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 on Form 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 the 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 on Form 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 and elsewhere in this Quarterly Report on
Form 10-Q.
 Business Overview
    20




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##### Table of Contents



Financial Operations Overview
 Revenue
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Income
  Interest Expense
  21




---



##### Table of Contents



Results of Operations
 Three Month Period Ended September 30, 2007 Compared to Three Month Period Ended September 30, 2006
 Revenues
  Cost of Product Sales
  Research and Development Expenses
   Sales, General and Administrative Expenses
   Change in Fair Value of Convertible Derivative Liability
  22




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##### Table of Contents



Change in the Fair Value of the Preferred Stock Warrants
  Interest Income
  Interest Expense
  Nine Month Period Ended September 30, 2007 Compared to Nine Month Period Ended September 30, 2006
 Revenues
  Cost of Product Sales
  Research and Development Expenses
   Sales, General and Administrative Expenses
  23




---



##### Table of Contents



Change in Fair Value of Convertible Derivative Liability
  Change in the Fair Value of the Preferred Stock Warrants
  Interest Income
  Interest Expense
  Liquidity and Capital Resources
     24




---



##### Table of Contents




    
    the level of research and development investment required to maintain and improve our
technology;
    
    the amount and growth rate, if any, 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;
 25




---



##### Table of Contents




    
    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.
  Income Taxes
  Contractual Obligations and Commitments
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsLong-term debt obligations
    
    $
    12,345,478
    
    
    $
    2,494,534
    
    
    $
    9,850,944
    
    
    $
    
    
    
    $
    Interest on long-term debt obligations
    
    
    2,730,189
    
    
    
    1,437,670
    
    
    
    1,292,519
    
    
    
    
    
    
    
    Capital lease
    
    
    67,043
    
    
    
    35,922
    
    
    
    31,121
    
    
    
    
    
    
    
    Operating lease
    
    
    1,414,321
    
    
    
    503,366
    
    
    
    910,955
    
    
    
    
    
    
    
    Obligations under license agreements
    
    
    1,439,500
    
    
    
    97,500
    
    
    
    372,000
    
    
    
    245,000
    
    
    
    725,000Total
    
    $
    17,996,531
    
    
    $
    4,568,992
    
    
    $
    12,457,539
    
    
    $
    245,000
    
    
    $
    725,000
  License Agreements
   26




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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
   Stock-Based Compensation Expense
   27




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Convertible Derivative Liability
   Recent Accounting Pronouncements
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  28




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Item 4. Controls and Procedures
   
    
    sufficient personnel with appropriate financial accounting and reporting expertise;
    
    sufficient segregation of duties due to our limited number of finance and accounting
personnel;
    
    sufficient internal controls for addressing accounting for complex transactions, such
as those related to our equity transactions;
    
    a formal process and related controls to identify and appropriately record and
disclose certain contractual obligations, such as licenses and other agreements;
    
    internal controls related to cutoff, impacting the accounting and reporting of
inventory, prepaid expenses, accounts payable and accrued expenses; and
    
    a perpetual record of our inventory of purchased components that formally tracks
inventory during interim financial periods.
    
    
    Engaged personnel with a sufficient level of experience in accounting to produce
timely financial reporting and to implement internal control procedures. In addition, we
hired a controller with the expertise required to account for complex transactions
and to complete SEC reporting requirements. The Company has approved a staffing plan to
continue to build a sufficient accounting department.
    
    Designed controls to segregate key responsibilities, such as maintaining custody
of assets, recording entries in the books and records and reviewing the books and records;
    
    Designed formal processes and controls to identify and record contractual
obligations and to address cutoff impacting the accounting and reporting of inventory,
prepaid expenses, accounts payable and accrued expenses; and
    
    Conducted a physical inventory of purchased components as of September 30, 2007
and designed processes to maintain a perpetual inventory listing on a monthly basis.
  29




