##### 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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission File Number 001-33775
 Nanosphere, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    36-4339870(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)4088 Commercial Avenue
    
    Northbrook, Illinois 60062(Address of principal executive offices)
    
    (Zip Code)
 (847) 400-9000
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o
 o þ




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##### 



NANOSPHERE, INC.
 INDEX
 Part I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Balance Sheets
    
    
    1Statements of Operations
    
    
    2Statements of Cash Flows
    
    
    3Notes to Financial Statements
    
    
    4-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6. Exhibits
    
    
    19Exhibit 18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Nanosphere, Inc.
(A Development Stage Company)
 
 Balance Sheets
 (Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007As Adjusted(Note 1)CURRENT ASSETS:Cash and cash equivalents
    
    $
    83,742,196
    
    
    $
    114,312,573Accounts receivable
    
    
    476,685
    
    
    
    100,799Inventories
    
    
    1,894,954
    
    
    
    1,903,004Other current assets
    
    
    366,389
    
    
    
    670,402Total current assets
    
    
    86,480,224
    
    
    
    116,986,778PROPERTY AND EQUIPMENT Net
    
    
    7,924,030
    
    
    
    7,033,597INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    1,526,471
    
    
    
    1,779,934OTHER ASSETS
    
    
    136,373
    
    
    
    163,553TOTAL
    
    $
    96,067,098
    
    
    $
    125,963,862CURRENT LIABILITIES:Accounts payable
    
    $
    1,627,080
    
    
    $
    2,221,522Accrued compensation
    
    
    995,191
    
    
    
    1,303,355Accrued license fees
    
    
    266,644
    
    
    
    393,473Accrued financing costs
    
    
    
    
    
    
    778,731Other current liabilities
    
    
    653,017
    
    
    
    969,962Long term debt  current portion
    
    
    4,673,421
    
    
    
    3,597,823Lease payable  current portion
    
    
    27,925
    
    
    
    37,037Total current liabilities
    
    
    8,243,278
    
    
    
    9,301,903LONG-TERM LIABILITIES:Lease payable  noncurrent portion
    
    
    
    
    
    
    21,433Long term debt  noncurrent portion
    
    
    4,450,313
    
    
    
    7,440,804Total liabilities
    
    
    12,693,591
    
    
    
    16,764,140COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares
authorized; 22,228,696 shares and 22,192,005
shares issued and outstanding as of September 30,
2008 and December 31, 2007, respectively
    
    
    222,287
    
    
    
    305,174Preferred stock, $0.01 par value; 10,000,000
shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    273,664,993
    
    
    
    271,765,776Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,424,551Deficit accumulated during the development stage
    
    
    (195,937,544
    )
    
    
    (168,295,779
    )Total stockholders equity
    
    
    83,373,507
    
    
    
    109,199,722TOTAL
    
    $
    96,067,098
    
    
    $
    125,963,862
   1




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 
 Statements of Operations

(Unaudited)
 Period FromDecember 30, 1999(Date of Incorporation)Three Month Periods Ended September 30,
    
    
    Nine Month Periods Ended September 30,
    
    
    Through2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    September 30, 2008As Adjusted
    
    
    
    
    
    As Adjusted(Note 1)
    
    
    
    
    
    (Note 1)REVENUE:Grant and contract revenue
    
    $
    73,459
    
    
    $
    192,880
    
    
    $
    346,071
    
    
    $
    919,383
    
    
    $
    9,163,699Product sales
    
    
    209,772
    
    
    
    6,125
    
    
    
    707,891
    
    
    
    59,795
    
    
    
    1,116,911Total revenue
    
    
    283,231
    
    
    
    199,005
    
    
    
    1,053,962
    
    
    
    979,178
    
    
    
    10,280,610COSTS AND EXPENSES:Cost of product sales
    
    
    246,128
    
    
    
    2,844
    
    
    
    821,733
    
    
    
    21,211
    
    
    
    1,080,701Research and development
    
    
    5,683,346
    
    
    
    5,778,946
    
    
    
