##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q





(Mark One)

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

For the quarterly period ended June 30, 2012

OR



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

For the transition period
from             to

Commission File Number 001-33775





Nanosphere,
Inc.

(Exact name of registrant as specified in its charter)







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

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    x  Yes     ̈  No

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



|                        |  |   |  |  |  |                           |  |  
|----------------------- |  | - |  |  |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  |  |  | Accelerated filer         |  |  ̈
|                        |  |   |  | 
|Non-accelerated filer   |  | x |  |  |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

The number of outstanding shares of the registrants common stock, par value $0.01 per share, as of August 6, 2012 was
56,090,437.









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NANOSPHERE, INC.

INDEX



|         |  |                       |  |                                                                                       |  |  |       | 
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  |  | ----- | 
|Part I.  |  | FINANCIAL INFORMATION |  |                                                                                       |  | 
|         |  | Item 1.               |  | Financial Statements (unaudited)                                                      |  |  |       | 
|         |  |                       |  | Balance Sheets                                                                        |  |  | 1     | 
|         |  |                       |  | Statements of Operations                                                              |  |  | 2     | 
|         |  |                       |  | Statements of Cash Flows                                                              |  |  | 3     | 
|         |  |                       |  | Notes to Financial Statements                                                         |  |  | 4-8   | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 9-16  | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 16-17 | 
|         |  | Item 4.               |  | Controls and Procedures                                                               |  |  | 17    | 
|         |  |                      
|Part II. |  | OTHER INFORMATION     |  |                                                                                       |  | 
|         |  | Item 1.               |  | Legal Proceedings                                                                     |  |  | 18    | 
|         |  | Item 1A.              |  | Risk Factors                                                                          |  |  | 18    | 
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  |  | 18    | 
|         |  | Item 6.               |  | Exhibits                                                                              |  |  | 19    | 



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##### Table of Contents

PART I.

FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Nanosphere, Inc.

Balance Sheets

(dollars in thousands)

(Unaudited)



|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                              |  | June 30,2012 |          |   | December 31,2011 |  
|                                                                                                                                                                              |  |             
|CURRENT ASSETS:                                                                                                                                                               |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                     |  | $            | 23,733   |   |                  | $ | 39,273   |  
|Accounts receivable                                                                                                                                                           |  |              | 867      |   |                  |   | 861      |  
|Inventories                                                                                                                                                                   |  |              | 4,537    |   |                  |   | 2,325    |  
|Other current assets                                                                                                                                                          |  |              | 460      |   |                  |   | 248      |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                          |  |              | 29,597   |   |                  |   | 42,707   |  
|                                                                                                                                                                              |  |             
|PROPERTY AND EQUIPMENT  Net                                                                                                                                                  |  |              | 3,202    |   |                  |   | 4,522    |  
|INTANGIBLE ASSETS  Net of accumulated amortization                                                                                                                           |  |              | 2,896    |   |                  |   | 3,033    |  
|OTHER ASSETS                                                                                                                                                                  |  |              | 75       |   |                  |   | 75       |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|TOTAL                                                                                                                                                                         |  | $            | 35,770   |   |                  | $ | 50,337   |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                                                              |  |             
|CURRENT LIABILITIES:                                                                                                                                                          |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                              |  | $            | 2,636    |   |                  | $ | 1,794    |  
|Accrued compensation                                                                                                                                                          |  |              | 703      |   |                  |   | 342      |  
|Other current liabilities                                                                                                                                                     |  |              | 1,433    |   |                  |   | 1,842    |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                     |  |              | 4,772    |   |                  |   | 3,978    |  
|LONG-TERM LIABILITIES:                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Other noncurrent liabilities                                                                                                                                                  |  |              | 750      |   |                  |   | 750      |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                             |  |              | 5,522    |   |                  |   | 4,728    |  
|                                                                                                                                                                              |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                 |  |              |          |   |                  |   |          |  
|                                                                                                                                                                              |  |             
|STOCKHOLDERS EQUITY:                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 44,015,437 and 44,070,437 shares issued and outstanding as of
June 30, 2012 and December 31, 2011, respectively |  |              | 440      |   |                  |   | 441      |  
|Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued                                                                                              |  |              |         |   |                  |   |         |  
|Additional paid-in capital                                                                                                                                                    |  |              | 360,633  |   |                  |   | 359,493  |  
|Warrants to acquire common stock                                                                                                                                              |  |              | 992      |   |                  |   | 992      |  
|Accumulated deficit                                                                                                                                                           |  |              | (331,817 | ) |                  |   | (315,317 | )
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                    |  |              | 30,248   |   |                  |   | 45,609   |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|TOTAL                                                                                                                                                                         |  | $            | 35,770   |   |                  | $ | 50,337   |  
|                                                                                                                                                                              |  |              |          |   |                  |   |          |  

See notes to financial statements.



1



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Nanosphere, Inc.

Statements of Operations

(dollars and shares in thousands except per share data)

(Unaudited)



|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ---------------------------------- | ------ | - | -------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three Month Periods Ended June 30, |        |   | Six Month Periods Ended June 30, |  
|                                                                         |  | 2012                               |        |   | 2011                             |   |        | 2012 |  |   | 2011    |  
|                                                                         |  |                                    |        |  
|REVENUE:                                                                 |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Grant and contract revenue                                               |  | $                                  | 30     |   |                                  | $ |       |      |  | $ | 43      |   |  | $ | 54      |  
|Product sales                                                            |  |                                    | 1,315  |   |                                  |   | 509    |      |  |   | 2,601   |   |  |   | 1,095   |  
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                                            |  |                                    | 1,345  |   |                                  |   | 509    |      |  |   | 2,644   |   |  |   | 1,149   |  
|COSTS AND EXPENSES:                                                      |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Cost of sales                                                            |  |                                    | 884    |   |                                  |   | 374    |      |  |   | 1,797   |   |  |   | 865     |  
|Research and development                                                 |  |                                    | 4,716  |   |                                  |   | 4,634  |      |  |   | 9,151   |   |  |   | 9,329   |  
|Sales, general, and administrative                                       |  |                                    | 4,196  |   |                                  |   | 3,940  |      |  |   | 8,221   |   |  |   | 8,290   |  
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Total costs and expenses                                                 |  |                                    | 9,796  |   |                                  |   | 8,948  |      |  |   | 19,169  |   |  |   | 18,484  |  
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                                     |  |                                    | (8,451 | ) |                                  |   | (8,439 | )    |  |   | (16,525 | ) |  |   | (17,335 | )
|OTHER INCOME (EXPENSE):                                                  |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Foreign exchange gain (loss)                                             |  |                                    | (1     | ) |                                  |   | (7     | )    |  |   | (2      | ) |  |   | (11     | )
|Interest income                                                          |  |                                    | 13     |   |                                  |   | 11     |      |  |   | 27      |   |  |   | 22      |  
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                             |  |                                    | 12     |   |                                  |   | 4      |      |  |   | 25      |   |  |   | 11      |  
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|NET LOSS                                                                 |  | $                                  | (8,439 | ) |                                  | $ | (8,435 | )    |  | $ | (16,500 | ) |  | $ | (17,324 | )
|                                                                         |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|                                                                         |  |                                    |        |  
|Net loss per common share  basic and diluted                            |  | $                                  | (0.19  | ) |                                  | $ | (0.23  | )    |  | $ | (0.38   | ) |  | $ | (0.54   | )
|Weighted average number of common shares outstanding  basic and diluted |  |                                    | 43,716 |   |                                  |   | 36,205 |      |  |   | 43,716  |   |  |   | 32,005  |  

See notes to financial statements.