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PART II.
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We have a history of losses, our losses are likely to increase significantly, and we may never
achieve or maintain profitability.
  Our financial results depend on commercial acceptance of the Verigene System, its array of tests,
and the development of additional tests.
   The regulatory approval process is expensive, time consuming and uncertain and the failure to
obtain such approvals will prevent us from commercializing our future products.
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We and our customers are subject to various governmental regulations, and we may incur significant
expenses to comply with, and experience delays in our product commercialization as a result of,
these regulations.
     If third-party payors do not reimburse our customers for the use of our clinical diagnostic
products or if they reduce reimbursement levels, our ability to sell our products will be harmed.
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We may fail to receive positive clinical results from the diagnostic tests currently in development
that require clinical trials, and even if we receive positive clinical results, we may still fail
to receive the necessary clearances or approvals to market our products.
  Our operating results may be variable and unpredictable.
  If we do not achieve significant product revenue, we may not be able to meet our cash requirements
without obtaining additional capital from external sources, and if we are unable to do so, we may
have to curtail or cease operations.
  
    
    the level of research and development investment required to maintain and improve our
technology;
    
    the amount and growth rate, if any, 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;
    
    the expansion of our sales force; and
    
    changes in regulatory policies or laws that affect our operations.
  32




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If our products do not perform as expected or the reliability of the technology on which our
products are based is questioned, we could experience lost revenue, delayed or reduced market
acceptance of our products, increased costs and damage to our reputation.
   We rely on third-party license agreements for patents and other technology related to our products,
and the termination of these agreements could delay or prevent us from being able to commercialize
our products.
    If we are unable to obtain, maintain and enforce intellectual property protection covering our
products, others may be able to make, use, or sell our products, which could adversely affect our
ability to compete in the market.
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Our products could infringe patent rights of others, which may require costly litigation and, if we
are not successful, could cause us to pay substantial damages or limit our ability to commercialize
our products.
   We have limited experience in sales and marketing and may be unable to successfully commercialize
our Verigene System, or it may be difficult to build brand loyalty.
  
    
    our ability to attract and retain the skilled support team, marketing staff and sales
force necessary to commercialize and gain market acceptance for our technology and our
products;
 34




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
    
    the ability of our sales and marketing team to identify and penetrate the potential
customer base including hospitals, research institutions, and independent diagnostic
laboratories;
    
    the time and cost of establishing a support team, marketing staff and sales force; and
    
    the difficulty of establishing brand recognition and loyalty for our products.
  We may be unsuccessful in our long-term goal of expanding our product offerings outside the United
States.
   Manufacturing risks and inefficiencies may adversely affect our ability to produce products.
   We will need to develop manufacturing capacity by ourselves or with third parties.
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Our business and future operating results may be adversely affected by events outside of our
control.
  We face intense competition from established and new companies in the molecular diagnostics field.
  Our success may depend upon how we and our competitors anticipate and adapt to market conditions.
  We may not be able to manage our anticipated growth, and we may experience constraints or
inefficiencies caused by unanticipated acceleration and deceleration of customer demand.
   We use hazardous chemicals, biological materials, and infectious diseases in our business. Any
claims relating to improper handling, storage or disposal of these materials could be time
consuming and costly.
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If we are unable to recruit and retain key executives and scientists, we may be unable to achieve
our goals.
   Healthcare reform and restrictions on reimbursement may adversely affect our profitability.
   Risks Related to Our Common Stock
 The market price of our common stock may be volatile and fluctuate significantly, which could
result in substantial losses for investors and subject us to securities class action litigation.
  
    
    fluctuations in our quarterly operating results or the operating results of our
competitors;
    
    changes in estimates of our financial results or recommendations by securities
analysts;
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
    
    variance in our financial performance from the expectations of securities analysts;
    
    changes in the estimation of the future size and growth rate of our markets;
    
    changes in accounting principles or changes in interpretations of existing principles,
which could affect our financial results;
    
    failure of our products to achieve or maintain market acceptance or commercial
success;
    
    conditions and trends in the markets we serve;
    
    changes in general economic, industry and market conditions;
    
    success of competitive products and services;
    
    changes in market valuations or earnings of our competitors;
    
    changes in our pricing policies or the pricing policies of our competitors;
    
    announcements of significant new products, contracts, acquisitions or strategic
alliances by us or our competitors;
    
    changes in legislation or regulatory policies, practices, or actions;
    
    the commencement or outcome of litigation involving our company, our general industry
or both;
    
    recruitment or departure of key personnel;
    
    changes in our capital structure, such as future issuances of securities or the
incurrence of additional debt;
    
