FIRST QUARTER 2008 CONFERENCE CALL

Joseph Cross, President and CEO

• Welcome to Nanophase’s conference call to review the first quarter of 2008. Especially given current economic conditions, Nanophase had a solid quarter and we are pleased that you are taking the time to be with us today. Jess Jankowski, Nanophase’s CFO, and I will be hosting this session.

• To begin our discussion, Jess will comment on first quarter financial reporting….

Jess Jankowski, CFO

• Good afternoon and thank you for your continuing support of Nanophase.

I’d like to start out with a recap of the first quarter and some forward looking thoughts regarding 2008. As always, numbers will be discussed in approximate terms.

The first quarter was a pleasant surprise in terms of revenue volume for Nanophase. We grew 5% compared to the first quarter of 2007 and we maintained an excellent product mix. We qualify our comments here because our outlook for all of 2008 still remains at 5-15% growth and our visibility is not yet clear for the second half of the year. We thought that Q1 revenue would be lower than what we experienced and we now think that Q2 revenue will be roughly flat from Q1. At this point, we still need to get through the second quarter, and in to the 3rd, before we will have a solid handle on annual revenue growth beyond what we have predicted. As you may recall, in Q2 of 2007 we had two major customers building inventory that resulted in a record quarter of $4.1Million. Unfortunately, this was followed by a big drop in revenue, a drop of almost 40%, to $2.6M in Q3. We neither expect a repeat of 2007’s $4million Q2, nor do we expect a repeat of the large revenue fall-off between Q2 and Q3 of last year.

As frustrating as it may be for our investors and analysts, Nanophase is still not established enough for quarterly trend and quarterly revenue estimates to track historical curves. Regardless, we are in strong applications with demonstrated value propositions for engineered nanomaterial solutions, and these will grow over time. 2008 will be a good year, and a critical set-up year for 2009.

Roughly 90% of our revenue for Q108 was from our four largest customers. BASF accounted for about 37% of our business, our large architectural coatings customer 32%, BYK Chemie 10% of our business and Rohm & Haas about 9% of our business. The first three of these customers also accounted for about 90% of last year’s 1st quarter, but with a decidedly different mix, with BASF accounting for more than 55% of last year’s Q1 revenue. While their Q108 volume is lower than in 2007, based on BASF’s current annual forecast, we expect full year 2008 shipments to exceed last year’s.

Moving down, Nanophase achieved a 35% gross margin on sales for Q1 of 2008, compared to 25% for the same period in 2007. This was a function of both favorable product mix and manufacturing overhead reductions from last year flowing through the current P&L. While we are pleased with current margins, we expect them to normalize around 27-30% for 2008 given our product mix and volume expectations. Again, visibility is always an issue.

Our margin expectations are tempered by the knowledge that we must maintain capacity, including some excess direct labor, while we continue to invest in the coatings business. We are still shipping a wide variety of products in relatively small lots. As the demand within our coatings business grows, and we see larger quantities of each type of coatings product being shipped, efficiencies, and margins, should improve. This situation is typical when building new business with the characteristics we see with BYK Chemie, namely: A larger than optimal catalog of products, a lot of sampling and engineering of initial quantities from sample through pilot phase, and, the building of product awareness in the marketplace.

To continue working my way down the P&L…..

R&D Expenses were down 16% from Q107. Most of this reduction is due to a continued migration of the Company’s R&D and advanced engineering groups to working mainly on applications development. We continue to focus on development that is market driven. We expect that total R&D expenses for 2008 might increase slightly from the first quarter’s run rate, but will remain below historic levels.

SG&A Expenses were up 20% from Q1 of 2007 to 2008. Two discrete factors drove most of this increase.

As we have indicated in the past, USPTO rules and practices have changed and these changes have had a negative impact on small companies. And now, Nanophase has been lucky enough to experience this first hand! In 2003, Nanophase was granted a broad patent covering plasma processing of nanomaterials. In 2004, the first of three re-exam requests were allowed. Nanophase prevailed in the first two re-exams, but was unsuccessful in the third. Thus, in Q1 2008, the claims in the broad patent were canceled. During the 4 years we argued the broad patent, Nanophase’s process technology has evolved and improved significantly. These new developments are well protected as Trade Secrets.

While Nanophase continues to selectively prosecute patent applications which would protect specific plasma processes and products by these processes, our IP focus has shifted toward protecting the practical applications of our nanomaterials. As a result of our continued innovation and development, the canceling of the claims in our broad process patent will have no impact on ongoing operations. However, there was some non-cash P&L impact. This treatment by the USPTO, among other items, resulted in us expensing $168K of formerly capitalized patent and trademark work. The bulk of this charge was accumulated during the torturous re-exam process and related to the disallowance of the claims in our original NAS patent.

The second item contributing to this large quarter-over-quarter variance is approximately $120K in audit fees that were all recognized in Q1 of 2008. This is basically a timing difference. Given recent changes in SEC reporting requirements, we no longer accrue things like audit or annual report fees and expense them ratably throughout the year. The bulk of the annual audit work is typically performed in Q1, and we are now expensing it as services are rendered, as newly required by the SEC. In 2007, we still had a remaining accrual that offset some of our 2006 audit fees and this resulted in the delta between the two quarters being increased.

