UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from                      to                     

Nanosphere, Inc.

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No [This requirement is currently not applicable to the registrant.]

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of October 29, 2010 was 28,406,266.

 

 

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
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 4. (Removed and Reserved)			18
Item 6. Exhibits			18
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements

Nanosphere, Inc.

Balance Sheets
(Unaudited)

		September 30,				December 31,
		2010				2009
CURRENT ASSETS:
Cash and cash equivalents		$	45,637,143			$	76,689,279
Accounts receivable			199,292				735,047
Inventories			2,661,826				2,940,574
Other current assets			735,937				374,657
Total current assets			49,234,198				80,739,557
PROPERTY AND EQUIPMENT— Net			5,210,941				6,144,555
INTANGIBLE ASSETS — Net of accumulated amortization			3,543,609				1,709,842
OTHER ASSETS			75,000				75,000
TOTAL		$	58,063,748			$	88,668,954
CURRENT LIABILITIES:
Accounts payable		$	1,877,374			$	2,509,405
Accrued compensation			1,136,569				955,130
Other current liabilities			3,414,193				2,303,631
Long-term debt — current portion			—				3,818,790
Total current liabilities			6,428,136				9,586,956
LONG-TERM LIABILITIES:
Other noncurrent liabilities			1,350,000				—
Total liabilities			7,778,136				9,586,956
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000,000 shares authorized; 28,406,266 and 28,422,461 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively			284,063				284,225
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued			—				—
Additional paid-in capital			317,092,867				312,660,430
Warrants to acquire common stock			5,423,771				5,423,771
Accumulated deficit			(272,515,089	)			(239,286,428	)
Total stockholders’ equity			50,285,612				79,081,998
TOTAL		$	58,063,748			$	88,668,954

See notes to financial statements.

Nanosphere, Inc.

Statements of Operations
(Unaudited)

		Three Month Periods Ended								Nine Month Periods Ended
		September 30,								September 30,
		2010				2009				2010				2009
REVENUE:
Grant and contract revenue		$	31,890			$	422,300			$	609,961			$	581,797
Product sales			341,547				306,717				1,106,106				804,682
Total revenue			373,437				729,017				1,716,067				1,386,479
COSTS AND EXPENSES:
Cost of sales			1,074,023				587,901				2,237,970				1,298,384
Research and development			4,939,558				4,618,001				13,986,317				13,858,186
Sales, general, and administrative			5,279,859				3,519,404				18,517,102				10,339,580
Total costs and expenses			11,293,440				8,725,306				34,741,389				25,496,150
Loss from operations			(10,920,003	)			(7,996,289	)			(33,025,322	)			(24,109,671	)
OTHER INCOME (EXPENSE):
Foreign exchange gain (loss)			(12,030	)			(338	)			6,487				(2,518	)
Interest expense			(12,623	)			(287,185	)			(274,024	)			(1,030,263	)
Interest income			25,693				41,451				64,198				322,475
Total other income (expense)			1,040				(246,072	)			(203,339	)			(710,306	)
NET LOSS		$	(10,918,963	)		$	(8,242,361	)		$	(33,228,661	)		$	(24,819,977	)
Net loss per common share — basic and diluted		$	(0.39	)		$	(0.37	)		$	(1.20	)		$	(1.12	)
Weighted average number of common shares outstanding — basic and diluted			27,756,086				22,232,621				27,754,851				22,230,070

See notes to financial statements.

Nanosphere, Inc.

Statements of Cash Flows
(Unaudited)

		Nine Month Periods Ended
		September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(33,228,661	)		$	(24,819,977	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,695,553				2,220,847
Amortization of financing costs and accretion of debt discount			118,961				405,305
Loss from disposal of fixed assets			20,699				2,758
Share-based compensation			4,406,025				1,861,910
Changes in operating assets and liabilities:
Accounts receivable			535,755				184,144
Inventories			(816,337	)			42,199
Other current assets			(381,738	)			(955,672	)
Accounts payable			(426,354	)			198,968
Accrued and other current liabilities			1,202,470				646,621
Net cash used in operating activities			(25,873,627	)			(20,212,897	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(444,997	)			(974,470	)
Investments in intangible assets			(865,469	)			(340,000	)
Other			23,000				—
Net cash used in investing activities			(1,287,466	)			(1,314,470	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt			(3,917,293	)			(3,557,982	)
Payments on capital lease obligation			—				(21,434	)
Proceeds from stock option exercises			26,250				46,012
Other			—				(35	)
Net cash used in financing activities			(3,891,043	)			(3,533,439	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(31,052,136	)			(25,060,806	)
CASH AND CASH EQUIVALENTS — Beginning of period			76,689,279				75,356,960
CASH AND CASH EQUIVALENTS — End of period		$	45,637,143			$	50,296,154
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable		$	—			$	99,299
License costs capitalized and included in accrued liabilities			1,700,000				75,000
Reclassification of inventory to property and equipment			1,095,085				—