    17,631,003
    
    
    
    16,287,056
    
    
    
    99,517,013Sales, general, and administrative
    
    
    3,376,807
    
    
    
    4,429,214
    
    
    
    10,563,212
    
    
    
    9,685,797
    
    
    
    43,305,668Total costs and expenses
    
    
    9,306,281
    
    
    
    10,211,004
    
    
    
    29,015,948
    
    
    
    25,994,064
    
    
    
    143,903,382Loss from operations
    
    
    (9,023,050
    )
    
    
    (10,011,999
    )
    
    
    (27,961,986
    )
    
    
    (25,014,886
    )
    
    
    (133,622,772
    )OTHER INCOME (EXPENSE):Change in fair value of
convertible derivative liability
    
    
    
    
    
    
    (11,888,721
    )
    
    
    
    
    
    
    (11,888,721
    )
    
    
    (17,777,723
    )Change in fair value of preferred
stock warrants
    
    
    
    
    
    
    (4,858,974
    )
    
    
    
    
    
    
    (5,135,586
    )
    
    
    (4,551,236
    )Foreign exchange (gain) loss
    
    
    1,347
    
    
    
    (27,175
    )
    
    
    (23,298
    )
    
    
    (40,945
    )
    
    
    (75,660
    )Interest expense  related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (388,804
    )Interest expense
    
    
    (499,836
    )
    
    
    (572,772
    )
    
    
    (1,630,464
    )
    
    
    (1,396,520
    )
    
    
    (3,615,589
    )Interest income
    
    
    495,067
    
    
    
    286,654
    
    
    
    1,973,984
    
    
    
    1,045,087
    
    
    
    5,796,321Total other income (expense)
    
    
    (3,422
    )
    
    
    (17,060,988
    )
    
    
    320,222
    
    
    
    (17,416,685
    )
    
    
    (20,612,691
    )NET LOSS
    
    
    (9,026,472
    )
    
    
    (27,072,987
    )
    
    
    (27,641,764
    )
    
    
    (42,431,571
    )
    
    
    (154,235,463
    )Accumulated convertible preferred
stock dividends
    
    
    
    
    
    
    (1,652,493
    )
    
    
    
    
    
    
    (4,832,822
    )
    
    
    (10,300,417
    )Convertible preferred stock
redemption value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608,940
    )
    
    
    (31,401,664
    )NET LOSS ATTRIBUTABLE TO COMMON
STOCK
    
    $
    (9,026,472
    )
    
    $
    (28,725,480
    )
    
    $
    (27,641,764
    )
    
    $
    (47,873,333
    )
    
    $
    (195,937,544
    )Net loss per common share  basic
and diluted
    
    $
    (0.41
    )
    
    $
    (30.80
    )
    
    $
    (1.24
    )
    
    $
    (51.33
    )Weighted average number of common
shares outstanding  basic and
diluted
    
    
    22,228,539
    
    
    
    932,646
    
    
    
    22,207,843
    
    
    
    932,646
   2




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 
 Statements of Cash Flows

(Unaudited)
 Period FromDecember 30, 1999(Date of Incorporation)Nine Month Periods Ended September 30,
    
    
    Through2008
    
    
    2007
    
    
    September 30, 2008As Adjusted(Note 1)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (27,641,764
    )
    
    $
    (42,431,571
    )
    
    $
    (154,235,463
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,142,214
    
    
    
    1,186,499
    
    
    
    6,928,562Amortization of financing costs and accretion of debt discount
    
    
    592,040
    
    
    
    470,702
    
    
    
    1,263,520Loss from write-off of intangible assets
    
    
    245,134
    
    
    
    
    
    
    
    245,134Loss from disposal of fixed assets
    
    
    326,291
    
    
    
    
    
    
    
    326,291Share-based compensation
    
    
    1,649,151
    
    
    
    1,232,751
    
    
    
    3,974,778Change in fair value of preferred stock warrants
    
    
    
    
    
    
    5,135,586
    
    
    
    4,551,236Change in fair value of convertible derivative liability
    
    
    
