NANOPHASE TECHNOLOGIES CORPORATION, S-1/A, 1997-11-26

NANOPHASE TECHNOLOGIES CORPORATION
S-1/A, 1997-11-26
MISCELLANEOUS PRIMARY METAL PRODUCTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997

REGISTRATION NO. 333-36937
================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
-------------------------

AMENDMENT NO. 4

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------

NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
ILLINOIS 3399 36-3687863
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code No.) Identification No.)
</TABLE>

453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

ROBERT W. CROSS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NANOPHASE TECHNOLOGIES CORPORATION
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------

Copies to:

MATTHEW S. BROWN, ESQ.
LAWRENCE D. LEVIN, ESQ.
KATTEN MUCHIN & ZAVIS
525 WEST MONROE STREET
CHICAGO, ILLINOIS 60661
(312) 902-5200
CHRISTOPHER L. KAUFMAN, ESQ.
CLIFFORD MENTRUP, ESQ.
LATHAM & WATKINS
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606
(312) 876-7700

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]

-------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

================================================================================
<PAGE> 2

PROSPECTUS

NOVEMBER 26, 1997

4,000,000 SHARES

NANOPHASE LOGO

COMMON STOCK

All of the 4,000,000 shares of Common Stock (the "Common Stock") of
Nanophase Technologies Corporation ("Nanophase" or the "Company") offered hereby
are being sold by the Company.

Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "NANX."

AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE MADE BY PERSONS WHO
CAN AFFORD AN ENTIRE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON
PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $8.00 $0.56 $7.44
Total(3)........................... $32,000,000 $2,240,000 $29,760,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."

(2) Before deducting expenses estimated at $400,000, which will be paid by the
Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 600,000 additional shares at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $36,800,000,
$2,576,000 and $34,224,000, respectively. See "Underwriting."

The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of shares will be made in New York, New York on or about
December 2, 1997.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

FURMAN SELZ
CIBC OPPENHEIMER
<PAGE> 3

TARGETED MARKETS FOR THE COMPANY'S NANOCRYSTALLINE MATERIALS

ELECTRONICS

[Picture of semiconductor wafer being polished by a CMP slurry]
Slurries formulated with the Company's nanocrystalline materials
for use in polishing semiconductor wafers.

STRUCTURAL CERAMICS AND COMPOSITES
[Picture of ceramic rings, valve inserts and armor tiles]
Structural ceramics fabricated by the Company's net-shaping process.

COSMETICS AND SKIN-CARE

[Picture of cosmetics and skin-care products]
Cosmetics and skin-care products formulated with the Company's nanocrystalline
materials.

INDUSTRIAL CATALYSTS

[Picture of catalytic cracking tower in an oil refinery]
Catalysts fabricated with the Company's nanocrystalline
materials for use in the chemical process industry.

-------------------------

The Company's corporate logo and design is a registered trademark of the
Company. All other trade names and trademarks appearing in this Prospectus are
the property of their respective holders.
-------------------------

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements (and
related notes thereto) included elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus (i) reflects a 0.579-for-one stock
split to be effected prior to the consummation of this offering, (ii) reflects
the conversion of all outstanding shares of all series of Convertible Preferred
Stock, no par value, of the Company (collectively, the "Preferred Stock") into
8,156,443 shares of Common Stock upon the consummation of this offering (the
"Preferred Stock Conversion"), (iii) reflects the reincorporation of the Company
in Delaware to be effected prior to the consummation of this offering and (iv)
assumes no exercise of the Underwriters' over-allotment option.

THE COMPANY

Nanophase Technologies Corporation ("Nanophase" or the "Company") develops
and markets nanocrystalline materials for use as ingredients and components in a
wide range of commercial applications. The Company began manufacturing
nanocrystalline materials in commercial quantities in the fourth quarter of
1996. Nanocrystalline materials are metallic and ceramic materials that
generally consist of particles that are less than 100 nanometers (billionths of
a meter) in diameter and contain only a few thousand or tens of thousands of
atoms, rather than the millions or billions of atoms in particles of most
conventional materials. By processing materials in this near-atomic size range,
the Company is able to engineer the structure of particles and exploit the
properties of their surface atoms to enhance the performance of basic raw
materials such as aluminum, iron, titanium and zinc, as well as to molecularly
engineer new composite materials. Compared to conventional materials, the
Company believes its nanocrystalline materials generally exhibit superior
chemical, mechanical, electronic, magnetic and optical properties. The Company
believes that through its extensive proprietary research and development
programs, combined with its proprietary and patented production processes, it
has established new standards for high-performance commercially produced
nanocrystalline materials.

The Company is in the advanced materials industry and has identified
initial commercial applications for its nanocrystalline materials in four
primary markets: electronics, structural ceramics and composites, cosmetics and
skin-care, and industrial catalysts. The Company believes each of these markets
provides numerous commercial applications in which its nanocrystalline materials
will have significant competitive advantages based on product performance.
Commercial applications currently being developed in these markets include the
following:

- Electronics. Abrasives for chemical/mechanical polishing of semiconductor
wafers (CMP), anti-radiation coatings for cathode ray tubes ("CRTs"),
thin-film materials for semiconductor manufacturing, high-performance
electrodes and photonic materials for flat-panel displays.

- Structural Ceramics and Composites. Ceramic mechanical seals, components
for continuous steel casting, abrasion-resistant polymers for oil
drilling sensors, ceramic armor and remotely monitored medical implants.

- Cosmetics and Skin-Care. Topical health-care products, transparent
ultraviolet ("UV") blockers and colorants for cosmetics.

- Industrial Catalysts. Chemical-process catalysts.

3
<PAGE> 5
Corporation ("Hyundai"), Samsung Group ("Samsung"), International Business
Machines Corporation ("IBM"), Lucent Technologies, Inc. ("Lucent") and Motorola,
Inc. ("Motorola"); with Schering-Plough Corporation ("Schering-Plough") pursuant
to which the Company will supply its nanocrystalline zinc oxide to
Schering-Plough for use in topical health-care products; and with LWT
Instruments, Inc. ("LWT") for anti-abrasive polymers used in oil drilling
applications. To gain access to foreign markets, Nanophase has entered into an
agreement with a subsidiary of Itochu Corporation ("Itochu"), formerly C. Itoh,
for the distribution of the Company's materials in broad-based industrial
markets throughout Asia. To gain world-wide access to the cosmetics and
skin-care market, the Company has a global distribution agreement with
Whittaker, Clark & Daniels, Inc. ("WCD"), a leading distributor of cosmetic and
skin-care ingredients.

The Company believes that its nanocrystalline materials have broad and
enabling potential beyond the product applications it is currently developing
with its customers. In 1995, the Battelle Memorial Institute, a leading contract
research organization, identified "molecularly engineered" materials (i.e.,
nanocrystalline materials) as "super materials" which represent one of the ten
most important technologies for the coming decade. Nanophase was organized in
1989 to commercialize technologies that are based on principles developed at
Argonne National Laboratory ("Argonne"), and believes that it is the only
company to successfully transition the production of high-performance
nanocrystalline materials from laboratory to commercial scale. In contrast to
particles of conventional materials, including other commercially produced
nanocrystalline materials, the particles of the Company's nanocrystalline
materials are (i) nearly spherical, (ii) virtually free of chemical residues,
(iii) uniformly small, (iv) not strongly agglomerated, and (v) easily
engineered. As a result, the Company is able to engineer the attributes,
including strength, flexibility, color and electronic conductivity, of materials
to yield products that are superior to conventional materials and to establish
new standards for a range of high-performance commercial applications.

At the core of the Company's technologies is its proprietary and patented
physical-vapor-synthesis ("PVS") process, which enables the Company to produce
significant quantities of high-quality nanocrystalline materials. The Company
also has developed related technologies to further enhance the materials
produced by its PVS process. The Company's proprietary
discrete-particle-encapsulation ("DPE") process, which completely coats each
individual nanocrystalline particle and for which a patent is pending, can alter
or enhance the optical, chemical and electronic behavior of particles and
prevent agglomeration. The Company also has developed a proprietary net-shaping
technology which enables the rapid fabrication of dimensionally-precise,
high-tolerance structural ceramic components without costly machining.

Nanophase's principal production and research facility is located in Burr
Ridge, Illinois, a suburb of Chicago. The Company's operations in Burr Ridge are
registered under ISO 9001 standards, and the Company believes its manufacturing
operations are compliant with the current Good Manufacturing Practices ("cGMP")
requirements of the U.S. Food and Drug Administration ("FDA").

Nanophase was incorporated in Illinois on November 30, 1989, and will be
reincorporated in Delaware on November 26, 1997. As of September 30, 1997, the
Company had an accumulated deficit of $13,976,617. Nanophase's principal
executive offices are located at 453 Commerce Street, Burr Ridge, Illinois 60521
and its telephone number is (630) 323-1200.

4
<PAGE> 6
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......... 4,000,000 shares
Common Stock to be outstanding after the
offering.................................. 12,277,454 shares(1)
Use of proceeds............................. To expand the Company's manufacturing
facilities and for working capital and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol............... NANX
</TABLE>

- ------------------------------
(1) Does not include (i) 662,287 shares of Common Stock issuable upon the
exercise of outstanding warrants at an exercise price of $1.123 per share,
(ii) 1,508,469 shares of Common Stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $2.536 per share
and (iii) 1,206,138 shares of Common Stock reserved for issuance upon the
exercise of options that may be granted in the future under the Nanophase
Technologies Corporation Amended and Restated 1992 Stock Option Plan, as
amended (the "Stock Option Plan"). See "Management--Stock Option Plan" and
"Description of Capital Stock."

5
<PAGE> 7

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Commercial revenue... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415
Government research
contracts.......... 212,183 -- 64,015 27,995 110,770 26,207 --
--------- --------- ----------- ----------- ----------- ----------- -----------
Total revenue...... 232,189 25,265 95,159 121,586 595,806 287,220 2,245,415
Cost of revenue...... 202,215 61,978 164,746 532,124 4,019,484 2,925,560 3,321,288
Research and
development
expense............ 29,638 143,362 456,162 485,059 677,284 515,675 571,210
Selling, general and
administrative
expense............ 366,378 556,616 799,558 1,150,853 1,661,504 1,209,823 1,714,725(2)
Interest income...... 10,191 7,022 37,535 86,576 184,778 145,746 57,392
--------- --------- ----------- ----------- ----------- ----------- -----------
Net loss............. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416)
========= ========= =========== =========== =========== =========== ===========
Pro forma net loss per
share(1)............. $ (0.77) $ (0.41)
=========== ===========
Shares used in
computing the pro
forma net loss per
share(1)............. 7,235,723 8,063,143
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 770,704 $30,130,704
Working capital........................................... 3,059,060 32,419,060
Total assets.............................................. 7,286,071 36,646,071
Total stockholders' equity................................ 5,576,916 34,936,916
</TABLE>

- ------------------------------

(1) Includes the anti-dilutive effect (equivalent to 400,043 shares) of options
issued to employees, a consultant and members of the Advisory Board (as
defined herein) since October 1996. Does not include as of September 30,
1997 (i) 662,287 shares of Common Stock issuable upon the exercise of
outstanding warrants at an exercise price of $1.123 per share, (ii) 803,247
shares of Common Stock issuable upon the exercise of outstanding options at
a weighted average exercise price of $1.119 per share and (iii) 476,598
shares of Common Stock reserved for issuance upon the exercise of options
that may be granted in the future under the Stock Option Plan. Also does not
include 694,800 additional shares of Common Stock which were made subject to
the Stock Option Plan after September 30, 1997. See "Management--Stock
Option Plan" and "Description of Capital Stock."

(2) Includes $375,103 of costs related to a proposed public offering withdrawn
in May 1997.

(3) As adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated offering expenses as described in "Use of Proceeds."

6
<PAGE> 8

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution and should only be made by
persons who can afford a loss of their entire investment. In evaluating an
investment in the Common Stock being offered hereby, investors should consider
carefully, among other matters, the following risk factors, as well as the other
information contained in this Prospectus.

LIMITED HISTORY OF COMMERCIAL SALES; UNCERTAIN MARKET ACCEPTANCE OF THE
COMPANY'S NANOCRYSTALLINE MATERIALS

The Company was founded in November 1989 and through December 31, 1996 was
engaged principally in research and development activities. While the Company
recently commenced marketing certain nanocrystalline materials, it is in the
early stage of commercialization and its potential product applications are in
various stages of development or under evaluation. As a result, the Company's
nanocrystalline materials have been sold only in limited quantities, generally
for testing and evaluation purposes, and there can be no assurance that a
significant market will develop for such materials. Because virtually all of the
product applications for the Company's materials are new, in order to penetrate
its targeted markets, the Company must participate in a multi-step process that
includes initial discussions of the product application which highlight the
advantages of the Company's nanocrystalline materials, proof of concept, proof
of feasibility within the specific application, and evaluations of cost and
manufacturability. Completion of this evaluation process usually takes at least
18 months, and may take several years. The Company's current and potential
commercial customers establish demanding specifications for performance and
reliability. Although the products incorporating the Company's nanocrystalline
materials have passed certain product performance and reliability testing by
certain current and potential customers, there can be no assurance that the
Company's nanocrystalline materials will continue to pass such tests in the
future, meet future customer performance standards, or offer sufficient price or
performance advantages as required to achieve commercial success. The Company's
failure to develop, manufacture and commercialize nanocrystalline materials on a
timely and cost-effective basis or successfully complete its customers'
multi-step evaluation processes would have a material adverse effect on the
Company's business, results of operations and financial condition. Because the
Company's materials are used as ingredients in, or components of, other
companies' products, the inability of the Company's customers to achieve market
acceptance with respect to end-users of their products or successfully to
manufacture their products could also have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business."

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY

Substantially all of the Company's revenues through December 31, 1996 were
derived from government research contracts, commercial development contracts and
sales of nanocrystalline products for customer evaluation. The Company has only
recently begun shipping significant amounts of its materials for commercial use
and there can be no assurance that the Company's nanocrystalline materials will
generate significant revenues from commercial applications. Accordingly, the
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. An investment in the Company must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development.

The Company has incurred net losses in each year since its inception, and
as of September 30, 1997, had an accumulated deficit of $13,976,617. The Company
may continue to incur operating losses and there can be no assurance that the
Company will become profitable. Commercial development of the Company's
nanocrystalline materials will require the commitment of substantial resources
to continuing research and development, establishment of additional
commercial-scale manufacturing facilities, and further development of quality
control, marketing, sales, service and administrative capabilities. The
Company's ability to achieve profitability will depend on many factors,
including the Company's ability to enter into collaborative customer
relationships and the Company's ability, alone or with its customers, to
develop, manufacture, introduce and market commercially acceptable products
based on the Company's nanocrystalline materials and proprietary

7
<PAGE> 9

processes. There can be no assurance that significant quantities of the
Company's nanocrystalline materials or their product applications will be
manufactured, introduced or marketed successfully, or that the Company will ever
achieve a profitable level of operations or, if profitability is achieved, that
it can be sustained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."

DEPENDENCE ON A LIMITED NUMBER OF KEY CUSTOMERS

A limited number of key customers have initially accounted for a
substantial portion of the Company's commercial revenue. The Company's customers
are significantly larger than, and are able to exert a high degree of influence
over, the Company. The loss of one or more of the Company's customers or failure
to attract new customers would have a material adverse effect on the Company's
business, results of operations and financial condition. In February 1997, the
Company entered into a five-year requirements contract with Moyco, a distributor
to a number of semiconductor manufacturers, pursuant to which the Company will
supply its nanocrystalline materials to Moyco for use in Moyco's semiconductor
polishing slurries. Sales to Moyco pursuant to the agreement constituted
approximately 70% of the Company's revenue during the nine month period ended
September 30, 1997. In August 1997, Moyco and Ashland Chemical Company
("Ashland") signed a non-binding letter of intent pertaining to the potential
purchase by Ashland of Moyco's intellectual properties, technologies and certain
other intangible assets for the chemical/mechanical polishing of semiconductor
wafers. There can be no assurance that Moyco will sell such assets to Ashland or
any other entity or if it does or does not sell such assets what the impact on
the Company will be. Sales to Moyco or Ashland, as the case may be, are
currently expected to constitute a significant portion of the Company's revenues
over the next three years. In March 1997, Cabot Corporation ("Cabot") filed a
claim against Moyco which alleges that the slurries manufactured by Moyco, which
contain the Company's nanocrystalline materials, infringe a patent owned by
Cabot. Moyco has denied Cabot's allegations of patent infringement. In April
1997, Moyco filed a civil action against Cabot alleging that Cabot's patent is
invalid and that Cabot improperly interfered with contractual relationships
between Moyco and third parties. If Cabot prevails in its patent infringement
claim against Moyco or Moyco is otherwise prevented from manufacturing slurries
which contain the Company's materials, then Moyco's purchase of the Company's
materials may be significantly reduced which would have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business--Customers and Applications--Electronics--Semiconductor
Polishing."

RELIANCE ON COLLABORATIVE DEVELOPMENT RELATIONSHIPS

The Company has established, and will continue to pursue, collaborative
relationships with a variety of corporate customers. Through such relationships,
the Company seeks to develop applications for the Company's nanocrystalline
materials, share development and manufacturing resources and coordinate the
development, manufacturing, commercialization and marketing of nanocrystalline
product applications. The Company's future success will depend, in part, on its
continued relationships with these customers, its ability to enter into similar
collaborative relationships, the commitment of the Company's customers to the
potential product applications under development and, eventually, the customers'
success in marketing, or willingness to purchase the Company's nanocrystalline
materials for, such product applications. There can be no assurance that the
Company's customers will not seek to manufacture jointly developed products
internally or obtain them from alternative sources. These customers may require
the Company to share control of its development, manufacturing and marketing
programs, limit its ability to license its technology to others, or restrict its
ability to engage in certain product development, manufacturing and marketing
activities. These relationships may also be subject to unilateral termination by
the Company's customers. If the Company is unable to initiate or sustain such
collaborative relationships, there can be no assurance that the Company will be
able independently to develop, manufacture, market or sell its current and
future nanocrystalline materials or their product applications. The failure of
the Company to initiate or sustain such collaborative relationships would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Customers and Applications."

LIMITED MANUFACTURING CAPACITY AND EXPERIENCE

The Company's success will depend, in part, on its ability to manufacture
its nanocrystalline materials in significant quantities, with consistent
quality, at acceptable cost and on a timely basis. The Company has

8
<PAGE> 10

limited experience in high-volume manufacturing, may incur significant start-up
costs and unforeseen expenses in connection with attempts to manufacture
substantial quantities of nanocrystalline materials, and will need to increase
the efficiency of its manufacturing operations significantly to reach its
production goals. In addition, the Company will need to expand its current
facilities or obtain additional facilities in the near future in order to
manufacture substantial quantities of its products. No assurance can be given
that the Company will be able to make the transition to high-volume production
successfully. The Company's primary operations, including research, engineering,
manufacturing, marketing, distribution and general administration, are housed in
a single facility in Burr Ridge, Illinois. Any material disruption in the
Company's operations, whether due to fire, natural disaster, power loss or
otherwise, could have a material adverse effect on the Company's business,
results of operations and financial condition. While the Company maintains
property and business interruption insurance, such insurance may not adequately
compensate the Company for all losses that it may incur. See
"Business--Manufacturing and Facilities."

While most of the Company's product applications involve the Company
producing materials which are to be used as ingredients in other companies'
products, the Company's net-shaping applications require the Company to produce
finished components. The Company currently is not capable of producing ceramic
finished components in commercial volume and plans to develop an in-house
capability to fabricate net-shaped components or establish manufacturing
arrangements with third parties. There can be no assurance that the Company will
be able to fabricate its net-shaped components internally or that it will be
able to enter into third-party arrangements on satisfactory terms. See
"Business--Manufacturing and Facilities."

DEPENDENCE ON PATENTS AND PROTECTION OF PROPRIETARY INFORMATION

The Company's success will depend, in part, on its ability to obtain patent
protection for its nanocrystalline materials and processes, to preserve its
trade secrets, and to operate without infringing the patent or other proprietary
rights of others and without breaching or otherwise losing rights in the
technology licenses upon which any of the Company's products are based. The
Company has been granted two United States patents which expire in July 2013,
has filed three applications for other United States patents and licenses eleven
patents held by others, which licenses generally last the life of their
respective patents. No assurance can be given that the patent applications filed
by the Company will result in issued patents or that the scope and breadth of
any claims allowed in any patents issued to the Company or its licensors will
exclude competitors or provide competitive advantages to the Company. In
addition, there can be no assurance that any patents issued to the Company or
its licensors will be held valid if subsequently challenged or that others will
not claim rights in the patents and other proprietary technology owned or
licensed by the Company, or that others have not developed or will not develop
similar products or technologies without violating any of the Company's
proprietary rights. The Company's inability to obtain patent protection,
preserve its trade secrets or operate without infringing the proprietary rights
of others, as well as the Company's loss of any license to technology that it
now has or acquires in the future, would have a material adverse effect on the
Company's business, results of operations and financial condition.

Patent applications in the United States are currently maintained in
secrecy until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period of time after filing. Accordingly,
publication of discoveries in the scientific literature or of patents themselves
or laying open of patent applications in foreign countries tends to lag behind
actual discoveries and filings of related patent applications. Due to this
factor and the large number of patents and patent applications related to
nanocrystalline materials, comprehensive patent searches and analysis associated
with nanocrystalline materials are often impractical or not cost-effective.
Therefore, there can be no assurance that the Company's patent and publication
searches have been comprehensive, or that materials or processes used by the
Company for its planned products do not or will not infringe upon existing
technology described in United States patents or will not infringe upon claims
of patent applications of others in the future. Because of the volume of patents
issued and patent applications filed relating to nanocrystalline materials,
there is a significant risk that current and potential competitors and other
third parties have filed or will file patent applications for, or have obtained
or will obtain patents or other proprietary rights relating to, materials or
processes used or proposed to be used by the Company. In any such case, to avoid
an infringement, the Company would have to either license such technology or
design around any such patents. There can be no assurance that the Company will
be able either

9
<PAGE> 11

to successfully design around these third-party patents or obtain licenses to
such technology or that, if obtainable, such licenses would be available on
terms acceptable to the Company.

Litigation, which could result in substantial cost to, and diversion of
effort by, the Company, may be necessary to enforce patents issued or licensed
to the Company, to defend the Company against infringement claims made by
others, or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. An adverse outcome in any such litigation
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties, and/or require the Company to
cease using certain technology, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company may also become involved in interference proceedings declared by the
United States Patent and Trademark Office ("PTO") in connection with one or more
of the Company's owned or licensed patents or patent applications to determine
priority of invention. Any such proceeding could result in substantial cost to
the Company, as well as a possible adverse decision as to priority of invention
of the patent or patent application involved. In addition, the Company may
become involved in reissue or reexamination proceedings in the PTO in connection
with the scope or validity of the Company's owned or licensed patents. Any such
proceeding could have a material adverse effect on the Company's business,
results of operations and financial condition, and an adverse outcome in such
proceeding could result in a reduction of the scope of the claims of any such
patents or such patents being declared invalid. In addition, from time to time,
to protect its competitive position, the Company may initiate reexamination
proceedings in the PTO with respect to patents owned by others. Such proceedings
could result in substantial cost to, and diversion of effort by, the Company,
and an adverse decision in such proceedings could have a material adverse effect
on the Company's business, results of operations and financial condition.

The Company also relies on trade secrets and proprietary know-how in the
conduct of its business and uses employee and third-party confidentiality and
non-disclosure agreements to protect such trade secrets and know-how. There can
be no assurance that the obligation to maintain the confidentiality of such
trade secrets or proprietary information will not wrongfully be breached by
employees, consultants, advisors or others, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets or proprietary
know-how will not otherwise become known or be independently developed or
discovered by third parties. In addition, because the Company's employees have
not entered into noncompetition agreements with the Company, they may become
competitors of the Company upon termination of employment. See
"Business--Intellectual Property and Proprietary Rights."

RAPID TECHNOLOGICAL CHANGE

Rapid changes have occurred, and are likely to continue to occur, in the
development of advanced materials and processes. The future success of the
Company will depend, in large part, upon its ability to keep pace with advanced
materials technologies, industry standards and market trends and to develop and
introduce new and improved products on a timely basis. The Company will require
substantial resources to expand its commercial manufacturing capacity, further
develop its technologies and develop and introduce innovative product
applications. There can be no assurance that the Company's development efforts
will not be rendered obsolete by the research efforts and technological advances
of others or that other advanced materials will not prove more advantageous than
those produced by the Company.