See notes to financial statements.

Nanosphere, Inc.

Notes to Financial Statements
As of September 30, 2010 and December 31, 2009, and
For the Three and Nine month Periods Ended September 30, 2010 and 2009
(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, 2009 and notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations expected for the full year.

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses attributable to common stock of $272.5 million since inception, and has funded those losses primarily through the sale and issuance of equity securities and secondarily through the issuance of debt. 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. 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. 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.

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

2. Net Loss Per Common Share

Basic and diluted net loss per common share has been calculated in accordance with Accounting Standards Codification (“ASC”) Topic 260, “Earnings Per Share”, for the three and nine month periods ended September 30, 2010 and 2009. 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 nine month periods ended September 30, 2010 excluded 650,000 shares of restricted stock issued in November 2009. 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.

The computations of diluted net loss per common share for the three and nine month periods ended September 30, 2010 and 2009 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:

		September 30, 2010				September 30, 2009
Restricted stock			650,000				—
Stock options			4,200,790				3,588,405
Common stock warrants			1,300,119				1,300,119
			6,150,909				4,888,524

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

3. Intangible Assets

Intangible assets, consisting of purchased intellectual property, as of September 30, 2010 and December 31, 2009 comprise the following:

		September 30, 2010												December 31, 2009
						Accumulated												Accumulated
		Cost				Amortization				Net				Cost				Amortization				Net
Intellectual property — licenses		$	4,288,218			$	(1,195,720	)		$	3,092,498			$	2,438,218			$	(728,376	)		$	1,709,842
Patents			455,000				(3,889	)		$	451,111				—				—				—
		$	4,743,218			$	(1,199,609	)		$	3,543,609			$	2,438,218			$	(728,376	)		$	1,709,842

On July 9, 2010, the Company executed a worldwide non-exclusive license agreement (“the License Agreement”) to utilize certain patented technology believed by the Company to be useful in the manufacture of certain of its current and future products. Under the terms of the License Agreement, the Company will pay a license and technology transfer fee of $1,865,000, payable in four installments. The first installment of $165,000 was paid upon the execution of the License Agreement. The second installment of $350,000 is payable on July 9, 2011 and is reflected in “Current Liabilities — Other Current Liabilities” on the balance sheet as of September 30, 2010. The final two installments of $600,000 and $750,000 are payable on July 9, 2012 and 2013, respectively, and are reflected in “Long-Term Liabilities — Other Noncurrent Liabilities” on the balance sheet as of September 30, 2010. These fees represent full payment for use of the licensed patents during the term of the License Agreement, which ends on the expiration date of the last patent issued and licensed under the License Agreement.

The Company acquired patents and patent rights from Eppendorf AG on August 18, 2010. See Note 8.

Amortization expense for intangible assets amounted to $127,332 and $471,233 for the three and nine month periods ended September 30, 2010, respectively, and to $39,763 and $172,669 for the three and nine month periods ended September 30, 2009, respectively. Estimated future amortization expense is as follows:

Years Ending December 31
2010 (Period from October 1 to December 31)		$	97,757
2011			367,138
2012			356,228
2013			352,592
2014			348,047
Thereafter			1,769,848

Licenses are amortized from the date products associated with the licensed technology receive clearance from of the U.S. Food and Drug Administration (the “FDA”), and such amortization continues over the remaining life of the license. The future amortization expense reflected above is based on licenses related to products cleared by the FDA as of September 30, 2010. Approximately $0.3 million of purchased licenses are not amortized because the diagnostic test products associated with the licensed technology have not been cleared by the FDA.