2



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Nanosphere, Inc.

Statements of Cash Flows

(dollars in thousands)

(Unaudited)



|                                                                            |  |                                  |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Month Periods 
EndedJune 30, |        
|                                                                            |  | 2012                             |         |   | 2011 |  
|                                                                            |  |                                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                                  |         |   |      |   |         |  
|Net loss                                                                    |  | $                                | (16,500 | ) |      | $ | (17,324 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                  |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                  | 1,329   |   |      |   | 1,319   |  
|Share-based compensation                                                    |  |                                  | 1,139   |   |      |   | 2,189   |  
|Changes in operating assets and liabilities:                                |  |                                  |         |   |      |   |         |  
|Accounts receivable                                                         |  |                                  | (6      | ) |      |   | (124    | )
|Inventories                                                                 |  |                                  | (2,015  | ) |      |   | (399    | )
|Other current assets                                                        |  |                                  | (212    | ) |      |   | (102    | )
|Accounts payable                                                            |  |                                  | 842     |   |      |   | (2,184  | )
|Accrued and other current liabilities                                       |  |                                  | (48     | ) |      |   | (497    | )
|                                                                            |  |                                  |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                  | (15,471 | ) |      |   | (17,122 | )
|                                                                            |  |                                  |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                                  |         |   |      |   |         |  
|Purchases of property and equipment                                         |  |                                  | (44     | ) |      |   | (149    | )
|Investments in intangible assets                                            |  |                                  | (25     | ) |      |   |        |  
|                                                                            |  |                                  |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                                  | (69     | ) |      |   | (149    | )
|                                                                            |  |                                  |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                                  |         |   |      |   |         |  
|Proceeds from the issuance of common stock, net of offering expenses        |  |                                  |        |   |      |   | 32,178  |  
|                                                                            |  |                                  |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                  |        |   |      |   | 32,178  |  
|                                                                            |  |                                  |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        |  |                                  | (15,540 | ) |      |   | 14,907  |  
|CASH AND CASH EQUIVALENTS  Beginning of period                             |  |                                  | 39,273  |   |      |   | 39,628  |  
|                                                                            |  |                                  |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS  End of period                                   |  | $                                | 23,733  |   |      | $ | 54,535  |  
|                                                                            |  |                                  |         |   |      |   |         |  
|                                                                            |  |                                 
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                 |  |                                  |         |   |      |   |         |  
|Reclassification of inventory to (from) property and equipment              |  | $                                | (197    | ) |      | $ | 1,090   |  

See notes to financial statements.



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Nanosphere, Inc.

Notes to Financial Statements

As of
June 30, 2012 and

For the Three and Six Month Periods June 30, 2012 and 2011

(Unaudited)

1. Description of Business

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

Basis of Presentation  The accompanying unaudited condensed
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring
adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Therefore, these financial statements should be read in conjunction with the Companys most
recent audited financial statements for the year ended December 31, 2011 and notes thereto included in the Companys Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results
of operations expected for the full year.

The accompanying financial statements have been prepared on a going-concern basis,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

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

2. Liquidity and Capital Resources

As of June 30, 2012, the Company has incurred net losses attributable to common stock of $331.8 million since
inception, and has funded those losses primarily through the sale and issuance of equity securities. While the Company is no longer in the development stage and the focus of the Companys business activities has turned towards commercialization
of its products, because of the numerous risks and uncertainties associated with its product development and commercialization efforts, the Company is unable to predict when it will become profitable, and the Company may never become
profitable.

In July 2012, the Company completed an underwritten public offering (the Offering) of 12,075,000
shares of its common stock at a public offering price of $2.40 per share, including 1,575,000 shares issued pursuant to the underwriters exercise in full of their overallotment option. The Company received net proceeds from the Offering of
approximately $26.9 million after deducting underwriting discount, commissions and offering expenses.

While the Company
anticipates that capital resources will be sufficient to meet estimated needs for the foreseeable future, the Company operates in a market that makes its prospects difficult to evaluate, and the Company may need additional financing in the future to
execute on its current or future business strategies. Capital outlays and operating expenditures may increase over the next few years as the Company expands its commercial and manufacturing operations.

3. Net Loss Per Common Share

Basic and diluted net loss per common share have been calculated in accordance with Accounting Standards Codification
(ASC) Topic 260, Earnings Per Share, for the three and six month periods ended June 30, 2012 and 2011. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the
same.

The computation of basic net loss per common share for the three and six month periods ended June 30, 2012 and
2011 excluded 299,000 and 679,000 shares of restricted stock, respectively (see Note 6). While these restricted shares of stock are included in outstanding shares on the balance sheet, these restricted shares are excluded from basic net loss per
common share in accordance with ASC Topic 260 due to the forfeiture provisions associated with these shares.



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Nanosphere, Inc.

Notes to Financial Statements  (Continued)

(Unaudited)



The computations of diluted net
loss per common share for the three and six month periods ended June 30, 2012 and 2011 did not include the outstanding shares of restricted stock as well as the effects of the following options to acquire common stock and common stock warrants
as the inclusion of these securities would have been antidilutive:



|                      |  |                                            |           |  |      |  |           | 
|--------------------- |  | ------------------------------------------ | --------- |  | ---- |  | --------- | 
|                      |  | Three and Six Month Periods Ended June 30, |          
|                      |  | 2012                                       |           |  | 2011 | 
|Restricted stock      |  |                                            | 299,000   |  |      |  | 679,000   | 
|Stock options         |  |                                            | 6,093,936 |  |      |  | 4,281,685 | 
|Common stock warrants |  |                                            | 164,925   |  |      |  | 164,925   | 
|                      |  |                                            |           |  |      |  |           | 
|                      |  |                                            | 6,557,861 |  |      |  | 5,125,610 | 
|                      |  |                                            |           |  |      |  |           | 

