SECOND QUARTER 2006 CONFERENCE CALL

Joseph Cross, President and CEO

• Welcome to Nanophase’s conference call to review the second quarter and first half of 2006. From a revenue view, we had a record first half with almost 20% year-over-year revenue growth and achieved the highest quarterly revenue in the Company’s history during the second quarter, which followed the highest first quarter revenue in Nanophase’s history. We believe it is a very positive start to 2006 and are optimistic for continued revenue growth during the second half. Sherman Jung, Nanophase’s Manager of Accounting and Financial Reporting, and I will be hosting this call. Jess Jankowski, our CFO, is unavailable for the conference today.

• To begin our discussion, Sherman will summarize the financial highlights of the quarter. Sherman... .

Sherman Jung, Accounting Manager

Good afternoon and thank you for your continuing support of Nanophase. As Joe mentioned, the second quarter set another revenue record for the Company.

• As I review the financial performance of the Company, I intend to only address significant areas comparing Q2 2006 to Q2 2005 briefly and the two six-month periods in greater depth. All numbers will be in approximate terms for ease of discussion. Details are included in the financials accompanying today’s press release.

• Revenues for the second quarter were at 2.4 million this year, versus 2.1 million last year. Sales for the first half of this year were at $4.4million for 2006 versus $3.7million for the first half of 2005. The second quarter and first six months of 2006 both set new Nanophase records.

  Gross margin continues to grow. This is a sign of our business model, as we discussed in depth in April’s call, delivering as promised. Recall that our fixed manufacturing cost structure, the minimum that’s required to be in the game, does not need to grow until we achieve a multiple of 2005 revenue. This is a key component of our path to cash flow breakeven, then profitability.

  Moving on, we also want to ensure that we have made bottom line progress as we grow. This is not obvious when comparing the relative losses from the first half of ’06 to the first half of ’05. Our loss, per GAAP accounting, appears to have grown by $180,000 year over year.

  Two anomalies took place this year that have negatively affected comparative GAAP earnings:

  1. As we discussed during the April call, we abandoned two patent applications, along with their foreign counterparts. One patent applies to particle separation technology that we’ve outgrown, while the other, in the view of the patent office, is redundant when viewed against Nanophase patents already in place. We wrote these off in Q1 in the amount of $111,000. Management’s assessment of the costs of continuing on the path to grant outweighed our estimates of value gained.

  2. The second, and more pervasive, issue is the advent of FAS123(R), the requirement that we begin expensing stock options in 2006. To put this in perspective, in the first half of 2005, we had about $28,000 in equity compensation expense. In the first half of 2006, we had $326,000 of equity compensation expense, of which $182,000 related to this new standard. The balance was composed of expenses relating to a change in board of director compensation which added a stock component, and past issuances of restricted and performance share grants whose expense swelled this quarter due to growth in our stock’s value.

• In total, the Company lost $0.15 per share this year, of which $0.02 relates to the two items just discussed, versus $0.14 per share last year. Note that first half 2006 depreciation and amortization amounted to about $620,000, equity compensation expense about $326,000, and the non-recurring patent expense amounted to $111,000 or almost $1.1million of the Company’s $2.7 million loss for the quarter.

• Net of these expenses, the 2006 first half loss would have been $1.6M, or $0.09 per share, versus $2.2M, or $0.13 per share, for the same period last year, when adjusted for these same factors. Taking another view, these 2006 non-cash and patent items amounted to 39% of the Company’s operating loss.

  So, relatively speaking, we’re continuing to see progress where it matters on our path to becoming cash flow positive.

Moving to the balance sheet highlights;

• Nanophase ended Q2 with $6.2 million in cash and investments.

• In terms of accounts receivable, over 90% of this balance is made up of receivables from BASF, Rohm and Haas, the C.I. Kasei license fees, and our previously discussed customer in architectural coatings. These same customers also accounted for a cumulative total of approximately 92% of our first half revenue. 23% of Q2 revenue was generated by our new significant customer in architectural coatings.