4. Related Party Transactions

Chad Mirkin, a co-founder of the Company, provides contracted research and development services to the Company and is reimbursed for these services based upon negotiated contract rates. The Company incurred expenses of $25,000 and $75,000 for these services in each of the three and nine month periods ended September 30, 2010 and 2009, respectively.

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

5. Equity Incentive Plan

The Company’s board of directors has adopted and the shareholders have approved the Nanosphere 2000 Equity Incentive Plan (the “2000 Plan”) and the Nanosphere 2007 Long-Term Incentive Plan. The plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Company’s common stock at the date of grant with ten year contractual terms. Certain 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 46% of the options granted and outstanding contain “accelerated vesting” provisions.

The fair values of the Company’s option awards granted during the nine month period ended September 30, 2010 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected dividend yield			0	%
Expected volatility			101	%
Risk free interest rate			2.62	%
Weighted-average expected option life			6.0 years
Estimated weighted-average fair value on the date of grant based on the above assumptions		$	4.01
Estimated forfeiture rate for unvested options			7.5	%

The expected volatility for option awards granted in 2010 was based on the Company’s actual historical volatility. The risk-free interest 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 ASC Topic 718, “Compensation — Stock Compensation.” 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 was $1,148,152 and $3,303,295 in the three and nine month periods ended September 30, 2010, respectively, and $632,878 and $1,861,910 in the three and nine month periods ended September 30, 2009.

As of September 30, 2010, the total compensation cost not yet recognized related to the nonvested awards is approximately $6.6 million, which is expected to be recognized over the weighted average term of four 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, it is the Company’s practice to deliver newly issued shares of its common stock upon the exercise of stock options.

A summary of option activity under the plans as of September 30, 2010, and for nine month period then ended is presented below:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
Options		Shares				Price				Term				Value of Options
Outstanding — January 1, 2010			4,338,695			$	5.75
Granted			119,945			$	5.06
Exercised			(6,305	)		$	4.16
Expired			(107,803	)		$	9.86
Forfeited			(143,742	)		$	6.43
Outstanding — September 30, 2010			4,200,790			$	5.61				7.21			$	1,397,751
Exercisable — September 30, 2010			1,833,697			$	5.54				6.28			$	846,984
Vested and Expected to Vest — September 30, 2010			4,091,904			$	5.61				7.19			$	1,372,416

The intrinsic value of options exercised during the nine month periods ended September 30, 2010 and 2009 was insignificant.

Included in the number of options outstanding at September 30, 2010 are 1,922,606 options with a weighted average exercise price of $5.28 per share and accelerated vesting provisions based on the criteria mentioned above. The total fair value of shares vested during the three and nine month periods ended September 30, 2010 was $113,325 and $1,677,093, respectively, and was $253,894 and $1,954,800 for the three and nine month periods ended September 30, 2009, respectively.

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

In November 2009, the Company granted 672,500 shares of restricted stock under the 2007 Plan, of which 50% vest on the two-year anniversary of the grant date and are subject to forfeiture until vested, and 50% vest on the four-year anniversary of the grant date and are subject to forfeiture until vested. During the nine month period ended September 30, 2010, 22,500 shares of restricted stock were forfeited. The Company recognized $379,223 and $1,102,730 in compensation expense associated with the restricted stock during the three and nine month periods ended September 30, 2010, respectively. As of September 30, 2010, the total compensation cost not yet recognized related to the nonvested restricted stock awards was approximately $2.8 million, which amount is expected to be recognized over the next two years, which is a weighted average term.

6. License Agreements

The Company has entered into several nonexclusive license agreements with various companies covering certain technologies which are embedded in the Company’s diagnostic instruments and diagnostic test products. As of September 30, 2010, the Company has paid aggregate initial license fees of $2.8 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%. Certain of the license agreements have minimum annual royalty payments, and the sums of such minimum payments are $173,750 in 2010, $176,250 in 2011, $181,250 in 2012, $200,000 in 2013, $207,500 in 2014 and are $30,000 to $215,000 annually thereafter through the dates the respective licenses terminate. These licenses expire at various times, corresponding to the subject patents expirations, which currently range from 2011 to 2025.

7. Stockholders’ Equity

As of September 30, 2010 and December 31, 2009, there were outstanding warrants to acquire 1,300,119 shares of common stock. The expiration dates of the warrants outstanding at September 30, 2010 are as follows:

Class of Stock for		Number of				Expiration
which the Warrant is Exercisable		Warrants				Date
Common — exercise price of $17.50 per share			1,135,194			April 2011
Common — exercise price of $8.75 per share			164,925			April 2013

In April 2010 the exercise price on the common stock warrants increased from $15.32 per share to $17.50 per share.