    actual or expected sales of our common stock by our stockholders; and
    
    the trading volume of our common stock.
  If equity research analysts do not publish research or reports about our business or if they
issue unfavorable commentary or downgrade our common stock, the price of our common stock could
decline.
  Certain provisions of our corporate governing documents could make an acquisition of our
company more difficult.
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
    
    authorize the issuance of preferred stock that can be created and issued by our board
of directors without prior stockholder approval, commonly referred to as blank check
preferred stock, with rights senior to those of our common stock;
    
    limit the persons who can call special stockholder meetings;
    
    provide that a majority vote of our stockholders is required to amend our amended and
restated certificate of incorporation and amended and restated by-laws;
    
    establish advance notice requirements to nominate persons for election to our board
of directors or to propose matters that can be acted on by stockholders at stockholder
meetings;
    
    not provide for cumulative voting in the election of directors; and
    
    provide for the filling of vacancies on our board of directors by action of a
majority of the directors and not by the stockholders.
   We do not currently intend to pay dividends on our capital stock and, consequently, your
ability to achieve a return on your investment will depend on appreciation in the price of our
common stock.
  We and our independent registered public accounting firm have identified material weaknesses
in our internal control over financial reporting. Failure to achieve and maintain effective
internal control over financial reporting could result in our failure to accurately report our
financial results.
   
    
    sufficient personnel with appropriate financial accounting and reporting expertise;
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
    
    sufficient segregation of duties due to our limited number of finance and accounting
personnel;
    
    sufficient internal controls for addressing accounting for complex transactions, such as
those related to our equity transactions;
    
    a formal process and related controls to identify and appropriately record and disclose
certain contractual obligations, such as licenses and other agreements; and
    
    internal controls related to cutoff, impacting the accounting and reporting of
inventory, prepaid expenses, accounts payable and accrued expenses.
   We will incur increased costs and demands upon management as a result of complying with the
laws and regulations affecting public companies, which may adversely affect our operating results
and failure to achieve and maintain effective internal controls in accordance with Section 404 of
the Sarbanes-Oxley Act could cause investors to lose confidence in our operating results and in the
accuracy of our financial reports and could have a material adverse effect on our business and on
the price of our common stock.
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Concentration of ownership among some of our stockholders, including directors and management
may limit your ability to influence corporate matters.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
      41




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Item 6. Exhibits
 Exhibit Number
    
    Exhibit Description3.1
    
    Second Amended and Restated Certificate of Incorporation of
Nanosphere, Inc. (2) (Exhibit 3.1)3.2
    
    Amended and Restated Bylaws of Nanosphere, Inc. (2) (Exhibit 3.2)4.1
    
    Specimen of common stock certificate (3) (Exhibit 4.3)4.2
    
    Nanosphere, Inc. Amended and Restated Registration Rights
Agreement, dated as of April 12, 2006 (1)10.1
    
    Non-Exclusive Financial Advisory Services Engagement Letter,
dated as of August 8, 2007, by and between Nanosphere, Inc. and
Allen & Company LLC (3) (Exhibit 10.30)31.1
    
    Certification of William P. Moffitt, President and 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 J. Roger Moody, Jr., 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 William P. Moffitt III, President and 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 J. Roger Moody, Jr., Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *99.1
    
    Press release, dated
December 13, 2007, regarding the Companys results for its
third quarter ended September 30, 2007 *
 
 *
    
    Filed herewith(1)
    
    Incorporated by reference from the Companys Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission on August 13, 2007.(2)
    
    Incorporated by reference from the Companys Amendment No. 2 to Form S-1 as filed with the
Securities and Exchange Commission on October 17, 2007. The exhibit reference in parentheses
indicates the corresponding exhibit number in such Amendment.(3)
    
    Incorporated by reference from the Companys Amendment No. 3 to Form S-1 as filed with the
Securities and Exchange Commission on October 29, 2007. The exhibit reference in parentheses
indicates the corresponding exhibit number in such Amendment. 42




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SIGNATURES
  NANOSPHERE, INC.Date:  December 13, 2007
    

/s/
William P. Moffitt IIIWilliam P. Moffitt III
 
President and Chief Executive OfficerDate:  December 13, 2007
    

/s/
J. Roger Moody, Jr.J. Roger Moody, Jr.
Chief Financial Officer and Treasurer