    
    
    
    11,888,721
    
    
    
    17,777,723Changes in operating assets and liabilities:Accounts receivable
    
    
    (375,886
    )
    
    
    (28,669
    )
    
    
    (476,685
    )Inventories
    
    
    (269,612
    )
    
    
    (989,572
    )
    
    
    (2,172,616
    )Other current assets
    
    
    306,643
    
    
    
    (59,517
    )
    
    
    (417,653
    )Other assets
    
    
    
    
    
    
    10,830
    
    
    
    (77,630
    )Accounts payable
    
    
    (484,303
    )
    
    
    569,475
    
    
    
    1,506,414Accrued and other current liabilities
    
    
    (629,438
    )
    
    
    561,296
    
    
    
    1,859,205Net cash used in operating activities
    
    
    (24,139,530
    )
    
    
    (22,453,469
    )
    
    
    (118,947,184
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from investment maturities
    
    
    
    
    
    
    
    
    
    
    53,894Purchases of property and equipment
    
    
    (2,904,855
    )
    
    
    (1,876,758
    )
    
    
    (14,314,855
    )Investments in intangible assets
    
    
    (400,732
    )
    
    
    (395,148
    )
    
    
    (1,886,616
    )Net cash used in investing activities
    
    
    (3,305,587
    )
    
    
    (2,271,906
    )
    
    
    (16,147,577
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from related party notes payable
    
    
    
    
    
    
    
    
    
    
    6,339,210Proceeds from issuance of debt
    
    
    
    
    
    
    12,500,000
    
    
    
    12,500,000Repayment of long term debt
    
    
    (2,482,383
    )
    
    
    (154,522
    )
    
    
    (2,649,056
    )Payments on capital lease obligation
    
    
    (30,545
    )
    
    
    (24,203
    )
    
    
    (89,760
    )Proceeds from principal and interest on CEO note receivable
    
    
    
    
    
    
    1,530,740
    
    
    
    1,530,740Deferred financing fees
    
    
    
    
    
    
    (114,565
    )
    
    
    (114,565
    )Proceeds from the issuance of common stock, net of offering expenses
    
    
    (778,731
    )
    
    
    (18,570
    )
    
    
    102,220,002Proceeds from warrant redemptions
    
    
    2,189
    
    
    
    
    
    
    
    1,288,809Proceeds from stock option exercises
    
    
    164,210
    
    
    
    
    
    
    
    284,235Proceeds 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
    
    
    
    
    
    
    
    
    
    
    46,793,897Net cash provided by (used in) financing activities
    
    
    (3,125,260
    )
    
    
    13,718,880
    
    
    
    218,836,957NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (30,570,377
    )
    
    
    (11,006,495
    )
    
    
    83,742,196CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    114,312,573
    
    
    
    29,112,429
    
    
    
    CASH AND CASH EQUIVALENTS  End of period
    
    $
    83,742,196
    
    
    $
    18,105,934
    
    
    $
    83,742,196NONCASH INVESTING AND FINANCING ACTIVITIES:Equipment acquired under capital lease
    
    $
    
    
    
    $
    
    
    
    $
    117,685Capital expenditures included in accounts payable
    
    
    117,534
    
    
    
    220,497
    
    
    
    117,534Capital expenditures included in accrued liabilities
    
    
    
    
    
    
    110,387License costs capitalized and included in accrued liabilities
    
    
    225,000
    
    
    
    330,000
    
    
    
    225,000Common stock issued for note payable  related party
    
    
    
    
    
    
    
    
    
    
    1,440,000Payment of Series A convertible preferred stock dividends in additional
shares of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    410,5396% dividends earned on Series C-2 and Series D convertible preferred stock
    
    
    
    
    
    
    4,832,822
    
    
    
    9,889,878Conversion of preferred stock, including accumulated dividends on Series
C-2 and Series D convertible preferred stock into common stock
    
    
    
    
    
    
    
    
    
    
    116,281,865Conversion of convertible derivative liability to additional paid-in
capital
    