LIMITED MARKETING EXPERIENCE; RELIANCE ON DISTRIBUTION AGREEMENTS

The Company has limited experience marketing and selling its products. To
market its nanocrystalline materials directly, the Company will be required to
develop a marketing and sales force that can effectively demonstrate the
advantages of its nanocrystalline product applications compared to competitive
products containing conventional or advanced materials. The Company currently
has arrangements for distribution of certain of its nanocrystalline materials
and expects to enter into additional distribution or other arrangements with
third parties regarding the commercialization or marketing of its materials. The
Company's future success will depend in part on its continued relationships with
distributors, its ability to enter into other similar distribution arrangements,
the continuing interest of the Company's distributors in current and potential
product applications and, eventually, the distributors' success in marketing, or
willingness to purchase, any of the Company's nanocrystalline materials. There
can be no assurance that the Company will be successful in its marketing
efforts, that it will be able to establish adequate sales and distribution
capabilities, that it will be

10
<PAGE> 12

able to enter into or maintain marketing and distribution arrangements with
third parties on financially acceptable terms, or that any third parties with
whom it enters into such arrangements will be successful in marketing the
Company's products. See "Business--Customers and Applications" and
"--Marketing."

COMPETITION

The advanced materials industry is highly competitive. The market for
materials having the characteristics and potential uses of the Company's
nanocrystalline materials is the subject of intensive research and development
efforts by both governmental entities and private enterprises around the world.
The Company believes that the level of competition will increase further as more
product applications with significant commercial potential are developed. The
nanocrystalline product applications being developed by the Company will compete
directly with products incorporating conventional and advanced materials and
technologies. While the Company is not currently aware of the existence of
commercially available competitive products with the same attributes as those
offered by the Company, there can be no assurance that such competitive products
will not be introduced by third parties, or that competing materials based on
different or new technologies may not become commercially available. There can
be no assurance that the Company's competitors will not succeed in developing or
marketing materials, technologies and products that exhibit superior
performance, are more commercially desirable or are more cost effective than
those developed or marketed by the Company. In addition, many potential
competitors of the Company have substantially greater financial and technical
resources, larger research and development staffs, and greater manufacturing and
marketing capabilities than the Company. Failure of the Company's current and
potential nanocrystalline product applications to improve performance
sufficiently at an acceptable price, achieve commercial acceptance or otherwise
compete with conventional materials would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Competition."

FUTURE CAPITAL NEEDS

The Company believes that its future capital requirements will depend, on
many factors, including continued progress in its research and development and
product testing programs, the magnitude of these programs, the costs necessary
to increase the Company's manufacturing capabilities and to market any resulting
materials and product applications, and customer acceptance of the Company's
current and potential materials and product applications. Additional factors
that may affect the Company's future capital requirements are the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patents and other
proprietary rights or in obtaining licenses, the ability of the Company to
establish collaborative relationships, and the amount and timing of future
revenues. Depending on its requirements, the Company may seek additional funding
through public or private financing, collaborative relationships, government
contracts or licensing agreements. There can be no assurance that such
additional financing will be available on acceptable terms or at all. If
adequate funds are not available on acceptable terms, the Company may be
required to delay, scale-back or eliminate manufacturing and marketing of one or
more of its materials or product applications or research and development
programs, or to obtain funds through arrangements with customers or others that
may require the Company to relinquish rights to certain of its technologies or
nanocrystalline materials that the Company would not otherwise relinquish.
Inadequate funding also could impair the Company's ability to compete in the
marketplace. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

RISK OF RESCISSION OF SERIES F OFFERING

In June, August and September 1997, the Company issued shares of Series F
Convertible Preferred Stock (the "Series F Preferred") for an aggregate of
$3,876,108 to approximately 60 investors, all of whom are "accredited investors"
within the meaning of rules promulgated under the Securities Act. The offering
and sale of the Series F Preferred was not registered under the Securities Act,
but may not have qualified for an exemption from the registration requirements
of the Securities Act. If the sale of the Series F Preferred was not consummated
in accordance with a valid exemption under the registration requirements of
Section 5 of the Securities Act, purchasers of Series F Preferred may have a
right to rescind their purchases of the Series F Preferred (which will convert
into 748,089 shares of Common Stock upon consummation of this offering) pursuant
to Section 12(a)(1) of the Securities Act, and there may be a risk of
enforcement action by the

11
<PAGE> 13

Commission or state securities regulators. Under Section 13 of the Securities
Act, a rescission right, which is the effective equivalent of a put right, can
be maintained to enforce liability under Section 12(a)(1) of the Securities Act
at any time within one year after the violation on which it is based, but in no
event more than three years after the relevant securities were bona fide offered
to the public. A rescission right would entitle the holders of the Series F
Preferred to receive a return of the consideration paid for their shares of
Series F Preferred ($5.18 per share), together with interest from the date of
purchase. The Company does not currently intend to offer rescission to the
holders of the Series F Preferred. Even if the holders of Series F Preferred are
entitled to rescind their purchases, the Company does not believe that any
rescission would adversely affect its financial condition following consummation
of this offering.

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend, in large part, upon its ability to
attract and retain highly qualified research and development, management,
manufacturing and marketing and sales personnel. Due to the specialized nature
of the Company's business, it may be difficult to locate and hire qualified
personnel, and to retain such personnel once hired. The loss of the services of
any of the Company's executive officers or other key personnel, or the failure
of the Company to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
have "key-man" life insurance policies covering any of its executive officers or
key employees. See "Management."

PRODUCT LIABILITY RISKS

The Company may be subject to product liability claims in the event that
any of its nanocrystalline product applications are alleged to be defective or
cause harmful effects. Because the Company's nanocrystalline materials are used
as ingredients in, or components of, other companies' products, to the extent
certain of the Company's customers become subject to claims, suits or complaints
relating to their products, such as medical implants and cosmetic and skin-care
products, there can be no assurance that such claims will not be asserted
against the Company. The Company currently maintains separate insurance coverage
in the amount of $1 million for product liability claims. The cost of defending
or settling product liability claims may be substantial and there can be no
assurance that the Company could do so on acceptable terms or that such claims,
if successful or settled, would not have a material adverse effect on the
Company's business, results of operations and financial condition.

INTERNATIONAL SALES

For the nine months ended September 30, 1997, 12% of the Company's total
revenues were derived from product sales and development agreements with
international customers, and the Company expects that it will continue to derive
a substantial percentage of revenues from international customers in the future.
There can be no assurance that the Company will be able successfully to market,
sell and deliver its nanocrystalline materials in international markets. In
addition, there are certain risks inherent in conducting international business,
including exposure to currency fluctuations, longer payment cycles, greater
difficulties in accounts receivable collection, political instability,
difficulties in complying with a variety of foreign laws and unexpected changes
in regulatory requirements. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's business,
results of operations and financial condition.

GOVERNMENTAL REGULATIONS

The Company's coating facility, which is located in Chicago, is a "small
quantity generator" of hazardous materials, including ethanol, under the Federal
Resource Conservation and Recovery Act ("RCRA") and, as a result, is subject to
stringent federal, state and local regulations governing the handling, storage
and disposal of such materials. It is possible that current or future laws and
regulations could require the Company to make substantial expenditures for
preventive or remedial action, reduction of chemical exposure or waste treatment
or disposal. There can be no assurance that the Company's operations, business
or assets will not be materially and adversely affected by the interpretation
and enforcement of current or future environmental laws and regulations. The
Company believes it has complied in all material respects with regard to
environmental regulations applicable to it and does not anticipate generating
substantially increased amounts of such

12
<PAGE> 14

materials because its coating process has been modified to significantly reduce
the generation of ethanol. In addition, although management believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the Company's coating
operations do pose a risk of accidental contamination or injury. To date, the
Company has not been required to make substantial expenditures for preventive or
remedial action with respect to the hazardous materials it generates. The
damages in the event of an accident or the costs of such preventive or remedial
actions could exceed the Company's resources or otherwise have a material
adverse effect on the Company's business, results of operations and financial
condition.

In addition, both of the Company's facilities and all of its operations are
subject to the plant and laboratory safety requirements of various occupational
safety and health laws. The Company believes it has complied in all material
respects with regard to governmental regulations applicable to it. There can be
no assurance, however, that the Company will continue to comply with applicable
government regulations or that such regulations will not materially restrict or
impede the Company's operations in the future.

The manufacture and use of certain products which contain the Company's
nanocrystalline materials are subject to governmental regulation. As a result,
the Company is required to adhere to the cGMP requirements of the FDA and
similar regulations in other countries which include testing, control and
documentation requirements enforced by periodic inspections. Such regulations
can increase the Company's cost of doing business and/or render certain
potential markets prohibitively expensive. See "Business--Governmental
Regulations."

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

The Company has experienced, and expects to continue to experience,
quarterly fluctuations in its results of operations as a result of a variety of
factors, including the timing and amount of expenses associated with expansion
of the Company's operations, the timing of collaborative relationships with, and
performance of, customers, the timing of new product application offerings,
changes in the Company's revenue mix among its product application offerings,
and changes in the mix between pilot production of new nanocrystalline materials
and full-scale manufacturing of existing nanocrystalline materials. The Company
does not currently have any significant backlog of orders and the timing of
revenues will therefore depend upon the amount and timing of new orders received
for its nanocrystalline materials.

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
POSSIBLE VOLATILITY OF COMMON STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this offering. The initial public offering price for the
Common Stock was determined by negotiations between the Company and the
Underwriters based upon several factors and may not be indicative of the price
that may prevail in the public market. The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of any particular company. In particular, there has
been significant volatility in the market price of securities of other
technology companies, particularly those that, like the Company, are still
primarily engaged in product development activities. Factors such as
announcements of technology innovations and new product applications by the
Company or its competitors, disputes relating to patents and proprietary rights,
changes in financial estimates by securities analysts, failure to meet earnings
expectations of the market or of analysts, general market conditions and
fluctuations in quarterly operating results may have a significant impact on the
market price of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such a company. Any such litigation
initiated against the Company could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Underwriting."

ANTI-TAKEOVER PROVISIONS

Upon consummation of this offering, the Company's Board of Directors will
have the authority to issue up to 17,000,000 shares of undesignated preferred
stock and to determine the price, rights, preferences,

13
<PAGE> 15

privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue such shares of preferred stock. Further, certain
provisions of the Company's Certificate of Incorporation and Bylaws and of
Delaware law could delay or make more difficult a merger, tender offer or proxy
contest involving the Company. See "Description of Capital Stock--Preferred
Stock" and "--Certain Corporate Provisions."

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of this offering, the Company will have a total of
12,277,454 shares of Common Stock outstanding (12,877,454 if the Underwriters
exercise in full their over-allotment option), of which the 4,000,000 (4,600,000
if the Underwriters exercise in full their over-allotment option) shares offered
hereby will be eligible for immediate sale in the public market without
restriction unless they are held by "affiliates" of the Company within the
meaning of Rule 144 ("Rule 144") under the Securities Act of 1933, as amended
(the "Securities Act"), in which case they will be subject to the volume and
other limitations of such rule. The sale of a substantial number of shares of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock. The remaining 8,277,454
shares of Common Stock outstanding upon completion of this offering will be
"restricted securities" within the meaning of Rule 144 (the "Restricted Shares")
and all of such Restricted Shares are subject to the lock-up provisions of the
Registration Rights Agreement (as defined herein) or lock-up agreements pursuant
to which the holders of such Restricted Shares have agreed that they will not,
directly or indirectly, sell or otherwise dispose of any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Upon expiration of the lock-up provisions of the Registration Rights Agreement
or the lock-up agreements (or earlier upon the consent of DLJ), 7,529,365 of the
Restricted Shares outstanding upon completion of this offering will be eligible
for sale under Rule 144, subject to, in some cases, the volume and other
limitations of such rule. An additional 662,287 Restricted Shares are issuable
upon exercise of currently exercisable warrants issued to certain of the
Company's existing stockholders and an additional 1,508,469 Restricted Shares
are issuable at various dates upon exercise of options heretofore granted to
certain employees, consultants and members of the Advisory Board of the Company
pursuant to stock option agreements. Optionholders, upon the exercise of such
options, must enter into agreements with the Company pursuant to which they will
also agree not to sell, offer for sale or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of DLJ.

Subject to the lock-up provisions of the Registration Rights Agreement and
the lock-up agreements, the holders of all but 95,535 of the Restricted Shares
that will be outstanding upon consummation of this offering and all of the
Restricted Shares issuable upon exercise of the warrants have been accorded
registration rights under the Securities Act. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of shares
for future sales, will have on the market price of the Common Stock from time to
time or the Company's ability to raise capital through an offering of its equity
securities. See "Description of Capital Stock--Registration Rights," "Shares
Eligible for Future Sale" and "Underwriting."

DILUTION AND DIVIDEND POLICY

The initial public offering price of the Common Stock offered hereby is
substantially higher than the net book value of the currently outstanding Common
Stock. Therefore, purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of the Common
Stock. The Company has never paid a cash dividend on its Common Stock and does
not expect to pay dividends in the foreseeable future. See "Dilution" and
"Dividend Policy."

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
being offered hereby are estimated to be approximately $29,360,000 ($33,824,000
if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company.

The Company currently intends to use approximately $23 to $28 million of
the net proceeds for the expansion of its manufacturing facilities over at least
the next 15 months, including approximately $19 to $23 million for installing
additional PVS plasma reactors and making leasehold improvements and
approximately $4 to $5 million for purchasing additional equipment. The Company
expects additional funds for such purposes to be available from cash flows from
operations in 1998, but there can be no assurance that this will be the case.
See "Risk Factors--Limited Operating History; History of Losses; Uncertainty of
Future Profitability." The remaining net proceeds will be used for working
capital and other general corporate purposes. The Company may from time to time
seek to acquire complementary businesses, products, services or technologies.
The Company may use a portion of the net proceeds for one or more of such
transactions, although the Company has no current plans or agreements with
respect to any such transaction. The exact cost, timing and amount of funds
required for specific uses by the Company cannot be precisely determined at this
time. The Company could also potentially use a portion of the net proceeds to
fund a rescission of shares of Series F Preferred. See "Risk Factors--Risk of
Rescission of Series F Offering." Pending such uses, the Company intends to
invest the net proceeds of this offering in short-term, investment grade,
interest-bearing obligations.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends or other distributions on
its Common Stock in the foreseeable future, but intends instead to retain any
future earnings for reinvestment in its business. Any future determination to
pay cash dividends will be at the discretion of the Company's Board of Directors
and will be dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Company's Board
of Directors deems relevant.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth as of September 30, 1997, the Company's
actual capitalization and capitalization on an as adjusted basis to reflect the
Preferred Stock Conversion and the sale by the Company of 4,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated expenses of this offering and the application of the
net proceeds therefrom as described under "Use of Proceeds." The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
Stockholders' equity:
Preferred Stock, no par value, 9,829,054 shares
authorized, 8,156,443 shares issued and outstanding,
actual; $.01 par value, 17,000,000 shares authorized,
no shares issued and outstanding, as adjusted.......... $ 19,553,083 $ --
Common Stock, no par value, 12,632,158 shares authorized;
77,586 shares issued and outstanding, actual; $.01 par
value, 25,000,000 shares authorized, 12,234,029 shares
issued and outstanding, as adjusted(1)................. 450 122,340
Additional paid-in capital................................ -- 48,791,193
Accumulated deficit.................................... (13,976,617) (13,976,617)
------------ ------------
Total stockholders' equity and capitalization..... $ 5,576,916 $ 34,936,916
============ ============
</TABLE>

- ------------------------------
(1) Does not include as of September 30, 1997 (i) 662,287 shares of Common Stock
issuable upon the exercise of outstanding warrants at an exercise price of
$1.123 per share, (ii) 1,586,634 shares of Common Stock issuable upon the
exercise of outstanding options at a weighted average exercise price of
$2.499 per share and (iii) 476,598 shares of Common Stock reserved for
issuance upon the exercise of options that may be granted in the future
under the Stock Option Plan. Also does not include an additional 694,800
shares of Common Stock which were made subject to the Stock Option Plan
after September 30, 1997. See "Management--Stock Option Plan," "Description
of Capital Stock" and Note 12 of Notes to the Financial Statements.

16
<PAGE> 18

DILUTION

The pro forma net tangible book value of the Company as of September 30,
1997 was $5,352,020 or $0.65 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the total
number of shares of Common Stock outstanding after the Preferred Stock
Conversion. After giving effect to the sale of the 4,000,000 shares of Common
Stock being offered by the Company, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, the pro
forma net tangible book value of the Company as of September 30, 1997 would have
been approximately $34,837,693, or $2.85 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $2.20
per share to existing stockholders and an immediate dilution of $5.15 per share
to new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $8.00
Pro forma net tangible book value per share before this
offering............................................... $0.65
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.20
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.85
-----
Dilution per share to new investors......................... $5.15
=====
</TABLE>

The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
(before deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 10,482,950 72.4% $24,262,279 43.1% $ 2.31
New investors............................ 4,000,000 27.6 32,000,000 56.9 8.00
---------- ----- ----------- -----
Total............................... 14,482,950 100.0% $56,262,279 100.0%
========== ===== =========== =====
</TABLE>

The foregoing calculations give effect to, as of September 30, 1997, (i)
662,287 shares of Common Stock issuable upon the exercise of outstanding
warrants at an exercise price of $1.123 per share and (ii) 1,586,634 shares of
Common Stock issuable upon the exercise of outstanding options at a weighted
average exercise price of $2.499 per share. Does not give effect to, as of
September 30, 1997, 476,598 shares of Common Stock reserved for issuance upon
the exercise of options that may be granted in the future under the Stock Option
Plan. Also does not include an additional 694,800 shares of Common Stock which
were made subject to the Stock Option Plan after September 30, 1997. See
"Capitalization," "Management--Stock Option Plan," "Description of Capital
Stock" and Note 12 of Notes to the Financial Statements.

17
<PAGE> 19

SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements and related notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data set forth below for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1997 and the balance
sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived
from the audited financial statements of the Company, which are included
elsewhere in this Prospectus. The selected statement of operations data for the
years ended December 31, 1992 and 1993 and the balance sheet data as of December
31, 1992, 1993 and 1994 are derived from audited financial statements of the
Company which are not included in this Prospectus. The selected financial data
for the nine months ended September 30, 1996 have been derived from unaudited
financial statements of the Company which, in the opinion of management, include
all adjustments that are necessary for a fair statement of the results of the
interim period, and all adjustments of a recurring nature. Results for the nine
months ended September 30, 1997 are not necessarily indicative of results to be
expected during the remainder of the current fiscal year or for any future
period.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commercial revenue........... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415
Government research
contracts.................. 212,183 -- 64,015 27,995 110,770 26,207 --
--------- --------- ----------- ----------- ----------- ----------- -----------
Total revenue............ 232,189 25,265 95,159 121,586 595,806 287,220 2,245,415
Cost of revenue.............. 202,215 61,978 164,746 532,124 4,019,484 2,925,560 3,321,288
Research and development
expense.................... 29,638 143,362 456,162 485,059 677,284 515,675 571,210
Selling, general and
administrative expense..... 366,378 556,616 799,558 1,150,853 1,661,504 1,209,823 1,714,725(2)
--------- --------- ----------- ----------- ----------- ----------- -----------
Total operating
expense................ 598,231 761,956 1,420,466 2,168,036 6,358,272 4,651,058 5,607,223
--------- --------- ----------- ----------- ----------- ----------- -----------
Operating expense in excess
of revenue................. (366,042) (736,691) (1,325,307) (2,046,450) (5,762,466) (4,363,838) (3,361,808)
Interest income.............. 10,191 7,022 37,535 86,576 184,778 145,746 57,392
--------- --------- ----------- ----------- ----------- ----------- -----------
Net loss................. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416)
========= ========= =========== =========== =========== =========== ===========
Pro forma net loss per
share(1)................... $ (0.77) $ (0.41)
=========== ===========
Shares used in computing
the pro forma net loss
per share(1)............... 7,235,723 8,063,143
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 70,652 $225,230 $ 18,462 $ 261,902 $ 617,204 $ 72,519 $ 770,704
Working capital.................... 184,881 225,988 2,226,184 2,451,627 3,070,789 4,432,816 3,059,060
Total assets....................... 377,042 406,238 2,568,691 3,741,128 5,539,634 6,955,669 7,286,071
Total stockholders' equity......... 334,603 348,434 2,456,516 3,506,050 5,110,450 6,470,046 5,576,916
</TABLE>

- ------------------------------

(1) Includes the anti-dilutive effect (equivalent to 400,043 shares) of options
issued to employees, a consultant and members of the Advisory Board since
October 1996. Does not include as of September 30, 1997 (i) 662,287 shares
of Common Stock issuable upon the exercise of outstanding warrants at an
exercise price of $1.123 per share, (ii) 803,247 shares of Common Stock
issuable upon the exercise of outstanding options at a weighted average
exercise price of $1.119 per share and (iii) 476,598 shares of Common Stock
reserved for issuance upon the exercise of options that may be granted in
the future under the Stock Option Plan. Also does not include an additional
694,800 shares of Common Stock which were made subject to the Stock Option
Plan after September 30, 1997. See "Management--Stock Option Plan" and
"Description of Capital Stock."

(2) Includes $375,103 of costs related to a proposed public offering withdrawn
in May 1997.

18
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Selected Financial Data and financial statements and related notes thereto
appearing elsewhere in this Prospectus. When used in the following discussions,
the words "believes," "anticipates," "intends," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including, but not limited to,
those set forth in "Risk Factors," which could cause actual results to differ
materially from those projected.

OVERVIEW

From its inception in November 1989 through December 31, 1996, Nanophase
was in the development stage. During that period, the Company primarily focused
on the development of its manufacturing processes in order to transition from
laboratory-scale to commercial-scale production. As a result, the Company
developed an operating capacity to produce significant quantities of its
nanocrystalline materials for commercial sale. The Company was also engaged in
developing commercial applications and formulations and recruiting marketing,
technical and administrative personnel. From inception through September 30,
1997, the Company was primarily capitalized through the private placement of
approximately $19,554,000 of equity securities, net of issuance costs.

Through 1995, the majority of the Company's revenues resulted from
government contracts to perform research and development activities. During that
period, the Company also entered into cost-sharing agreements with the U.S.
government and offset amounts received against the related costs. During 1996,
the Company began emerging from the development stage and significantly
increased its commercial revenue. Commercial revenue is recorded when products
are shipped by the Company or when specific milestones are met regarding
development arrangements. Cost of revenue generally includes costs associated
with commercial production and customer development agreements, and costs of
material production and development related to government research contracts. In
1996, the Company also began to scale-up operations in its Burr Ridge
manufacturing facility. The Company incurred substantial operating expenses as a
result of certain one-time costs associated with the scale-up of operations.

Since January 1, 1997, the Company has been engaged in commercial
production and sales of its nanocrystalline materials, and the Company no longer
considers itself in the development stage.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

Total revenue increased to $2,245,415 for the nine months ended September
30, 1997, compared to $287,220 for the same period in 1996. Commercial revenue
increased to $2,245,415 for the nine months ended September 30, 1997, compared
to $261,013 for the same period in 1996. This increase in commercial revenue was
due primarily to increased product sales volume, increased acceptance of the
commercial potential of the Company's products, customer development agreements
and a one-time fee of $160,000 paid by the Company's Asian distributor for
training such distributor how to operate a PVS plasma reactor in order to
manufacture samples of the Company's nanocrystalline materials. Commercial
revenue for the nine months ended September 30, 1997 was primarily generated
from sales of the Company's nanocrystalline materials to, and product
development contracts with, the Company's customers in the electronics and
structural ceramics and composites markets. In particular, sales to Moyco, a
distributor to a number of semiconductor manufacturers, constituted
approximately 70% of such commercial revenue. See "Risk Factors--Dependence on a
Limited Number of Key Customers." There can be no assurance, however, that this
will be indicative of future revenue generated by the Company in each of the
four markets initially targeted by the Company because many of its product
applications are still in various stages of development or under evaluation.
Revenue from government research contracts decreased to zero for the nine months
ended September 30, 1997, compared to $26,207 for the same period in 1996,
because the Company did not pursue any further U.S. government contracts for
such nine month period.

19
<PAGE> 21

Cost of revenue increased to $3,321,288 for the nine months ended September
30, 1997, compared to $2,925,560 for the same period in 1996. This increase in
cost of revenue was generally attributed to a further expansion of the
production infrastructure to support anticipated revenue growth and increased
costs which are commensurate with the increased sales volume and customer
development programs, primarily in the electronics and structural ceramics and
composites markets. The Company also incurred development costs to expand its
quality assurance programs and obtain its ISO certification. Cost of revenue as
a percentage of revenue decreased significantly for the nine months ended
September 30, 1997, compared to the same period in 1996, primarily because of
increased efficiencies in the Company's manufacturing process and greater
production volume. Because the Company is in the early stage of
commercialization, cost of revenue as a percentage of revenue is uncertain for
the future.

