FIRST QUARTER 2005 CONFERENCE CALL

Joseph Cross, President and CEO

• Welcome to the Nanophase conference call to review the first quarter of 2005, which, we believe, was quite a strong quarter for the Company entering a new fiscal year and is consistent with our expectations for material revenue growth for 2005. We are pleased that you are taking the time to visit with us today. Jess Jankowski, Nanophase’s chief financial officer, and I will be hosting this call.
• To begin our discussion, Jess will review the financial highlights.

Jess Jankowski, CFO and Controller

• Good morning.
• As I review the financial performance of the Company for the first quarter, I‘ll continue to do so at a strategic level, highlighting points of specific interest and significant variances. More details are included in the financials accompanying our press release of April 27th.

All numbers will be in approximate terms for ease of discussion.

• Total revenues for the first quarter of 2005 were up $320K compared to the first quarter of 2004. This statistic, by itself, doesn’t really tell the whole story.
  
  Product Revenue was up $460K, to $1,526K, the highest in the Company’s history. This increase was largely composed of sales of sunscreen materials, along with some personal care materials, to BASF. As our 10-Q will tell, the large majority of our Q105 revenue was from BASF. More to follow on this in the margin discussion
• For the periods presented, Other Revenue was down $140K. This decrease in Other Revenue, when compared to the first quarter of last year, related to the Company recognizing the first quarterly payment of $150K in technology development funding from Rohm & Haas Electronic Materials in 2004. This funding from Rohm & Haas was part of its $600,000 commitment to support Nanophase’s efforts in jointly developing slurry products for current and future semiconductor technologies during 2004.
• Rohm & Haas’ commitment to Nanophase for 2005 will ultimately be greater, and be in the form of product sales. We expect to begin shipping this product in Q2 of this year.
• We have generated a positive gross margin of $170K for this quarter. About $90K, of this was margin purely on product sales. We view this as a validation of our business plan and our financial modeling. As we continue to discuss, our margins have been impeded by not having enough revenue to absorb the manufacturing overhead that’s required to work with the customers we have and the new ones we expect to have. The additional product revenue this quarter showed that, as volume grows and manufacturing overhead is absorbed, our solid variable margins have an appreciable impact on gross margins.
  
  Another thing that management is optimistic about is that this positive margin was achieved with minimal revenue from the CMP business and minimal revenue from the Company’s customers other than BASF. As the Rohm & Haas and Altana volume begins to grow this year and next, our margins will also grow. The variable margins on the materials we sell to BASF for sunscreens are typically lower than those we expect from our other customers in different applications. In other words, in Q1 we achieved a positive gross margin on product sales with our least advantageous expected product mix.
• Moving down the P&L....
• R&D Expenses were relatively flat quarter to quarter. In SG&A, which was up 8%, we saw increases in auditing and SOX-404-related expenses and compensation, offset by reductions in business insurance costs and other items.
• In total, the Company lost $0.08/share this quarter versus $0.09/share for the same quarter last year. Note that depreciation amounted to about $0.02 cents per share, or $320K of the Company’s loss for the first quarter of 2005.
• Moving to the balance sheet, Nanophase ended the first quarter with $10.2 million in cash and investments compared to about $11.6 million at the end of 2004.
• Looking at cash burn, we used $1.2M for operations and about $200K for capital improvements in Q1. Note that accounts receivable were $200K for higher than at year end. That A/R change was more cyclical than anything and should swing back favorable as the year progresses. The Company also reduced debt by $120K in the quarter. Management expects the note to BASF, currently at $460K, to be paid off no later than mid-2006. There is a possibility that this note will be called in June, but we think it’s unlikely. In any event the payoff of this note will not have a material impact on the Company’s ability to execute it’s business plan.
  
  In terms of gauging future cash burn, last year, Nanophase used an average of $1.2M per quarter in operations and $175K for capital improvements and capitalized patents. Management expects 2005 operational cash burn to be lower than in 2004, heading toward a planned positive operating cash flow run-rate by the end of 2006. Capitalized expenditures should be a little higher, with patent costs being the component that is more difficult to predict.
• We are also proud to note that we completed our newly required annual SOX-404 compliance audit.....having found no material weaknesses in our internal controls. Many larger companies, with deeper pockets and more abundant resources, cannot make this claim.
• As an administrative matter, I would like to discuss conference call timing relative to the close of the reporting period. It has been our past practice to schedule these calls on or about the third Thursday of any given month following a quarterly reporting period, a little later during the annual call. This year, we had to extend the annual call timing due to resources being limited internally, and externally, with our service providers. These limitations were in light of the newly expanded SOX-404 documentation, reporting, and audit requirements.
  
  This call is taking place on the fourth Thursday, largely for the same reasons. In the future, I would expect our calls to remain on a similar timetable, with the possibility that they could end up being later as these standards mature. We are navigating the delicate balance between avoiding adding overhead to expedite these types of things and keeping the Company’s fixed costs as low as possible to maximize your returns.
• Thank you for your attention, now I'd like to turn things back over to Joe Cross, our CEO.