    
    
    
    
    
    
    
    
    
    47,554,882Conversion of preferred stock warrant liability to warrants to acquire
common stock
    
    
    
    
    
    
    
    
    
    
    5,424,551Conversion 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
    
    
    
    
    
    
    
    
    
    
    6,516,568Equity offering transaction costs included in other current assets and
accrued liabilities
    
    
    
    
    
    
    1,928,358
   3




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 
 Notes to Financial Statements
As of September 30, 2008 and December 31, 2007, and
For the three and nine month periods ended September 30, 2008 and 2007 and
for the Cumulative Period From December 30, 1999
(Date of Incorporation) through September 30, 2008
(Unaudited)
 1. Description of Business
    Basis of Presentation
  Use of Estimates
 Change in Method of Accounting for Patent Costs
   4




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
   As of December 31, 2007Balance Sheet
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeIntangible assets  net of accumulated amortization
    
    $
    4,930,752
    
    
    $
    1,779,934
    
    
    $
    (3,150,818
    )Total assets
    
    $
    129,114,680
    
    
    $
    125,963,862
    
    
    $
    (3,150,818
    )Deficit accumulated during the development stage
    
    $
    (165,144,961
    )
    
    $
    (168,295,779
    )
    
    $
    (3,150,818
    )Total stockholders equity
    
    $
    112,350,540
    
    
    $
    109,199,722
    
    
    $
    (3,150,818
    )Total liabilities and stockholders equity
    
    $
    129,114,680
    
    
    $
    125,963,862
    
    
    $
    (3,150,818
    )
 Three Month Period Ended September 30, 2007Statement of Operations
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeResearch and development
    
    $
    5,674,390
    
    
    $
    5,778,946
    
    
    $
    104,556Total costs and expenses
    
    $
    10,106,448
    
    
    $
    10,211,004
    
    
    $
    104,556Loss from operations
    
    $
    (9,907,443
    )
    
    $
    (10,011,999
    )
    
    $
    (104,556
    )Net loss
    
    $
    (26,968,431
    )
    
    $
    (27,072,987
    )
    
    $
    (104,556
    )Net loss attributable to common stock
    
    $
    (28,620,924
    )
    
    $
    (28,725,480
    )
    
    $
    (104,556
    )Net loss per common share  basic and diluted
    
    $
    (30.69
    )
    
    $
    (30.80
    )
    
    $
    (0.11
    )
 Nine Month Period Ended September 30, 2007Statement of Operations
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeResearch and development
    
    $
    15,893,437
    
    
    $
    16,287,056
    
    
    $
    393,619Total costs and expenses
    
    $
    25,600,445
    
    
    $
    25,994,064
    
    
    $
    393,619Loss from operations
    
    $
    (24,621,267
    )
    
    $
    (25,014,886
    )
    
    $
    (393,619
    )Net loss
    
    $
    (42,037,952
    )
    
    $
    (42,431,571
    )
    
    $
    (393,619
    )Net loss attributable to common stock
    
    $
    (47,479,714
    )
    
    $
    (47,873,333
    )
    
    $
    (393,619
    )Net loss per common share  basic and diluted
    
    $
    (50.91
    )
    
    $
    (51.33
    )
    
    $
    (0.42
    )
 Nine Month Period Ended September 30, 2007Statement of Cash Flows
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeCash Flows From Operating Activities:Net loss
    
    $
    (42,037,952
    )
    
    $
    (42,431,571
    )
    
    $
    (393,619
    )Depreciation and amortization
    
    $
    1,275,936
    
    
    $
    1,186,499
    
    
    $
    (89,437
    )Loss from write-off of intangible assets
    
    $
    206,683
    
    
    $
    
    
    
    $
    (206,683
    )Accounts payable
    
    $
    464,622
    
    
    $
    569,475
    
    
    $
    104,853Accrued and other current liabilities
    
    $
    610,932
    
    
    $
    561,296
    
    
    $
    (49,636
    )Net cash used in operating activities
    
    $
    (21,818,947
    )
    