8. Commitments and Contingencies

On August 28, 2009, the Company executed a lease renewal which commenced in June 2010 and ends in May 2014. Under the terms of the lease renewal, the Company has two successive three year options to renew the lease, and the Company has the right of first refusal to lease additional space within the facility.

Rent and operating expenses associated with the office and laboratory space were $159,428 and $441,600 for the three and nine month periods ended September 30, 2010, respectively, and $117,073 and $322,131 for the three and nine month periods ended September 30, 2009, respectively.

Annual future minimum obligations for the operating lease as of September 30, 2010, are as follows:

		Operating
Years Ending December 31		Lease
2010 (Period from October 1 to December 31)		$	104,870
2011			426,643
2012			438,921
2013			451,198
2014			190,131
Total minimum lease payments		$	1,611,763

In July 2009, the Company was named as a defendant in a lawsuit filed in the United States District Court for the District of Delaware by Eppendorf AG alleging infringement of a patent owned by the plaintiff. On August 18, 2010, the Company executed a Settlement Agreement and Intellectual Property Purchase Agreement (the “ Settlement and Purchase Agreement”) with Eppendorf AG. The Settlement and Purchase Agreement provides for, among other things, a lump sum payment of $4 million to settle a patent litigation dispute between the companies, the Company’s acquisition from Eppendorf of certain patents and patent rights, and a limited license back to service existing Eppendorf customers and licenses previously issued that relate to the purchased patents and patent rights. Pursuant to the Settlement and Purchase Agreement, the Company paid $4 million to Eppendorf AG during the third quarter of 2010. The Company has allocated $3.5 million of the lump sum payment to settlement expense, previously accrued as of June 30, 2010, and $0.5 million to intangible assets for the fair value of the acquired patents and patent rights.

Nanosphere, Inc.

Notes to Financial Statements — (Continued)
(Unaudited)

9. Long-Term Debt

In February 2007, the Company entered into two loan and security agreements, with commitments for debt financing with Venture Lending & Leasing IV, Inc., and Venture Lending & Leasing V, Inc. The Company borrowed $12.5 million under these agreements in February 2007. Interest rates under the agreements were 12.5% for the initial twelve month period and 10.0% during the following thirty month period. Notes issued pursuant to this commitment were secured by a first security lien on all of the Company’s assets including intellectual property. This debt matured in August 2010.

The $12.5 million of proceeds received were allocated to debt and the Series D Convertible Preferred Stock based on their fair values on the borrowing date with $1.9 million allocated to Series D Convertible Preferred Stock and the remaining $10.6 million allocated to debt. The discount on the debt of $1.9 million resulted in an effective interest rate on the debt of 21% and the discount was amortized as interest expense over the term of the debt following the interest method. Interest expense on this debt was $8,531 and $253,567 for the three and nine month periods ended September 30, 2010, respectively, which included less than $100,000 of discount amortization in both periods. Interest expense on debt was $279,002 and $1,005,041 for the three and nine month periods ended September 30, 2009, respectively, which included $107,643 and $380,756 of discount amortization respectively. Cash interest paid on this debt was $21,480 and $195,107 for the three and nine month periods ended September 30, 2010, respectively, and $183,854 and $660,656 for the three and nine month periods ended September 30, 2009, respectively.

10. Supplemental Financial Information

Inventories:		September 30, 2010				December 31, 2009
Work-in-process component parts		$	922,160			$	1,061,982
Finished goods			1,739,666				1,878,592
Total		$	2,661,826			$	2,940,574

During the three and nine month period ended September 30, 2010, the Company established a valuation reserve of $679,536 for most of the original Verigene System inventory. All near-term assay submissions are expected to be on the Verigene SP.

Property and Equipment — Net:		September 30, 2010				December 31, 2009
Total property and equipment — at cost		$	17,200,815			$	16,029,532
Less accumulated depreciation			(11,989,874	)			(9,884,977	)
Property and equipment — net		$	5,210,941			$	6,144,555

Other Current Liabilities:		September 30, 2010				December 31, 2009
Accrued clinical trial expenses		$	634,194			$	939,509
All other			2,779,999				1,364,122
Total		$	3,414,193			$	2,303,631

As of September 30, 2010, All other current liabilities includes accrued litigation defense fees of approximately $1.7 million for services rendered through September 30, 2010.