Research and development expense consists of costs associated with the
Company's development of new product applications and coating formulations and
the cost of enhancing the Company's manufacturing processes. Research and
development expense increased to $571,210 for the nine months ended September
30, 1997, compared to $515,675 for the same period in 1996. The increase in
research and development expense was attributable primarily to the costs of
developing new coating formulations and product applications, increased usage of
research supplies, and ongoing experimentation expenses associated with
technological enhancements and product improvements. The Company expects to
increase its research and development expenditures during the remainder of 1997
in connection with its plans to continue to enhance and expand its product lines
and manufacturing processes.

Selling, general and administrative expense increased to $1,714,725 for the
nine months ended September 30, 1997, compared to $1,209,823 for the same period
in 1996. This increase was attributable primarily to increased selling and
advertising expense, outside consulting fees, corporate salaries and expensing
costs aggregating $375,103 related to a proposed public offering withdrawn in
May 1997. Selling, general and administrative expense for the third quarter of
1997 also includes certain one-time costs associated with the Company's Asian
distribution agreement. Selling, general and administrative expense is expected
to increase significantly in the next several years to support the Company's
business development efforts.

Interest income decreased to $57,392 for the nine months ended September
30, 1997, compared to $145,746 for the same period in 1996. This decrease was
primarily due to a lower outstanding cash balance.

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Total revenue increased to $595,806 in 1996, compared to $121,586 in 1995
and $95,159 in 1994. Commercial revenue increased to $485,036 in 1996, compared
to $93,591 in 1995 and $31,144 in 1994. This increase in commercial revenue was
due primarily to increased commercial acceptance and availability of the
Company's products. Revenue from government research contracts increased to
$110,770 in 1996, compared to $27,995 in 1995 and $64,015 in 1994, as the
Company completed certain development agreements with U.S. governmental
agencies.

Cost of revenue increased to $4,019,484 in 1996, compared to $532,124 in
1995 and $164,746 in 1994. The increase in cost of revenue for 1996 was
generally a result of the scale-up of the Company's operations in anticipation
of increased commercial sales and development. Specifically, the Company
increased expenditures relating to product and process improvement activities.
The Company also incurred one-time costs in connection with the establishment of
its Chicago coating facility, extensive product development activities, the
scale-up of manufacturing operations, and the certification of its Burr Ridge
facility under ISO standards.

Research and development expense increased to $677,284 in 1996, compared to
$485,059 in 1995 and $456,162 in 1994. The increase in research and development
expense was attributable primarily to the hiring of additional research and
development personnel, costs associated with the development and evaluation of
new product applications, and increased purchases and use of research supplies.

Selling, general and administrative expense increased to $1,661,504 in
1996, compared to $1,150,853 in 1995 and $799,558 in 1994. This increase was
attributable primarily to the hiring of additional marketing and administrative
personnel, an increase in selling expenses, and the increase in costs associated
with the establishment of the Company's corporate headquarters.

20
<PAGE> 22

Interest income was $184,778 in 1996, compared to $86,576 in 1995 and
$37,535 in 1994. The increases resulted from the Company's investment of net
proceeds from its sales of equity securities pending use of such proceeds for
the Company's operations.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents were $770,704 at September 30,
1997, compared to $617,204 at December 31, 1996 and $261,902 at December 31,
1995. The Company's net cash used in operating activities was $2,740,641 for the
nine months ended September 30, 1997, compared to $4,399,928 for the same period
in 1996. The net cash used in operating activities for the nine months ended
September 30, 1997 was primarily for the further expansion of the production
infrastructure to support anticipated growth, the further development of
products, the funding of research and development activities, and the funding of
trade accounts receivable and inventory levels, which was offset by an increase
in accounts payable and accrued liabilities. Net cash used in investing
activities, including capital expenditures and purchases and sales of securities
in which cash is invested pending its use for the Company's operations, amounted
to $751,068 for the nine months ended September 30, 1997, compared to net cash
used of $2,894,150 for the same period in 1996. Capital expenditures amounted to
$763,276 for the nine months ended September 30, 1997, compared to $1,084,697
for the same period in 1996 and were primarily for leasehold improvements and
equipment purchases. Net cash provided by private placements of equity
securities was $3,770,882 during the nine month period ended September 30, 1997,
compared to $7,182,088 during the same period for the prior year.

The Company's net cash used in operating activities was $5,795,858 in 1996,
compared to $1,860,353 in 1995 and $1,206,497 in 1994. The net cash used in 1996
operating activities was primarily for the scale-up of manufacturing operations,
for development of products, and to fund research and development expenses. Net
cash used in investing activities, including capital expenditures and purchases
and sales of securities in which cash is invested pending its use for the
Company's operations, amounted to $951,806 in 1996, $905,615 in 1995 and
$2,396,125 in 1994. Capital expenditures amounted to $1,173,437 in 1996,
$937,956 in 1995 and $66,303 in 1994 and were primarily for leasehold
improvements and equipment purchases. Net cash provided by private placements of
equity securities was $7,182,088 in 1996, compared to $3,009,408 in 1995 and
$3,395,854 in 1994.

The Company believes that funds from operations and cash on hand, together
with the net proceeds of this offering, will be adequate to fund the Company's
current operating plans for the foreseeable future. The Company expects capital
expenditures of approximately $2 million in 1997 and approximately $20 million
to $25 million in 1998, which expenditures will be funded in part by the net
proceeds from this offering. The Company's actual future capital requirements
will depend, however, on many factors, including continued progress in its
research and development and product testing programs, the magnitude of these
programs, the costs necessary to increase the Company's manufacturing
capabilities and to market any resulting materials and product applications, and
customer acceptance of the Company's current and potential materials and product
applications. In addition, the Company could potentially be required to fund a
rescission of shares of Series F Preferred. Depending on future requirements,
the Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or licensing agreements. There
can be no assurance that such additional financing will be available on
acceptable terms or at all, and any such additional financing could be dilutive
to the Company's stockholders. See "Use of Proceeds," "Risk Factors--Future
Capital Needs" and "--Risk of Rescission of Series F Offering."

At September 30, 1997, the Company had a net operating loss carryforward of
approximately $13.9 million for income tax purposes. Because the Company may
have experienced "ownership changes" within the meaning of the U.S. Internal
Revenue Code (the "Internal Revenue Code") related to prior issuance of its
preferred stock and may experience ownership changes due to this offering,
future utilization of this carryforward may be subject to certain limitations as
defined by the Internal Revenue Code. If not utilized, the carryforward expires
at various dates between 2005 and 2012. As a result of the annual limitation, a
portion of this carryforward may expire before ultimately becoming available to
reduce income tax liabilities.

21
<PAGE> 23

QUARTERLY INFORMATION

The following table presents selected unaudited quarterly results of the
Company for each quarter of 1996 and the first three quarters of 1997. The
financial data is derived from the unaudited quarterly financial statements of
the Company which have been prepared by the Company on a basis consistent with
the Company's audited financial statements included elsewhere in this Prospectus
and, in the opinion of management, include all adjustments, including normal
recurring adjustments, that are necessary for a fair statement of the Company's
results of operations for such periods. These operating results are not
necessarily indicative of future performance.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------------ -------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Commercial revenue..... $ 43,223 $ 63,809 $ 153,981 $ 224,023 $ 429,464 $ 603,003 $ 1,212,948
Government research
contracts............ 13,532 6,780 5,895 84,563 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue...... 56,755 70,589 159,876 308,586 429,464 603,003 1,212,948
Cost of revenue........ (743,651) (1,224,895) (957,014) (1,093,924) (1,102,877) (1,059,204) (1,159,207)
Research and
development
expense.............. (150,483) (177,137) (188,055) (161,609) (161,198) (215,334) (194,678)
Selling, general and
administrative
expense.............. (315,885) (507,254) (386,684) (451,681) (425,497) (765,995)(1) (523,233)
Interest income........ 24,302 55,384 66,060 39,032 21,917 9,830 25,645
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss............... $(1,128,962) $(1,783,313) $(1,305,817) $(1,359,596) $(1,238,191) $(1,427,700) $ (638,525)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>

- ------------------------------
(1) Includes $375,103 of costs related to a proposed public offering withdrawn
in May 1997.

22
<PAGE> 24

BUSINESS

Nanophase develops and markets nanocrystalline materials for use as
ingredients and components in a wide range of commercial applications. The
Company began manufacturing nanocrystalline materials in commercial quantities
in the fourth quarter of 1996. Nanocrystalline materials are metallic and
ceramic materials that generally consist of particles that are less than 100
nanometers (billionths of a meter) in diameter and contain only a few thousand
or tens of thousands of atoms, rather than the millions or billions of atoms in
particles of most conventional materials. By processing materials in this
near-atomic size range, the Company is able to engineer the structure of
particles and exploit the properties of their surface atoms to enhance the
performance of basic raw materials such as aluminum, iron, titanium and zinc, as
well as to molecularly engineer new composite materials. Compared to
conventional materials, the Company believes its nanocrystalline materials
generally exhibit superior chemical, mechanical, electronic, magnetic and
optical properties. The Company believes that through its extensive proprietary
research and development programs, combined with its proprietary and patented
production processes, it has established new standards for high-performance
commercially produced nanocrystalline materials.

- Electronics. Abrasives for chemical/mechanical polishing of semiconductor
wafers (CMP), anti-radiation coatings for CRTs, thin-film materials for
semiconductor manufacturing, high-performance electrodes and photonic
materials for flat-panel displays.

- Cosmetics and Skin-Care. Topical health-care products, transparent UV
blockers and colorants for cosmetics.

- Industrial Catalysts. Chemical-process catalysts.

In each of these markets, the Company's strategy is to establish
collaborative relationships with industry leaders in order to validate the
capabilities of its materials and coordinate the development and commercial
introduction of product applications. These relationships generally include
specific milestones and a development path that is intended to lead to
significant commercial product revenues. The Company is currently collaborating
with, among others, Acutus Gladwin, Dow, DuPont, Medtronic, Pacific Safety and
Philips. As a result of its collaborative relationships, the Company entered
into commercial supply contracts with Moyco, a manufacturer of semiconductor
polishing slurries for use by semiconductor manufacturers, including Hyundai,
Samsung, IBM, Lucent and Motorola; with Schering-Plough pursuant to which the
Company will supply its nanocrystalline zinc oxide to Schering-Plough for use in
topical health-care products; and with LWT for anti-abrasive polymers used in
oil drilling applications. To gain access to foreign markets, Nanophase has
entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the
distribution of the Company's materials in broad-based industrial markets
throughout Asia. To gain world-wide access to the cosmetics and skin-care
market, the Company has a global distribution agreement with WCD, a leading
distributor of cosmetic and skin-care ingredients.

23
<PAGE> 25

the production of high-performance nanocrystalline materials from laboratory to
commercial scale. In 1995, the Company's patented PVS process for producing
these materials received the R&D 100 Award, given each year by R&D Magazine to
recognize the 100 most technologically significant new products and processes in
the world.

NANOCRYSTALLINE MATERIALS

All matter is composed of atoms, or molecules which are combinations of
atoms. Most solid materials, such as ceramics and metals, are crystalline in
nature, i.e., they consist of microscopic particles, or crystals, the atoms or
molecules of which are stacked in orderly patterns. The attributes of a
crystalline material, including strength, flexibility, color and electronic
conductivity, depend upon the shape and size of the material's individual
crystals, the organization of atoms in the individual crystals, and the
relationships and interactions among the crystals. The particles of conventional
crystalline materials generally have irregular shapes and sizes. The
organization of a crystalline material's atoms or molecules, however, can be
manipulated to form particles that are much smaller and more uniform. Particles
that are less than 100 nanometers (billionths of a meter) in diameter are
generally called nanocrystals and contain only a few thousand or tens of
thousands of atoms, rather than the millions or billions of atoms in particles
of most conventional materials. Through molecular engineering, the shape and
size of such particles in nanocrystalline materials can be manipulated to
produce materials with superior properties. These nanocrystalline materials
behave in enhanced and novel ways because the properties of, and interactions
among, their ultra-small particles have been significantly altered.

The potential of nanocrystalline materials has been known for decades and
such materials have been produced by a variety of other processes. However,
these other processes are more limited in their ability to engineer the
materials for high-performance applications. Mechanical and chemical processes
are the two most common methods for producing nanocrystalline materials. In
mechanical processes, fine powders are commonly made from large particles
through the use of crushing techniques such as a high-speed ball mill. The
resulting fragmented powders contain particles of inconsistent shapes and sizes,
are relatively coarse, and are not adequate for many high-performance commercial
applications. Nanocrystalline materials can also be made through chemical
processes which utilize chemicals to create a reaction that precipitates
particles of varying size and shape. Chemical processes, like mechanical
processes, often produce nanometric particles of inconsistent shapes and sizes
that are difficult to engineer for high-performance applications. Chemical
processes also tend to leave chemical residues on the particle surfaces, making
it difficult to precisely engineer the mechanical, chemical and electronic
properties of the materials. Historically, high-quality nanocrystalline
materials have been difficult to consistently produce in other than
laboratory-scale quantities and have not been produced at commercially
affordable costs. The Company believes that these traditional methods of
producing nanocrystalline materials do not provide the means to realize the full
potential of such nanocrystalline materials.

ADVANTAGES OF THE COMPANY'S NANOCRYSTALLINE MATERIALS

The Company has developed new technologies for the engineering and
high-volume production of high-quality nanocrystalline materials which it
believes cannot be accomplished by the traditional methods described above. At
the core of the Company's technologies is its patented PVS process, whereby
metallic or ceramic materials are vaporized into atoms that are mixed with a gas
to form nanometric particles.

The following attributes of the particles produced by the Company's PVS
process enable it to produce significant quantities of nanocrystalline materials
which it believes to be superior, for a range of high-performance applications,
to both conventional materials and nanocrystalline materials produced by other
means:

SPHERICAL SHAPES AND SMALL SIZES enable particles to slide over each
other, which allows the Company's ceramic materials to become more ductile
and more easily formed. This enables the Company to rapidly mold variously
shaped ceramic components without the costly and time-consuming

24
<PAGE> 26

machining which is typically used for conventional ceramics (e.g., 15 to 30
minutes for the Company's process as opposed to 4 to 8 hours for
conventional machining).

CLEAN SURFACES enable particles to flow freely and be dispersed
easily. For example, the Company produces iron oxides that make cosmetics
feel smoother on the skin and blend easily.

NARROW SIZE DISTRIBUTION of nanometric particles ensures that
nanocrystalline materials are virtually free of large particles, which
facilitates engineering of the chemical, mechanical, optical and electronic
properties of the material because these properties vary according to
particle size. For example, the Company produces titanium dioxide with
particles that are large enough to block ultraviolet rays but are
consistently smaller than the wave length of visible light, which enables
sunscreens formulated with these particles to provide an unprecedented
combination of high SPF protection and transparency.

AGGREGATION CONTROL results in loosely agglomerated and uniformly
small particles that can be readily and uniformly dispersed in a variety of
media. For example, the Company produces ultra-fine abrasives for slurries
used to polish the surfaces of semiconductors, which results in
significantly smoother surfaces and faster and more selective removal of
material.

DIALABLE CONTROL OF PARTICLE SIZE enables precise engineering of
particles through subtle modifications of the Company's PVS process. By
controlling the evaporation rate of a material's atoms or the type or
pressure of gas used in the production process, the Company can alter,
enhance and tailor the performance of its basic raw materials for specific
product applications. For example, further decreasing the particle size of
a metal oxide increases its number of surface atoms, which enables the
Company to produce metal oxides with enhanced catalytic performance.

The Company has developed related technologies to further enhance the
materials produced by its PVS process. Because the PVS process produces
particles that, in contrast to particles of conventional materials, are (i)
nearly spherical, (ii) virtually free of chemical residues, (iii) uniformly
small, (iv) not strongly agglomerated, and (v) easily engineered, the Company
can apply its other proprietary technologies to further process these particles
to set new standards for a range of additional high-performance commercial
applications. For example, certain product applications require surface
treatments for nanocrystalline particles so they can be dispersed in a variety
of media. To enable the incorporation of its materials in dispersions, the
Company developed its proprietary DPE process which prevents particles from
agglomerating by completely coating each individual particle. The coating
process also enables the Company to alter the optical, chemical and electronic
behavior of particles to meet the requirements of particular applications. In
addition, certain product applications require nanocrystalline materials to be
formed into structural ceramics of a precise shape and tolerance. As part of its
strategy to enter markets for structural ceramics, the Company developed its
net-shaping technology which enables the rapid fabrication of
dimensionally-precise, high tolerance structural ceramic components without
costly machining.

COMPANY STRATEGY

To take advantage of the broad potential applicability of nanocrystalline
materials, the Company has adopted a strategy to develop a variety of
value-added applications in targeted industries where the potential for future
growth is substantial. The Company intends to establish itself as the leading
manufacturer of nanocrystalline materials for these targeted application areas
by continuously enhancing its technologies, product applications and customer
base. Specific elements of the Company's business strategy include the
following:

Target Innovative Commercial Applications

The Company identifies and pursues commercial applications where the
value-added benefits of its nanocrystalline materials and technologies (i)
represent breakthrough capabilities, (ii) are substantial and demonstrable,
(iii) are not achievable with conventional materials, and (iv) offer the Company
the potential for long-term market leadership and sustainable revenues.

25
<PAGE> 27

Establish Collaborative Relationships with Marquee Customers

To facilitate the development of product applications that meet market
needs and create markets for its nanocrystalline materials, the Company
establishes collaborative relationships with customers who are leaders in their
industries. The Company targets such customers because it believes that these
customers (i) are technologically innovative, (ii) will support product
development and (iii) require a long-term supply of superior products in order
to maintain their competitive advantages. The collaborative relationships
pursued by the Company include agreed-upon developmental milestones and a
development path that is intended to lead to significant commercial revenues
from the customer.

Expand Product Applications and Broaden the Customer Base

After developing nanocrystalline materials and product applications for a
customer, the Company seeks to broaden its relationship with that customer by
identifying additional opportunities for the Company's nanocrystalline materials
and technologies, and seeks to identify other potential customers in that market
that can benefit from derivative materials and technologies. The Company also
seeks to have the nanocrystalline materials and technologies that it
successfully develops for customers in one market meet the application
requirements of customers in other markets without significant process or
material re-engineering.

Maintain Technical and Commercial Leadership

The Company is committed to maintaining its status as a leader in the field
of nanocrystalline-based materials through ongoing research and development
activities, collaborations with industrial, university and government entities,
and efforts to continuously attract top scientists and engineers. The Company
concentrates its research and development efforts on the key technological
issues that affect the production and engineering of nanocrystalline materials
that have new and superior capabilities tailored for specific commercial
applications. This focus has resulted in the Company's development of its
proprietary core technologies, including the PVS process, DPE process and
net-shaping. To protect its proprietary core technologies, the Company has been
issued patents with respect to its PVS process and the related apparatus,
applied for patents with respect to its DPE process and licenses patents related
to the synthesis of nanocrystalline materials and net-shaping.

CUSTOMERS AND APPLICATIONS

The Company is in the advanced materials industry and has identified four
primary markets--electronics, structural ceramics and composites, cosmetics and
skin-care, and industrial catalysts--each of which offers the Company
significant potential for revenue growth. In addition, the Company believes
these markets provide opportunities to achieve competitive advantages based on
product performance. The Company's strategy is to collaborate with industry
leaders in these markets in order to validate the capabilities of its materials
and coordinate the development and commercial introduction of product
applications. The collaborative relationships pursued by the Company include (i)
agreed-upon specifications for the proposed commercial application of the
Company's materials; (ii) confirmation by the customer that the proposed
application appears to be commercially viable and valuable; (iii) a significant
commitment of developmental resources; (iv) agreed-upon developmental
milestones, and (v) a development path that is intended to lead to

26
<PAGE> 28

significant commercial revenues from the customer. Certain details of the
Company's significant customer and product development relationships are
contained in the table below.

[CAPTION]
<TABLE>
<CAPTION>
CUSTOMER/PRODUCT NANOPHASE
DEVELOPMENT PARTNER MATERIAL/TECHNOLOGY PRODUCT APPLICATION STATUS
<S> <C> <C> <C>
ELECTRONICS
Moyco Technologies, Inc. Aluminum oxide; Abrasives for semiconductor Shipping products pursuant to
cerium oxide polishing five- year requirements
contract; customer evaluations
underway at Hyundai, IBM,
Motorola, Lucent and Samsung
Philips Electronics N.V. Metal oxide Anti-radiation coatings for Development agreement
CRTs
Medtronic, Inc. Precious metal High-performance electrodes Samples purchased; tests and
evaluations ongoing
A leading electronic Metal oxides Thin-film materials for Samples purchased; tests and
materials company semiconductor manufacturing evaluations ongoing
A Fortune 50 Metal oxides Photonic materials for Joint application for U.S.
communications company flat-panel displays Department of Defense contract
STRUCTURAL CERAMICS AND COMPOSITES
LWT Instruments, Inc. Aluminum oxide Abrasion-resistant polymers for Shipping product pursuant to
oil drilling sensors requirements contract
AG Industries Net-shaped ceramics Components for continuous steel Development agreement; field
casting tests scheduled
A Fortune 100 Net-shaped ceramics Ceramic mechanical seals Prototypes purchased; tests and
manufacturer of heavy evaluations ongoing
equipment
Pacific Safety, Inc. Net-shaped ceramics Ceramic armor Development agreement; tests
and evaluations ongoing
Medtronic, Inc. Metal oxides Remotely monitored medical Samples purchased; tests and
implants evaluations ongoing
COSMETICS AND SKIN-CARE
Schering-Plough Zinc oxide Topical health-care products Shipping product pursuant to
Corporation(1) four- year requirements
contract
A Fortune 500 cosmetics Titanium dioxide; Transparent UV blockers and Shipping product
company(1) iron oxide colorants for cosmetics
INDUSTRIAL CATALYSTS
E.I. DuPont de Nemours & Precious metal Chemical-process catalysts Samples purchased; tests and
Co. evaluations ongoing
A Fortune 50 chemical Metal oxides Chemical-process catalysts Samples purchased; tests and
company evaluations ongoing
</TABLE>

- ------------------------------
(1) These relationships are through the Company's distribution arrangement with
WCD, which is distributing the Company's nanocrystalline materials to a
number of cosmetics and skin-care formulators. See "--Cosmetics and
Skin-Care" and "--Marketing."

Following is a more detailed description of the Company's targeted markets
and its activities in specific product applications.

ELECTRONICS

Electronics is one of the world's largest and fastest growing markets,
fueled in part by rising demand for increased computing power and information
storage requirements and the rapid growth of communications technologies. The
new levels of performance in electronics that are necessary to meet these
requirements depend, in large part, on advanced materials, especially advanced
ceramics, that enable higher performance and further miniaturization.
Increasingly, critical dimensions and performance criteria for high-speed
electronic pathways and dense platforms are measured in nanometers and angstroms
(tenths of nanometers).

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<PAGE> 29

It is at this level of performance that Nanophase believes its engineered
nanocrystalline materials have advantages that can be converted into immediate
opportunities.

Nanophase's initial focus in this market has primarily been on three
product applications: (i) semiconductor polishing, (ii) coatings for
electromagnetic radiation protection and (iii) high-performance electrodes. The
Company believes that the uniformly small particle size, nearly spherical
particle morphology and clean particle surface of the Company's materials allow
such materials to provide innovative, value-added benefits for these and other
product applications in the electronics market.

Semiconductor Polishing

Increases in computing power require increased memory capacity, which is
achieved by fabricating smaller circuits on smoother semiconductor wafer
surfaces. These smoother surfaces are obtained by a technique called
chemical/mechanical polishing (CMP), in which an abrasive slurry is used to
polish semiconductor surfaces to a very fine finish.

Polishing slurries utilizing the Company's nanometer-sized aluminum dioxide
("alumina") and cerium oxide ("ceria"), with their nearly spherical particle
shapes and uniformly small particle sizes, provide semiconductor polishing that
results in (i) significantly smoother surfaces, (ii) a faster rate of material
removal, (iii) more selective removal of material, and (iv) easier cleaning
during the manufacturing process, compared to slurries utilizing conventional
materials. The Company believes that these attributes will be an important
element in the production of semiconductor wafers with smaller geometries that
will result in increased memory capacity, faster processing speeds and lower
production costs.