4. Intangible Assets

Intangible assets, consisting of purchased intellectual property, as
of June 30, 2012 and December 31, 2011 comprise the following (in thousands):



|                                 |  |               |       |  |                         |   |        |     |  |   |       |  |  |                         |       |  |     |   |        |   |  |   |       | 
|-------------------------------- |  | ------------- | ----- |  | ----------------------- | - | ------ | --- |  | - | ----- |  |  | ----------------------- | ----- |  | --- | - | ------ | - |  | - | ----- | 
|                                 |  | June 30, 2012 |       |  | December 31, 2011       |  
|                                 |  | Cost          |       |  | AccumulatedAmortization |   |        | Net |  |   | Cost  |  |  | AccumulatedAmortization |       |  | Net |  
|                                 |  |               |       |  |                         |  
|Intellectual property  licenses |  | $             | 4,061 |  |                         | $ | (1,531 | )   |  | $ | 2,530 |  |  | $                       | 4,036 |  |     | $ | (1,392 | ) |  | $ | 2,644 | 
|Patents                          |  |               | 455   |  |                         |   | (89    | )   |  |   | 366   |  |  |                         | 455   |  |     |   | (66    | ) |  | $ | 389   | 
|                                 |  |               |       |  |                         |   |        |     |  |   |       |  |  |                         |       |  |     |   |        |   |  |   |       | 
|                                 |  | $             | 4,516 |  |                         | $ | (1,620 | )   |  | $ | 2,896 |  |  | $                       | 4,491 |  |     | $ | (1,458 | ) |  | $ | 3,033 | 
|                                 |  |               |       |  |                         |   |        |     |  |   |       |  |  |                         |       |  |     |   |        |   |  |   |       | 

Amortization expense for intangible assets was $0.2 million for the six month period ended June 30, 2012 and less
than $0.1 million in the three month period ended June 30, 2012 and each of the three and six month periods ended 2011.
Estimated future amortization expense is as follows:



|                                         |  |   |       | 
|---------------------------------------- |  | - | ----- | 
|Years Ending December 31                 |  |   |      
|2012 (Period from July 1 to December 31) |  | $ | 162   | 
|2013                                     |  |   | 325   | 
|2014                                     |  |   | 325   | 
|2015                                     |  |   | 320   | 
|2016                                     |  |   | 308   | 
|Thereafter                               |  |   | 1,456 | 

Licenses are amortized from the date of initial use of the licensed technology and such amortization continues over the
remaining life of the license. The future amortization expense reflected above is based on licenses for which the licensed technology is being used as of June 30, 2012. The amortization period related to $1.8 million of licenses began in
the fourth quarter of 2011 when the Company began using the licensed technology.

5. Related Party Transactions

Dr. Chad Mirkin, a co-founder of the Company, provides contracted research and development consulting services to
the Company and is reimbursed for these services based upon negotiated contract rates. The Company incurred expenses of less than $0.1 million for these services in each of the three and six month periods ended June 30, 2012 and 2011.

Alpha-Tech, LLC, a 5% stockholder of the Company, and Anda-Proquest, LLC, an affiliate of Alpha-Tech, LLC, purchased
1,350,000 shares each of the Companys common stock at $2.20 per share in the Companys May 2011 underwritten public offering on the same terms and conditions as all non-affiliate investors in the offering. Mark Slezak, a director of the
Company, is the managing member of Alpha-Tech, LLC and Anda-Proquest, LLC.



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Nanosphere, Inc.

Notes to Financial Statements  (Continued)

(Unaudited)



6. Equity Incentive Plan

The Companys board of directors has adopted and the shareholders have approved the Nanosphere 2000 Equity
Incentive Plan (the 2000 Plan) and the Nanosphere 2007 Long-Term Incentive Plan (the 2007 Plan). The plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted
share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Companys common stock at the date of
grant with ten year contractual terms. Certain options vest ratably over four years of service, while other options cliff vest after seven years of service but provide for accelerated vesting contingent upon the achievement of various company-wide
performance goals, such as decreasing time to market for new products and entering into corporate collaborations (as defined in the option grant agreements). For these accelerated vesting options, 20-25% of the granted option shares will
vest upon the achievement of each of four or five milestones as defined in the option grant agreements, with any remaining unvested options vesting on the seven year anniversary of the option grant dates. Approximately 27% of the options granted and
outstanding contain accelerated vesting provisions.

The fair values of the
Companys option awards granted during the six month period ended June 30, 2012 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:



|                                                                                          |  |   |            |  
|----------------------------------------------------------------------------------------- |  | - | ---------- | -
|Expected dividend yield                                                                   |  |   | 0          | %
|Expected volatility                                                                       |  |   | 93         | %
|Risk free interest rate                                                                   |  |   | 1.07       | %
|Weighted-average expected option life                                                     |  |   | 6.15 years |  
|Estimated weighted-average fair value on the date of grant based on the above assumptions |  | $ | 1.34       |  
|Estimated forfeiture rate for unvested options                                            |  |   | 6.8        | %

The expected volatility for option awards granted in 2012 was based on the Companys actual historical volatility.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grants for periods consistent with the expected life of the option. The expected life of options that vest ratably over four years of service is derived
from the average of the vesting period and the term of the option as defined in the Plans, following the guidance in Securities and Exchange Commission (SEC) Staff Accounting Bulletin Nos. 107 and 110. The Company estimates the
expected life of options with accelerated vesting terms giving consideration to the dates that the Company expects to achieve key milestones under the option agreements and the term of the option.

Total compensation cost recognized for all stock option awards was $0.4 million and $0.9 million in the three and six month periods ended
June 30, 2012, respectively, and $0.7 million and $1.4 million for the three and six month periods ended June 30, 2011, respectively.

As of June 30, 2012, the total compensation cost not yet recognized related to the nonvested stock option awards is approximately $3.5 million, which amount is expected to be recognized over the next
four years, with a weighted average term of 2.1 years. Certain milestone events are deemed probable of achievement prior to their seven year vesting term, and the acceleration of vesting resulting from the achievement of such milestone events has
been factored into the weighted average vesting term. While the Company does not have a formally established policy, as a practice the Company has delivered newly issued shares of its common stock upon the exercise of stock options.



6



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##### Table of Contents

Nanosphere, Inc.