11. Subsequent Event

On October 29, 2010, the United States Department of the Treasury awarded the Company a grant of $977,917 for investments in qualifying therapeutic discovery projects under section 48D of the Internal Revenue Code.

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, prospects and plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.

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

These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after 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, 2009 and elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

Nanosphere, Inc. (the “Company”) develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost and highly sensitive genomic and protein testing on a single platform. Our proprietary nanoparticle technology provides the ability to run multiple tests simultaneously on the same sample.

The Verigene System is also differentiated by its ease of use, rapid turnaround times and ability to support a broad test menu. It provides laboratories already performing molecular diagnostic testing a low cost solution and enables smaller hospitals without advanced diagnostic capabilities to perform these tests. 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 identify infectious diseases,
	2)		point-of-care pharmacogenetics to ensure that the appropriate therapy is prescribed, and
	3)		earlier detection of disease through ultra-sensitive protein assays.

Our assays were originally developed for use on the first generation Verigene System (“Verigene I”). Subsequently, we developed and launched the Verigene SP System (“Verigene SP”) which handles the same processing steps as the Verigene I and incorporates sample preparation. While our current customers continue to use Verigene I predominantly for hypercoagulation testing and Warfarin metabolism testing, our near-term development plans are focused on the Verigene SP, and all future assays are expected to be submitted to the FDA on the Verigene SP.

The following table summarizes the FDA regulatory status of our near-term genomic and protein assays on the Verigene System:

		FDA Status
Assay		Verigene I		Verigene SP
Infectious Disease Assays
Respiratory Virus		510(k) cleared		510(k) cleared
Respiratory Virus with Sub-Typing				Filing submitted Q4 2010
Blood Infection Panels				In development
Human and Pharmacogenetic Assays
Warfarin Metabolism		510(k) cleared		Filing expected 2011
Hyper-Coagulation		510(k) cleared		Filing expected 2011
Cystic Fibrosis		510(k) cleared (launch pending clearance on Verigene SP)
Plavix® Metabolism (2C19)				Premarket approval filing submitted Q3 2010
Hemochromatosis (HFE)		Pending resubmission on the Verigene SP
Ultra-Sensitive Protein Assays
Cardiac Troponin I		Pending resubmission on the Verigene SP		Filing expected 2011
Prostate-Specific Antigen (PSA)		Research use only

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 Verigene SP provide microbiology labs with a compelling solution for conversion to molecular testing.

We have received 510(k) clearance for our respiratory panel that detects the presence of influenza A and B as well as respiratory syncitial virus (“RSV”) A and B. Influenza is commonly known as the seasonal flu and RSV is a respiratory virus that infects the lungs and breathing passages. RSV is the most common cause of bronchitis and pneumonia in children under the age of one 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 of our respiratory panel on the Verigene SP. We believe that our respiratory assay on the Verigene SP offers 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 Verigene SP.

In the fourth quarter of 2010, we submitted a 510(k) application for a respiratory assay that adds subtyping for seasonal H1 virus, seasonal H3 virus, and the 2009 novel H1N1 virus, commonly known as swine flu, to our previously cleared respiratory assay. We believe this will be 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. Once cleared by the FDA, the demand for this test will be highly dependent upon the seasonality and prevalence of respiratory viruses.

We are developing three blood stream infection panels for the earlier detection of specific bacteria present within patients with blood stream infections. Currently under development are gram positive, gram negative and fungal panels. These assays are designed to enable physicians to pinpoint bacterial strains infecting patients and thus prescribe the most appropriate antibiotic regimen within the 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 often include serious side effects.

Our development efforts also include a C. difficile test and an enteric bacteria test. Our C. difficile test includes both the genetic test to detect the presence of C. difficile and toxin B, a protein test that indicates whether the virus is active. C. difficile is 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 Enterobacteriaceae species 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.

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. Pharmacogenetics 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.

We have received 510(k) clearance for a warfarin metabolism assay performed on our Verigene I. 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. We plan to submit an additional FDA application for this assay to allow its use on the Verigene SP.