Joseph Cross, President and CEO

• Thanks, Jess.
• My comments today will be briefer than normal since we had a rather thorough discussion on the Company and expectations for 2005 on March 3. My intent is to provide an update on activities during this past quarter.
• Starting with the investment community, we presented at the Stephens Nanotechnology conference during April and plan to be more active in these venues during 2005. For instance, we expect to present at the NanoBusiness Alliance investor forum in New York during May. We would also note, since we are asked repeatedly, that two analysts initiated coverage of Nanophase during the first quarter – Global Crown Capital and ThinkEquity. Two additional analysts have indicated to us that may start coverage, but, obviously, we do not know where or when. Moving to Nanophase during the first quarter...
• Continuing the Company’s momentum on continuous improvement, variable manufacturing cost reductions, and variable margin growth, we again made excellent progress this quarter.

• We were able once again to increase PVS reactor rates by about 7%, which adds the capacity of about one additional reactor without capital cost, while reducing variable manufacturing cost. This is important in that as our volume grows the paradigm continues to improve and we will not have to add additional reactors at the same capacity levels. This reduces capital we might have had to spend and minimizes further depreciation, which, as Jess noted, impacts the financial numbers appreciably. As a side note, we have now improved reactor rates by about 8 times since 1999 when we started the effort.
• We were also able to increase raw material yield about 3%, again reducing variable manufacturing cost.
• Incorporating a subtle design change, we increased reactor productivity by about 3%, which is equivalent to adding about half a reactor for no capital cost and also again reduces variable manufacturing cost.
• Continuing our emphasis on six-sigma process control, we now have all supervisors and some engineers qualified as green belts. Over the past four years, Nanophase has improved process controls from about one-sigma to now approaching six-sigma. The improvement in our nanomaterials since 1999 has been dramatic. Consistent, repetitive high quality nanomaterials have definitely been noticed by our customers and are a key competitive strength for us.
• In parallel with the six-sigma thrust, we have been able to reduce variable manufacturing cost by about 80% over time; this translates directly into increased variable margin and improved gross margin as Jess noted for the first quarter. We expect to continue improvements throughout 2005.

• From an intellectual property perspective, we remain focused on expanding our patent estate. The Company filed one patent application in the first quarter regarding our nanoparticle coating technology for the second generation sunscreen and received three foreign patents. The Company still has 10 US and 32 foreign patent applications pending. We also expect to file additional patent applications during 2005.
• Relative to revenue growth for 2005, we remain quite optimistic. We continue to believe that expected revenue growth will be driven by our market partners and Nanophase’s internal business development initiatives, some of which we expect to reach revenue fruition during the latter part of 2005. Reviewing some key areas:

• As we stated on the last conference call, we expect demand for the current sunscreen nanomaterial to grow slightly more than 25% over 2004 levels. First and second quarter order rates match this expectation and the rolling six month forecast provided by BASF appears to continue this trend and shows fairly strong demand.
• The second generation sunscreen in now being rolled out to selected customers on a global basis and, according to BASF, is being well accepted. Nanophase shipped the initial qualification lots for customer sampling during April. Based on information from BASF, we would expect that revenues for this product should begin ramping during late 2005 and early 2006, but new product demand is expected to add to 2006 revenues.
• New personal care products with BASF continue in active development and appear to be on track. BASF designated Nanophase a “strategic partner” during this last quarter based on the strength of the new product development. This is a rather nice compliment and status in that we are considered a strategic partner rather than a vendor or supplier. We have a key meeting with BASF in Ludwigshafen in late May to solidify several details on new product introductions. We are quite optimistic about the future revenue potential from the new personal care products under development.
• Altana Chemie continues to make considerable progress introducing the NanoBYK series of nanoparticle-based ingredients to the various coatings markets that we detailed on the last conference call. Nanophase is supporting BYK during a major European paint show this week and providing additional training to BYK’s European and Asian sales personnel. We continue to see a high level of activity in new product development, customer interest in the US where we work closely with BYK in business development, and in Europe and Asia. We expect additional new NanoBYK product introductions during the next six months and throughout 2005. We continue to believe that the partnership with Altana Chemie is a critical relationship for Nanophase due to the size and breadth of the markets addressed.
• Based on recent discussions, Rohm & Haas Electronic Materials seems to be gathering momentum in the CMP market and is very upbeat about 2005 and 2006. We continue to expect that revenue from CMP will be about 25% higher than 2004. We have our quarterly business review meeting with them in early May and I should be able to provide more color on this during the next conference call.

• Our business development initiatives are progressing and we added several new opportunities this quarter. We believe that the business development pipeline is more robust and active than at any time in our history and should support our aggressive revenue growth plans for 2005-2006. We continue to reach closure on the opportunities that I reviewed during the last conference call and expect these to likely occur during the second quarter. We will, of course, announce new orders and customers as they happen. This concludes our prepared remarks; we are now available for any questions you may have.