Nanophase has entered into a five-year requirements contract with Moyco, a
manufacturer of semiconductor polishing slurries, pursuant to which the Company
will supply its nanocrystalline alumina and ceria to Moyco. Moyco markets its
slurries to Hyundai, Samsung, IBM, Lucent and Motorola, all of which are
currently evaluating slurries containing the Company's nanocrystalline materials
for use in their next generation semiconductor manufacturing processes. The
Company has agreed to sell the materials to Moyco for this market on an
exclusive basis so long as Moyco purchases the following annual minimums
specified in the contract: 23, 50, 80, 140 and 200 tons of alumina and 4, 8, 16,
20 and 30 tons of ceria in 1997, 1998, 1999, 2000 and 2001, respectively. If
Moyco purchases the aggregate minimum quantities specified in the contract, it
will purchase approximately $30 million of the Company's materials through the
end of 2001. If Moyco fails to purchase such minimum quantities, the Company may
terminate Moyco's exclusivity, or the Company may terminate the entire contract.
In August 1997, Moyco and Ashland signed a non-binding letter of intent
pertaining to the potential purchase by Ashland of Moyco's intellectual
properties, technologies and certain other intangible assets for the
chemical/mechanical polishing of semiconductor wafers. See "Risk
Factors--Dependence on a Limited Number of Key Customers."

Electromagnetic Radiation Protection

Cathode ray tubes ("CRTs") utilized in television and computer monitors
emit electromagnetic radiation due to the high voltages used to generate light.
In the past, little attention was paid to the potential harmful effects of this
radiation. Recent European Economic Community regulations scheduled to go into
effect over the next several years, however, place more stringent limits on the
quantity of radiation that can be emitted by television and computer monitors.
In response to such regulations, CRT manufacturers require transparent,
conductive coatings that meet the new electromagnetic radiation standards.

The materials currently used for conductive coating of CRTs have not been
proven to meet all of the new radiation requirements. Nanophase can produce a
proprietary metal oxide mixture which has a narrower particle-size distribution
and cleaner particle surfaces than currently used materials. The Company's
nanocrystalline metal oxide mixture is highly conductive and easily dispersed
and, when applied as a coating to CRTs, is expected by the Company to meet the
increased radiation shielding regulatory requirements, while maintaining the
transparency required for quality video images. The Company is actively working
with Philips pursuant to an agreement to develop a specific coating for CRTs
manufactured by Philips. This agreement

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<PAGE> 30

includes an expression of intention by Philips to purchase the Company's coating
materials if developmental milestones are met.

High-Performance Electrodes

Electronic medical devices require new high-performance electrodes which
deliver more precise voltages. In order to achieve such precision, the surface
area of the electrode needs to be increased substantially. As the surface area
of an electrode increases, transient signals caused by polarization at the
electrode surface are reduced. In a development program with Medtronic, a
leading manufacturer of medical devices, the Company is developing
nanocrystalline precious metals that can be directly deposited on medical-device
electrodes to create the additional surface area required to decrease
polarization. The Company believes that its material provides higher surface
area than the conventional technology currently used. The Company is working
with Medtronic to meet specific performance requirements and establish
developmental milestones.

Thin-Film Materials for Semiconductor Manufacturing

Nanophase has begun an early stage development program with a leading
electronic materials company for developing advanced materials for use in
semiconductor manufacturing. The objective is to develop advanced materials
which can be used to fabricate thin-films on the surfaces of semiconductors to
enable the production of semiconductor wafers with increased memory capacity,
faster processing speeds and lower production costs. Nanocrystalline materials
are used because the products require a uniform and fine-grained structure. This
product application is in an early stage of development and investigation.

Flat-Panel Displays

Nanophase and a Fortune 50 communications company have submitted a joint
proposal to the U.S. Department of Defense for funding to develop photonic
materials and manufacturing technology for a new generation of electronic
displays for a broad range of light-weight, low-power multi-purpose
communication devices. If funded, the two companies will work jointly to develop
the products.

STRUCTURAL CERAMICS AND COMPOSITES

Structural ceramics are advanced compounds that offer hardness, high
strength and inertness for a broad range of industrial applications involving
harsh chemical and thermal environments. The free-flowing nature and weak
agglomeration of the Company's nearly spherical nanocrystalline particles enable
the Company to rapidly fabricate high-tolerance, dimensionally precise
structural ceramic parts without costly machining. Because the conventional
methods for forming structural ceramics involve the use of high temperatures,
high pressures or lengthy machining operations, the high costs of fabrication
have limited the usage of dimensionally-precise ceramics to only the most
critical applications. Through its net-shaping process, the Company can mold
nanocrystalline ceramic materials into fully-dense ceramic parts with little or
no machining. This process makes it possible to fabricate a variety of
dimensionally precise structural ceramic components in a short period of time
(e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for
conventional machining), at significantly lower temperatures and pressures, and
at substantially lower costs, than conventional fabrication methods.

Composites, like structural ceramics, are engineered structures that
consist of diverse elements and are geared toward high-stress product
applications that require durable, resistant materials. Composites combine the
advantageous qualities of their constituent materials. The properties of these
composites depend heavily on the nature and amount of the materials that are
incorporated into the composites. For example, incorporating a hard material
like alumina into a flexible and light-weight plastic can increase the plastic's
resistance to abrasion and wear. Such an increase is related to the number of
particles of the constituent alumina. Because there are more particles in one
pound of nanocrystalline materials than in one pound of more commonly used
micron-sized particles, properties such as abrasion resistance are enhanced by
substituting nanocrystalline materials for conventionally used materials.

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<PAGE> 31

Composite Polymer for Oil Drilling Machinery

Nanophase has entered into a one-year requirements contract with LWT, a
supplier of instrumentation to the oil drilling industry, for the supply of
abrasion-resistant composite polymers to protect down-hole data logging
equipment. The contract requires LWT to purchase a minimum of $375,000 of
materials from the Company. In this application, instrumentation is lowered into
a drilled shaft in order to provide information to the drill operator on a
continuous basis. Because drilled shafts often pass through hard rock
formations, or very abrasive layers of sandstone, the data logging instruments
must be protected from potential wear. A protective housing, or collar, is used
to protect the data logging equipment. These collars are conventionally coated
with a commercially available ceramic-filled polymer. Conventional fabrication
of these collars is difficult because the polymer is thick and must be applied
by hand. LWT requires a polymer which can be applied by automatic machinery, has
a long service life and is abrasion-resistant. Tests performed by LWT using the
Company's composite materials indicate that such materials meet these
requirements.

Ceramic Components for Continuous Steel Casting

The Company is collaborating with Acutus Gladwin, a leading supplier of
services and products in the steel industry, to produce a ceramic component for
use in continuous steel casting. Continuous steel casting is performed by
pouring molten steel from a ladle through a funnel-shaped nozzle into a mold
which is several hundred feet long. Current nozzles are made of a porous
alumina/graphite material and require frequent replacement due to wear. During
replacement, steel-casting lines using these nozzles must be shut down for 15 to
45 minutes while new components are installed, resulting in down-time costs of
up to approximately $25,000/hour and several tons of second-quality steel which
must be remelted or downgraded for use in lower-quality products. Nanophase
believes that its denser net-shaped ceramics in this application will
substantially increase wear resistance, resulting in significant cost savings
due to decreased downtime and less wasted or sub-standard steel. Under a
development agreement with Acutus Gladwin, the Company has successfully
completed laboratory testing of its material and prototypes are scheduled to be
field tested by the end of 1997.

Ceramic Mechanical Seals

Nanophase is currently fabricating prototype ceramic mechanical seals for a
Fortune 100 manufacturer of heavy equipment. The ceramic seals are designed for
use in harsh applications to prevent abrasive particles from entering mechanical
joints and to prevent oil from leaking from the joints. Conventional seals used
in these applications are commonly made of plastic composite materials and
either wear or corrode, requiring replacement after only a few thousand hours of
operation. Ceramic seals, because of their improved abrasion and corrosion
resistance, are believed by the Company to be more reliable and durable than
conventional seals. Customer-laboratory tests of prototype seal designs have
shown that Nanophase's ceramic seals can increase the service life of a seal up
to ten-fold compared to currently-used seal materials, resulting in a reduction
of equipment downtime and associated costs. In addition, Nanophase's net-shaping
process reduces or eliminates the costly diamond grinding that normally would be
required to fabricate these ceramic seals. The Company believes that reduced
manufacturing costs make these ceramic seals cost-effective for a number of
high-volume mechanical-seal applications. The Company expects field testing of
its ceramic seals to begin by the end of 1997.

Ceramic Armor

The Company is currently fabricating net-shaped alumina armor plates under
a development agreement with Pacific Safety, a leading Canadian armor producer.
Ceramic based armor is highly desirable because of its strength and weight
advantage over steel. It can provide the same protection at a significantly
reduced weight. However, current ceramic armor materials, made from hot-pressed
alumina or boron carbide, are either not durable enough or very costly to
fabricate, and thus have limited markets. Based on preliminary studies, the
Company believes that it will be able to produce denser, fine-grained alumina
armor tiles which will have greater durability and impact resistance than
hotpressed alumina tiles and offer a significant economic advantage over boron
carbide.

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<PAGE> 32

Remotely Monitored Medical Implants

In collaboration with Medtronic, Nanophase is developing a net-shaped
ceramic housing for an electronic medical device. Current housings for this
application are fabricated from metal, and while medically proven and in daily
use, they do not allow the transmission of Radio Frequency ("RF") signals. A
ceramic housing would allow the passage of RF signals and, hence, remote
wireless monitoring. Nanophase is also developing materials for medical implants
for Medtronic which can be viewed without using X-rays. Both medical devices, if
successfully developed, will require the customer to undertake long-term
clinical testing and seek FDA approval. See "Risk Factors--Governmental
Regulations."

COSMETICS AND SKIN-CARE

The cosmetics and skin-care market is a substantial consumer of particulate
materials as active ingredients and pigments. The Company has targeted three of
its nanocrystalline materials, titanium dioxide ("titania"), iron oxide and zinc
oxide, for applications in the cosmetics and skin-care market, including
sunscreens, cosmetic colorants and topical health-care applications. Nanophase
has entered into a global distribution agreement with WCD for exclusive
distribution of its nanocrystalline materials to cosmetic and skin-care
companies. Through this distribution arrangement, the Company (i) has recently
begun commercial sales of its titania to several small cosmetics companies,
including Geurlain, the Jafra division of Gillette, Inc., Medicia Pharmaceutical
Corporation and Sunny World Co., Ltd (of Thailand), for use in sunscreens, (ii)
is shipping its iron oxides to a Fortune 500 cosmetics company for use as
cosmetic colorants, (iii) is shipping titania dispersions to that same customer
for use in a product with SPF protection, which was introduced to the market in
the fourth quarter of 1997, and (iv) has entered into a commercial supply
contract with Schering-Plough for its nanocrystalline zinc oxide.

Topical Health-Care Applications

The Company has recently entered into a four-year requirements contract
with Schering-Plough pursuant to which the Company will supply its
nanocrystalline zinc oxide to Schering-Plough for certain topical health-care
products. For example, the Company's nanocrystalline materials are being
supplied for use in new anti-fungal sprays and powders which were introduced to
the market in the fourth quarter of 1997. Several skin-care companies are
currently evaluating Nanophase's nanocrystalline zinc oxide for use in other
topical health-care products. The Company's zinc oxide contains uniformly small
particles which contain a large number of surface area atoms. Initial testing by
the Company's customers indicates that this attribute provides enhanced
anti-fungal activity compared to conventional materials because a lower amount
of the Company's zinc oxide is needed to achieve the desired level of activity.
In addition, the Company's zinc oxide, because of its weakly agglomerated
particles, is better suited than conventional materials for aerosol applicators.

Sunscreens

The market for titania-based sunscreens has rapidly expanded due to (i)
increasing consumer awareness of the harmful effects of ultraviolet ("UV") rays
and (ii) a desire to replace conventional chemical sun-block ingredients, which
can cause irritation, with "chemical-free" ingredients, such as titania. Because
the Company's nanocrystalline titania is comprised of particles that are large
enough to block UV rays, but are consistently smaller than the wave length of
visible light, it enables "chemical-free" sunscreen products to provide an
unprecedented combination of high SPF protection and transparency. In this
regard, sunscreens using Nanophase's titania provide SPF protection of 17+ with
transparency, at only 3% weight loading, whereas, based upon independent
performance results, competitive products made with conventional titania are
able to achieve SPF protection of no better than 12, require a weight loading of
5% or more and often exhibit a whitening effect on the skin. The weight loading
percentage is a measure of the amount of material in a product, by weight, in
relation to the weight of all of the materials in the product. The relationship
between SPF and weight-loading is only roughly linear; however, at these
performance points, sunscreens using the Company's titania provide 5.6 SPF
points for each percent of weight loading versus 2.4 SPF points for the
best-performing current competitive products. Nanophase's total-encapsulation
coating, based on its DPE

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<PAGE> 33

process, also makes Nanophase's titania compatible with certain skin-product
ingredients, like self-tanning ingredients, with which competitive titania is
not compatible. This compatibility enables cosmetics formulators to develop
self-tanning products which offer chemical-free protection from excessive
exposure to UV rays.

Cosmetic Colorants

Through its PVS and DPE processes, the Company has engineered
nanocrystalline brown, red and black iron oxides for use as coloring agents in
cosmetics. Because of their visible transparency, these iron oxides can
intensely color the skin without the caking or streaking effects caused by
conventional opaque coloring agents. This is due to the nanometer-sized
particles of Nanophase's iron oxides which absorb light without significant
visible scattering, thereby providing color without opacity. In addition, the
nearly spherical particles of Nanophase's iron oxides enable them to be
discretely encapsulated and readily dispersed to create smooth, free-flowing
cosmetic foundations which cosmetics formulators can blend to more closely match
varying skin tones.

INDUSTRIAL CATALYSTS

Catalysts are materials that help convert, or accelerate the conversion of,
one chemical into another. The Company's PVS process allows for the fabrication
of two distinct types of solid catalysts: (i) a single pure material, such as
iron oxide, which is a widely used chemical-process catalyst for the synthesis
of hydrogen, ammonia and other bulk chemicals, and (ii) composite materials in
which a nanocrystalline metal, such as palladium, is deposited on a larger
substrate. This latter catalyst has a broad range of applications, including
polymer synthesis, hydrogen peroxide production and the conversion of petroleum
feedstock to higher value chemicals.

The activity of a catalyst (i.e., the amount of desired product that can be
produced per unit weight of catalytic material) is an important measure of its
efficacy, and is related to a number of physical properties of the catalyst,
including surface area, particle size and the reactivity of atoms on the surface
of the catalytic material. Nanocrystalline materials offer better performance as
catalysts because they have a higher proportion of catalytically active surface
atoms than conventional materials. In addition to enhanced reactivity, the
Company's materials can potentially reduce costs because less catalyst is needed
to achieve a desired level of activity.

Nanophase is developing a process to directly deposit nanocrystalline
metals on a substrate for use by DuPont as a catalyst in large-scale chemical
production. Early measurements have shown a two to fourfold increase in
catalytic activity over the current, chemically produced DuPont catalyst. The
Company is working with DuPont to meet specific performance requirements for
this catalyst. The Company has also begun an early-stage development program
with a Fortune 50 chemical company to produce catalysts comprised of
nanocrystalline metal oxides on larger substrates. Based on the Company's
discussions, both internally and with potential customers, additional potential
applications for PVS-produced heterogeneous catalysts include wash coats for
automotive catalysts and surface-enhanced catalysts for the chemical-process
industry.

TECHNOLOGICALLY-SIMILAR APPLICATIONS

Although the Company focuses its efforts on product applications in the
above-mentioned markets, the Company believes there is a broad range of
technologically-similar applications, the performances of which could be
substantially improved by utilizing the Company's materials and technologies
without extensive additional engineering. Based on the Company's discussions,
both internally and with potential customers, these include applications for
fibers, textiles, plastics, paper, optical polymers, pigments and other
specialty products. These applications are primarily based on the coating or
dispersion of nanocrystalline materials produced by the PVS process. The Company
only pursues those specialty applications which fit into its business strategy
and which receive substantial support from a significant prospective customer.

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THE COMPANY'S TECHNOLOGIES

Nanophase has developed and employs several related technologies for the
engineering and production of nanocrystalline materials and product
applications, including technologies for the synthesis, surface-treatment and
dispersion of nanocrystalline materials and the fabrication of structural
ceramic components. The Company also is engaged in ongoing research and
technology-licensing activities as part of its strategy to maintain a technical
and commercial leadership position in the field of nanocrystalline materials.

The PVS Process

The Company uses its patented PVS process to produce nanocrystalline
powders. The PVS process is based on the formation of a physical vapor from a
selected metallic or ceramic material which is fed through a plasma reactor and
heated to a temperature above its melting point. As the temperature rises, the
atoms of this material evaporate from its surface into a stream of flowing
vapor. These evaporated atoms are then mixed with selected gases which
chemically react with the atoms. Additional gases then cool the atoms
sufficiently to condense the vapor into solid, nearly spherical clusters of
molecules. The flowing gas transports the resulting clusters to a collection
vessel. The rapid transport and cooling of the nanometric particles produce a
weakly agglomerated powder.

- -------------------------------------------------------------------------------
THE PVS PROCESS
- -------------------------------------------------------------------------------

[CHART]

The Company holds two patents relating to its PVS process which expire in
2013; one covers the process itself, while the other covers the apparatus used
in the process. The Company's plasma reactor embodies proprietary features which
enable the production of high-quality materials at high-volume and competitive
cost. Nanophase utilizes its PVS process to exploit the relative advantages of
physical versus chemical synthesis of nanocrystalline materials. These
advantages include the production of nanocrystalline materials with particles
that are nearly spherical, virtually free of chemical residue, uniformly small,
not strongly agglomerated, and easily engineered.

The Company believes that the PVS process is a superior commercial process
in the degree of control that can be exercised over particle size and particle
size distribution. By means of controlled and subtle modifications to the PVS
process (e.g., the evaporation rate, the type or pressure of the gas, or how
quickly the

33
<PAGE> 35

flow of gas carries the clusters to the collection vessel), the Company can
control the size of a material's particles, thereby altering the traits of a
substance. The Company is thus able to engineer and produce a wide range of
materials and products without substantial process and product re-engineering.
In 1995, the Company's PVS process received the R&D 100 Award given each year by
R&D Magazine to recognize the 100 most technologically significant new products
and processes in the world.

Surface Treatments (The DPE Process)

Many of the applications that the Company is pursuing require further
engineering of the particles produced in the PVS process in order to meet
specific application requirements. To satisfy these requirements, the Company
has developed a variety of surface-treatment technologies to stabilize, alter or
enhance the performance of nanocrystalline particles, together with technologies
to enable the particles to be dispersed in fluids or polymers. At the core of
these surface-treatment and dispersion technologies is Nanophase's proprietary
DPE process, which enables Nanophase to completely surround each nanocrystalline
particle with a durable coating. The Company has applied for a patent for its
DPE process.

The DPE process can coat the surface of each nanometer-sized particle
produced by the PVS process with a proprietary polymer that is not removed by
subsequent processing. Traditional coating technologies employ strand-like
polymers that cannot completely cover the surfaces of nanometric particles. The
Company's DPE process uses polymers that are shaped like hands. When the
nanometer-sized particles are coated, the fingers of the hand collapse and
completely encapsulate each particle with a thin polymeric shell. This shell
also can be engineered to contain covalently bound spacer groups of controllable
size that function to prevent particles from sticking to each other. The
coatings enable the particles to be uniformly dispersed in a wide range of
media, including water, cosmetic emollients, plastics and polymers, thus
enabling these materials to be used in applications ranging from highly
transparent sunscreens to dense opaque coatings.

Net-Shaping

Nanophase has developed a proprietary process whereby it net-shapes its
nanocrystalline ceramic materials produced by the PVS process to rapidly
fabricate precise, high-tolerance industrial ceramic parts without costly
machining. This net-shaping technology was developed in collaboration with the
Company's subcontractors, Lockheed Missiles & Space Co., Inc. ("LMSC") and
Caterpillar, Inc., under an Advanced Technology Program ("ATP") contract funded
by the U.S. Department of Commerce.

The Nanophase technologies relevant to net-shaping involve (i) the
production of nanocrystalline ceramic materials in commercial quantities, (ii)
the consolidation of Nanophase's ceramic materials into dense nanocrystalline
preforms without exaggerated particle growth, and (iii) net-shape forming of
fully-dense, precisely-shaped ceramic parts.

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<PAGE> 36

- -------------------------------------------------------------------------------
NET SHAPING PROCESS
- -------------------------------------------------------------------------------
[CHART]

The conventional fabrication of structural ceramics involves machining that
uses diamond tools. This process is costly, time consuming and often produces
highly stressed ceramic parts and components with structural flaws. Nanophase's
process enables fabrication of ceramic parts and components using significantly
lower temperatures and pressures than used by conventional fabrication methods
(e.g., 1300-1500 degreesC and 2000-4000 psi, as compared to up to 1700 degreesC
and 100,000 psi). This technology enables the Company to fabricate dimensionally
precise ceramic components in a short period of time without costly machining
(e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for
conventional machining). This rapid deformation processing is made possible by
the consistent ultrafine particle size of the Company's nanocrystalline ceramic
materials, the Company's ability to control the consolidation of such particles
into preforms of high and uniform density, and the ability of the ultrafine
particles to easily slide over one another in the forming process. The Company's
net-shaping technology produces ceramic products with a variety of detailed
shapes, high tolerances and smooth surface finishes that can be tailored to a
customer's needs.

Following the successful completion of the ATP program, the Company entered
into a research, development and prototyping agreement with LMSC whereby the
Company funds LMSC to perform design, prototyping and research and development
tasks related to net-shaping using technology developed during the ATP project.
LMSC currently designs, engineers and fabricates prototypes to the Company's
specifications for the Company's commercial customers. Technology developed
during the ATP project is jointly owned by the Company and LMSC. New technology
developed under the current arrangement between LMSC and the Company is
wholly-owned by the Company and, under the terms of the arrangement, LMSC can
use the newly-developed technology only for its internal research.

Other Technologies

The Company constantly seeks to develop new technologies relating to
nanocrystalline-based materials through ongoing research and development
activities and collaborations with industrial, university and government
research programs. For example, the Company is developing a new generation of
metallic and ceramic precursors to be processed into nanocrystalline materials.
Such activities are intended to enable the Company to develop new product
applications and offer more materials with enhanced capabilities.

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<PAGE> 37

MANUFACTURING AND FACILITIES

Nanophase operates a 20,000 square-foot production and research facility in
Burr Ridge, Illinois, a suburb of Chicago, which also serves as the Company's
administrative headquarters. The Company also operates a smaller facility in
Chicago, Illinois, for coating nanocrystalline materials using its DPE process.
The Company believes its Burr Ridge facility is the first in the world that is
dedicated to the commercial-scale development and production of physically
synthesized nanocrystalline materials. The Company's operations in Burr Ridge
are registered under ISO 9001 standards, and the Company believes its
manufacturing operations are in compliance with the cGMP requirements of the
FDA.

Through the first three quarters of 1997, 15 PVS plasma reactors were
operational and producing various nanocrystalline materials at the Burr Ridge
facility. The throughput of each reactor depends on many factors, including the
mix of products produced, the commencement, expiration or termination of
development programs, the status of tests and evaluations of samples and
prototypes and production yields. In the third quarter of 1997, the Burr Ridge
facility operated 24 hours a day, seven days a week.

Each PVS plasma reactor is comprised of modular equipment which is designed
and assembled to the Company's proprietary specifications. These modular
reactors provide flexibility in the expansion of the Company's manufacturing
capability. In the third quarter of 1997, the Company began the installation of
eight additional PVS plasma reactors in the Burr Ridge facility. The Company
expects that such PVS plasma reactors will be operational by the end of 1997. In
addition, the Company expects to increase the throughput per reactor as it
increases the efficiency and yields of its PVS process and decreases the amount
of downtime for each reactor. The Company believes that additional manufacturing
capacity will be required in 1998 and intends to use a portion of the net
proceeds from this offering for the expansion of its manufacturing facilities.
See "Use of Proceeds." Also operational within the Burr Ridge facility is a
quality control laboratory designed for the dual purpose of validating
operations to cGMP and ISO standards, and production process control. This
laboratory is equipped to handle all routine analytical and in-process
techniques that are currently required by the Company. In addition, capability
for specialized analytical and physical measurements currently is available at
Argonne upon terms which the Company believes are reasonable and adequate. The
Company leases its Burr Ridge facility pursuant to an agreement which expires in
September 1999. The Company has options to extend the lease for up to five
additional years.

Based on the Company's current product mix, the Company's coating facility
has the capacity to coat those nanocrystalline materials which it desires to
coat. The Company believes that its coating capacity is adequate to support the
Company's anticipated 1998 production plans. The Company subleases its Chicago
facility pursuant to a one-year agreement which automatically renews unless
terminated by either party upon proper notice.