• Equipment and leasehold improvements netted to $7.6 million in total, which included $1.4million for capital additions this year. $1.3M of this related to the equipment specified in our previously discussed $1.6million loan from BYK Chemie, a subsidiary of Altana. Capital requirements for the balance of 2006 will be mainly composed of any remaining build-out of this equipment and some smaller unrelated items.

• On the liabilities side, the Company now has about $1.4million in total debt, net of unamortized discount.

  The note payable to BASF was paid off in Q2. The bulk of our remaining debt reflects the previously mentioned $1.6million loan from BYK Chemie. The debt discount, and offsetting deferred other revenue referenced on the balance sheet, relate to the required accounting treatment under APB 21 of this loan and have no cash impact.

• Thank you 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, Sherman.

• For the discussion today, I would like to provide a summary overview on Nanophase in two general areas: first, technology and operations and, secondly, status of market partners and customers.

• From an operational perspective, Nanophase continues to perform and improve. During the first half, we again achieved almost 100% on-time shipping performance with zero customer returns and were able to almost double inventory turns to over 11+ on an annualized basis. From a safety perspective, we have now passed 640,000 hours without a lost time accident; this is an extraordinary achievement for a manufacturing company of our size. Nanophase was also recertified to ISO 14001, the international Environmental Management System, and ISP 9001, the international Quality Management System. As our market partners and customers recognize, manufacturing and environmental safety is a core strength of this company.

• At the end of the second quarter into the early days of this quarter, we essentially completed installation and operational readiness of the new NanoArc® reactor and volume dispersion facilities that were financed by the $1.6 million loan from BYK Chemie. This equipment has two major benefits for the Company: first, it provides Nanophase the capability to deliver volume nanoengineered products and dispersions to BYK Chemie for the industrial coatings and plastics markets; and, secondly, it opens scarce time on our research NanoArc® reactor to develop new nanomaterials for targeted markets, which is critical to our growth plans. I would also like to note that this is a Generation II NanoArc® reactor that offers improved particle size control and significantly improved particle size distribution. For example, many of the nanoparticles being produced for BYK Chemie are in the 20 nanometer range. This volume equipment capability is vital for Nanophase to support the scale-up in BYK Chemie products that is forecast for the second half of 2006 and into 2007.

• We also made considerable progress on Generation III of the Company’s PVS technology, which is a significant and material operational improvement. Generation III has been designed and built with a 50% smaller footprint, 40% reduced capital costs, alternate feed systems to materially reduce the cost of raw material, increase overall yields about 5%, increase production rates about 20%, and reduce labor content about 40% through reactor automation. Obviously, all of these improvements will further lower the Company’s manufacturing cost and improve margin relative to profitability. We plan to begin testing the initial Generation III PVS reactor in 4th quarter. Obviously, we will transfer most of these improvements to our current reactors and any future reactor additions that are needed to support volume increases will incorporate the new design improvements and benefits.

• Moving to revenue, as we have stated previously, revenue growth is Nanophase’s first priority. We achieved 52% product revenue growth during 2005 and recognize that such a growth rate is necessary for the Company to achieve its financial goals. The first half is a solid foundation to fiscal 2006 and one the Company hopes to build on both in the second half and moving into 2007.

• Covering our market partners first, let me begin with BASF. To be clear in this discussion, Nanophase has what we term market partners as well as customers. Market partners include Altana Chemie, BASF, Rohm & Haas Electronic Materials CMP Technologies, and Alfa Aesar. With market partners, we have long-term exclusive relationships for specific markets, or fields of application, where we provide nanomaterial products and the market partner offers application development, global sales and distribution, as well as focused new product development for their respective markets based on their intimate knowledge of customer or market needs. Customers are typically obtained through the Company’s business development initiatives, have little or no exclusivity, and order nanomaterial products from Nanophase.

  With BASF, volume from personal care and sunscreens for the original Z-Cote product remains strong through the first half and our current expectation is that BASF will meet their annual volume forecast for 2006. This has been a long –term volume product for Nanophase and we are now approaching 2000 metric tons shipped since the contract began.

  The new product launched mid-2005, Z-Cote MAX, is on target with the new product launch plan and we anticipate increased volume in the second half of 2006. Again, this product features a novel patent-pending nanoparticle coating that was developed by Nanophase to provide formulation compatibility and high loading levels with European and Asian personal care and sunscreen products. As announced, we have signed a long-term exclusive supply agreement with BASF for this new product line.