In the third quarter of 2010, we filed a pre-market approval application (PMA) for our cytochrome P450 2C19 assay that detects genetic mutations associated with deficient metabolism of clopidogrel, more commonly known by the trade name Plavix. 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 do not properly 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 have also received 510(k) clearance to use the Verigene I for two human genetic tests. The first test is a hyper-coagulation assay, one of the highest volume human genetic tests currently performed, 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, potentially resulting in a stroke or heart attack. We plan to submit an additional FDA application for this assay to allow its use on the Verigene SP.

The second human genetic test is our cystic fibrosis test that enables molecular laboratories to perform prenatal screening and diagnostic confirmations through identification of the number of copies of each of the 23 most common gene mutations recognized by the American College of Obstetricians and Gynecologists as markers for cystic fibrosis. We have elected to delay the launch of our cystic fibrosis test until such time as it may receive 510(k) clearance for use on the Verigene SP.

In the first quarter of 2009, we filed a de novo 510(k) submission for a hereditary hemochromatosis (“HFE”) genetic test. We re-submitted an amended 510(k) submission in October 2009 to supply additional data requested by the FDA. Mutations in the HFE gene are associated with hemochromatosis, which is the leading cause of iron overload disease, a systematic iron build up that can eventually adversely affect the heart, liver, pancreas, joints and pituitary gland. Untreated, hemochromatosis can be fatal. Once detected, hemochromatosis is easily treated. Approximately one in every 250 people of European descent has the disease and one in eight is a carrier of at least one of the recessive gene mutations. This is a de novo 510(k) because there are currently no FDA-cleared tests to detect these mutations of the HFE gene. We have received additional feedback from the FDA indicating that further testing would be necessary in order to proceed with this application. This assay was submitted for clearance on the Verigene I and the FDA requires separate testing and a new application to clear this assay on the Verigene SP.

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 the occurrence 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 Verigene I. The Company has withdrawn this application and plans to submit a new 510(k) application to obtain clearance for this assay on the Verigene SP. We plan to use patient samples from our FAST-TRAC clinical trial to run the clinical trials in support of our new 510(k) submission, and we believe we can commence these trials around the end of this year.

In addition to the cardiac troponin I assay, we currently have research and development efforts underway for an ultra-sensitive prostate-specific antigen (PSA) test for early diagnosis of recurrent prostate cancer, and early testing data suggests 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. We are also investigating new biomarkers where our ultra-sensitive protein detection technology may enable earlier detection of a broad range of diseases, such as cancer. We are in the process of assessing the commercial viability of these applications and the various paths to regulatory approval that may be available.

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 $33.2 million for the nine month period ended September 30, 2010. As of September 30, 2010, we had an accumulated deficit of approximately $272.5 million. Our operations to date have been funded principally through capital contributions from investors in two 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, and our debt borrowings.

In November 2007, we completed our initial public offering of 8,050,000 shares of common stock at $14.00 per share. We received approximately $102 million of net proceeds from our initial public offering. In October 2009, we completed a public offering of 5,405,000 shares of our common stock at $7.00 per share. We received approximately $35.4 million of net proceeds from this offering.

The Company has an effective shelf registration statement on Form S-3 filed with the SEC for an aggregate amount of $100 million in common stock, preferred stock, warrants, stock purchase contracts and/or stock purchase units of the Company, under which $64.6 million remains available for future issuances.

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 seeking grants and contract opportunities. However, the Company recently completed development of certain custom pharmacogenetic assays to be used in conjunction with the clinical trials associated with new therapeutic drugs for a major pharmaceutical company. We will continue to be opportunistic with regard to future contract and grant opportunities.

Cost of Sales

Cost of sales represents the cost of materials, direct labor and other manufacturing overhead costs incurred to produce Verigene cartridges and instruments, as well as royalties on product sales, amortization of purchased intellectual property relevant to products available for sale and depreciation of instrument leases and rentals. Labor, validation and testing associated with our custom assay development contracts is 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-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 additional genomic and protein tests.

Sales, General and Administrative Expenses

Sales, general and administrative expenses principally include compensation for employees in our sales, customer service, marketing, management and administrative functions. We also include professional services, facilities, technology, communications and administrative expenses in sales, general and administrative. The professional services costs primarily consist of legal and accounting costs. We expect sales and marketing expenses 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.