Notes to Financial Statements  (Continued)

(Unaudited)



A summary of option activity under the plans as of June 30, 2012, and for the six month period then ended is presented below:



|                                            |  |                 |           |   |                              |   |      |                                         |  |  |                                    |  |  |   |           | 
|------------------------------------------- |  | --------------- | --------- | - | ---------------------------- | - | ---- | --------------------------------------- |  |  | ---------------------------------- |  |  | - | --------- | 
|Options                                     |  | Number ofShares |           |   | WeightedAverageExercisePrice |   |      | WeightedAverageRemainingContractualTerm |  |  | AggregateIntrinsicValue of Options | 
|Outstanding  January 1, 2012               |  |                 | 4,663,760 |   |                              | $ | 5.09 |                                         |  |  |                                    |  |  |   |           | 
|Granted                                     |  |                 | 1,772,471 |   |                              | $ | 1.77 |                                         |  |  |                                    |  |  |   |           | 
|Expired                                     |  |                 | (107,525  | ) |                              | $ | 9.09 |                                         |  |  |                                    |  |  |   |           | 
|Forfeited                                   |  |                 | (234,770  | ) |                              | $ | 4.68 |                                         |  |  |                                    |  |  |   |           | 
|                                            |  |                 |           |   |                              |   |      |                                         |  |  |                                    |  |  |   |           | 
|                                            |  |                 |           |  
|Outstanding  June 30, 2012                 |  |                 | 6,093,936 |   |                              | $ | 4.07 |                                         |  |  | 7.06                               |  |  | $ | 1,104,860 | 
|                                            |  |                 |           |   |                              |   |      |                                         |  |  |                                    |  |  |   |           | 
|Exercisable  June 30, 2012                 |  |                 | 2,974,208 |   |                              | $ | 4.82 |                                         |  |  | 5.76                               |  |  | $ | 371,088   | 
|                                            |  |                 |           |   |                              |   |      |                                         |  |  |                                    |  |  |   |           | 
|                                            |  |                 |           |  
|Vested and Expected to Vest  June 30, 2012 |  |                 | 5,950,429 |   |                              | $ | 4.09 |                                         |  |  | 7.03                               |  |  | $ | 1,071,107 | 
|                                            |  |                 |           |   |                              |   |      |                                         |  |  |                                    |  |  |   |           | 

There were no options exercised in the six month periods ended June 30, 2012 or June 30, 2011.

Included in the number of options outstanding at June 30, 2012 are 1,632,216 options with a weighted average exercise price of $5.21
per share and accelerated vesting provisions based on the criteria mentioned above. The total fair value of shares vested during the three and six month periods ended June 30, 2012 was $0.3 million and $1.1 million, respectively, and was $0.6
million and $2.0 million for the three and six month periods ended June 30, 2011, respectively. During the six month period ended June 30, 2012, the Company achieved an accelerated vesting milestone resulting from the FDA granting a de
novo petition permitting marketing of its Gram-Positive Blood Culture Nucleic Acid Test (BC-GP) on the automated sample-to-result Verigene SP.

As of January 1, 2012, there were 354,000 shares of restricted stock outstanding under the 2007 Plan and during the six month period ended June 30, 2012, 55,000 shares were forfeited and no
additional shares of restricted stock were granted. The restricted shares vest 50% on the two-year anniversary of the grant date and are subject to forfeiture until vested and vest 50% on the four-year anniversary of the grant date and are subject
to forfeiture until vested. No shares were vested during the six month period ended June 30, 2012. The Company recognized $0.1 million and $0.2 million in restricted stock compensation expense during the three and six month periods ended
June 30, 2012, respectively, and recognized $0.4 million and $0.8 million during the three and six month periods ended June 30, 2011, respectively. As of June 30, 2012, the total compensation cost not yet recognized related to the
nonvested restricted stock awards was approximately $0.6 million, which amount is expected to be recognized over the next two years, with a weighted average term of 1.3 years.

7. License Agreements

The Company has entered into several nonexclusive license agreements with various companies covering certain
technologies which are embedded in the Companys diagnostic instruments and diagnostic test products. As of June 30, 2012, the Company has paid aggregate initial license fees of $3.2 million for these licenses, and has agreed to pay a
percentage of net sales as royalties, in percentage amounts ranging from less than 1.0% to 12.0%. These initial license fees were capitalized as intangible assets (see Note 4). Certain of the license agreements have minimum annual royalty payments,
and such minimum payments are $0.2 million in each of the fiscal years 2012, 2013, 2014 and 2015 and are approximately $0.1 million annually thereafter through the dates the respective licenses terminate. These licenses expire at various times,
corresponding to the subject patents expirations, which currently range from 2012 to 2027.



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##### Table of Contents

Nanosphere, Inc.

Notes to Financial Statements  (Continued)

(Unaudited)



8. Stockholders Equity

As of both June 30, 2012 and December 31, 2011, there were outstanding warrants to acquire 164,925 shares of
common stock. These warrants have an exercise price of $8.75 per share and an expiration date of April 2013.

Warrants for
1,135,194 shares of common stock with an exercise price of $17.50 expired unexercised on April 12, 2011.

9. Commitments and Contingencies

Rent and operating expenses associated with the office and laboratory space were $0.2 million and $0.3 million for the
three and six month periods ended June 30, 2012, respectively, and $0.2 million and $0.4 million for the three and six month periods ended June 30, 2011, respectively.

Annual future minimum obligations for the
operating leases as of June 30, 2012, are as follows (in thousands):



|                                         |  |                |     | 
|---------------------------------------- |  | -------------- | --- | 
|Years Ending December 31                 |  | OperatingLease |    
|2012 (Period from July 1 to December 31) |  | $              | 222 | 
|2013                                     |  |                | 451 | 
|2014                                     |  |                | 190 | 
|                                         |  |                |     | 
|Total minimum lease payments             |  | $              | 863 | 
|                                         |  |                |     | 

10. Supplemental Financial Information



|                |  |                |       |  |                   |   |       | 
|--------------- |  | -------------- | ----- |  | ----------------- | - | ----- | 
|                |  | June 30, 2012  |       |  | December 31, 2011 |  
|                |  | (in thousands) |      
|Inventories:    |  |                |       | 
|Raw materials   |  | $              | 2,939 |  |                   | $ | 1,021 | 
|Work-in-process |  |                | 208   |  |                   |   | 64    | 
|Finished goods  |  |                | 1,390 |  |                   |   | 1,240 | 
|                |  |                |       |  |                   |   |       | 
|Total           |  | $              | 4,537 |  |                   | $ | 2,325 | 
|                |  |                |       |  |                   |   |       | 



|                                       |  |                |         |   |                   |   |         |  
|-------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                       |  | June 30, 2012  |         |   | December 31, 2011 |  
|                                       |  | (in thousands) |        
|Property and Equipment  Net:          |  |                |         |  
|Total property and equipment  at cost |  | $              | 18,982  |   |                   | $ | 19,504  |  
|Less accumulated depreciation          |  |                | (15,780 | ) |                   |   | (14,982 | )
|                                       |  |                |         |   |                   |   |         |  
|Property and equipment  net           |  | $              | 3,202   |   |                   | $ | 4,522   |  
|                                       |  |                |         |   |                   |   |         |  



|                                |  |                |       |  |                   |   |       | 
|------------------------------- |  | -------------- | ----- |  | ----------------- | - | ----- | 
|                                |  | June 30, 2012  |       |  | December 31, 2011 |  
|                                |  | (in thousands) |      
|Other Current Liabilities:      |  |                |       | 
|Accrued clinical trial expenses |  | $              | 426   |  |                   | $ | 292   | 
|Accrued license fees            |  |                | 627   |  |                   |   | 632   | 
|All other                       |  |                | 380   |  |                   |   | 918   | 
|                                |  |                |       |  |                   |   |       | 
|Total                           |  | $              | 1,433 |  |                   | $ | 1,842 | 
|                                |  |                |       |  |                   |   |       | 