MARKETING

The Company believes that one of its principal strengths is its marketing
department, the members of which have experience in each of the Company's
targeted markets. These individuals are often teamed with the Company's
scientists and researchers to demonstrate the advantages of the Company's
materials and product applications to potential customers. The Company's
scientists, engineers and marketing personnel attend and speak at advanced
materials symposia, publish articles in scientific journals and participate in
selected industry trade shows. In addition, the Company uses a web page on the
internet, advertisements in selected industry and trade journals, and
specification sheets and corporate brochures.

The Company also markets its materials through distributors in certain
application areas where the requirements for ongoing development and technical
support by Nanophase are not substantial, or where the distributor has existing
customer relationships, marketing or post-processing infrastructure, or
companion products or services that may enable Nanophase to enter the market
more quickly. For example, pursuant to a global distribution agreement, WCD
exclusively distributes Nanophase's nanocrystalline titania, iron oxides and
zinc oxide to the cosmetics and skin-care market. See "--Customers and
Applications--Cosmetics and Skin-Care."

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<PAGE> 38

As part of its strategy to gain access to foreign markets, Nanophase has
entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the
distribution of Nanophase's materials in broad-based industrial markets
throughout Asia. The agreement is intended to enable Nanophase to quickly
establish foothold positions in Asian markets by utilizing the technology and
market-support capabilities of Itochu. The agreement does not target specific
materials or applications; however, Itochu is pursuing high-volume industrial
applications in electronics, industrial ceramics and catalysts.

Because virtually all of the product applications for the Company's
materials are new and innovative, in order for the Company to penetrate its
targeted markets, it must participate in a multi-step process that includes
initial discussions of the product application which highlight the advantages of
the Company's nanocrystalline materials, proof of concept, proof of feasibility
within the specific application, and evaluations of cost and manufacturability.
Completion of this evaluation process usually takes at least 18 months, and may
take several years.

RESEARCH AND DEVELOPMENT

The near-term objective of the Company's research and process-development
activities is to develop and consistently produce sufficient commercial
quantities of application-specific nanocrystalline materials to meet the
Company's near-term requirements. Although the Company has de-emphasized the
pursuit of revenue from government research contracts, a key component of the
Company's long-term research and development strategy is to identify and develop
relationships with leading industrial, university and government research
programs across the United States and internationally to leverage the Company's
technological and scientific capabilities. The Company believes that these
research relationships may provide accelerated introduction of new technologies
into its product applications, early indications of new technology developments
which could enhance or compete with the Company's nanocrystalline materials, and
high-value improvements in its current key technologies. The Company will also
continue its efforts to attract and retain top scientists and engineers, which
management believes will enable the Company to maintain a long-term leadership
position in the nanocrystalline materials field.

The Company's total research and development expenses during the nine
months ended September 30, 1997 and fiscal years 1996, 1995 and 1994 were
$571,210 and $677,284, $485,059 and $456,162, respectively. The future success
of the Company will depend in large part upon its ability to keep pace with
evolving advanced materials technologies and industry standards, and there can
be no assurance it will be able to do so. See "Risk Factors--Rapid Technological
Change" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The objective of Nanophase's intellectual property activities is to
implement ongoing strategies that maximize and protect the proprietary rights of
the Company. These strategies encompass (i) obtaining patents and trademarks
based on Nanophase inventions and products, and (ii) licensing third-party
patents to expand the Company's technology base and prevent Nanophase from being
blocked should future developments require use of technology covered by those
patents. To date, the Company has not been required to license technologies or
design around other parties' patents in order to avoid claims of patent
infringement.

Nanophase currently owns or licenses an aggregate of 16 United States
patents and patent applications: two issued patents owned directly by Nanophase;
three pending patent applications owned directly by Nanophase; and eleven
patents licensed from third parties.

Two United States patents have been issued to Nanophase: one covering its
PVS process for the synthesis of nanocrystalline materials, and the other
covering the related apparatus. The patents expire in July 2013. Additional
United States patent applications filed by the Company include applications
relating to nanocrystalline materials, plasma sensors and the coating of metal
oxides. Foreign patent applications owned directly by Nanophase are pending in
Australia, Europe and Japan for the PVS process and apparatus. An international
patent application owned by the Company for the coating of ceramic powders is
also pending

37
<PAGE> 39

under the Patent Cooperation Treaty, with Australia, Canada, Europe and Japan
designated for the national phase of the application.

The Company holds the following licenses of United States patents: an
exclusive worldwide license of two patents owned by ARCH Development Corporation
which embody a laboratory-scale method and apparatus for making nanocrystalline
materials; a non-exclusive license from Research Development Corporation of
Japan of four patents which embody early laboratory-scale work in the physical
synthesis of nanocrystalline materials; a non-exclusive license of two patents
owned by Hitachi, Ltd. which are related to the synthesis of nanocrystalline
materials; and a remainder-exclusive license of three patents held by Cornell
University relating to a laboratory-scale process for net-shaping of a limited
range of materials. Other than the license from Research Development Corporation
of Japan, which remains in force until May 2006 and is extendable upon further
agreement, each of the licenses lasts for the life of their respective patents.
Under each of the licenses, the Company is obligated to pay the licensor
royalties equal to a percentage of net sales of products which embody the
licensed technology.

The Company requires its employees, consultants, outside scientific
collaborators and other advisors to execute confidentiality and proprietary
rights agreements upon the commencement of employment or consulting
relationships with the Company. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company will be kept
confidential and will not be disclosed to third parties except in specific
circumstances. In the case of research employees, the agreements also provide
that all inventions made by the individual shall be the exclusive property of
the Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or
patent rights or will provide the Company with adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, because none of
the Company's employees have entered into noncompetition agreements with the
Company, they may become competitors of the Company upon termination of
employment. See "Risk Factors--Dependence on Patents and Protection of
Proprietary Information."

COMPETITION

Within each of its targeted markets and product applications, Nanophase
faces current and potential competition from numerous chemical companies, as
well as the in-house capabilities of several of its current and potential
customers. For example, with regard to semiconductor wafer polishing, Cabot,
Rodel Incorporated, Fujimi Corporation (of Japan) and Solution Technology
Incorporated, all market polishing slurries for CMP. In addition, Cabot,
Baikowski International Corporation and Norton Company (a unit of Compagnie De
Saint-Gobain) all manufacture their own ultrafine alumina. In the cosmetics and
skin-care market, various companies manufacture their own sub-micron titania
(Tioxide Specialties Limited, Tayca Corporation (of Japan), Ishihara Sangyo
Kaisha, Ltd., Kemira Oy, Degussa AG and DuPont), iron oxide (Sun Chemical
Corporation, Harcros Pigments Incorporated) and zinc oxide (Zinc Corporation of
America) by chemical or other means. In structural ceramics, the Company
competes against manufacturers of ceramic composites who machine such composites
for specific product applications. In the catalysts market, the Company faces
competition from companies that chemically deposit metal oxides onto substrates.
Although Nanophase believes that its materials and technologies are superior to
the competitive materials and technologies that are utilized by these companies,
such companies represent significant competitive risks to Nanophase because they
have substantially greater financial and technical resources, larger research
and development staffs, and greater manufacturing and marketing capabilities
than the Company. See "Risk Factors--Competition."

The Company also faces potential competition from Vacuum Metallurgical Co.,
Ltd. of Japan ("Vacuum Metallurgical"), which manufactures nanocrystalline
materials and equipment. Currently, the Company does not compete with Vacuum
Metallurgical, but there can be no assurance that Vacuum Metallurgical will not
develop products or manufacturing capabilities to compete with the Company in
the future. Potential competitive risks are also represented by numerous small
development companies engaged in the development of nanocrystalline materials,
such as Plasma Quench Technologies, Inc. and Nanopowder Enterprises, Inc. Most
of these companies are associated with university or national laboratories and
use chemical and physical methods to produce nanocrystalline materials.
Nanophase believes that most of such companies are engaged

38
<PAGE> 40

primarily in funded research, and is not aware of any such company with
commercial production capability. However, there can be no assurance that such
companies will not represent significant competitive risks in the future. See
"Risk Factors--Competition."

GOVERNMENTAL REGULATIONS

The Company's Chicago facility, which houses its coating operations, is a
"small quantity generator" of hazardous materials, including ethanol, under RCRA
and, as a result, is subject to stringent federal, state and local regulations
governing the handling, storage and disposal of such materials. To date, the
Company has not been required to make substantial expenditures for preventive or
remedial action with respect to the hazardous materials it uses. The manufacture
and use of certain of the products which contain the Company's nanocrystalline
materials are also subject to governmental regulation. As a result, the Company
is required to adhere to the FDA's cGMP requirements and similar regulations in
other countries which include testing, control and documentation requirements
enforced by periodic inspections.

In addition, both of the Company's facilities and all of its operations are
subject to the plant and laboratory safety requirements of various occupational
safety and health laws. To date, those regulations have not materially
restricted or impeded the Company's operations. See "Risk Factors--Governmental
Regulations."

EMPLOYEES

On September 30, 1997, the Company had a total of 61 full-time employees,
11 of whom hold advanced degrees. Of the full-time employees, 9 are engaged in
research, development and engineering, 32 are engaged in manufacturing, 4 are
engaged in quality control, 7 are engaged in marketing and sales, and 9 are
engaged in general management, finance and administration. The Company also
currently engages two scientists as consultants on a regular basis, one of whom
is Dr. Richard W. Siegel, a co-founder and director of the Company. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.

LEGAL PROCEEDINGS

The Company is not a party to any litigation and is not aware of any
pending or threatened litigation against the Company that could have a material
adverse effect on the Company's business, results of operations or financial
condition.

39
<PAGE> 41

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert W. Cross........................... 60 President, Chief Executive Officer and Director
Dennis J. Nowak........................... 47 Vice President--Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
Richard W. Brotzman, Ph.D................. 44 Vice President--Research
Donald J. Freed, Ph.D..................... 55 Vice President--Marketing
Robert M. Kelly........................... 51 Vice President--Cosmetic Products
Dennis J. Nagle........................... 45 Vice President--Manufacturing
John C. Parker, Ph.D...................... 36 Vice President--Technology
Leonard A. Batterson(1)(2)................ 53 Chairman of the Board of Directors
Steven Lazarus(1)(2)...................... 66 Director
Robert W. Shaw, Jr., Ph.D.(1)(2).......... 56 Director
Richard W. Siegel, Ph.D................... 60 Director
</TABLE>

- ------------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

Robert W. Cross has served as President and Chief Executive Officer of
Nanophase since February 1993. He has extensive experience as an entrepreneurial
chief executive officer in developmental companies and in the commercialization
of complex technologies. He has also served as chief executive officer of Cross
Technologies, Inc. ("CTI") since 1990. CTI is a holding company that previously
developed secure information systems for U.S. Government and North American
Treaty Organization intelligence agencies. For the 20 years prior, Mr. Cross
served primarily as chief executive officer or interim management for
developmental high-technology venture-backed companies. Mr. Cross' previous
positions included Chairman and Chief Executive Officer, Delta Data Systems
Corp.; President and Chief Executive Officer, Columbia Data Products, Inc.; and
Special Counsel, Control Video Corp. (predecessor to America Online). In 1968
and 1969, Mr. Cross was General Counsel to Electronic Data Systems Corp.,
Dallas. From 1964 to 1968, he was a corporate finance attorney with Winthrop,
Stimson, Putnam & Roberts in New York. He holds BSBA and J.D. degrees from
Washington University in St. Louis. In 1995, Mr. Cross served as chairman of the
Gorham/Intertech International Conference on Nanostructured Materials and
Coatings.

Dennis J. Nowak has served as Vice President--Finance and Administration,
Chief Financial Officer, Treasurer and Secretary of Nanophase since joining the
Company in September 1996. From October 1991 to September 1996, Mr. Nowak was a
partner in the accounting firm of Ernst & Young LLP, where he specialized in
financial management and audit services for emerging high-technology companies.
Mr. Nowak has more than 20 years experience as a public accountant. He holds a
B.S. degree from Indiana University.

Richard W. Brotzman joined the Company in July 1994 and has served as Vice
President--Research of Nanophase since July 1996. He is the inventor of the
Company's coating technology. Dr. Brotzman has 15 years experience in research
and development of advanced materials leading to new products. His technical
areas of expertise include interfacial adhesion and chemistry, self-assembled
polymeric coatings, nanosized inorganic powders, powder processing, reactive
coupling agents, solgel derived protective coatings, non-destructive evaluation
of composites, neo-debye relaxation in green inorganic gels, asymmetric
membranes and plasma processing. From January 1991 to July 1994, Dr. Brotzman
served as Director of Research at TPL, Inc., an advanced materials company. He
holds a B.S. degree in chemical engineering from Lafayette

40
<PAGE> 42

College, an M.S. degree in engineering and applied science from the University
of California, Davis and a Ph.D. in chemistry from the University of Washington.

Donald J. Freed has served as Vice President--Marketing of Nanophase since
April 1995. He has extensive experience in the commercial development of new
technology products, and has been responsible for the successful startup of
advanced-materials initiatives in three Fortune 50 companies. From 1985 to April
1995, Dr. Freed held senior marketing, strategic planning and
product-development positions with AMP, Inc., and certain of its subsidiaries,
primarily in the development and marketing of advanced materials for
microelectronics and photonics. From 1980 to 1985, he held similar positions
with GTE Corp. and Imperial Chemical Industries, PLC. Previously, Dr. Freed held
various scientific and managerial positions at AT&T Bell Laboratories. He holds
a B.A. degree in chemistry from Queens College and an A.M. degree and Ph.D. in
chemistry from Harvard University. Dr. Freed is a member of The Illinois
Coalition and is past chairman of the International Standards Council for
Electronic Interconnection and Packaging Technologies.

Robert M. Kelly has served as Vice President--Cosmetic Products of
Nanophase since joining the Company in March 1996. He has more than 20 years
experience in the marketing of cosmetic, food and pharmaceutical ingredients.
From July 1994 to January 1996, Mr. Kelly was Vice President of Sales and
Marketing at Crompton & Knowles Corporation, a cosmetic, food and pharmaceutical
ingredients company. From January 1992 to July 1994, he was the director of
marketing at Milwaukee Seasonings, Inc., a subsidiary of CPC International, Inc.
Prior to 1992, he held senior marketing management positions with Warner
Jenkinson and Johnson & Johnson. He holds a B.A. degree in business from Parsons
College and an M.B.A from the University of Chicago.

Dennis J. Nagle has served as Vice President--Manufacturing of Nanophase
since joining the Company in July 1996. From March 1991 to March 1996, Mr. Nagle
was Manufacturing Manager of the Electronic Chemicals Division of Ashland
Chemical. From April 1977 to March 1991, he held positions of progressively
increasing responsibility in manufacturing management with the Chemical Division
of Olin Corporation. Mr. Nagle holds combined bachelors degrees in chemical
engineering and engineering administration from Michigan Technological
University.

John C. Parker has served as Vice President--Technology of Nanophase since
1993 and has been a principal scientist with the Company since June 1990. Dr.
Parker was the principal developer of the Company's PVS production system. He
has a broad range of experience in the synthesis, processing and
characterization of semiconductor and ceramic materials. Prior to joining
Nanophase, Dr. Parker was a research associate at Argonne where he participated
in the development and characterization of chemical vapor deposition-grown thin
films and nanocrystalline ceramics. Dr. Parker holds a B.S. degree in physics
from Northeastern Illinois University and an M.S. degree and Ph.D. in physics
from Purdue University. He has published 37 refereed papers and given numerous
scientific and technical presentations at national and international conferences
and private institutions. Dr. Parker co-chaired the symposium on Nanophase and
Nanocomposite Materials at the 1992 and 1996 Materials Research Society fall
meetings.

Leonard A. Batterson has served as a director and as Chairman of the Board
of Nanophase since 1991. He is Chairman and Chief Executive Officer of Batterson
Venture Partners L.L.C., a venture capital investment firm which he founded in
1995. In 1988, he co-founded and continues as Managing General Partner of
Batterson Johnson and Wang L.P., a venture capital fund. The Batterson Johnson &
Wang L.P. fund, a stockholder of the Company, invest in the following
industries: publishing, communications, telecommunications, medical,
biotechnology, materials, retailing, consumer products, manufacturing, computers
and software. As Managing General Partner, Mr. Batterson manages its daily
operations, investor relationships, reporting and investment strategy. Prior to
1988, he was Director of the Venture Capital Division of the Allstate Insurance
Company. Mr. Batterson is Chairman of the Board of LinksCorp, Inc., a golf
course management company, and previously served as Chairman and Chief Executive
Officer of the Dytel Corporation and Receptor Laboratories, and as Chief
Executive Officer of Lamb Enterprises. He holds a B.A. degree from Washington
University, a J.D. degree from Washington University Law School and an M.B.A.
degree from the Harvard Graduate School of Business Administration.

41
<PAGE> 43

Steven Lazarus has served as a director of Nanophase since 1991. Mr.
Lazarus is Managing Director of ARCH Venture Partners L.P. From 1986 to 1994, he
served concurrently as President and Chief Executive Officer of ARCH Development
Corporation and Associate Dean of the Graduate School of Business of the
University of Chicago. Prior to joining ARCH Development Corporation, Mr.
Lazarus held a variety of positions at Baxter Travenol Laboratories, Inc., the
predecessor of Baxter Healthcare Corporation, including Group Vice President of
the Health Care Services Group and Senior Vice President for Technology. From
1972 to 1974, Mr. Lazarus served in Washington, D.C. as Deputy Assistant
Secretary of Commerce for East-West Trade and was founder and first Director of
the Bureau of East-West Trade. He is a 21-year veteran of the U.S. Navy,
retiring in 1973 with the rank of captain. He holds a bachelors degree with
honors from Dartmouth College and an M.B.A. degree with high distinction from
the Harvard Graduate School of Business Administration, where he was also a
Baker Scholar. Mr. Lazarus is a director of Amgen Corporation, Primark
Corporation, Illinois Superconductor Corporation and New Era of Networks, Inc.,
all of which are public companies.

Robert W. Shaw, Jr. has served as a director of Nanophase since 1991. He is
the founder of Arete Ventures, Inc., President of Arete Corporation and Managing
Partner for the Utech Funds. Dr. Shaw is experienced in both venture capital and
consulting for the electric utility industry. Prior to forming Arete Ventures,
Inc. in 1983, Dr. Shaw was Senior Vice President of Booz, Allen & Hamilton's
Energy Division and a member of the firm's board of directors. Earlier in his
career, he conducted materials and electronics research at Bell Laboratories and
at the Cavendish Laboratory in the U.K. He serves as a director and Chairman of
Proton Energy Systems, Inc. and Evergreen Solar, Inc. He holds a Ph.D. in
applied physics from Stanford University, an M.P.A. from American University and
M.S. and B.E.P. degrees from Cornell University.

Richard W. Siegel is a co-founder of Nanophase and has served as a director
of Nanophase since 1989. Dr. Siegel is an internationally renowned scientist in
the field of nanocrystalline materials. During his tenure on the research staff
at Argonne from July 1974 to May 1995, he was the principal scientist engaged in
research with the laboratory-scale synthesis process that was the progenitor of
Nanophase's PVS production system. He currently is the Robert W. Hunt Professor
and Head of the Materials Science and Engineering Department of Rensselaer
Polytechnic Institute, a position he has held since June 1995. During 1995, he
was also a visiting professor at the Max Planck Institute for Microstructure
Physics in Germany on an Alexander von Humboldt Research Prize. He has served on
the Council of the Materials Research Society and as Chairman of the
International Committee on Nanostructured Materials. He also served on the
Committee on Materials with Sub-Micron Sized Microstructures of the National
Materials Advisory Board and was the co-chairman of the Study Panel on Clusters
and Cluster-Assembled Materials for the U.S. Department of Energy. Dr. Siegel
holds an A.B. degree in physics from Williams College and an M.S. degree and
Ph.D. from the University of Illinois at Urbana/Champaign.

ADVISORY BOARD

The Company recently formed an advisory board (the "Advisory Board") to
assist the Company in analyzing, developing and implementing its long-term
business growth strategies. The Advisory Board will advise and consult with
management and the Board of Directors of the Company as needed. Though the
members of the Advisory Board have outside commitments that may limit their
availability to the Company, each member has agreed to devote at least a certain
number of hours to the Company over the term of their service. The Company has
entered into a one-year consulting agreement with each of the members of the
Advisory Board, pursuant to which each member has been granted stock options to
purchase 10,000 shares of Common Stock as compensation for his services on the
Advisory Board. Members of the Advisory Board will also be reimbursed for
reasonable out-of-pocket expenses incurred in connection with their services to
the Company.

The members of the Advisory Board are Casey Cowell, James V. Kimsey and
Jonathan N. Zakin.

Casey Cowell is Vice Chairman of 3Com Corporation ("3Com") and is the
founder of U.S. Robotics Corporation ("U.S. Robotics"). Prior to the combination
of U.S. Robotics with 3Com in June 1997,

42
<PAGE> 44

Mr. Cowell was Chairman and Chief Executive Officer of U.S. Robotics. Mr. Cowell
also serves as a director of Eagle River Interactive, Inc., May & Speh, Inc.,
and Northwestern Memorial Corp., the parent company of Northwestern Memorial
Hospital, and is a trustee of the Illinois Institute of Technology. Mr. Cowell
holds a bachelors degree in economics from the University of Chicago.

James V. Kimsey is the founder and Chairman Emeritus of America Online,
Inc. ("AOL"). He was formerly Chairman and Chief Executive Officer of AOL, and
continues to serve AOL as a member of its board of directors. Mr. Kimsey also
serves as a director of Capital One Financial Corporation, Capital One Bank,
EduCap, Inc. and BTG Incorporated, and is an advisory director of Batterson
Venture Partners and Carousel Capital. Mr. Kimsey is a graduate of the United
States Military Academy at West Point.

Jonathan N. Zakin was Executive Vice President, Business Development and
Corporate Strategy, of U.S. Robotics prior to its combination with 3Com in June
1997. Currently, Mr. Zakin is a private investor. He holds a bachelors degree in
management from New York University and an M.B.A. degree from the Harvard
Graduate School of Business Administration.

BOARD OF DIRECTORS

The Company's Board of Directors is divided into three classes with
staggered three-year terms. The terms of Mr. Cross and Dr. Shaw expire at the
annual meeting of the Company's stockholders in 1998, the terms of Mr. Lazarus
and Dr. Siegel expire at the annual meeting of the Company's stockholders in
1999, and Mr. Batterson's term expires at the annual meeting of the Company's
stockholders in 2000. At each annual meeting of the Company's stockholders, the
successors to the class of directors whose term expires at such annual meeting
are elected for a three-year term.

ARRANGEMENTS FOR NOMINATION AS DIRECTOR

In connection with the sale of its Preferred Stock, the Company and certain
of its stockholders entered into the Amended and Restated Shareholders'
Agreement, dated as of March 16, 1994, as amended (the "Shareholders'
Agreement"), pursuant to which they agreed that the Company's Board of Directors
shall consist of (i) up to two individuals designated jointly by the holders of
Common Stock, one of whom shall be the President of the Company, (ii) up to
three individuals designated jointly by holders of the Company's Series C
Convertible Preferred Stock ("Series C Preferred"), (iii) one individual
designated jointly by certain holders of the Company's Series D Convertible
Preferred Stock ("Series D Preferred") and (iv) one individual unrelated to any
holder of Preferred Stock designated jointly by the members of the Company's
Board of Directors who were elected pursuant to (i) and (ii). The Company's
stockholders also agreed that as long as Batterson Johnson & Wang L.P. ("BJ&W")
continues to own shares of Series D Preferred, they shall use their best efforts
to elect Mr. Batterson as Chairman of the Company's Board of Directors. Of the
current directors of the Company, Messrs. Cross and Lazarus were elected as
nominees of the holders of Common Stock and Mr. Batterson and Drs. Shaw and
Siegel were elected as nominees of the holders of the Series C Preferred.
Substantially all of the material provisions of the Shareholders' Agreement,
including the rights and obligations of the aforementioned parties to elect
directors, will terminate upon the consummation of this offering.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has appointed an Audit Committee and a
Compensation Committee. The members of the Audit Committee are Messrs. Lazarus
(Chairman) and Batterson and Dr. Shaw. The Audit Committee makes recommendations
concerning the Company's engagement of independent public accountants, reviews
the Company's annual audit, and reviews with the Company's independent public
accountants the Company's internal controls and financial management policies.
The members of the Compensation Committee are Messrs. Batterson (Chairman) and
Lazarus and Dr. Shaw. The Compensation Committee establishes the Company's
general compensation policy and recommends to the Company's Board of Directors
compensation for the Company's officers and key employees.