Interest Expense

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

Three month Period Ended September 30, 2010 Compared to the Three month Period Ended September 30, 2009

Revenues

Revenues were $0.4 million for the three month period ended September 30, 2010, as compared to $0.7 million for the three month period ended September 30, 2009. Product sales were $0.3 million for three month period ended September 30, 2010 and 2009. The three month period ended September 30, 2009 included $0.4 million of service revenue related primarily to the assay development contract with a major pharmaceutical company.

Cost of Sales

Cost of sales was $1.1 million for the three month period ended September 30, 2010 and $0.6 million for the three month period ended September 30, 2009. During the three month period ended September 30, 2010, the Company established a valuation reserve of $0.7 million for the Verigene I inventory. This reserve was taken based on the Company’s plan to submit future assay applications to the FDA for use only on the Verigene SP. In addition, the Company withdrew its 510(k) application to the FDA for the cardiac troponin assay on the Verigene I and plans to submit a new 510(k) application for this assay on the Verigene SP.

Research and Development Expenses

Research and development expenses increased from $4.6 million for the three month period ended September 30, 2009 to $4.9 million for the three month period ended September 30, 2010 due to clinical trial expenses for our 2C19 and respiratory virus assays.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased from $3.5 million for the three month period ended September 30, 2009 to $5.3 million for the three month period ended September 30, 2010. The $1.8 million increase in sales, general and administrative expenses for the three months ended September 30, 2010 resulted from a $1.2 million increase in litigation defense expenses for the patent litigation dispute with Eppendorf AG that was settled on August 18, 2010. In addition, non-cash share-based compensation increased $0.5 million due to options and restricted stock granted in the fourth quarter of 2009.

Interest Expense

Interest expense was less than $0.1 million for the three month period ended September 30, 2010, as compared to $0.3 million for the three month period ended September 30, 2009. The decrease in interest expense for the three months ended September 30, 2010 resulted from a decrease in the scheduled amortization, which includes increased principal and lower interest, in accordance with the loan and security agreements with Venture Lending and Leasing. The balance of this debt was fully repaid in August 2010.

Interest Income

Interest income was less than $0.1 million for the three month periods ended September 30, 2010 and 2009.

Nine month Period Ended September 30, 2010 Compared to the Nine month Period Ended September 30, 2009

Revenues

Revenues were $1.7 million for the nine month period ended September 30, 2010, as compared to $1.4 million for the nine month period ended September 30, 2009. Product sales increased from $0.8 million for the nine month period ended September 30, 2009 to $1.1 million for the same period in 2010. Service revenue was $0.6 million for the nine month periods ended September 30, 2010 and 2009.

Cost of Sales

Cost of sales was $2.2 million for the nine month period ended September 30, 2010 and $1.3 million for the nine month period ended September 30, 2009. The $0.9 million increase in cost of sales for the nine month period ended September 30, 2010 resulted from the $0.7 million valuation reserve for the Verigene I inventory, as previously discussed. The balance of the increase was driven by the increase in sales.

Research and Development Expenses

Research and development expenses have remained relatively consistent at $14.0 million for the nine month period ended September 30, 2010 as compared to $13.9 million for the nine month period ended September 30, 2009.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased from $10.3 million for the nine month period ended September 30, 2009 to $18.5 million for the nine month period ended September 30, 2010 due to litigation settlement expenses of $3.5 million as well as a $2.6 million increase in litigation defense expenses related to the Eppendorf AG litigation, as previously discussed. In addition, non-cash share-based compensation increased $1.9 million due to options and restricted stock granted in the fourth quarter of 2009.

Interest Expense

Interest expense was $0.3 million for the nine month period ended September 30, 2010, as compared to $1.0 million for the nine month period ended September 30, 2009. The decrease in interest expense for the nine month period ended September 30, 2010 resulted from a decrease in the scheduled amortization, which includes increased principal and lower interest, in accordance with the loan and security agreements with Venture Lending and Leasing. The balance of this debt was fully repaid in August 2010.

Interest Income

Interest income was less than $0.1 million for the nine month period ended September 30, 2010 and $0.3 million for the nine month period ended September 30, 2009. The decrease in interest income during the nine month period ended September 30, 2010 resulted from lower interest rates during the nine month period ended September 30, 2010 as compared to the same period in 2009.