    $
    (22,453,469
    )
    
    $
    (634,522
    )Cash Flows From Investing Activities:Investments in intangible assets
    
    $
    (1,029,670
    )
    
    $
    (395,148
    )
    
    $
    634,522Net cash used in investing activities
    
    $
    (2,906,428
    )
    
    $
    (2,271,906
    )
    
    $
    634,522Noncash Investing and Financing Activities:Patent costs capitalized and included in accounts payable
    
    $
    253,372
    
    
    $
    
    
    
    $
    (253,372
    )Patent and license costs capitalized and included in accrued liabilities
    
    $
    347,654
    
    
    $
    330,000
    
    
    $
    (17,654
    )
  5




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
 As of September 30, 2008As Computed under the
    
    
    As Reported under theBalance Sheet
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeIntangible assets  net of accumulated amortization
    
    $
    4,689,907
    
    
    $
    1,526,471
    
    
    $
    (3,163,436
    )Total assets
    
    $
    99,230,534
    
    
    $
    96,067,098
    
    
    $
    (3,163,436
    )Deficit accumulated during the development stage
    
    $
    (192,774,108
    )
    
    $
    (195,937,544
    )
    
    $
    (3,163,436
    )Total stockholders equity
    
    $
    86,536,943
    
    
    $
    83,373,507
    
    
    $
    (3,163,436
    )Total liabilities and stockholders equity
    
    $
    99,230,534
    
    
    $
    96,067,098
    
    
    $
    (3,163,436
    )
 Three Month Period Ended September 30, 2008As Computed under the
    
    
    As Reported under theStatement of Operations
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeResearch and development
    
    $
    5,747,265
    
    
    $
    5,683,346
    
    
    $
    (63,919
    )Total costs and expenses
    
    $
    9,370,200
    
    
    $
    9,306,281
    
    
    $
    (63,919
    )Loss from operations
    
    $
    (9,086,969
    )
    
    $
    (9,023,050
    )
    
    $
    63,919Net loss
    
    $
    (9,090,391
    )
    
    $
    (9,026,472
    )
    
    $
    63,919Net loss attributable to common stock
    
    $
    (9,090,391
    )
    
    $
    (9,026,472
    )
    
    $
    63,919Net loss per common share  basic and diluted
    
    $
    (0.41
    )
    
    $
    (0.41
    )
    
    $
    
 Nine Month Period Ended September 30, 2008As Computed under the
    
    
    As Reported under theStatement of Operations
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeResearch and development
    
    $
    17,618,386
    
    
    $
    17,631,003
    
    
    $
    12,617Total costs and expenses
    
    $
    29,003,331
    
    
    $
    29,015,948
    
    
    $
    12,617Loss from operations
    
    $
    (27,949,369
    )
    
    $
    (27,961,986
    )
    
    $
    (12,617
    )Net loss
    
    $
    (27,629,147
    )
    
    $
    (27,641,764
    )
    
    $
    (12,617
    )Net loss attributable to common stock
    
    $
    (27,629,147
    )
    
    $
    (27,641,764
    )
    
    $
    (12,617
    )Net loss per common share  basic and diluted
    
    $
    (1.24
    )
    
    $
    (1.24
    )
    
    $
    Period From December 30, 1999 (Date of Incorporation)Through September 30, 2008As Computed under the
    
    
    As Reported under theStatement of Operations
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeResearch and development
    
    $
    96,353,577
    
    
    $
    99,517,013
    
    
    $
    3,163,436Total costs and expenses
    
    $
    140,739,946
    
    
    $
    143,903,382
    
    
    $
    3,163,436Loss from operations
    
    $
    (130,459,336
    )
    
    $
    (133,622,772
    )
    
    $
    (3,163,436
    )Net loss
    
    $
    (151,072,027
    )
    
    $
    (154,235,463
    )
    
    $
    (3,163,436
    )Net loss attributable to common stock
    
    $
    (192,774,108
    )
    
    $
    (195,937,544
    )
    
