FOURTH QUARTER 2007 CONFERENCE CALL

Joseph Cross, President and CEO

• Welcome to Nanophase's conference call to review the fourth quarter and annual results for 2007. Nanophase set year-over-year revenue growth records for each quarter of 2007 and for the year as a whole with 36% year-over-year revenue growth. The Company had a solid year 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.
• Entering 2008, we are attempting to have more thorough communication with investors and the investment community. We would appreciate any feedback you might care to offer on this approach. We provided more information than normal in our press release along with an outlook for 2008, which is a new practice for Nanophase. Our conference call today will also be slightly different. Jess will be discussing the business and financials along with most of the topics that I have covered in the past. I will be discussing Nanophase's competitive position entering 2008 along with the Company's goals to achieve greater levels of revenue growth and what measures we are taking to make this happen.
• To begin our discussion, Jess...

Jess Jankowski, CFO

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

I'd like to start out with a recap of 2007, and some forward looking statements regarding 2008, while limiting the detailed financial discussion so that we can stay focused on the most important drivers of Nanophase's business. As always, numbers will be discussed in approximate terms.

Two-thousand seven was another strong year for Nanophase. We grew 36% in top line revenue, we validated and further improved the business model, and we took additional measures to reduce overhead to remain nimble going forward.

2007 also marks the third consecutive year the Company has grown revenue 30% or more.

We saw year-over-year growth from three of our four largest customers with the fourth, Rohm and Haas, now anticipating a 70% increase from 2007 to 2008.

The BYK-Chemie business experienced solid growth in 2007, accounting for 12% of total revenue, although it remains well below our initial expectations for the applications and markets being served.

Architectural coatings revenue grew over 55% from 2006. Our major customer in architectural coatings represented 25% of the Company's 2007 revenue. Outsized Q2 2007 volume for this customer, some portion of which we suspect was for initial stocking of retail locations, has made it difficult for management to predict volume trends for 2008.

We do know that our customers, and ultimately, the consumers of their products, are pleased with the product introduction and performance..so we expect volume sales to continue on an ongoing basis.

Revenue volume from BASF, our market partner for sunscreen and personal care products, was up 18% in 2007. We expect growth in unit volume for 2008, but are unsure as to whether this will result in significant dollar revenue growth due to the impacts in reductions of raw materials pricing, and the resulting reductions in surcharge revenue.

As discussed in our press release today, many of our sunscreen, personal care, and architectural product applications are subject to pricing that is influenced by commodity market-driven raw material costs. At current commodity pricing levels, approximately $500K, or 4% of total 2007 revenue, represents surcharges that won't be repeated if today's commodity market conditions remain stable.

Given that we typically have not been able to recoup all of our costs with these surcharges, a secondary impact of these cost reductions will be increases in variable margins, both in dollar and percentage terms.

Regarding our revenue outlook for 2008, two metrics are important to keep in mind:

1^st) We expect annual growth of 5-15% for the year taken as a whole. This total, at least given current market conditions, has been weighed down by the $500K reduction in revenue volume expected in '08 due to known commodity pricing reductions. We also suspect the 2007 revenue was further increased due to inventory building, possibly by three customers, some of which may not be repeated in 2008. In total we anticipate that Nanophase will have to make-up about $1 million in revenues from 2007 surcharges and inventory build.

2^nd) 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. Given economic conditions and customer inventory uncertainties, the first six months of 2008 may well be lower than the same period in 2007. Our expectation is that projected year-over-year growth for the full year will occur mainly in the second half of 2008. We are watching first quarter order inputs closely and, even at this date, do not have adequate visibility. At this point, it would not surprise management if first quarter 2008 turned out to be the weakest quarter of the year.

That being said, the last three quarters in 2008 SHOULD see less variability than we saw in 2007. Given the impact of things we can't control we, necessarily, have some uncertainty at this time.

Regardless, we are in strong applications that have demonstrated the value proposition of engineered nanomaterial solutions and these will continue to grow.

2008 will be a good year, and a critical set-up year for 2009.