Liquidity and Capital Resources

From our inception in December 1999 through December 31, 2009, 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, $35.4 million from our October 2009 underwritten public offering and $9.2 million from government grant revenue. We have devoted substantially all of these funds to research and development and sales, general and administrative expenses. Since our inception, we have generated minimal revenues from the sale of the Verigene System, including consumables and related products, to our initial clinical customers, research laboratories and government agencies. We also incurred significant losses and, as of September 30, 2010, we had an accumulated deficit of approximately $272.5 million. While we are currently in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future.

Because we recently began to commercialize our products, we do not anticipate achieving positive operating cash flow before 2013. During this period we expect to increase investment in additional manufacturing scale-up, research and development costs to expand our assay menu and to develop a fully automated instrument with increased throughput, and to add to sales and marketing personnel. 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 will have a material effect on our cash flows. We anticipate that our current cash and cash equivalents will be sufficient to cover our operating and investing activities as well as our debt interest and principal obligations until approximately the middle of 2012.

A customer may purchase the Verigene System, lease it from a third party or enter into a reagent rental agreement. 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 charge 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 September 30, 2010, we had $45.6 million in cash and cash equivalents as compared to $76.7 million at December 31, 2009. The decrease in cash and cash equivalents was principally due to the use of cash in operating activities.

Net cash used in operating activities increased from $20.2 million for the nine months ended September 30, 2009 to $25.9 million for the nine months ended September 30, 2010 due to primarily to the lump sum payment to Eppendorf AG to settle a patent litigation dispute as well as $1.2 million paid for legal defense fees.

Net cash used in investing activities remained consistent at $1.3 million for the nine months ended September 30, 2010 and September 30, 2009.

Net cash used in financing activities increased slightly from $3.5 million for the nine months ended September 30, 2009 to $3.9 million for the nine months ended September 30, 2010 due to the scheduled payments under the loan and security agreements with Venture Lending and Leasing, which were fully repaid in the third quarter of 2010.

While we anticipate that our capital resources will be sufficient to meet our estimated needs until approximately the middle of 2012, 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 reductions. The amount of additional capital we may need to raise depends on many factors, including:

•

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

•

the amount and growth rate of our revenues;

•

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

•

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

•

competing technological and market developments;

•

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

•

changes in regulatory policies or laws that affect our operations.

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. 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 material contractual obligations and commitments are as described in its Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 11, 2010. In addition, on July 9, 2010, the Company executed a worldwide non-exclusive license agreement (the Agreement”) to utilize certain patented technology believed by the Company to be useful in the manufacture of certain of its current and future products. Under the terms of the Agreement, the Company will pay a license and technology transfer fee of $1,865,000, payable in four installments. The first installment of $165,000 was due upon the execution of the Agreement, and the remaining installments of $350,000, $600,000 and $750,000 are payable on July 9, 2011, 2012 and 2013, respectively. These fees represent full payment for use of the licensed patents during the term of the Agreement, which ends on the expiration date of the last patent issued and licensed under the Agreement.

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 increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including commercial paper, money market funds and corporate debt securities. Our cash and cash equivalents through September 30, 2010 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 our interest income to $0 for the nine month period ended September 30, 2010.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2010. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010.

(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.

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.

On August 18, 2010, the Company executed a Settlement Agreement and Intellectual Property Purchase Agreement (the “Settlement and Purchase Agreement”) with Eppendorf AG. The Settlement and License Agreement provides for, among other things, a lump sum payment of $4 million to settle a patent litigation dispute between the companies, the Company’s acquisition from Eppendorf of certain patents and patent rights, and a limited license back to service existing Eppendorf customers and licenses previously issued that relate to the purchased patents and patent rights. The patent litigation dispute that was terminated by the Settlement and License Agreement was described previously in Part II, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

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, 2009, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

Item 2. Unregistered Sales of Securities and Use of Proceeds

	(a)		During the three month period ended September 30, 2010, there were no sales of unregistered securities.
	(b)		Not Applicable.
	(c)		Not Applicable.

Item 6. Exhibits, Financial Statement Schedules

Exhibit Number				Exhibit Description
	10.1			License Agreement dated July 9, 2010 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 15, 2010 and incorporated herein by reference).
	10.2			Settlement Agreement and Intellectual Property Purchase Agreement, dated August 18, 2010 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 24, 2010 and incorporated herein by reference).
	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 *

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.

Date: November 3, 2010

Date: November 3, 2010