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<PAGE> 45

COMPENSATION OF DIRECTORS

Each director of the Company who is not an employee or consultant of the
Company (the "Outside Directors") and is first elected to the Board of Directors
after adoption of the Stock Option Plan will be granted stock options to
purchase 10,000 shares of Common Stock at the fair market value of the Common
Stock as determined by a committee appointed by the Company's Board of Directors
(the "Committee") as of the date of issuance of each stock option. On the date
of the annual meeting of the stockholders of the Company, commencing with the
1998 annual meeting, each Outside Director who is elected, re-elected or
continues to serve as a director because his or her term has not expired, shall
be granted stock options to purchase 2,000 shares of Common Stock; provided that
no such automatic grant shall be made to an Outside Director who is first
elected to the Board of Directors at the first such meeting or was first elected
to the Board of Directors within three months prior to such annual meeting.
One-third of the options granted to Outside Directors under the Stock Option
Plan vest each year on the first three anniversaries of the grant date. All
options granted under the Stock Option Plan to Outside Directors will be
exercisable for a period of ten years. The Company does not pay cash
compensation to its directors or Advisors for serving in such capacity. All
Outside Directors, however, are reimbursed for their reasonable out-of-pocket
expenses incurred in attending board and committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Batterson, who is Chairman of the Compensation Committee, is the
managing general partner of BJ&W. On the following dates, the Company issued to
BJ&W the following number of shares of Series D Preferred at the following
prices per share: 202,496 shares at $1.382 per share in March 1994; 163,904
shares at $1.727 per share in October 1994; 38,911 shares at $1.727 per share in
April 1995; and 173,700 shares at $1.727 per share in November 1995.

Mr. Lazarus, who is a member of the Compensation Committee, is the managing
director of ARCH Venture Fund II, L.P. ("AVF II"). On the following dates, the
Company issued to AVF II the following number of shares of Series D Preferred at
the following prices per share: 294,971 shares at $1.382 per share in March
1994; 251,639 shares at $1.727 per share in October 1994; and 159,225 shares at
$1.727 per share in November 1995.

Dr. Shaw, who is a member of the Compensation Committee, is the managing
general partner of (i) Arete Ventures Management Associates II, L.P., which is
the managing general partner of UVCC Fund II ("UVCC II") and (ii) Arete Ventures
Limited Partnership III, which is the managing general partner of UVCC II
Parallel Fund, L.P. ("UVCC Parallel"). On the following dates, the Company
issued to each of UVCC II and UVCC II Parallel the following number of shares of
Series D Preferred at the following prices per share: 94,088 shares at $1.382
per share in March 1994; 83,955 shares at $1.727 per share in October 1994;
5,790 shares at $1.727 per share in April 1995; and 66,585 shares at $1.727 per
share in November 1995.

All of the above described shares of Series D Preferred will be converted
into shares of Common Stock on a one-for-one basis upon the consummation of this
offering. Pursuant to the Amended and Restated Registration Rights Agreement,
dated as of March 16, 1994, as amended (the "Registration Rights Agreement"),
BJ&W, AVF II, UVCC II and UVCC Parallel, as holders of shares of Common Stock
issuable upon conversion of the shares of Series D Preferred, are entitled to
certain demand registration rights. In addition, whenever the Company proposes
to register any of its securities under the Securities Act, BJ&W, AVF II, UVCC
II and UVCC Parallel may also, subject to certain restrictions, include their
shares of Common Stock issuable upon conversion of the shares of Series D
Preferred in such registration. See "Description of Capital Stock--Registration
Rights."

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<PAGE> 46

EXECUTIVE COMPENSATION

The following table sets forth information with respect to all compensation
paid by the Company for services rendered during the fiscal year ended December
31, 1996, to its Chief Executive Officer and the other executive officers of the
Company whose total annual salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1996 (each, a "Named Executive Officer").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
<S> <C> <C> <C> <C> <C>
Robert W. Cross,.................. $151,800(1) $10,000(1) $-- 199,755 $4,685(2)
President and Chief Executive
Officer
Donald J. Freed, Ph.D.,........... 105,625 -- -- 104,220 --
Vice President -- Marketing
Richard W. Brotzman, Ph.D.,....... 102,615 -- -- 118,695 --
Vice President -- Research
</TABLE>

- -------------------------
(1) The salary and bonus were paid to Cross Technologies, Inc., of which Mr.
Cross is chief executive officer and the sole employee.

(2) Represents the full dollar value of premiums paid by the Company with
respect to life insurance for the benefit of Mr. Cross and his beneficiary.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement dated February 1994
with Robert W. Cross which continues his employment as President and Chief
Executive Officer of the Company, which began in February 1993. Mr. Cross'
employment agreement provides for an annual base salary of not less than
$130,000. The agreement further provides that Mr. Cross is entitled to the
reimbursement of expenses relating to commuting between the Company and his
out-of-state residence and his lodging expenses in the Chicago area incurred as
a result of his employment with the Company. Mr. Cross' employment agreement is
automatically renewed for successive one year periods unless 90-day prior
written notice of termination is given by the Company or Mr. Cross. If Mr.
Cross' employment is terminated other than for "cause" (as such term is defined
in Mr. Cross' employment agreement), Mr. Cross will receive severance benefits
in an amount equal to Mr. Cross' base salary for 26 weeks.

The Company has also entered into an employment agreement with Dennis J.
Nowak, pursuant to which Mr. Nowak became Vice President -- Finance and
Administration, Chief Financial Officer, Treasurer and Secretary of the Company
effective September 1996. Mr. Nowak's employment agreement provides for an
annual base salary of $140,000, with increases to be determined by the Company's
Board of Directors, at its discretion. In addition, Mr. Nowak was granted
options to purchase 57,900 shares of Common Stock at an exercise price of $3.886
per share, with options for one-fifth of such shares becoming exercisable on
each of the first five anniversaries of Mr. Nowak's employment. If employed by
the Company at such time, the agreement further provides that Mr. Nowak will be
entitled to a bonus of $35,000 upon the Company's successful completion of an
initial public offering and a bonus of $35,000 which was paid on the first
anniversary of his employment. No term has been assigned to Mr. Nowak's
employment agreement. If Mr. Nowak's employment is terminated other than for
"cause" (as such term is defined in Mr. Nowak's employment agreement), Mr. Nowak
will receive severance benefits in an amount equal to Mr. Nowak's base salary
for 26 weeks.

45
<PAGE> 47

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information regarding the grant of stock
options by the Company to the Named Executive Officers during 1996.

<TABLE>
<CAPTION>
PERCENTAGE POTENTIAL REALIZABLE
NUMBER OF OF TOTAL VALUE AT ASSUMED
SHARES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION OPTION TERM(2)
GRANTED FISCAL YEAR BASE PRICE DATE(1) 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Robert W. Cross................... 69,480 6.5% $1.727 03/01/06(3) $195,454 $ 311,228
130,275 12.2 3.886 11/07/06(4) 824,626 1,313,079
Donald J. Freed, Ph.D............. 46,320 4.3 1.727 03/01/06(3) 130,303 207,485
57,900 5.4 3.886 11/07/06(4) 366,500 583,590
Richard W. Brotzman, Ph.D. ....... 49,215 4.6 1.727 03/01/06(3) 138,447 220,453
69,480 6.5 3.886 11/07/06(4) 439,800 700,309
</TABLE>

- ------------------------------
(1) The grant dates are ten years prior to the respective expiration dates.

(2) Potential realizable value is calculated assuming that the fair market value
on the date of the grant, which equals the exercise price, appreciates at
the indicated annual rate (set by the Securities and Exchange Commission
(the "Commission")), compounded annually, for the term of the option. Using
the initial public offering price of $8.00 for purposes of this calculation
(pursuant to the rules of the Commission), the potential realizable values
of the options granted in 1996 to Mr. Cross and Drs. Freed and Brotzman is
approximately $2,603,039, $1,358,107 and $1,546,733, respectively, at a 5%
assumed annual appreciation rate, and approximately $4,144,904, $2,162,559
and $2,462,914, respectively, at a 10% assumed annual appreciation rate. The
5% and 10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future increases in the price of its Common Stock.

(3) Subject to certain restrictions, these options vest pro rata over a
five-year period on each of the first five anniversaries of the date of
grant.

(4) Subject to certain restrictions, these options vest eight years from the
date of grant, subject to an earlier five-year period if specified
performance targets for 1997 are met.

FISCAL YEAR-END OPTION VALUES

The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1996. None of the Named
Executive Officers exercised any options during 1996.

<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, 1996 OPTIONS AS OF DECEMBER 31, 1996(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
Robert W. Cross................. 65,330/256,015 $243,406/$349,733
Donald J. Freed, Ph.D. ......... --/104,220 --/ 100,005
Richard W. Brotzman, Ph.D. ..... 5,790/141,855 19,999/ 186,250
</TABLE>

- ------------------------------
(1) The value per option is calculated by subtracting the exercise price of the
option from the fair market value of the option shares at December 31, 1996
of $3.886 per share, as determined by the Company's Board of Directors based
on the most recent price prior to December 31, 1996 at which the Company had
issued or agreed to issue Preferred Stock.

46
<PAGE> 48

STOCK OPTION PLAN

Effective January 13, 1992 and as amended and restated on April 6, 1997,
the Company's Board of Directors adopted the Stock Option Plan, pursuant to
which options to acquire up to 2,758,032 shares of Common Stock (2,671,182 of
which are reserved for issuance to employees and consultants and 86,850 of which
are reserved for issuance to Outside Directors) may be granted to the Company's
employees, consultants or Outside Directors, as the Committee may from time to
time designate. During any calendar year, stock options for no more than 100,000
shares of Common Stock may be granted to any individual. The stock options
expire no more than ten years from the date of grant; provided, however, that in
the case of stock options granted to individuals who at the time of such grant
own more than 10% of the voting power of the Company's stock, the options shall
expire no more than five years from the date of grant. 731,277 of the 1,508,469
currently outstanding options vest eight years following the grant date, subject
to accelerated vesting if specified performance targets are met. Of the
remaining 777,192 outstanding options, 759,822 vest over a five-year period and
17,370 vest over a three-year period. Exercise prices are determined by the
Committee, but may not be less than the fair market value of the Common Stock as
determined by the Committee as of the date of issuance of each stock option;
provided, however, that exercise prices for options granted to employees who own
more than 10% of the Company's Common Stock may not be less than 110% of the
fair market value of the Common Stock as determined by the Committee as of the
date of issuance of each such stock option.

401(K) PLAN

Effective June 30, 1995, the Company adopted the Nanophase Technologies
Corporation 401(k) and Profit Sharing Plan (the "401(k) Plan") covering all of
the Company's employees who meet prescribed service requirements. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to fifteen percent, but not to exceed the statutorily prescribed annual limit
($9,500 in 1997), and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan is intended to qualify under Section 401 of the
Internal Revenue Code so that employee contributions to the 401(k) Plan, and
income earned on such contributions, are not taxable to employees until
withdrawn from the 401(k) Plan. Each participant's contributions are fully
vested. The Company, at the sole discretion of the Company's Board of Directors,
may make additional or "matching" contributions under the 401(k) Plan, which
contributions are not to exceed statutorily prescribed limits. The Company has
not made any such contributions to the 401(k) Plan since its inception.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Pursuant to the provisions of the Delaware General Corporation Law
("DGCL"), the Company adopted provisions in its Certificate of Incorporation
which eliminate the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of their fiduciary duty as a
director to the fullest extent permitted by the DGCL except for liability (i)
for any breach of their duty of loyalty to the Company or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. The provisions of the
Company's Certificate of Incorporation do not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

The Certificate of Incorporation also contains provisions which require the
Company to indemnify its directors, and permit the Company to indemnify its
officers and employees, to the fullest extent permitted by Delaware law,
including those circumstances in which indemnification would otherwise be
discretionary, except that the Company shall not be obligated to indemnify any
such person (i) with respect to proceedings, claims or actions initiated or
brought voluntarily by any such person and not by way of defense, or (ii) for
any amounts paid in settlement of an action indemnified against by the Company
without the prior written consent of the Company. Prior to consummation of this
offering, the Company intends to (a) enter into indemnity agreements with each
of its directors providing for such indemnification and (b) obtain directors'
and officers' liability insurance.

47
<PAGE> 49

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In addition to transactions described under "Management--Compensation
Committee Interlocks and Insider Participation," the following relationships and
transactions have been effected involving the Company and its directors,
executive officers and principal stockholders.

The Company leased its original office space from ARCH Development
Corporation, formerly an affiliate of Mr. Lazarus, a director of the Company,
under a sublease agreement which expired in November 1996. Monthly lease
payments amounted to $3,600. When the Company moved to its Burr Ridge facility
in 1995, it entered into a sublease of this office space and received monthly
rental payments under the sublease of $2,200 per month through November 1996.

The Company entered into a consulting agreement with Dr. Richard W. Siegel,
a co-founder and director of the Company, in May 1990. Pursuant to this
agreement, Dr. Siegel renders consulting services to the Company with respect to
applications for, and commercialization of, nanocrystalline materials. The
original term of the agreement was for 5 years, and the agreement is renewable
for successive one-year terms unless terminated by Dr. Siegel or the Company.
Payment to Dr. Siegel under this agreement currently amounts to $2,500 per
month.

Prior to joining the Company in September 1996, Dennis J. Nowak, the
Company's Vice President--Finance and Administration, Chief Financial Officer,
Treasurer and Secretary, was a partner of Ernst & Young LLP, where he was
responsible for overseeing the audit of the Company's financial statements.
Ernst & Young LLP has been the Company's financial accountants since 1993.

Pursuant to a severance benefit agreement with Dr. John C. Parker, the
Company's Vice President--Technology, the Company has established a trust in the
amount of $80,000. Interest was credited to the trust until the funds held in
trust became equal to $80,000. Payments from the trust to Dr. Parker will be
required in the event the Company terminates his employment, as defined in Dr.
Parker's agreement, before November 15, 1999. Upon consummation of this
offering, the funds in the trust will revert to the Company.

The Company intends that any future transactions between the Company and
its officers, directors and affiliates will be on terms no less favorable to the
Company than can be obtained from unaffiliated third parties, and any
transactions with such persons will be approved by a majority of the Company's
outside directors or will be consistent with policies approved by such outside
directors.

48
<PAGE> 50

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock, as of October 31, 1997, assuming
consummation of the Preferred Stock Conversion, and as adjusted to reflect the
sale of Common Stock offered hereby, by (i) each person who is known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each Named Executive
Officer and (iv) all directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- -----------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
<S> <C> <C> <C> <C>
Batterson Johnson & Wang L.P.................. 1,068,935(2) 12.7% 1,068,935(2) 8.6%
Grace Investments, Ltd.(3).................... 1,042,200 12.7 1,042,200 8.5
ARCH Venture Fund Limited Partnership......... 768,088(4) 9.1 768,088(4) 6.2
ARCH Venture Fund II Limited Partnership(5)... 705,835 8.6 705,835 5.8
Harris & Harris Group, Inc.(6)................ 672,916 8.2 672,916 5.5
UVCC Fund II.................................. 450,842(7) 5.4 450,842(7) 3.7
UVCC II Parallel Fund, L.P.................... 450,842(7) 5.4 450,842(7) 3.7
AMT Associates Ltd. .......................... 450,058(8) 5.4 450,058(8) 3.7
Richard W. Siegel, Ph.D....................... 219,729(9) 2.7 219,729(9) 1.8
Robert W. Cross............................... 103,544(10) 1.2 103,544(10) *
Richard W. Brotzman, Ph.D..................... 21,423(10) * 21,423(10) *
Donald J. Freed, Ph.D......................... 9,264(10) * 9,264(10) *
Leonard A. Batterson.......................... --(11) -- --(11) --
Steven Lazarus................................ --(12) -- --(12) --
Robert W. Shaw, Jr., Ph.D..................... --(13) -- --(13) --
All directors and executive officers as a
group (11 persons).......................... 445,442(14) 5.4 445,442(14) 3.6
</TABLE>

- ------------------------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Commission. Unless otherwise indicated below, the persons in the above
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.

(2) Includes 178,154 shares of Common Stock issuable upon exercise of warrants
presently exercisable. Don Johnson and Sona Wang share voting and
investment power with Mr. Batterson with respect to the shares of Common
Stock beneficially held by BJ&W and, therefore, may be deemed to be
beneficial owners of such shares. Mr. Johnson and Ms. Wang each disclaim
this beneficial ownership. The address of the stockholder is 303 West
Madison Street, Suite 1110, Chicago, Illinois 60606.

(3) Bradford T. Whitmore has sole voting and investment power with respect to
the shares of Common Stock beneficially held by Grace Investments, Ltd.
and, therefore, may be deemed to be the beneficial owner of such shares.
Mr. Whitmore disclaims this beneficial ownership. The address of the
stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201.

(4) Includes 232,491 shares of Common Stock issuable upon exercise of warrants
presently exercisable. The address of the stockholder is 135 South LaSalle
Street, Suite 3702, Chicago, Illinois 60603.

(5) The address of the stockholder is 135 South LaSalle Street, Suite 3702,
Chicago, Illinois 60603.

(6) Charles Harris, Mel Melsheimer and David Johnson share voting and
investment power with respect to the shares of Common Stock beneficially
held by Harris & Harris Group, Inc. and, therefore, may be deemed to be
beneficial owners of such shares. Messrs. Harris, Melsheimer and Johnson
each disclaim this beneficial ownership. The address of the stockholder is
One Rockefeller Plaza, New York, New York 10020.
(footnotes continued on following page)

49
<PAGE> 51

(footnotes continued from previous page)

(7) Includes 66,808 shares of Common Stock issuable upon exercise of warrants
presently exercisable. The address of the stockholder is 6110 Executive
Boulevard, Suite 1040, Rockville, Maryland 20852.

(8) Consists of 142,497 shares of Common Stock and 43,981 shares of Common
Stock issuable upon exercise of warrants presently exercisable, all of
which are beneficially held by Advanced Material Technologies Venture
Partner Limited ("AMT Venture"); 197,284 shares of Common Stock and 38,553
shares of Common Stock issuable upon exercise of warrants presently
exercisable, all of which are beneficially held by AMT Capital, Ltd. ("AMT
Capital"); and 21,200 shares of Common Stock and 6,543 shares of Common
Stock issuable upon exercise of warrants presently exercisable, all of
which are beneficially held by JHAM Limited Partnership ("JHAM"). AMT
Associates Ltd. is general partner of AMT Venture, AMT Capital and JHAM. In
such capacity, it shares voting and investment power with respect to the
shares of Common Stock held by AMT Venture, AMT Capital and JHAM and,
therefore, may be deemed to be the beneficial owner of the shares of Common
Stock directly owned by AMT Venture, AMT Capital and JHAM. Tom Delimitros
and Peter Walmsley share voting and investment power with respect to the
shares of Common Stock beneficially held by AMT Associates Ltd. and,
therefore, may be deemed to be beneficial owners of such shares. Messrs.
Delimitros and Walmsley each disclaim such beneficial ownership. The
address of AMT Associates Ltd. is 8204 Elmbrook, Suite 101, Dallas, Texas
75247.

(9) Includes 28,950 shares of Common Stock issuable upon exercise of warrants
presently exercisable and 38,098 shares of Common Stock issuable upon
exercise of options exercisable currently or within 60 days of October 31,
1997.

(10) Consists of shares of Common Stock issuable upon exercise of options
exercisable currently or within 60 days of October 31, 1997.

(11) Excludes 890,781 shares of Common Stock and 178,154 shares of Common Stock
issuable upon exercise of warrants presently exercisable, all of which are
beneficially held by BJ&W. Mr. Batterson is the managing general partner of
BJ&W and in such capacity he shares voting and investment power with
respect to the shares of Common Stock held by BJ&W and, therefore, may be
deemed to be the beneficial owner of the shares of Common Stock directly
owned by BJ&W. Mr. Batterson disclaims this beneficial ownership.

(12) Excludes 535,597 shares of Common Stock and 232,491 shares of Common Stock
issuable upon exercise of warrants presently exercisable, all of which are
beneficially held by ARCH Venture Fund Limited Partnership ("AVFLP");
705,835 shares of Common Stock held by ARCH Venture Fund II Limited
Partnership ("AVF II"); and 14,034 shares of Common Stock held by ARCH Fund
II Parallel, L.P. ("AFP"). Mr. Lazarus serves as the managing director of
ARCH Venture Partners L.P. and has been granted power of attorney to act in
the name of and for ARCH Development Corporation ("ADC") with respect to
ADC's role as general partner of AVFLP. Mr. Lazarus also serves as managing
director of AVF II and AFP. In such capacities, Mr. Lazarus has sole voting
and investment power with respect to the shares of Common Stock held by
AVFLP, AVF II and AFP and, therefore, may be deemed to be the beneficial
owner of the shares of Common Stock directly owned by AVFLP, AVF II and
AFP. Mr. Lazarus disclaims this beneficial ownership.

(13) Excludes 384,034 shares of Common Stock and 66,808 shares of Common Stock
issuable upon exercise of warrants presently exercisable, all of which are
beneficially held by UVCC Fund II ("UVCC II"), and 384,034 shares of Common
Stock and 66,808 shares of Common Stock issuable upon exercise of warrants
presently exercisable, all of which are beneficially held by UVCC II
Parallel Fund, L.P. ("UVCC Parallel"). Dr. Shaw serves as the managing
general partner of (i) Arete Ventures Management Associates II, L.P., which
is the managing general partner of UVCC II and (ii) Arete Ventures Limited
Partnership III, which is the managing general partner of UVCC Parallel. In
such capacities, he has sole voting power and shares investment power with
respect to shares of Common Stock held by UVCC II and UVCC Parallel and,
therefore, may be deemed to be the beneficial owner of the shares of Common
Stock directly owned by UVCC II and UVCC Parallel. Dr. Shaw disclaims this
beneficial ownership.

(14) Includes 28,950 shares of Common Stock issuable upon exercise of warrants
presently exercisable and 263,811 shares of Common Stock issuable upon
exercise of options exercisable currently or within 60 days of October 31,
1997.

50
<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $.01 par value per share, and 17,000,000 shares of preferred
stock, $.01 par value per share.

The following summary of certain provisions relating to the Common Stock
and preferred stock does not purport to be complete and is subject to, and
qualified in its entirety by, provisions of applicable law, and by the
provisions of the Company's Certificate of Incorporation and Bylaws that are
included as exhibits to the Registration Statement of which this Prospectus is a
part.

COMMON STOCK

The Company currently has 121,011 shares of Common Stock outstanding and
held by three holders of record. 12,277,454 shares of Common Stock will be
outstanding upon consummation of the Preferred Stock Conversion and this
offering. Subject to the rights of holders of preferred stock, the holders of
outstanding shares of Common Stock are entitled to share ratably in dividends
declared out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time lawfully determine. Each
holder of Common Stock is entitled to one vote for each share held. Subject to
the rights of holders of any outstanding preferred stock, upon liquidation,
dissolution or winding up of the Company, any assets legally available for
distribution to stockholders as such are to be distributed ratably among the
holders of the Common Stock at that time outstanding. All shares of Common Stock
currently outstanding are, and all shares of Common Stock offered by the Company
hereby when duly issued and paid for will be, fully paid and nonassessable, not
subject to redemption and assessment and without conversion, preemptive or other
rights to subscribe for or purchase any proportionate part of any new or
additional issues of any class or of securities convertible into stock of any
class.

PREFERRED STOCK

The Company currently has 8,156,443 shares of Preferred Stock outstanding
and held by approximately 180 holders of record. Pursuant to the Preferred Stock
Conversion, all of the issued and outstanding shares of Preferred Stock will
convert, upon the consummation of this offering, into 8,156,443 shares of Common
Stock. Thus, the following information does not pertain to the currently
outstanding Preferred Stock, but rather the preferred stock that may be issued
in the future as provided in the Company's Certificate of Incorporation.
Preferred stock may be issued by the Company in series from time to time with
such designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Certificate of Incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of preferred stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The Board of Directors may authorize
the issuance of preferred stock which ranks senior to the Common Stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of preferred stock are outstanding. The
Board of Directors, without stockholder approval, may issue preferred stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present intention to issue shares of preferred stock.

WARRANTS

The Company currently has warrants to purchase a total of 662,287 shares of
Common Stock outstanding at an exercise price of $1.123 per share. The warrants
expire February 8, 2003 or one year later if at such time the shares of Common
Stock underlying the warrants are required to be or are in the process of being
registered under the Securities Act. The number of shares issuable upon exercise
of the warrants is subject to proportionate adjustment in the event of stock
splits, stock dividends and similar events.