Regarding our business model, let's take a quick look at Q2 of 2007. With $4.2M in revenue on a product mix that we see as repeatable, we reached a 37% gross margin. We hit positive EBITDA, but fell short of GAAP earnings by more than a penny. Management viewed this quarter as an excellent milestone AND as a lesson on strategic focus.

We learned that we could achieve the margins that we had been predicting, AND that such modeling was no longer an academic exercise. Through more thorough market analysis, and focusing more on specific markets for future sales growth, rather than specific target customers, we re-confirmed that it is likely that the best opportunities to achieve revenue growth and gross margin goals exist within the palette of materials that we currently make in volume. Through years of application development, and through the honing of our coatings and dispersion technologies,

We now believe we have everything we need to succeed.

This means that we have to go deeper in product development to actually demonstrate performance and value in the application; we can't just rely on customers or market partners to do this.

This marks a developmental milestone in continuing to build products that the market wants, always via market pull, but we're now applying a finer filter.

Also, regarding Q2 of '07, all of us thought profitability should have been higher.

As part of this re-focusing, we were able to eliminate some overhead in manufacturing and R&D, as well as to continue to attack discretionary expenses. As our revenue and product bases have solidified, we now see more opportunities to find additional efficiencies.

Getting back to recap a few specifics...

For 2007, BASF, our architectural coatings customer and BYK Chemie accounted for 49%, 25% and 12% of total revenue, respectively.

We also achieved a 26% gross margin for 2007, which we expect to increase incrementally in this year, while positioning Nanophase for greater margin realization going forward.

Note that in the second half of 2007, margin suffered from lower revenue volume which did not allow us to absorb fixed overhead, along with the Company having some excess direct labor that had been put in place to support the higher third quarter run rate that management had expected given Q2's record volume and customer forecasts and feedback at that time...
Product mix and market stage also figured in the lower margins realized. While we build the coatings business, we are shipping a wide variety of products in relatively small lots. This has lead to a degree of near-term margin erosion.

As the demand within the umbrella of the underlying coatings business grows, and we see larger quantities of each type of product within that group being shipped, 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.

Much of the groundwork has now been laid.

As I mentioned, we believe that we have reached a turning point in terms of our marketing and business development efforts that should allow us to better apply fewer resources... to greater advantage.

Moving down....

R&D Expenses were down 17% from 2006. We expect that total R&D expenses for this year might increase slightly, but will remain well below 2006 levels. SG&A was up 2% in '07. We expect SG&A to remain roughly flat through 2008, with any net increases driven by the addition of more salespeople.

On a GAAP basis, as reported, Nanophase lost $0.18/share in 2007 versus $0.28/share in 2006.

Analyzing the non-cash components of the '07 loss, we have depreciation and amortization of about $1.4Million. This amount, a regular component of our GAAP bottom line, amounted to about seven cents/share of the eighteen cent loss. Equity compensation, also a non-cash expense, amounted to $570K and contributed another $0.03 per share to the loss. In total, depreciation and equity comp. expense, both of which are non-cash items, amounted to about 55%, or $0.10/share, of the $0.18/share 2007 loss.

For more details, please see the financial statements accompanying today's press release. We have added a supplementary schedule to break out depreciation and equity compensation expense, by category, in order not to bog down the call.

Before I Move to the balance sheet highlights I would like to address a concern..

There have been some rumblings among our shareholder base regarding the financial strength of Nanophase, particularly in light of recent stock volatility and equity market conditions.

We'd like to respond to these by reiterating that the Company's outlook remains solid.

I want to be very clear here..we are in a strong cash position and we continue to operate the business within conservative parameters.

Nanophase ended 2007 with $16.7 million in cash and investments. Additionally, cash burn from operations amounted to $1.6 million for the year and, depending upon how quarterly volume ramps and impacts working capital, we expect to improve further on this number for 2008. Internally, our projections have us exiting the year with $14-15 Million in cash. Cash used in operations for 2008 should be similar, or lower, than in 2007 and we don't plan on any major capital spending this year.