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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, within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, about us and our industry that involve substantial risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding
our strategy, future operations, future financial position, future net sales, projected expenses, products placements, performance and acceptance, prospects and plans and - managements objectives, as well as the growth of the overall
market for our products in general and certain products in particular and the relative performance of other market participants, 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, including but not limited to:



| |  |  | inaccurate estimates of the potential market size for our products (including the hospital lab market in general and the blood stream
infection (BSI) market in particular) or failure of the market for these products to grow as anticipated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the past performance of other companies which we believe to have been in a market position analogous to where we believe we are now may not
be predictive of our future results in the manner we believe them to be;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our analysis of who our competitors have been, who they are now and who they will be in the future (particularly in the BSI, enteric,
extended tuberculosis and meningitis MDx product markets) and our predictions of relevant future performance may be inaccurate;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | comparisons of actual financial results for another company to what we predict will be our future financial results may be inappropriate;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | predictions of customer metrics needed to achieve profitability and their relationship to our cash flow position, needs and expenses may
prove to be inaccurate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | entrance of other competitors or other factors causing us to lose competitive advantage in the sample-to-result MDx market;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | a lack of commercial acceptance of the Verigene System, its array of tests, and the development of additional tests, which could negatively
affect our financial results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of third-party payors to reimburse our customers for the use of our clinical diagnostic products or reduction of reimbursement
levels, which could harm our ability to sell our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of our products to perform as expected or to obtain certain approvals or the questioning of the reliability of the technology on
which our products are based, which could cause lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | our inability to manage our anticipated growth, constraints or inefficiencies caused by unanticipated acceleration and deceleration of
customer demand; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | those set forth under Risk Factors in our Annual Report on Form 10-K, as amended from time to time under Risk Factors
in our Quarterly Reports on Form 10-Q.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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 any
statement is made or to conform these statements to actual results. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report 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 Item 1A.  Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2011, as supplemented or amended from time to time under Item 1A.  Risk Factors in our Quarterly Reports on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

We
develop, manufacture and market an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost and highly sensitive genomic and protein testing on a single platform. Our proprietary nanoparticle technology provides
the ability to run multiple tests simultaneously on the same sample. The Verigene System includes a bench-top molecular diagnostics workstation that is a universal platform for genomic and protein testing. While many systems currently available on
the market provide a diagnostic result for one test or a few tests within a specific market niche, the Verigene System provides for multiple tests to be performed on a single platform, including both genomic and protein assays, from a single sample.

The Verigene System is differentiated by its ease of use, rapid turnaround times and ability to detect many targets on a
single test, referred to as multiplexing. It provides lower cost for laboratories already performing molecular diagnostic testing and enables smaller laboratories and hospitals without advanced diagnostic capabilities to perform genetic
testing. Our ability to detect proteins, which can be as much as 100 times more sensitive than current technologies for certain targets, may enable earlier detection of and intervention in diseases associated with known biomarkers as well as the
introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We are focused on the clinical diagnostics market.

Our test menu is designed to fulfill the following unmet hospital laboratory needs:



| | 1) | the conversion of microbiology to molecular methods to more rapidly pinpoint infectious diseases;
| | -- | -------------------------------------------------------------------------------------------------



| | 2) | point-of-care pharmacogenetics to ensure that appropriate therapies are prescribed; and
| | -- | ---------------------------------------------------------------------------------------



| | 3) | earlier detection of life threatening disease through ultra-sensitive protein assays.
| | -- | -------------------------------------------------------------------------------------

The Verigene System is comprised of a microfluidics processor, a touchscreen reader and disposable test cartridges. Certain assays, such
as the Warfarin metabolism and hyper-coagulation tests, were cleared by the U.S. Food and Drug Administration (FDA) for use with the original Verigene System processor (the Original Processor). Subsequently, we developed and
launched a second generation Verigene System processor (the Processor SP) that handles the same processing steps as the Original Processor and incorporates sample preparation. Some of our current customers continue to use the
Original Processor for hyper-coagulation testing and Warfarin metabolism testing. Our development plans are focused on expanding the menu of tests that will run on the Processor SP,and we plan to develop and seek regulatory approval of all
future assays on the Processor SP.



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##### Table of Contents

Our Applications

The following table summarizes the FDA and CE In-Vitro Diagnostic Mark (CE IVD Mark) regulatory status of our near-term genomic and protein assays on the Verigene System:



|                                                                                                                                                                    |  |                                                                |  |                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------
|Assay                                                                                                                                                               |  | FDA
Status(1)                                                  |  | CE IVD Mark
Status(2)                                    
|                                                                                                                                                                    |  |                                                               
|Infectious Disease Assays                                                                                                                                           |  |                                                                |  |                                                          
|                                                                                                                                                                    |  |                                                               
|Respiratory Virus with Sub-Typing                                                                                                                                   |  | 510(k) cleared                                                 |  | CE IVD Marked                                            
|                                                                                                                                                                    |  |                                                               
|Blood Infection Panels                                                                                                                                              |  |                                                                |  |                                                          
|    Blood Culture  Staphylococcus (BC-S)
    Blood Culture  Gram Positive (BC-GP)
    Blood Culture  Gram Negative (BC-GN)
    Blood Culture  Fungal (BC-F) |  | 510(k) cleared 510(k)
cleared(4) In
development In development |  | Part of BC-GP CE IVD
Marked In development In
development
|                                                                                                                                                                    |  |                                                               
|C. difficile                                                                                                                                                        |  | In development                                                 |  | In development                                           
|                                                                                                                                                                    |  |                                                               
|Enteric Panel                                                                                                                                                       |  | In development                                                 |  | In development                                           
|                                                                                                                                                                    |  |                                                               
|Human and Pharmacogenetic Assays                                                                                                                                    |  |                                                                |  |                                                          
|                                                                                                                                                                    |  |                                                               
|Warfarin Metabolism                                                                                                                                                 |  | 510(k) cleared(3)                                              |  | CE IVD Marked                                            
|                                                                                                                                                                    |  |                                                               
|Hyper-Coagulation                                                                                                                                                   |  | 510(k) cleared(3)                                              |  | CE IVD Marked                                            
|                                                                                                                                                                    |  |                                                               
|Plavix®
Metabolism (2C19)                                                                                                                                           |  | 510(k) and PMA pending                                         |  | CE IVD Marked                                            
|                                                                                                                                                                    |  |                                                               
|Ultra-Sensitive Protein Assays                                                                                                                                      |  |                                                                |  |                                                          
|                                                                                                                                                                    |  |                                                               
|Cardiac Troponin I                                                                                                                                                  |  | In development                                                 |  | In development                                           
|                                                                                                                                                                    |  |                                                               
|Prostate-Specific Antigen (PSA)                                                                                                                                     |  | Research use only                                              |  |                                                          



|(1) | For further description of our FDA regulatory requirements, please refer to the section Regulation by the United States Food and Drug
Administrationbeginning on page 10 of our Annual Report on Form 10-K for the year ended December 31, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For further description of our CE IVD Mark regulatory requirements, please refer to the section Foreign Government Regulationbeginning on page 13 of our Annual Report on Form 10-K for the year ended December 31, 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Currently cleared only for use with the Original Processor.
|--- | -----------------------------------------------------------

|(4) | Received FDA clearance in June 2012.
|--- | ------------------------------------