51
<PAGE> 53

CERTAIN CORPORATE PROVISIONS

The Company is subject to the provisions of Section 203 of the DGCL. In
general, this statute prohibits a publicly held Delaware corporation from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless either
(i) prior to the date at which the stockholder became an interested stockholder
the board of directors approved either the business combination or the
transaction in which the person becomes an interested stockholder, (ii) the
stockholder acquires more than 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in
certain employee stock plans) upon consummation of the transaction in which the
stockholder becomes an interested stockholder or (iii) the business combination
is approved by the board of directors and by two-thirds of the outstanding
voting stock of the corporation (excluding shares held by the interested
stockholder) at a meeting of the stockholders (and not by written consent) held
on or subsequent to the date of the business combination. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
at any time within the prior three years did own) 15% or more of the
corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.

The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) a requirement that stockholder
action may be taken only at stockholder meetings; (ii) the authority of the
Board of Directors to issue series of preferred stock with such voting rights
and other powers as the Board of Directors may determine; (iii) notice
requirements in the Bylaws relating to nominations to the Board of Directors and
to the raising of business matters at stockholders meetings; and (iv) the
classification of the Board of Directors into three classes, each serving for
staggered three year terms. See "Management -- Executive Officers and
Directors."

REGISTRATION RIGHTS

Pursuant to the Registration Rights Agreement, the holders of all but
95,535 of the Restricted Shares that will be outstanding upon consummation of
this offering (including the shares of Common Stock issued pursuant to
consummation of the Preferred Stock Conversion) and all of the Restricted Shares
issuable upon the exercise of outstanding warrants (collectively, the
"Registrable Securities") are entitled to certain demand registration rights.
Under the Registration Rights Agreement, subject to certain exceptions, the
holders of at least 60% of the Registrable Securities may require the Company to
use its best efforts to register such Registrable Securities on one occasion for
public resale. If the Company is entitled to register the Registrable Securities
on a Form S-2 or Form S-3, one or more holders of the Registrable Securities may
request the Company to register such Registrable Securities on one of such
forms. In addition, whenever the Company proposes to register any of its
securities under the Securities Act, the holders of Registrable Securities are
entitled, subject to certain restrictions, to include their Registrable
Securities in such registration. Except for a limited circumstance, the Company
is required to bear all registration expenses in connection with the
registration of Registrable Securities (other than underwriting discounts and
commissions). See "Risk Factors -- Shares Eligible for Future Sale."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is LaSalle National
Bank, Chicago, Illinois.

52
<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock. Sales of substantial amounts of Common Stock in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock.

Upon completion of this offering, the Company will have an aggregate of
12,277,454 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants after the date hereof. Of these shares, the 4,000,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company, as that term is defined in Rule 144 promulgated under the Securities
Act. The remaining 8,277,454 shares of Common Stock outstanding upon completion
of this offering will be Restricted Shares.

All directors and executive officers of the Company have agreed with the
Underwriters that, for a period of 180 days from the date of this Prospectus,
they will not offer to sell or otherwise sell, dispose of or grant rights with
respect to any shares of Common Stock, now owned or hereafter acquired directly
by such holders or with respect to which they have the power of disposition,
otherwise than with the prior written consent of DLJ. The stockholders of the
Company, pursuant to the lock-up provisions of the Registration Rights Agreement
or lock-up agreements, and the optionholders of the Company, pursuant to
agreements with the Company which they must sign upon exercise of their options,
have agreed or will agree, as the case may be, not to sell, make any short sale
of, loan, grant any option for the purchase of, or otherwise dispose of their
shares of Common Stock for a period of 180 days from the date of this
Prospectus, without the prior written consent of DLJ. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701 of the Securities Act, shares
subject to lock-up provisions or agreements will not be salable until the
180-day lock-up periods expire unless prior written consent is received from
DLJ. Any early waiver of the lock-up period by DLJ, which, if granted, could
permit sales of a substantial number of shares and could adversely affect the
trading price of the Company's shares, may not be accompanied by an advance
public announcement by the Company. See "Underwriting."

Taking into account the lock-up provisions and agreements, the number of
shares that will be available for sale in the public market under the provisions
of Rules 144 and 144(k) will be as follows: (i) 7,529,365 Restricted Shares will
be eligible for sale 180 days from the date of this Prospectus, subject to, in
some cases, the volume limitations and other restrictions of Rule 144, and (ii)
the remaining 748,089 Restricted Shares will become eligible for sale under Rule
144 in June, August or September 1998, as the case may be.

Beginning 90 days after the effective date of the Registration Statement,
certain shares issued or issuable upon exercise of options granted by the
Company prior to the effective date of the Registration Statement will also be
eligible for sale in the public market pursuant to Rule 701 under the Securities
Act, subject to pre-existing lock-up provisions or agreements. In general, Rule
701 permits resales of shares issued pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144.

In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of one percent of the number of shares of Common Stock then
outstanding or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least two years the shares proposed to be
sold, would be entitled to sell such shares

53
<PAGE> 55

under Rule 144(k) without regard to the requirements described above. The
Company is unable to estimate accurately the number of Restricted Shares that
will be sold under Rule 144 because this will depend in part on the market price
for the Common Stock, the personal circumstances of the seller and other
factors.

Pursuant to Rule 144 and upon expiration of the one-year holding period, an
additional 662,287 shares of Common Stock will be available for sale upon the
exercise of outstanding warrants. Options to purchase 1,508,469 shares are
currently issued and outstanding under the Stock Option Plan (of which 334,367
are currently vested). See "Management--Stock Option Plan." All of these shares
issuable upon exercise of the warrants or the options are or will be subject to
lock-up provisions discussed herein.

54
<PAGE> 56

UNDERWRITING

Subject to the terms and conditions of an Underwriting Agreement dated
November 26, 1997 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), Furman Selz LLC and CIBC Oppenheimer Corp. (the "Representatives"),
have severally agreed to purchase from the Company the respective number of
shares of Common Stock set forth opposite their names below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,968,000
Furman Selz LLC............................................. 656,000
CIBC Oppenheimer Corp. ..................................... 656,000
Bear, Stearns & Co. Inc. ................................... 48,000
Cowen & Company............................................. 48,000
Deutsche Morgan Grenfell Inc. .............................. 48,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 48,000
NatWest Securities Corporation.............................. 48,000
PaineWebber Incorporated.................................... 48,000
Prudential Securities Incorporated.......................... 48,000
Smith Barney Inc. .......................................... 48,000
Advest, Inc. ............................................... 24,000
George K. Baum & Company.................................... 24,000
Dain Bosworth Incorporated.................................. 24,000
First Analysis Securities Corporation....................... 24,000
Gruntal & Co., L.L.C. ...................................... 24,000
Interstate/Johnson Lane Corporation......................... 24,000
McDonald & Company Securities, Inc. ........................ 24,000
Mesirow Financial, Inc. .................................... 24,000
Parker/Hunter Incorporated.................................. 24,000
Pennsylvania Merchant Group Ltd ............................ 24,000
Piper Jaffray Inc. ......................................... 24,000
Ryan, Beck & Co. ........................................... 24,000
Sands Brothers & Co., Ltd. ................................. 24,000
Stephens Inc. .............................................. 24,000
---------
Total.................................................. 4,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery all the shares of Common Stock offered hereby
(other that those shares covered by the over-allotment describe below) if any
are purchased.

The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession of not in excess of $0.32 per
share. The Underwriters may allow, and such selected dealers may reallow to
certain other dealers, a concession not in excess of $0.10 per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover

55
<PAGE> 57

overallotments, if any, made in connection with this offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.

The Company and its executive officers and directors have agreed not to
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any similar agreement that
transfers, in whole or in part, the economic risk of ownership of the Common
Stock, for a period of 180 days from the date of this Prospectus, without the
prior written consent of DLJ. In addition, during such period, the Company has
also agreed not to file any registration statement with respect to the
registration of any shares of Common Stock or any securities convertible into or
exchangeable for Common Stock without DLJ's prior written consent. The
stockholders of the Company, pursuant to the lock-up provisions of the
Registration Rights Agreement or lock-up agreements, and the optionholders of
the Company, pursuant to agreements with the Company which they must sign upon
exercise of their options, have also agreed or will agree, as the case may be,
not to sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of their shares of Common Stock for a period of 180 days
from the date of this Prospectus, without the prior written consent of DLJ.

Prior to this offering, there has been no established trading market for
the Common Stock. The initial public offering price for the shares of Common
Stock was determined by negotiations among the Company and the Representatives.
The factors considered in determining the initial public offering price included
the history of and the prospects for the industry in which the Company competes,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company, the
recent market prices of securities of generally comparable companies and the
general condition of the securities markets at the time of the offering.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "NANX."

Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published, in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the offering of the Common Stock and the distribution of this
Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.

In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.

56
<PAGE> 58

Certain employees of DLJ own an aggregate of 97,272 shares of the Series F
Preferred (post-split), which shares will be converted into shares of Common
Stock upon consummation of this offering. None of the shares of Common Stock
held by the DLJ employees are being offered hereby.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Katten Muchin & Zavis,
Chicago, Illinois, a partnership including professional corporations. Upon
consummation of the Preferred Stock Conversion and this offering, a current
partner of Katten Muchin & Zavis will own less than 1% of the outstanding shares
of Common Stock. Certain legal matters in connection with United States patents
will be passed upon for the Company by McAndrews, Held & Malloy, Ltd. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Latham & Watkins, Chicago, Illinois.

EXPERTS

The financial statements of the Company at December 31, 1995 and 1996 and
September 30, 1997 and for each of the three years in the period ended December
31, 1996 and for the nine month period ended September 30, 1997 appearing in
this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

Certain matters dealing with patents and proprietary rights set forth under
"Risk Factors--Dependence on Patents and Protection of Proprietary Information"
and "Business--Intellectual Property and Proprietary Rights" have been included
in this Prospectus in reliance upon the status of McAndrews, Held & Malloy, Ltd.
as experts in such matters. See "Legal Matters."

ADDITIONAL INFORMATION

The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-1 (of which this Prospectus is a part) under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules. Statements contained in this Prospectus regarding the contents of any
agreement or other document referred to are not necessarily complete, and in
each instance, reference is made to a copy of such agreement or other document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the public
reference facilities maintained by the Commission, including at the Commission's
Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the Commission's Regional Offices at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies may be obtained at prescribed rates
from the Public Reference Section of the Commission at its principal office in
Washington, D.C. Such materials also may be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.com.

57
<PAGE> 59

NANOPHASE TECHNOLOGIES CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997........................................ F-3
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September
30, 1996 (unaudited) and 1997............................. F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September
30, 1996 (unaudited) and 1997............................. F-6
Notes to the Financial Statements........................... F-7
</TABLE>

F-1
<PAGE> 60

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Nanophase Technologies Corporation

We have audited the accompanying balance sheets of Nanophase Technologies
Corporation as of December 31, 1995 and 1996 and September 30, 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
each of the three years in the period ended December 31, 1996 and for the nine
month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nanophase Technologies
Corporation at December 31, 1995 and 1996 and September 30, 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 and for the nine month period ended September 30,
1997, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP
Chicago, Illinois Ernst & Young LLP
October 24, 1997

F-2
<PAGE> 61

NANOPHASE TECHNOLOGIES CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF PRO FORMA
AS OF DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------- -------------
1995 1996 1997 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 261,902 $ 617,204 $ 770,704 $ 770,704
Investments..................................... 2,221,401 1,997,788 2,001,429 2,001,429
Trade accounts receivable, less allowance for
doubtful accounts of $0 in 1995 and 1996 and
$46,976 in 1997............................... 70,845 389,501 1,441,206 1,441,206
Inventories..................................... 65,280 445,205 503,815 503,815
Prepaid expenses and other current assets....... 67,277 50,275 51,061 51,061
----------- ------------ ------------ ------------
Total current assets.......................... 2,686,705 3,499,973 4,768,215 4,768,215
Equipment and leasehold improvements, net......... 924,814 1,794,798 2,212,960 2,212,960
OTHER ASSETS:
Deferred offering costs......................... -- 79,122 125,673 125,673
Patent costs, less accumulated amortization of
$5,156 in 1995, $6,732 in 1996 and $9,844 in
1997.......................................... 52,742 86,892 99,223 99,223
Cash held in trust.............................. 76,867 78,849 80,000 80,000
----------- ------------ ------------ ------------
$ 3,741,128 $ 5,539,634 $ 7,286,071 $ 7,286,071
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 219,411 $ 221,936 $ 756,889 $ 756,889
Accrued expenses................................ 15,667 207,248 952,266 952,266
----------- ------------ ------------ ------------
Total current liabilities..................... 235,078 429,184 1,709,155 1,709,155
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par
value; 169,490 shares authorized, issued, and
outstanding................................... 600,000 600,000 600,000 --
Series B convertible preferred stock, no par
value; 758,358 shares authorized, issued, and
outstanding................................... 851,351 851,351 851,351 --
Series C convertible preferred stock, no par
value; 662,287 shares authorized, issued, and
outstanding................................... 743,500 743,500 743,500 --
Series D convertible preferred stock, no par
value; 3,896,419 shares authorized; 3,882,385
issued and outstanding at December 31, 1995;
3,896,419 issued and outstanding at December
31, 1996 and September 30, 1997............... 6,405,262 6,429,500 6,429,500 --
Series E convertible preferred stock, no par
value; 2,026,500 shares authorized, no shares
authorized, issued and outstanding at December
31, 1995; 1,921,800 shares issued and
outstanding at December 31, 1996 and September
30, 1997...................................... -- 7,157,850 7,157,850 --
Series F convertible preferred stock, no par
value; no shares authorized, issued and
outstanding at December 31, 1995 and December
31, 1996; 2,316,000 shares authorized and
748,089 shares issued and outstanding at
September 30, 1997............................ -- -- 3,770,882 --
Common stock, no par value at December 31, 1995
and 1996 and September 30, 1997 and $.01 par
value at pro forma September 30, 1997;
8,088,544 shares authorized at December 31,
1995, 10,316,158 shares authorized at December
31, 1996, and 12,632,158 shares authorized at
September 30, 1997; 77,586 shares issued and
outstanding at December 31, 1995 and 1996 and
September 30, 1997 and 8,234,029 shares issued
and outstanding at pro forma September 30,
1997.......................................... 450 450 450 82,340
Additional paid-in capital...................... -- -- 19,471,193
Accumulated deficit............................. (5,094,513) (10,672,201) (13,976,617) (13,976,617)
----------- ------------ ------------ ------------
Total stockholders' equity.................... 3,506,050 5,110,450 5,576,916 5,576,916
----------- ------------ ------------ ------------
$ 3,741,128 $ 5,539,634 $ 7,286,071 $ 7,286,071
=========== ============ ============ ============
</TABLE>

See Notes to Financial Statements.

F-3
<PAGE> 62

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996
(UNAUDITED) 1997
<S> <C> <C> <C> <C> <C>
REVENUE:
Commercial revenue............. $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415
Government research
contracts................... 64,015 27,995 110,770 26,207 --
----------- ----------- ----------- ----------- -----------
Total revenue............. 95,159 121,586 595,806 287,220 2,245,415
OPERATING EXPENSES:
Cost of revenue................ 164,746 532,124 4,019,484 2,925,560 3,321,288
Research and development
expense..................... 456,162 485,059 677,284 515,675 571,210
Selling, general and
administrative expense...... 799,558 1,150,853 1,661,504 1,209,823 1,714,725
----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 1,420,466 2,168,036 6,358,272 4,651,058 5,607,223
----------- ----------- ----------- ----------- -----------
Operating expenses in excess of
revenue........................ (1,325,307) (2,046,450) (5,762,466) (4,363,838) (3,361,808)
Interest income.................. 37,535 86,576 184,778 145,746 57,392
----------- ----------- ----------- ----------- -----------
Net loss......................... $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416)
=========== =========== =========== =========== ===========
Pro forma net loss per share
(unaudited).................... $ (0.77) $ (0.41)
=========== ===========
Pro forma weighted average number
of common shares outstanding
(unaudited).................... 7,235,723 8,063,143
=========== ===========
</TABLE>

See Notes to Financial Statements.

F-4
<PAGE> 63

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------- ----------------------- ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994... 77,586 $450 1,590,135 $ 2,194,851 $ (1,846,867) $ 348,434
Issuance of Series D shares..... -- -- 868,690 1,200,262 -- 1,200,262
Issuance of Series D shares..... -- -- 1,271,248 2,195,592 -- 2,195,592
Net loss for the year ended
December 31, 1994............. -- -- -- -- (1,287,772) (1,287,772)
------ ---- --------- ----------- ------------ -----------
Balance as of December 31,
1994.......................... 77,586 450 3,730,073 5,590,705 (3,134,639) 2,456,516
Issuance of Series D shares..... -- -- 1,742,447 3,009,408 -- 3,009,408
Net loss for the year ended
December 31, 1995............. -- -- -- -- (1,959,874) (1,959,874)
------ ---- --------- ----------- ------------ -----------
Balance as of December 31,
1995.......................... 77,586 450 5,472,520 8,600,113 (5,094,513) 3,506,050
Issuance of Series D shares..... -- -- 14,034 24,238 -- 24,238
Issuance of Series E shares, net
of offering costs............. -- -- 1,921,800 7,157,850 -- 7,157,850
Net loss for the year ended
December 31, 1996............. -- -- -- -- (5,577,688) (5,577,688)
------ ---- --------- ----------- ------------ -----------
Balance as of December 31,
1996.......................... 77,586 450 7,408,354 15,782,201 (10,672,201) 5,110,450
Issuance of Series F shares, net
of offering costs............. -- -- 748,089 3,770,882 -- 3,770,882
Net loss for the nine months
ended September 30, 1997...... -- -- -- -- (3,304,416) (3,304,416)
------ ---- --------- ----------- ------------ -----------
Balance as of September 30,
1997.......................... 77,586 $450 8,156,443 $19,553,083 $(13,976,617) $ 5,576,916
====== ==== ========= =========== ============ ===========
</TABLE>

See Notes to Financial Statements.

F-5
<PAGE> 64

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1994 1995 1996 1996
(UNAUDITED) 1997
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................... $(1,287,772) $(1,959,874) $ (5,577,688) $ (4,218,092) $(3,304,416)
Adjustments to reconcile net
loss to net cash used in
operating activities.....
Depreciation................ 45,334 126,612 303,453 215,682 298,833
Amortization................ 855 335 6,397 5,389 3,112
Loss on sale of equipment... -- -- -- -- 29,281
Write off of patents........ -- 19,857 -- -- --
Changes in assets and
liabilities related to
operations:
Trade accounts
receivable............. 6,974 (23,573) (318,656) (182,722) (1,051,705)
Inventories.............. -- (65,280) (379,924) (419,118) (58,610)
Prepaid expenses and
other current assets... (12,700) (50,261) 17,002 (11,165) (786)
Patent costs............. (13,559) (31,072) (40,548) (40,447) (15,443)
Accounts payable......... 249 168,643 2,525 92,653 534,953
Accrued liabilities...... 54,122 (45,740) 191,581 157,892 824,140
----------- ----------- ------------ ------------ -----------
Net cash used in operating
activities.................. (1,206,497) (1,860,353) (5,795,858) (4,399,928) (2,740,641)
INVESTING ACTIVITIES:
Acquisition of equipment and
leasehold improvements...... (66,303) (937,956) (1,173,437) (1,084,697) (763,276)
Purchases of held-to-maturity
investments................. (2,255,609) (8,512,957) (15,486,131) (13,571,571) (7,960,981)
Maturities of held-to-maturity
investments................. -- 8,547,165 15,709,744 11,763,459 7,957,340
Increase in asset held in
trust....................... (75,000) (1,867) (1,982) (1,341) (1,151)
Proceeds from sale of
equipment................... 787 -- -- -- 17,000
----------- ----------- ------------ ------------ -----------
Net cash used in investing
activities.................. (2,396,125) (905,615) (951,806) (2,894,150) (751,068)
FINANCING ACTIVITIES:
Proceeds from issuance of
preferred stock, net of
offering costs.............. 3,395,854 3,009,408 7,182,088 7,182,088 3,770,882
Deferred offering costs....... -- -- (79,122) (77,393) (125,673)
----------- ----------- ------------ ------------ -----------
Net cash provided by financing
activities.................. 3,395,854 3,009,408 7,102,966 7,104,695 3,645,209
----------- ----------- ------------ ------------ -----------
Increase (decrease) in cash
and cash equivalents........ (206,768) 243,440 355,302 (189,383) 153,500
Cash and cash equivalents at
beginning of period......... 225,230 18,462 261,902 261,902 617,204
----------- ----------- ------------ ------------ -----------
Cash and cash equivalents at
end of period............... $ 18,462 $ 261,902 $ 617,204 $ 72,519 $ 770,704
=========== =========== ============ ============ ===========
</TABLE>

See Notes to Financial Statements.

F-6
<PAGE> 65

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
AND ALL PRO FORMA DATA ARE UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Nanophase Technologies Corporation (the "Company") was incorporated on
November 30, 1989, for the purpose of developing nanocrystalline materials for
commercial production and sale in domestic and international markets. The
Company was in its development stage for the period from inception through
December 31, 1996, primarily engaged in research and development activities, the
recruiting of technical, marketing and administrative personnel, and the
development of its manufacturing facility. These activities have been funded
through the issuance of preferred stock and through cooperative development
agreements and government contracts and grants. Although commercial shipments
began in late 1995 and continued in 1996, these shipments were limited and
primarily related to cooperative development agreements. The Company began
full-scale production in early 1997 at which time it no longer was a development
stage company.

In the course of its corporate development, the Company has experienced net
losses and negative cash flows from operations. Historically, the Company has
funded its operations primarily through the issuance of equity securities.

Export sales approximated $10,300, $51,400 and $256,500 for the years ended
December 31, 1994, 1995 and 1996, respectively and $68,600 and $277,400 for the
nine months ended September 30, 1996 and 1997, respectively.

Basis of Presentation

The financial statements of the Company as of September 30, 1996 and for
the nine month period ended September 30, 1996 contain all adjustments and
accruals (consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the financial position
and operating results of the Company for the interim period presented.

Pro Forma Presentation (Unaudited)

The pro forma balance sheet at September 30, 1997 gives effect to
conversion of the convertible preferred stock into common stock which will take
place upon the closing of the proposed public offering of common stock and the
change in the par value of the common stock, both as described in Note 11.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

Cash equivalents primarily consist of money market accounts which have a
maturity of three months or less from the date of purchase.

Investments

Investments are classified by the Company at the time of purchase for
appropriate designation and such designation is reevaluated as of each balance
sheet date. Investments are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost and are adjusted to
maturity for the amortization of premiums and accretion of discounts. Such
adjustments for amortization and accretion are included in interest income.

Inventory

Inventory is stated at the lower of cost, maintained on a first in, first
out basis, or market.

F-7
<PAGE> 66

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Equipment and Leasehold Improvements

Equipment is stated at cost and is being depreciated over its estimated
useful life (5-7 years) using the straight-line method. Leasehold improvements
are stated at cost and are being amortized using the straight-line method over
the shorter of the useful life of the asset or the term of the lease.

Deferred Offering Costs

Deferred costs related to the Company's proposed public offering totaled
$79,122 and $125,673 at December 31, 1996 and September 30, 1997, respectively.
In May 1997, the Company withdrew its March 1997 filing made with the Securities
and Exchange Commission. Costs incurred relating to that filing aggregating
$375,103 were expensed by the Company and included in selling, general and
administrative expense. Costs deferred at September 30, 1997 relate to the
current filing. Upon successful completion of the Company's proposed public
offering, the deferred costs will be offset against the proceeds received and
charged to stockholders' equity.

Patent Costs

Patent costs are being amortized over the life of the respective patent
using the straight-line method.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Commercial Revenue

Commercial revenue consists of sales of product and revenue from research
and development arrangements with non-governmental entities. Sales of product
are recorded as shipments are made by the Company. Research and development
arrangements include both cost-plus and fixed fee agreements and such revenue is
recognized when specific milestones are met under the arrangements.

Government Research Contracts

The Company accounts for contracts with governmental entities to complete
research and development activities using the percentage of completion method
measured by the relationship of costs incurred to total estimated costs. Amounts
paid to the Company under its cooperative cost-sharing agreement with the U.S.
government are accounted for as offsets against cost of revenues. See Note 8.

All payments to the Company for work performed on contracts and agreements
with agencies of the U.S. government are subject to adjustment upon audit by
agencies of the U.S. government. The Company believes that such audits, if any,
will not have a significant effect on the financial position or results of
operation of the Company.

Research and Development Expenses

Expenditures for research and development activities are charged to
operations as incurred by the Company.

Income Taxes

The Company accounts for income taxes using the liability method. As such,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for

F-8
<PAGE> 67

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

financial reporting purposes and the amounts used for income tax purposes.
Deferred tax assets and liabilities are calculated using the enacted tax rates
and laws that are expected to be in effect when the anticipated reversal of
these differences is scheduled to occur.