    $
    (3,163,436
    )
 Nine Month Period Ended September 30, 2008As Computed under the
    
    
    As Reported under theStatement of Cash Flows
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeCash Flows From Operating Activities:Net loss
    
    $
    (27,629,147
    )
    
    $
    (27,641,764
    )
    
    $
    (12,617
    )Depreciation and amortization
    
    $
    2,219,453
    
    
    $
    2,142,214
    
    
    $
    (77,239
    )Accounts payable
    
    $
    (481,272
    )
    
    $
    (484,303
    )
    
    $
    (3,031
    )Accrued and other current liabilities
    
    $
    (621,434
    )
    
    $
    (629,438
    )
    
    $
    (8,004
    )Net cash used in operating activities
    
    $
    (24,038,639
    )
    
    $
    (24,139,530
    )
    
    $
    (100,891
    )Cash Flows From Investing Activities:Investments in intangible assets
    
    $
    (501,623
    )
    
    $
    (400,732
    )
    
    $
    100,891Net cash used in investing activities
    
    $
    (3,406,478
    )
    
    $
    (3,305,587
    )
    
    $
    100,891
  6




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
 Period From December 30, 1999 (Date of Incorporation)Through September 30, 2008As Computed under the
    
    
    As Reported under theStatement of Cash Flows
    
    Prior Method
    
    
    New Method
    
    
    Effect of ChangeCash Flows From Operating Activities:Net loss
    
    $
    (151,072,027
    )
    
    $
    (154,235,463
    )
    
    $
    (3,163,436
    )Depreciation and amortization
    
    $
    7,225,306
    
    
    $
    6,928,562
    
    
    $
    (296,744
    )Loss from write-off of intangible assets
    
    $
    1,021,741
    
    
    $
    245,134
    
    
    $
    (776,607
    )Accounts payable
    
    $
    1,509,445
    
    
    $
    1,506,414
    
    
    $
    (3,031
    )Accrued and other current liabilities
    
    $
    1,867,209
    
    
    $
    1,859,205
    
    
    $
    (8,004
    )Net cash used in operating activities
    
    $
    (114,699,362
    )
    
    $
    (118,947,184
    )
    
    $
    (4,247,822
    )Cash Flows From Investing Activities:Investments in intangible assets
    
    $
    (6,134,438
    )
    
    $
    (1,886,616
    )
    
    $
    4,247,822Net cash used in investing activities
    
    $
    (20,395,399
    )
    
    $
    (16,147,577
    )
    
    $
    4,247,822
 2. Net Loss Per Common Share
  
 Outstanding as ofSeptember 30,2008
    
    
    2007Stock options
    
    
    3,368,062
    
    
    
    3,251,548Convertible preferred stock
    
    
    
    
    
    
    12,291,401Convertible preferred stock warrants
    
    
    
    
    
    
    1,445,997Common stock warrants
    
    
    1,300,119
    
    
    
    Total
    
    
    4,668,181
    
    
    
    16,988,946
 3. Intangible Assets
  September 30, 2008
    
    
    December 31, 2007Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    1,877,043
    
    
    $
    (350,572
    )
    
    $
    1,526,471
    
    
    $
    1,870,178
    
    
    $
    (90,244
    )
    
    $
    1,779,934
  Years Ending December 312008 (Period from October 1 to December 31)
    
    $
    82,8892009
    
    
    191,5562010
    
    
    121,5562011
    
    
    121,5562012
    
    
    121,556Thereafter
    
    
    597,859
  7




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
  4. Related Party Transactions
   5. Equity Incentive Plan
   Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    68
    %Risk free interest rate
    
    
    3.02
    %Weighted-average expected option life
    
    6.36 yearsEstimated weighted-average fair value
On the date of grant based on the above assumptions
    
    $
    7.03Estimated forfeiture rate for unvested options
    
    
    4.6
    %
   8




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2008
    
    
    3,141,530
    
    
    $
    4.97Granted
    
    
    398,500
    
    
    $
    10.94Exercised
    
    
    (36,491
    )
    