Infectious Disease Assays

The conversion of microbiology to molecular methods is driven by the need to identify infectious diseases more quickly, allowing a more rapid commencement of clinical intervention. Microbiology labs need
tests that can rapidly detect a wide range of potential infectious agents in an automated system. The Verigene System provides the multiplexing, rapid turnaround and ease-of-use needed by these labs. Our infectious disease menu and the Processor
SPprovide microbiology labs with a compelling solution for conversion to molecular testing.

We have received 510(k)
clearance from the FDA for our respiratory panel that detects the presence of influenza A and B as well as respiratory syncytial virus (RSV) A and B. Influenza is commonly known as the seasonal flu and RSV is a respiratory virus that
infects the lungs and breathing passages. RSV is the most common cause of bronchitis and pneumonia in children under the age of one year and has become a significant concern for older adults. Our respiratory panel provides physicians with a highly
accurate and fast determination of which virus is present. This test result guides the most appropriate treatment therapy.

In
the fourth quarter of 2009, we received 510(k) clearance from the FDA for our respiratory panel on the Processor SP. We believe that our respiratory assay on the Processor SPoffers a simple-to-use molecular test for diagnosing
respiratory infections and the flu, while providing improved sensitivity over currently available rapid tests. We have received clearance for a package insert change for this assay confirming that the novel H1N1 virus is detected as a positive
Influenza A when using our respiratory assay and the Processor SP.



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##### Table of Contents

In the first quarter of 2011, we received 510(k) clearance from the FDA and CE IVD Mark for
our respiratory assay that includes subtyping for seasonal H1 virus, seasonal H3 virus, and the 2009 novel H1N1 virus, commonly known as swine flu, as well as the targets on our previously cleared respiratory assay. We believe this is the first
sample-to-result molecular respiratory test to include all of these viruses, thus lowering the cost of molecular respiratory testing for hospitals and demonstrating the multiplexing capability of the Verigene System. The demand for this test will be
highly dependent upon the seasonality and prevalence of respiratory viruses.

We are developing blood stream infection panels
for the earlier detection of specific bacteria and resistance markers within patients with blood stream infections. These panels include gram positive, gram negative and fungal pathogens and resistance markers. These assays are designed to enable
physicians to pinpoint bacterial strains infecting patients and thus prescribe the most appropriate antibiotic regimen within 24 hours rather than after several days. Treatment is sometimes begun before assays are complete and we believe that this
early detection capability will allow patients to avoid unnecessary treatments that may expose them to serious side effects. The first blood stream infection panel developed was the gram positive that represents approximately 65% of blood stream
infections. In the fourth quarter of 2011 we received CE IVD Mark for the BC-GP and FDA clearance of BC-S, a subset of the BC-GP panel. In June 2012 we received a de novo510(k) clearance to market the full BC-GP panel. The BC-GN and BC-F
panels are in development.

Our development efforts also include a C. difficiletest and an enteric bacteria test.
C. difficileis a bacterium that can cause symptoms ranging from diarrhea to life-threatening inflammation of the colon. Our enteric bacteria assay is being developed to detect and identify the Enterobacteriaceaespecies that most
often result from food poisoning. The enteric assay tests for a wide spectrum of bacteria that are treated with various antibiotics and other anti-bacterial drug therapies. These assays also will require regulatory submission to the FDA and
corresponding foreign regulatory bodies. We have begun clinical trials for the C. difficile test that we believe are necessary to secure regulatory approval.

Human and Pharmacogenetic Assays

Hospitals need faster, less
expensive and easier-to-use human and pharmacogenetic tests that can be run for a single patient at the point-of-care. Our Verigene System and human and pharmacogenetic test menu addresses these hospital needs. Pharmacogenomics is an emerging subset
of human genetic testing that correlates gene variation with a drugs efficacy or toxicity. These tests play a key role in the advancement of personalized medicine where drug therapies and dosing are guided by each patients genetic
makeup. There is a growing demand on laboratories to implement molecular diagnostic testing, but the cost and complexity of existing technologies and the need for specialized personnel and facilities have limited the number of laboratories with
these capabilities. The ease-of-use and reduced complexity of the Verigene System enables any hospital to perform these testing needs.

We have received 510(k) clearance from the FDA for a warfarin metabolism assay performed on our Original Processor. This is a pharmacogenetic test to determine the existence of certain genetic mutations
that affect the metabolism of warfarin-based drugs, including Coumadin®, the most-prescribed oral anticoagulant.
This assay has been CE IVD Marked during the first quarter of 2011, and we plan to submit an FDA application for this assay to allow its use on the ProcessorSP.

In the third quarter of 2010, we filed a pre-market approval application (PMA) with the FDA for our cytochrome P-450 2C19 assay that detects genetic mutations associated with deficient
metabolism of clopidogrel, more commonly known by the trade name Plavix. On June 9, 2011, we received a not approvable letter from the FDA with respect to our PMA submission in which the FDA stated that it will not approve the
Plavix metabolism test for commercial use in the United States until the PMA is amended. The FDA cited several deficiencies in our submission that necessitate we perform additional analytical studies and address manufacturing questions. We have
completed the analytical studies required by the FDA and have submitted this data in a 510(k) application. If and when we receive 510(k) clearance for this product, we expect it will be indicated for the detection of certain 2C19 genetic variances.
This assay was CE IVD Marked during the first quarter of 2011.

Clopidogrel inhibits platelet function and is a standard
treatment to reduce the risk of thrombolytic events for patients undergoing percutaneous coronary interventions. Clopidogrel metabolism is affected by the cytochrome P-450 family of genes. Up to 50% of the population possess variations in these
genes and abnormally metabolize this drug, thus increasing the risk of adverse events. Our 2C19 assay is designed to identify patients possessing certain of these variations so that alternative therapeutic approaches can be prescribed to reduce
clotting that can result in heart attack or stroke.

We also have received 510(k) clearance from the FDA for a
hyper-coagulation assay on the Original Processor that determines an individuals risk, based upon genetic information, for the development of blood clots that can lead to pulmonary embolism and deep vein thrombosis. This assay has been CE IVD
Marked during the fourth quarter of 2011, and we plan to submit an FDA application for this assay to allow its use on the ProcessorSP.