Equipment and leasehold improvements amounted to about $1.2 million for '07. Fifty percent of this related to an additional dispersion line we put in place in anticipation of future product demand from several coatings applications and has the capacity to support expected growth through 2009.

Today, we don't anticipate material new capital expenditures for 2008, beyond updating manufacturing, R&D and IT infrastructure, and this will be done on an as needed basis.

As our view beyond 2008 unfolds, we may need to add capital equipment and, potentially, floor space to support future demand down the line. Much of this is product mix dependent and, therefore, difficult to predict at this time.

Moving on...

2007 year-end inventories were up 18% to $1.1M compared to '06. This increase largely relates to material for which we have orders and solid forecasts, but at a higher level than we would normally hold. Management doesn't believe that there's significant exposure here.

On the liabilities side, the Company now has $1.8million in total debt, composed of the loan from BYK Chemie and a small amount of capital leases.

Accounts payable were down about 50%, mainly in relation to the timing of payments for operational expenses and capital expenditures.

To summarize the position of the Company today, I'd like to leave you with a few thoughts:

• Our customer base is solid
• Our margins are growing
• Our business model is working
• We continue to attack costs
• Our cash burn is at an all-time low
• Our balance sheet is strong
• We are positioning for more growth
• And through application and end-market expansion we are better-insulated from economic volatility than ever before.

For further detail, we invite you to review our upcoming 10-K which we expect to be filed by March 17^th.

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
• Today, we thought it might be beneficial to discuss our assessment of Nanophase's competitive position entering 2008 with as much of a global view as possible, followed by a discussion of our revenue growth goals and measures we are taking to achieve these.
• Beginning with competitive positioning, during 2007, we contracted what we perceive is the leading research company in the nanotechnology industry to perform a global evaluation to assess our competitive position and also determine if there were unknown opportunities that Nanophase should consider. Based on their evaluation, buttressed by our own internal evaluation and comments from our customers and market partners, we believe that Nanophase has a global leadership position in total nanomaterials capability. We are one of the few companies who can produce discrete nanoparticles, and I emphasize discrete nanoparticles, in commercial quality and quantity. We are one of the very few who can surface treat, or engineer the nanoparticle surface, and produce stable, formulated nanomaterial dispersions in commercial quality and quantity. I do not believe I could over emphasize the importance of surface engineering nanoparticles and, especially, dispersing nanomaterials for commercial market success. We appear to have one of the broadest patent portfolios and practical ‘know-how' in the field. Also, based on this independent opinion, the Company has developed a reputation for operational excellence and performance in its customer base. Quoting from the report, "Nanophase's partners continually report satisfaction with the company's products, and especially its willingness to co-develop materials, a claim few other nanomaterial suppliers can make." We believe Nanophase is currently well-positioned on the global stage.
• As we strategically assess Nanophase entering 2008, relative to revenue-driven growth, we arrive at the following:
  • The Company has done quite a remarkable job over the years developing nanomaterial technologies to address multiple horizontal and vertical markets and, we believe, is a global leader;
  • Nanophase has created and evolved a relatively small, but sophisticated, manufacturing operation under Six Sigma discipline with rigorous environmental and EH&S practices that continually improves production processes and reduces manufacturing cost. This has become a core Company competency and a distinct market advantage.
  • Financially, the Company is well positioned. We entered 2008 with $16.7 million in cash and investments. We reduced our burn rate for operations by 50% during 2007 to $1.6M and should improve upon that this year. Simply do the math on your own; we clearly have adequate capital for the foreseeable future to fund the Company. We believe we currently have facilities and infrastructure to support $20-25M in annual revenue with little or no material capital investment required for capacity. In short, without much doubt, the Company is well funded to meet its obligations and growth plans over our planning horizon.
  • Especially over the past 3-4 years, Nanophase has gained appreciable knowledge on how to put nanomaterials into various customer products - kitchen and bath paint, masonry paint, exterior stain, and polyurethane floor finishes - and these products are currently in the consumer market. This same application knowledge spans multiple horizontal markets, is continually augmented and expanded, and should serve us well going forward.
  • So, in summary, our technology is at the forefront, product quality and quantity is likely the best available as evidenced by the fact that Nanophase is the sole source for all of its market partners and customers, application expertise is in all probability a globally leading position, and we are well capitalized to succeed.