    $
    4.50Expired
    
    
    (3,680
    )
    
    $
    13.68Forfeited
    
    
    (131,797
    )
    
    $
    4.80Outstanding  September 30, 2008
    
    
    3,368,062
    
    
    $
    5.68
    
    
    
    8.20
    
    
    $
    11,585,602Exercisable  September 30, 2008
    
    
    756,227
    
    
    $
    6.09
    
    
    
    7.40
    
    
    $
    2,657,472Vested and Expected to Vest  September 30, 2008
    
    
    3,248,282
    
    
    $
    5.69
    
    
    
    8.19
    
    
    $
    11,175,965
   6. License Agreements
    9




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
 7. Stockholders Equity
 Convertible Preferred Stock
     Series of Stock to
    
    Number of
    
    
    Expirationwhich the Warrant is Exercisable
    
    Warrants
    
    
    DateCommon  exercise price of $13.13 per share
    
    
    1,135,194
    
    
    April 2011Common  exercise price of $8.75 per share
    
    
    164,925
    
    
    April 2013
  8. Leases
   Operating
    
    
    CapitalYears Ending December 31
    
    Leases
    
    
    Leases2008 (Period from October 1 to December 31)
    
    $
    127,395
    
    
    $
    7,0302009
    
    
    520,197
    
    
    
    22,1082010
    
    
    220,898Total minimum lease payments
    
    $
    868,490
    
    
    
    29,138Less amounts representing interest
    
    
    
    
    
    
    (1,213
    )Net present value
    
    
    
    
    
    
    27,925Less current portion of net minimum lease payments
    
    
    
    
    
    
    (27,925
    )Long-term portion of net minimum lease payments
    
    
    
    
    
    $
    
  10




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##### Table of Contents



Notes to Financial Statements  (Continued)
(Unaudited)
 9. Long Term Debt
    2008 (October 1 to December 31)
    
    $
    1,115,4392009
    
    
    4,818,2112010
    
    
    3,917,293Total
    
    $
    9,850,943
 10. Inventory
  September 30, 2008
    
    
    December 31, 2007Work-in-process component parts
    
    $
    1,173,390
    
    
    $
    1,361,227Finished goods
    
    
    721,564
    
    
    
    541,777Total
    
    $
    1,894,954
    
    
    $
    1,903,004
 11. Property and Equipment
  September 30, 2008
    
    
    December 31, 2007Total property and equipment  at cost
    
    $
    14,201,015
    
    
    $
    11,729,127Less accumulated depreciation
    
    
    (6,276,985
    )
    
    
    (4,695,530
    )Net property and equipment
    
    $
    7,924,030
    
    
    $
    7,033,597
  11




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##### Table of Contents



Nanosphere, Inc.
(A Development Stage Company)
 Notes to Financial Statements  (Continued)
(Unaudited)
 12. New Accounting Standards
      ,
  12




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##### 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
      13




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##### Table of Contents



Financial Operations Overview
 Change in Method of Accounting for Patent Costs
    Revenue
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
   14




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##### Table of Contents



Interest Income
  Interest Expense
  Three Month Period Ended September 30, 2008 Compared to the Three Month Period Ended September 30,
2007
 Revenues
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
   15




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##### Table of Contents



Nine Month Period Ended September 30, 2008 Compared to the Nine Month Period Ended September 30,
2007
 Revenues
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
  Liquidity and Capital Resources
   16




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##### Table of Contents




    
    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.
   17




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##### Table of Contents



Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
      18




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##### Table of Contents



PART II.
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits, Financial Statement Schedules
 Exhibit Number
    
    Exhibit Description18
    
    
    Preferability Letter from Deloitte & Touche LLP *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




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##### Table of Contents



SIGNATURES
  NANOSPHERE, INC.By:
    /s/ William P. MoffittWilliam P. MoffittPresident and Chief Executive Officer  By:
    /s/ Roger MoodyRoger MoodyChief Financial Officer and Treasurer   20




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Description18
    
    
    Preferability Letter from Deloitte & Touche LLP *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 *
  21