12



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##### Table of Contents

Ultra-Sensitive Protein Assays

Our ability to detect proteins at sensitivity levels that can be 100 times greater than current technologies may enable earlier detection
of and intervention in diseases as well as enable the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We have developed or are currently developing diagnostic tests for markers
that reveal the existence of a variety of medical conditions including cardiovascular, respiratory, cancer, autoimmune, neurodegenerative and other diseases.

The first ultra-sensitive protein test we plan to commercialize is for cardiac troponin I (cTnI), which is the gold standard biomarker for diagnosis of myocardial infarction, or heart attack,
and identification of patients with acute coronary syndromes at risk for subsequent cardiovascular events. We previously submitted a 510(k) application to the FDA to obtain clearance for the cardiac troponin assay on the Original Processor. We have
withdrawn this application and plan to submit a new 510(k) application to obtain clearance for this assay on the ProcessorSP. We have completed accruing samples and one year clinical follow up for our international pivotal trial named
FAST-TRAC. We plan to use the patient samples from this clinical trial to run the tests needed to submit a 510(k) application for this assay. The FAST-TRAC clinical study is designed to further demonstrate the clinical utility of ultra-sensitive
cTnI measurements as a diagnostic tool for use in the management of both acute and chronic cardiac disease.

In addition to
the cardiac troponin I assay, we are developing an ultra-sensitive prostate-specific antigen (PSA) test for early diagnosis of recurrent prostate cancer. Early testing data suggest this assay may serve as a more specific test for
PSA screening. We are also working on a multiplexed protein-based connective-tissue panel for the detection of rheumatoid arthritis, lupus and other related diseases. Finally, we are investigating new biomarkers where our ultra-sensitive protein
detection technology may enable earlier detection of a broad range of diseases, such as cancer.

Financial Operations Overview

Since inception we have incurred net losses each year, and we expect to continue to incur losses for the foreseeable
future. Our net loss was $16.5 million for the six month period ended June 30, 2012 and $17.3 million for the six month period ended June 30, 2011. As of June 30, 2012, we had an accumulated deficit of approximately
$331.8 million. Our operations to date have been funded principally through capital contributions from investors in three underwritten public offerings of common stock and, prior thereto, in private placements of our convertible preferred stock
which was converted to common stock in 2007. On July 24, 2012, the Company completed an underwritten public offering of common stock and received net proceeds from the Offering of approximately $26.9 million after deducting underwriting
discount and commissions and offering expenses.

Revenue

Product sales revenue is derived from the sale or lease of the Verigene System, including consumables and related products sold to
research laboratories and hospitals. Grant and contract revenue consists of funds received under contracts and government grants, including funds for the reimbursement of certain research and development expenses. Our market efforts are primarily
focused on driving product sales rather than grants and contracts.

Cost of Sales

Cost of sales represents the cost of materials, direct labor and other manufacturing overhead costs incurred to produce Verigene
cartridges and instruments, as well as royalties on product sales, amortization of purchased intellectual property relevant to products available for sale and depreciation of instrument leased and rented to customers. Labor, validation and testing
costs associated with our custom assay development contracts are also included in cost of sales.

Research and
Development Expenses

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



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related costs and other expenses. We expense all research and development costs in the periods in which they are incurred. We expect research and development expenses to grow modestly as we
continue to develop future generations of the Verigene System and expand the genomic and protein tests.

Sales, General
and Administrative Expenses

Sales, general and administrative expenses principally include compensation for employees
in our sales, customer service, marketing, management and administrative functions. We also include professional services, facilities, technology, communications and administrative expenses in sales, general and administrative. The professional
services costs primarily consist of legal and accounting costs. We expect sales and marketing expenses will increase as additional sales and customer support are needed to drive and support customer growth.

Interest Income

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

Three month Period Ended June 30, 2012 Compared to the Three month Period Ended June 30, 2011

Revenues

Revenues were $1.3 million for the three month period ended June 30, 2012, as compared to $0.5 million for the three month period ended June 30, 2011. The increase in revenue was
primarily driven by cartridge and instrument sales to new infectious disease customers.

Cost of Sales

Cost of sales increased to $0.9 million for the three month period ended June 30, 2012 from $0.4 million for the three month period
ended June 30, 2011. The increase in cost was due to higher volume of both cartridge and instrument sales during the second quarter of 2012.

Research and Development Expenses

Research and development expenses
increased slightly to $4.7 million for the three month period ended June 30, 2012 from $4.6 million for the three month period ended June 30, 2011 due to goods and materials associated with clinical trials.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased in the second quarter of 2012 to $4.2 million compared to $3.9 million for the second quarter of 2011. This increase was due to sales and customer
support expansion, partially offset by reductions in non-cash equity compensation expense.

Six month Period Ended June 30, 2012
Compared to the Six month Period Ended June 30, 2011

Revenues

Revenues were $2.6 million for the six month period ended June 30, 2012, as compared to $1.1 million for the six month
period ended June 30, 2011. Product sales increased $1.5 million from the six month period ended June 30, 2011 to the same period in 2012 due to increase in both instrument sales and sales of cartridges. The cartridge unit volume increase
was driven primarily by an increase in our infectious disease customer base.



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Cost of Sales

Cost of sales was $1.8 million for the six month period ended June 30, 2012 and $0.9 million for the six month period ended
June 30, 2011. The $0.9 million increase in cost of sales for the six month period ended June 30, 2012 was due to higher volume of both cartridge and instrument sales during the six month period.

Research and Development Expenses

Research and development expenses decreased slightly from $9.3 million for the six month period ended June 30, 2011 to $9.2 million for the six month period ended June 30, 2012. The
$0.1 million decrease in research and development expenses for the six month period ended June 30, 2012 resulted primarily from a shift in resources from development roles into manufacturing roles with the labor cost being captured as
inventory valuation and cost of goods sold.

Sales, General and Administrative Expenses

Sales, general and administrative expenses decreased from $8.3 million for the six month period ended June 30, 2011 to
$8.2 million for the six month period ended June 30, 2012 due to a reduction in equity compensation expense, partially offset by sales and customer support expansion.

Liquidity and Capital Resources

From our inception in December 1999
through June 30, 2012, we have received net proceeds of $103.9 million from the sale of convertible preferred stock and issuance of notes payable that were exchanged for convertible preferred stock, $102.2 million from our
November 2007 initial public offering of common stock, $35.4 million from our October 2009 underwritten public offering of common stock, $32.2 million from our May 2011 underwritten public offering of common stock, and
$10.3 million from government grants. On July 24, 2012, the Company completed an underwritten public offering of common stock and received net proceeds from the Offering of approximately $26.9 million after deducting underwriting discount
and commissions and offering expenses. We have devoted substantially all of our investments to research, development, manufacturing and SG&A expenses. Since our inception, we have generated minimal revenues from the sale of the Verigene System,
including consumables and related products, to our initial clinical customers, research laboratories and government agencies. We also incurred significant losses and, as of June 30, 2012, we had an accumulated deficit of approximately
$331.8 million. While we are currently in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses in the foreseeable future.