Aside from the patent charge, we expect cumulative SG&A expenses to remain roughly flat from 2007 to 2008, with the exception of some increases driven by the addition of more salespeople. Joe will elaborate further on this during his comments.

On a GAAP basis, as reported, Nanophase lost $0.04/share in Q1 of ‘08 versus $0.06/share in Q1 of ‘07. $270K, or about $0.015/share of the current Q1 loss related to the two non-recurring and timing items in SG&A that we just discussed.

Analyzing the non-cash components of the Q108 loss, we have depreciation and amortization of about $320K. This expense, a regular component of our GAAP bottom line, amounted to about one-and-a-half of the four cent loss. Equity compensation, also a non-cash expense, amounted to $200K and contributed another penny per share to the loss. In total, depreciation and equity compensation expense amounted to about 55% of the 2008 loss, with the patent charge making up another 18% of the quarter’s loss. You can see where this is heading; we are closing in on cash flow break even.

Moving to the balance sheet highlights;

Nanophase ended Q1 with $16 million in cash and investments and remains in a strong financial position.

Equipment and leasehold improvements amounted to about $90K for the quarter, with $600K expected in total for 2008. We don’t anticipate material new capital expenditures this year, beyond updating manufacturing, R&D and IT infrastructure as required. Furthermore, we believe that we currently have capacity in place to support a $20-25M revenue run rate, depending upon product mix.

On the liabilities side, the Company now has $1.8million in total debt. All but $64K of this, representing capital leases on lab equipment, relates to the 2005 BYK Chemie loan of $1.6M that was used to expand both dispersion and powder-production capability to support expected growth in the coatings business.

In terms of Q1 working capital impact, Accounts Receivable were up to almost $2M at quarter end due to timing anomalies. Also, Accounts payable were up significantly from year-end 2007 to about $800K. This was also related to the timing of payments for operational expenses and capital expenditures being very unfavorable at 12/31. Our quarterly average accounts payable balance for 2007 was actually $700K.

To summarize, cash burn from operations amounted to $575K for the first quarter, including some working capital drains related to timing. During 2007, our cash burn from operations was at $1.6 million for the year. Depending upon how quarterly volume ramps and drives working capital, management expects to improve further on this number in 2008.

We still believe that our cash-flow break-even point is in the range of $15-16M in revenue with GAAP break-even at $18-19M.

Please see the financial statements accompanying today’s press release for more details. We have added a supplementary schedule to break out depreciation and equity comp. expense, in order not to bog down the call.

Also, we invite you to review our upcoming 10-Q which we expect to be filed by May 12th.

Thanks for your attention, now I'd like to turn things over to our President and CEO, Joseph Cross.

Joseph Cross, President and CEO

• Thank you, Jess

• As you may recall, at the last conference call on February 7, I discussed our assessment of Nanophase’s competitive status entering 2008 noting that the Company was financially well-postured entering 2008 with $16.7 million in cash and we believe that the combination of our technology, product quality, and application expertise, place Nanophase in a leading nanomaterials position globally.

  I further noted that we are not satisfied with the 30+% compounded annual revenue growth rate Nanophase has maintained from 2005 through 2007 and we are certainly not satisfied with our current growth estimates for 2008. Management views increasing the annual revenue growth rate as our first priority coupled with continued average gross margin expansion. We have a vision of reaching $50 million and then $100 million in annual revenue in a desired timeframe. To reach this level, we need to establish and maintain a 50% revenue growth rate and have taken several initiatives to achieve this as I discussed on the last conference call.

• While it has really been a relatively brief time since the February 7 conference call, we have focused very hard on opportunities in our top 20 market segments, which include energy, building & construction, printed electronics, and automotive to list a few and provide a flavor of the effort. We are intensely focused on the customer value proposition and understanding the performance and cost required for specific applicational success. We have experienced a very high level of customer activity during the first quarter, especially toward new opportunities and applications. We have made considerable progress in R&D application development for nanomaterial-enabled industrial coatings, printed electronics, architectural coatings, increasing the service life of outdoor clear coatings, and animal hygiene. We are continuing to rigorously advance customer and product opportunities through our stage gate process, anticipate that some of our new opportunities should be accretive to revenue during 2008, and are optimistic about the resultant revenue growth impact for 2009 from these efforts.

• We have also further increased our sales team by adding Chuck Cucuras as a Director of Sales. Chuck brings 22 years of work experience in chemical sales with Ashland Chemical (15 years) where he sold to coatings, plastics, textiles, specialty materials, electronics, and building materials companies, industries that have direct correlation to many of our targeted markets. Chuck has a Masters in Polymer Chemistry and an MBA.

• Relative to 2008, we continue to have limited visibility and concern about the macro economic condition, especially consumer spending and housing, impacting current products in the market. We are maintaining our estimate of 5-15% revenue growth for 2008. As Jess noted, we expect the second quarter to be essentially flat compared to the first quarter. The surprise second quarter of 2007, in retrospect, we believe was due to inventory building by two of our major customers that will not recur during 2008.

  We continue to anticipate increased year-over-year run rates during the second half of 2008 building toward 2009 based on current market partner forecasts and new opportunities that we believe should come on line. As we see how the second quarter actually unfolds and have increased understanding of new opportunity timing, we will re-evaluate our 2008 outlook at the appropriate time.

• This concludes our prepared remarks and we are available for questions at this time.