  BASF plans to launch two additional new products in the Z-Cote MAX line. Nanophase plans to produce the initial qualification lots for the first new product in August which, we understand, will be followed by testing and then a formal market launch during late 2006. The second product is now planned to be launched in early 2007. We anticipate that both of these new products should be additive to volume and revenues during 2007.

  We are also working to extend our relationship with BASF to develop nanoengineered structures for films. Films and plastics, or the category of polymers, make up about 40% of BASF’s revenues and nanomaterials offer specific performance advantages. We are in active development with BASF directly and in combination with BYK Chemie, and are optimistic that efforts will continue to expand and grow.

• BYK Chemie continues to make significant progress in nanoengineered product development and new product availability. BYK Chemie now has seven NANOBYK products, which is their brand label in the market for coatings and plastic additives containing Nanophase’s materials, anticipates launching roughly an additional 2-4 NANOBYK products by the end of 2006, and is market sampling and testing about 50 other new potential products. Having just met with key management, including Dr. Matthias Wolfgruber, Altana’s CEO, I can tell you that they are optimistic on the last half of 2006 and 2007. We continue to believe that this is vital long-term market partner that provides access to very large markets that are difficult for Nanophase to access without a partner like BYK Chemie, and the co-development and marketing relationship will help drive Nanophase’s revenue growth in the future.

• Rohm & Haas CMPT continues to make market inroads in semiconductor CMP and gain market share for STI and ILD0 technology nodes. The new customers that I have discussed previously continue to scale production and we continue to be positive about market penetration and growth. The ‘holisitic’, integrated approach that Rohm & Haas is taking to the market with innovative pad designs, pad conditioners and processes, and slurries seems to be having a positive impact on market penetration and growth and, we believe, gives Rohm & Haas a unique, sustainable performance advantage in the market. We are working with Rohm & Haas going forward to broaden our relationship across additional slurry products for CMP. As we can discuss additional aspects of on-going product development, we will do so.

• Alfa Aesar is now delivering 33 Nanophase-branded nanomaterial products to the research and development community, which is a product offering increase of 50% since April 2006. According to Alfa Aesar, interest is considerably above expectations. Alfa printed 6000 nanomaterial brochures advertising Nanophase-branded products and has had to go to a second printing to meet demand. Again, we anticipate that this global marketing relationship will help Nanophase reach the worldwide research and development community and potentially drive future revenue growth as Nanophase products are incorporated into commercial applications.

• Moving to customers, and I only intend to cover significant situations, during the second quarter, we began volume deliveries to a major new customer in architectural coatings for a consumer product that is being introduced at a primary DIY retailer. The new exterior stain product is being advertised as “self-priming’ and offers a ‘life time’ guarantee. Second quarter volume, which was over $500,000, represented less than 8% of the retail locations for initial rollout. Our customer has recently informed us that the launch was quite successful. The rollout is being quickly extended to about 33% of the retail locations in the second half of 2006 and we are already receiving material orders for the Stage II roll-out. During 2007 we have been told by our customer to anticipate rollout to the remaining 1400 retail locations nationwide. In total, we now have nanoengineered materials in two products with this customer and are continuing to develop new products for the DIY architectural coating market. Based on customer information and orders received to-date, we anticipate increasing revenue from this new application area in the second half of 2006 and into 2007.

  Architectural coatings are a market focus for Nanophase. The Freedonia Group estimates the global architectural coatings market at about $39B. BYK Chemie and Nanophase have several existing and new product offerings in this market area, have already received initial production orders in architectural coatings, and are optimistic going forward.

• In parallel, our business development efforts, both with our market partners and Nanophase’s own initiatives, remain robust and growing. We are actively addressing broad new markets, for example antimicrobial, textile, and catalysts, as well as pursuing specific applications with several new customers. We believe that some of these efforts will be successful and have a positive revenue impact during late 2006 and 2007. We remain positive on revenue growth for the remainder of this year and into 2007.

• That completes our prepared statements and we are available for any questions you may have at this time.