Because we recently began to expand our customer base, we do not anticipate achieving positive operating cash flow in the next one to two
years. During this period we expect to increase investment in additional manufacturing scale-up and product cost reduction projects and to add to sales and customer support personnel. During the six month period ended June 30, 2012, we invested
$2.2 million in inventories for components and assembled Verigene Systems, and we anticipate this trend to continue to support our increasing customer base. Achievement of positive cash flow from operations will depend upon revenue resulting
from adoption of both our current products and future products that depend upon regulatory clearance. Demand for our respiratory products is directly proportional to the size and duration of the annual season for influenza and other respiratory
illnesses. Any unanticipated acceleration or deceleration of customer demand for our products relative to projections may have a material effect on our cash flows. While the Company anticipates that capital resources will be sufficient to meet
estimated needs for the foreseeable future, the Company operates in a market that makes its prospects difficult to evaluate, and the Company may need additional financing in the future to execute on its current or future business strategies. Capital
outlays and operating expenditures may increase over the next few years as the Company expands its infrastructure, commercialization, manufacturing, and research and development activities.

A customer may purchase the Verigene System instruments, lease them from a third party or enter into a reagent rental agreement with the
Company. Our reagent rental agreements include customer commitments to purchase a certain minimum volume of cartridges over the term of the agreement. As part of these agreements, a portion of the selling price for each cartridge is a rental fee for
use of the equipment. To date, our aggregate investment in systems rented to customers has not been material. However, we may need to increase our investment in such systems to support future product placements under reagent rental agreements. We
have established a relationship with a third party financing company to provide our customers with lease financing for Verigene equipment. This arrangement may help mitigate the demand on our capital resources as it allows us to recover the cost of
such systems immediately, instead of over three to five years.

As of June 30, 2012, we had $23.7 million in cash
and cash equivalents as compared to $39.3 million at December 31, 2011. The decrease in cash and cash equivalents was principally due to the use of cash in operating activities. With the completion of our underwritten public offering of
common stock our cash and cash equivalents increased by $26.9 million in July 2012.



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Net cash used in operating activities decreased from $17.1 million for the six months ended
June 30, 2011 to $15.5 million for the six months ended June 30, 2012. This $1.6 million reduction in cash used for operating activities resulted from changes in working capital.

Net cash used in investing activities was less than $0.1 million for the six months ended June 30, 2012, approximately equivalent to
the $0.1 million for the six months ended June 30, 2011.

There was no net cash provided by financing activities for six
month period ended June 30, 2012. Net cash provided by financing activities of $32.2 million for the six months ended June 30, 2011 related to the May 2011 underwritten public stock offering.

We may need to increase our capital outlays and operating expenditures over the next several years as we expand our product offering,
drive product adoption, further scale-up manufacturing and implement product cost saving techniques. The amount and the timing of the additional capital we will need to raise depend on many factors, including:



| |  |  | the level of research and development investment required to maintain and improve our technology;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the amount and growth rate of our revenues;
| | - |  | -------------------------------------------



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



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



| |  |  | competing technological and market developments;
| | - |  | ------------------------------------------------



| |  |  | our need or decision to acquire or license complementary technologies or acquire complementary businesses; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | changes in regulatory policies or laws that affect our operations.
| | - |  | ------------------------------------------------------------------

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

Contractual Obligations and Commitments

The Companys contractual obligations and commitments have not changed materially from the disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2011 filed with
the SEC on February 16, 2012.

Off-Balance Sheet Arrangements

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



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. The primary objective of our
investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly



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increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including
commercial paper, money market funds and corporate debt securities. Our cash and cash equivalents through June 30, 2012 included amounts in bank checking and liquid money market accounts. As a result, we believe we have minimal interest rate
risk; however, a one percentage point decrease in the average interest rate on our portfolio, if such a decrease were possible, would have reduced interest income to $0 for the three month period ended June 30, 2012.



|Item 4. | Controls and Procedures
|------- | -----------------------



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2012. The Companys disclosure controls and procedures are designed to ensure that information required
to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Companys disclosure
controls and procedures were effective as of June 30, 2012.



|(b) | Changes in Internal Control over Financial Reporting
|--- | ----------------------------------------------------

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



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PART II.

OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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



|Item 1A. | Risk Factors
|-------- | ------------

In addition
to the other information set forth in this report, you should carefully consider the factors discussed in Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, which could
materially affect our business, financial condition or future results, as well as the following additional risk factors:

If we do not
achieve our projected development goals in the quantities or time frames we estimate, the commercialization of our products may be delayed and our business prospects may suffer. The assumptions underlying our product placement and development goals
also may prove to be materially inaccurate.

From time to time, we estimate the timing of the accomplishment of various scientific,
clinical, regulatory and other product development goals. These goals may include the commencement or completion of scientific studies and clinical trials, the timing and number of product placements and the submission of regulatory filings. We also
may disclose projected expenditures or other forecasts for future periods in information that we furnish to the SEC from time to time. These and other projections are based on managements current expectations and may not contain sufficient
margin of error or cushion for any specific uncertainties, or for the uncertainties inherent in all forecasting. The actual timing of our product placement and development goals and actual expenditures or other financial results can vary
dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet projections as announced from time to time, the development, placement and commercialization of our products may be delayed and our business
prospects may suffer. The assumptions management has used to produce these projections may significantly change or prove to be inaccurate. Accordingly, you should not unduly rely on any of these forward-looking statements.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

We currently have significant net operating losses (NOLs) that may be used to offset future taxable income. In general, under Section 382 of the
Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Our recently
completed underwritten public offering of common stock or future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, which would significantly limit our
ability to utilize NOLs to offset future taxable income.



|Item 2. | Unregistered Sales of Securities and Use of Proceeds
|------- | ----------------------------------------------------

During the three month period ended June 30, 2012, there were no sales of unregistered securities.



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|Item 6. | Exhibits, Financial Statement Schedules
|------- | ---------------------------------------



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



|* | Filed herewith
|- | --------------



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SIGNATURES

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



|                     |  |                  |  |                                      
|-------------------- |  | ---------------- |  | -------------------------------------
|                     |  | NANOSPHERE, INC.
|                     |  |                 
|                     |  | By:              |  | /s/ William P. Moffitt               
|                     |  |                  |  | William P. Moffitt                   
|                     |  |                  |  | President and Chief Executive Officer
|                     |  |                 
|Date: August 7, 2012 |  |                  |  |                                      
|                     |  |                 
|                     |  | By:              |  | /s/ Roger Moody                      
|                     |  |                  |  | Roger Moody                          
|                     |  |                  |  | Chief Financial Officer and Treasurer

Date: August 7, 2012