• What we have to address and improve is our revenue growth rate. Looking back and using 2004 as a base year, Nanophase grew revenue 31% in 2005, 32% in 2006, and 36% in 2007. While 30+% compounded annual growth is generally considered solid, it will not meet our vision of reaching $50M and then $100M in annual sales in our desired timeframe. We believe that the Company needs to achieve 50+% annual revenue growth to meet this vision.
• To achieve this we began reworking and honing our business development and sales strategy during the last half of 2006 and through 2007, and seeing increased success. Steps we have taken include:

• Restructuring and reskilling the sales and business development team: during 2007 we hired Kevin Wenta, as EVP of Sales and Marketing, and David Nelson as Vice President of Sales - both with excellent experience in chemical sales. This process continues; we are now searching and plan to add 1-2 additional Sales Directors. Moreover, Dr. Brotzman, who was focused solely on R&D, is now predominately in a technical sales and marketing role for the Company, supporting customer business development and sales where he is adding tremendous value.
• We have also worked hard to hone our five stage gate business development model and processes. If you are familiar with this model, essentially stages 0 to about 2.5 are considered the discovery stages and about 2.5 to 5 are develop and implement stages. We believe that to reach the 50+% annual revenue growth rates desired, we have to improve the discovery stages; we seem to do well in the develop and implement stages.
• To improve the discovery stages, we have taken several synergistic steps:

• First, we have increased our depth and level of understanding in target markets by consolidating and ranking about 44 market segments, but focusing on the top 20. Market segments include energy, building & construction, printed electronics, and automotive to list a few and provide a flavor of the effort. First with the top 20, and then the remainder, we are driving to the customer value proposition to understand the performance and cost required for specific applications.
• Secondly, we have refocused our application scientists and engineers solely on these target markets and our product development efforts are directed to demonstrating the value of nanomaterials in these specific markets. For example architectural coatings - we have installed equipment to test the benefit of nanomaterials in commercial formulations in a manner similar to architectural coating companies. We purchase commercially available architectural coating materials and use our developed applications knowledge to add our engineered nanomaterial solutions. We then apply the coatings to the appropriate substrate, test the samples to industry standards, and, finally, visually and quantitatively demonstrate the value of using Nanophase to leaders in the marketplace. This approach gets much better customer attention and mindshare, demonstrates the value of nanomaterials in their particular products, and significantly reduces the TTM.
• Thirdly, we are developing more opportunities in these targeted market segments - the sales team has been given goals designed to increase directly touching the end customer on a weekly basis. We have increased customer touch 2-3X. We have also increased our presence at application trade shows such as coatings, electronics, and similar target markets to improve and extend our market knowledge and emphasize the advantage of nanomaterials in specific market applications for enhanced performance.
• Fourth, we are taking a much more rigorous approach to qualifying and quantifying opportunities to select those opportunities in the target market that are most likely to succeed, provide the largest revenue opportunities, and appear to have the shortest TTM. Our improved process allows very close examination of each opportunity before it moves through a stage gate.

• In summary, we have given a great deal of thought and market research to select market targets and increasingly focus our efforts and resources to optimize the potential for revenue growth. Again, our vision is to reach $50M and then $100M in sales; to do so, we have to increase annual revenue growth to 50%. We have restructured, reskilled, and honed our business development and sales effort and implemented or refined processes to achieve these goals. We are adding additional sales personnel to increase market and customer contacts.
• As we have noted, while the revenue growth rate during 2008 may be below our internal goals for reasons we have stated and over many of which we have limited control, we are very positive about the future and confident that we can achieve the revenue growth goals the Company requires to reach the levels stated earlier. Our improved approach and increased understanding of market needs is rather quickly adding new opportunities to our pipeline.
• This concludes our prepared comments. We are available for questions at this time.