Employee Stock Options

The Company accounts for stock options granted to employees in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.
25). The exercise price of the options granted equals the estimated fair value
of the underlying stock on the date of grant. As such, no compensation expense
has been recognized by the Company for these options. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB No. 123).
FASB No. 123, which was adopted by the Company in 1996, establishes an
alternative method of accounting for stock-based compensation plans. In 1996,
the Company adopted the disclosure alternative for stock-based compensation
(Note 12) which provides for the use of APB No. 25 for financial statement
purposes with pro forma disclosure of the impact of FASB No. 123.

Fair Value of Financial Instruments

The Company's financial instruments include investments, accounts
receivable, accounts payable and accrued liabilities. The fair values of all
financial instruments were not materially different from their carrying values.

Net Loss and Pro Forma Net Loss Per Common Share

Pro forma net loss per common share and historical net loss per common
share are computed based upon the weighted average number of common shares
outstanding. Common equivalent shares are not included in the pro forma and
historical per share calculations since the effect of their inclusion would be
anti-dilutive, except that common and common equivalent shares issued during the
twelve month period prior to the proposed public offering have been included in
the pro forma calculation as if they were outstanding for all periods presented
using the treasury stock method. In addition, for the pro forma calculation, all
convertible preferred stock is treated as if converted into common shares at
date of issuance.

Net loss per common share computed on a historical basis is as follows:
$2.70, $4.10 and $11.68 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $8.83 and $6.92 for the nine month periods ended September 30,
1996 and 1997, respectively. The weighted average number of common shares
outstanding used to calculate these net loss per common share amounts are
477,629 for all periods.

(3) INVESTMENTS

Investments consist of U.S. Treasury bills with an estimated fair value of
$2,221,000, $1,998,000 and $2,001,000 at December 31, 1995 and 1996 and
September 30, 1997, respectively. All investments have been classified as
held-to-maturity and mature in subsequent year.

(4) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1995 1996 1997
<S> <C> <C> <C>
Raw materials............................................. $47,617 $332,167 $307,593
Finished goods............................................ 17,663 113,038 196,222
------- -------- --------
$65,280 $445,205 $503,815
======= ======== ========
</TABLE>

F-9
<PAGE> 68

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997
<S> <C> <C> <C>
Machinery and equipment.................................. $ 787,916 $1,662,721 $1,788,010
Office equipment......................................... 101,749 113,959 116,307
Office furniture......................................... 60,020 49,864 49,864
Leasehold improvements................................... 261,915 447,465 454,932
---------- ---------- ----------
1,211,600 2,274,009 2,409,113
Less: Accumulated depreciation and amortization.......... (286,786) (479,211) (767,924)
---------- ---------- ----------
924,814 1,794,798 1,641,189
Construction in progress................................. -- -- 571,771
========== ========== ==========
$ 924,814 $1,794,798 $2,212,960
========== ========== ==========
</TABLE>

(6) LEASE COMMITMENTS

The Company leases manufacturing and office space under an agreement that
will expire in September 1999. Monthly minimum lease payments amount to $7,900
for this facility.

The Company also leased its original office space from a stockholder under
a sublease agreement which expired in November 1996. The Company entered into a
sublease of this office space and received monthly rental payments under the
sublease through November 1996. Rent expense, net of sublease income, under this
lease amounted to $35,903, $26,668 and $19,072 for the years ended December 31,
1994, 1995 and 1996, respectively, and $13,023 for the nine month period ended
September 30, 1996.

Total rent expense, net of sublease income, under these leases amounted to
$65,903, $122,422, and $175,538 for the years ended December 31, 1994, 1995, and
1996, respectively, and $130,503 and $119,049 for the nine month periods ended
September 30, 1996 and 1997, respectively.

(7) ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
<S> <C> <C> <C>
Accrued subcontract costs................................... $ -- $ 40,000 $250,000
Accrued costs for goods received but not invoiced........... -- 24,332 184,341
Accrued offering costs...................................... -- 7,862 181,338
Other....................................................... 15,667 135,054 336,587
------- -------- --------
$15,667 $207,248 $952,266
======= ======== ========
</TABLE>

(8) RESEARCH AND DEVELOPMENT AGREEMENTS

In July 1992, the Company entered into a cooperative cost-sharing agreement
with the U.S. Government under the Department of Commerce Advanced Technology
Program. The three-year agreement ended in 1995. Under the terms of the
agreement, the U.S. Government agreed to share costs of the Company's research
efforts up to an aggregate of $944,259, including subcontractor costs. The net
costs associated with

F-10
<PAGE> 69

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the total research effort amounted to $2,992,130. The difference between these
amounts represented indirect costs of $2,047,871 which were absorbed as
operating expenses by the Company. For the years ended December 31, 1994 and
1995, the Company offset amounts received from the U.S. government of $224,256
and $154,710, respectively, against cost of revenues in the statement of
operations.

The Company is party to a number of other research and development
arrangements with both governmental and commercial entities. These arrangements
are generally short-term in nature and provided $31,144, $54,680 and $236,019 of
revenues for the years ended December 31, 1994, 1995, and 1996, respectively,
and $148,927 and $1,395,077 of revenues for the nine month periods ended
September 30, 1996 and 1997, respectively. These arrangements include both
cost-plus and fixed-price agreements.

(9) PATENT LICENSE AGREEMENT

In 1991, the Company was granted an exclusive license by a third party to
make, have made, use and sell products of the type claimed in a U.S. patent. In
consideration for this license, the Company agreed to pay royalties of 1/2% of
net sales of licensed products, as defined. As of September 30, 1997, no royalty
payments were due under this agreement.

In 1994, the Company was granted a non-exclusive license by a third party
to make, use, and sell products of the type claimed in two U.S. patents. In
consideration for this license, the Company agreed to pay royalties of 1% of net
sales, as defined, and made an advance royalty payment of $17,500. As of
September 30, 1997, royalties under this agreement amounting to $11,289 have
been offset against the royalty advance.

In 1996, the Company was granted a non-exclusive license by a third party
to produce and sell ultrafine powders of metal and ceramics claimed in four U.S.
patents. In consideration for this license, the Company agreed to pay $14,000 as
an initial payment, and pay royalties of 3% of net proceeds of sales of the
product, as defined. As of September 30, 1997, royalties under this agreement
approximated $8,000. The Company was also granted a remainder-exclusive license
by a third party to make, have made, use, import, sell or have sold products of
the type claimed in three U.S. patents. In consideration for this license, the
Company agreed to pay $5,000 as an initial payment, $5,000 upon reaching the
earlier of either defined profitability or the second anniversary of the
agreement, and royalties at the rate of 4% of the defined net sales of the
related products. As of September 30, 1997, no royalty payments were due to this
party under this agreement.

(10) INCOME TAXES

The Company has net operating loss carryforwards for tax purposes of
approximately $13,875,000 at September 30, 1997, which expire between 2005 and
2012. The Company has not paid income taxes since inception.

F-11
<PAGE> 70

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes consist of the following:

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1995 1996 1997
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward..................... $ 2,288,000 $ 4,212,000 $ 5,411,000
Start-up costs capitalized for income tax
purposes......................................... -- 162,000 132,000
Other accrued costs................................. 2,000 29,000 118,000
----------- ----------- -----------
Total deferred tax assets........................ 2,290,000 4,403,000 5,661,000
Deferred tax liability:
Accelerated tax depreciation........................ (21,000) (53,000) (62,000)
----------- ----------- -----------
Net deferred tax asset................................ 2,269,000 4,350,000 5,599,000
Less: Valuation allowance........................... (2,269,000) (4,350,000) (5,599,000)
----------- ----------- -----------
Deferred income taxes................................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

The valuation allowance increased $2,081,000 and $1,249,000 for the year
ended December 31, 1996 and nine months ended September 30, 1997, respectively,
due principally to the increase in the net operating loss carryforward and
uncertainty as to whether future taxable income will be generated prior to the
expiration of the carryforward period. Under the Internal Revenue Code, certain
ownership changes, including the prior issuance of preferred stock and this
proposed public offering, may subject the Company to annual limitations on the
utilization of its net operating loss carryforward.

(11) CAPITAL STOCK

All capital share and per share amounts in the financial statements and
notes to financial statements have been restated to reflect a .579-for-1 reverse
stock split effective prior to consummation of this proposed public offering.
Additionally, the par value has been restated to $0.01 for all common stock. The
Board of Directors has approved a migratory merger of the Company from Illinois
to Delaware, pursuant to which the stock split and restated par value will
occur.

In 1997, a total of 748,089 shares of Series F convertible preferred stock
were issued for cash amounting to $3,770,882 which is net of financing costs of
$105,226.

At September 30, 1997, authorized but unissued shares of common stock have
been reserved for future issuance as follows:

<TABLE>
<S> <C>
Series A convertible preferred stock........................ 169,490
Series B convertible preferred stock........................ 758,358
Series C convertible preferred stock........................ 662,287
Series D convertible preferred stock........................ 3,896,419
Series E convertible preferred stock........................ 2,026,500
Series F convertible preferred stock........................ 2,316,000
Warrants.................................................... 662,287
Options..................................................... 2,063,232
----------
12,554,573
==========
</TABLE>

All series of convertible preferred stock have the same voting rights as
the common stock. The Series A, C, D, E and F convertible preferred stock have
the same dividend rights as the common stock. At the holder's

F-12
<PAGE> 71

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

option, the preferred stock may be converted into common stock at the conversion
ratio, which is one common share for each preferred share. Mandatory conversion
occurs upon the occurrence of a Qualified Initial Public Offering, as defined,
at the conversion ratio.

The holders of Series B convertible preferred stock are entitled to receive
cumulative cash dividends in the amount of $.090 per share per annum. Dividends
began to accumulate on the date of issuance of the first shares of Series B and
will be paid to Series B shareholders of record only upon the liquidation of the
Company. Accumulated dividends total $397,289 at September 30, 1997.

Upon liquidation or dissolution of the Company, the Series F stockholders
will be entitled to be paid $5.181 per share, plus all declared but unpaid
dividends thereon before any distribution to the Series E, Series D, Series C,
Series B, Series A, or common stockholders. The Series E stockholders will be
entitled to be paid $3.886 per share, plus all declared but unpaid dividends
thereon before any distribution to the Series D, Series C, Series B, Series A,
or common stockholders. The Series D and Series C stockholders will be entitled
to be paid $1.382 per share (with respect to the Series D purchased prior to
October 1, 1994), $1.727 per share (with respect to the Series D purchased on or
after October 1, 1994), and $3.368 per share (with respect to the Series C),
plus all declared but unpaid dividends thereon before any distribution to the
Series B, Series A, or common stockholders. Series B preferred stockholders will
be entitled to be paid, before any payment or declaration and setting apart for
payment of any amount with respect to the Series A or common stockholders, an
amount equal to $1.123 per share, plus all accumulated but unpaid dividends
thereon. The Series A preferred stockholders will be entitled to be paid an
amount equal to $3.541 per share, after payment to the Series F, Series E,
Series D, Series C, and Series B stockholders but before any distribution is
made to the common stockholders.

(12) STOCK OPTIONS AND WARRANTS

The Company has entered into stock option agreements with certain
employees, a board member who is also a service provider and three Advisory
Board members. At September 30, 1997, the Company had granted options to
purchase 1,586,634 shares of common stock. The stock options generally expire
ten years from the date of grant. Of the total number of options granted,
766,017 of the outstanding options vest on the eighth anniversary following
their grant date, subject to an earlier five-year vesting period if specified
performance targets for 1997 are met. Of the remaining 820,617 outstanding
options, 803,247 vest over a five-year period and 17,370 vest over a three-year
period from their respective grant dates.

F-13
<PAGE> 72

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Exercise prices are determined by the Board of Directors and equal the
estimated fair values of the Company's common stock at the grant date. The table
below summarizes all option activity through September 30, 1997:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE EXERCISE
OF OPTIONS EXERCISE PRICE PRICE
<S> <C> <C> <C>
Outstanding at December 31, 1993.................... 182,035 $ .112 $ .112
Options granted during 1994......................... 100,746 .112 .112
Options canceled during 1994........................ (27,442) .112 .112
---------
Outstanding at December 31, 1994.................... 255,339 .112 .112
Options granted during 1995......................... 186,728 .432 .432
Options canceled during 1995........................ (6,948) .112 -- .432 .180
---------
Outstanding at December 31, 1995.................... 435,119 .112 -- .432 .249
Options granted during 1996......................... 1,192,508 1.727 -- 3.886 3.309
Options canceled during 1996........................ (12,101) .112 -- 1.727 1.549
---------
Outstanding at December 31, 1996.................... 1,615,526 .112 -- 3.886 2.499
Options granted during 1997......................... 17,370 5.181 5.181
Options canceled during 1997........................ (46,262) .112 -- 3.886 3.475
---------
Outstanding at September 30, 1997................... 1,586,634 .112 -- 5.181 2.499
=========
</TABLE>

At September 30, 1997, options for 209,183, 75,270, 62,903 and 13,896
shares of common stock were exercisable at $.112, $.432, $1.727 and $3.886 per
share, respectively. No options have been exercised or have expired to date.

In connection with the issuance of Series C convertible preferred stock in
1993, the Company issued common stock purchase warrants for 662,287 shares at no
additional cost to the Series C convertible preferred stockholders. These
warrants have an exercise price of $1.123 per share and expire upon the tenth
anniversary of issuance. All warrants were outstanding at September 30, 1997.

The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB No. 123 requires use
of option valuation models that were not developed for the use in valuing
employee stock options. Pro forma information regarding net income is required
by FASB No. 123, which also requires that the information be determined as if
the Company had accounted for the employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the
years ended December 31, 1995 and 1996 and the nine month periods ended
September 30, 1996 and 1997, respectively: risk-free interest rates of 4.5%,
4.0%, 4.5% and 4.4%; a dividend yield of zero percent; and a weighted-average
expected life of the option of 7 years. The volatility factor was assumed to be
zero as the Company is privately held and no market existed for its stock in
1995 or 1996.

The Black-Scholes option valuation model was developed for the use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's option, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

F-14
<PAGE> 73

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the respective
option. Because FASB No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma impact will not be fully reflected until 2002.
The Company's pro forma net loss and pro forma net loss per share on a
historical basis would be $1,963,974 and $5,607,688 and $3.54 and $10.12 for the
years ended December 31, 1995 and 1996 and would be $4,237,286 and $3,401,643
and $7.64 and $6.14 for the nine months ended September 30, 1996 and 1997,
respectively.

(13) 401(K) PROFIT-SHARING PLAN

Effective June 30, 1995, the Company implemented a 401(k) profit-sharing
plan covering substantially all employees who meet defined service requirements.
The plan provides for deferred salary contributions by the plan participants and
a Company contribution. Company contributions, if any, are at the discretion of
the Board of Directors and are not to exceed the amount deductible under
applicable income tax laws. No Company contributions have been made since
inception of the plan.

(14) SEVERANCE BENEFITS AGREEMENT

Pursuant to an agreement entered into in 1994, the Company has established
a trust for the benefit of an employee. Interest earned was credited to the
trust until the funds held in trust equaled $80,000. Payments will be required
in the event the Company terminates the employment of the individual, as
defined, before November 15, 1999. Upon the occurrence of an initial public
offering, the funds held in trust will revert to the Company.

(15) RELATED PARTY TRANSACTIONS

The Company has an ongoing consulting agreement with a
director/stockholder. The agreement is on a month-to-month basis. Payments under
this agreement amount to $2,500 per month.

(16) SIGNIFICANT CUSTOMER

Sales to a single customer were approximately 70% of total revenue for the
nine months ended September 30, 1997.

F-15
<PAGE> 74

[INSIDE BACK COVER PAGE]

[Picture of the Company's nanocrystalline materials
compared to conventional nanocrystalline materials]

In contrast to nanocrystalline materials produced by conventional
processes, nanocrystalline materials produced by the Company's patented PVS
process are nearly spherical and uniformly small. As a result of these and other
properties, the Company is able to engineer the attributes, including strength,
flexibility, color and electronic conductivity, of materials to yield products
that are superior to conventional materials and to establish new standards for a
range of high-performance commercial applications.

[Picture of equipment inside the Company's manufacturing
facility in Burr Ridge, Illinois]

PVS plasma reactors in the Company's production and research facility in Burr
Ridge, Illinois.
<PAGE> 75

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Financial Data.................... 18
Management's Discussion And Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 23
Management................................. 40
Certain Relationships and Related
Transactions............................. 48
Principal Stockholders..................... 49
Description of Capital Stock............... 51
Shares Eligible for Future Sale............ 53
Underwriting............................... 55
Legal Matters.............................. 57
Experts.................................... 57
Additional Information..................... 57
Index to Financial Statements.............. F-1
</TABLE>

------------------------

UNTIL DECEMBER 21, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================
======================================================

4,000,000 SHARES

NANOPHASE LOGO

COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

FURMAN SELZ

CIBC OPPENHEIMER

NOVEMBER 26, 1997

======================================================
<PAGE> 76

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement. The
Registrant will pay all of these expenses.

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
<S> <C>
Securities and Exchange Commission registration fee......... $ 17,425
NASD filing fee............................................. 6,250
Nasdaq National Market application fee...................... 50,000
Accountants' fees and expenses.............................. 70,000
Blue Sky fees and expenses.................................. 10,000
Legal fees and expenses..................................... 150,000
Transfer Agent and Registrar fees and expenses.............. 10,000
Printing and engraving...................................... 70,000
Miscellaneous expenses...................................... 16,325
--------
Total.................................................. $400,000
========
</TABLE>

All expenses other than the Securities and Exchange Commission registration
fee, the NASD filing fee and the Nasdaq National Market application fee are
estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article VII of the Registrant's Certificate of Incorporation provides that
the Registrant shall indemnify its directors to the full extent permitted by the
General Corporation Law of the State of Delaware and may indemnify its officers
and employees to such extent, except that the Registrant shall not be obligated
to indemnify any such person (i) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
or (ii) for any amounts paid in settlement of an action indemnified against by
the Registrant without the prior written consent of the Registrant. Prior to
consummation of this offering, the Registrant will enter into indemnity
agreements with each of its directors. These agreements may require the
Registrant, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status or service as directors, to
advance expenses to them as they are incurred, provided that they undertake to
repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification, and to obtain directors' liability
insurance if available on reasonable terms.

In addition, Article VII of the Registrant's Certificate of Incorporation
provides that a director of the Registrant shall not be personally liable to the
Registrant or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for willful or negligent conduct in paying
dividends or repurchasing stock out of other than lawfully available funds or
(iv) for any transaction from which the director derives an improper personal
benefit.

Reference is made to Section 145 of the General Corporation Law of the
State of Delaware which provides for indemnification of directors and officers
in certain circumstances.

II-1
<PAGE> 77

Prior to the consummation of this offering, the Registrant intends to
purchase a directors' and officers' liability insurance policy.

Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Registrant, its directors, certain
of its officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information reflects a 0.579-for-one stock split which will
be effected prior to the date of the Prospectus.

In March 1994, the Registrant issued an aggregate of 868,690 shares of
Series D Convertible Preferred Stock (the "Series D Preferred") at $1.382 per
share to nine investors, which included eight venture capital funds and Richard
Siegel, a director and consultant of the Company, in exchange for cash in the
aggregate amount of $1,200,262.

In October 1994, the Registrant issued 1,271,248 shares of Series D
Preferred at $1.727 per share to eight investors which are venture capital funds
in exchange for cash in the aggregate amount of $2,195,592.

In April 1995, the Registrant issued 89,402 shares of Series D Preferred at
$1.727 per share to four investors which are venture capital funds in exchange
for cash in the aggregate amount of $154,408. In November 1995, the Registrant
issued 1,653,045 shares of Series D Preferred at $1.727 per share to nine
investors, which included eight venture capital funds and Richard Siegel, a
director and consultant of the Company, in exchange for cash in the aggregate
amount of $2,855,000.

In April 1996, the Registrant issued 14,034 shares of Series D Preferred at
$1.727 per share to one investor which is a venture capital fund in exchange for
cash in the amount of $24,238. In May 1996, the Registrant issued 1,921,800
shares of Series E Convertible Preferred Stock (the "Series E Preferred") at
$3.886 per share to 122 investors, which included various individuals, trusts,
partnerships and retirement plans, in exchange for cash in the aggregate amount
of $7,468,135.

In June 1997, the Registrant issued 421,992 shares of Series F Convertible
Preferred Stock at (the "Series F Preferred") at $5.181 per share to 39
investors, which included various individuals, trust partnerships and retirement
plans, in exchange for cash in the aggregate amount of $2,186,487. In August
1997, the Registrant issued 183,468 shares of Series F Preferred at $5.181 per
share to 10 investors, which included various individuals, trusts, partnerships
and retirement plans, in exchange for cash in the aggregate amount of $950,613.
In September 1997, the Registrant issued 142,629 shares of Preferred Stock at
$5.181 per share to 15 investors, which included employees of DLJ, various
individuals and a trust, in exchange for cash in the aggregate amount of
$739,008.

Each share of Series D Preferred, Series E Preferred and Series F Preferred
will be converted into one share of Common Stock upon consummation of this
offering.

The sales of shares of Series D Preferred, Series E Preferred and Series F
Preferred are claimed to be exempt from registration with the Securities and
Exchange Commission pursuant to Section 4(2) of the Securities Act, and/or
Regulation D promulgated thereunder as transactions by an issuer not involving
any public offering, in that the transactions involved the issuance and sale by
the Company of its securities to financially sophisticated institutions or
individuals who represented that they were aware of the Company's activities as
well as its business and financial condition, and who took such securities for
investment purposes and understood the ramifications of the same. Each security
holder represented that they acquired such securities for investment for their
own account and not for distribution. All certificates representing the
securities issued in these transactions have been legended.

II-2
<PAGE> 78

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

<TABLE>
<S> <C>
1* Form of Underwriting Agreement.
3.1* Form of Certificate of Incorporation of the Registrant.
3.2* Form of Bylaws of the Registrant.
4.1* Specimen stock certificate representing Common Stock.
4.2* Form of Warrants.
5* Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1* The Nanophase Technologies Corporation Amended and Restated
1992 Stock Option Plan, as amended.
10.2* Form of Directors Indemnification Agreement.
10.3* Amended and Restated Registration Rights Agreements dated as
of March 16, 1994, as amended.
10.4* Employment Agreement dated February 3, 1994 between the
Registrant and Robert W. Cross.
10.5* Employment Agreement dated as of September 3, 1996 between
the Registrant and Dennis J. Nowak.
10.6* Severance Benefits Agreement dated as of November 15, 1994
between the Registrant, Steven Lazarus and John C. Parker.
10.7* License Agreement dated June 1, 1990 between the Registrant
and ARCH Development Corporation, as amended.
10.8* License Agreement dated October 12, 1994 between the
Registrant and Hitachi.
10.9* License Agreement dated May 31, 1996 between the Registrant
and Research Development Corporation of Japan.
10.10* License Agreement dated April 1, 1996 between the Registrant
and Cornell Research Foundation.
10.11* Consulting and Stock Purchase Agreement between Richard W.
Siegel and the Registrant dated as of May 9, 1990, as
amended February 13, 1991, November 21, 1991 and January 1,
1992.
10.12* Lease Agreement between the Village of Burr Ridge and the
Registrant, dated September 15, 1994.
10.13* Purchase Order and Purchase and Distribution Agreement dated
February 27, 1997 between the Registrant and Moyco
Technologies, Incorporated, as amended.
10.14* Marketing and Distribution Agreement between the Registrant
and Whittaker, Clark & Daniels, Inc., dated as of November
22, 1995.
10.15* Distribution Agreement between the Registrant and C.I.
Kasei, Ltd., (a subsidiary of Itochu) dated as of October
30, 1996.
10.16* Purchase Agreement between Nanophase Technologies
Corporation and LWT Instruments, Inc., dated February 1,
1997.
10.17* Supply Agreement between the Registrant and Schering-Plough
HealthCare Products, Inc. dated as of March 15, 1997.
10.18* Amended and Restated Shareholders' Agreement dated as of
March 16, 1994, as amended.
11 Statement regarding computation of per share earnings.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Katten Muchin & Zavis (contained in its opinion
filed as Exhibit 5 hereto).
23.3 Consent of McAndrews, Held & Malloy, Ltd.
24* Power of Attorney (included on signature page of the
Registration Statement).
27* Financial Data Schedule.
</TABLE>

- ------------------------------
* Previously filed with this Registration Statement.

II-3
<PAGE> 79

(b) Financial Statement Schedules.

<TABLE>
<CAPTION>
PAGE
<S> <C>
Schedule II -- Report of Independent Auditors S-1
Valuation and Qualifying Accounts S-2
</TABLE>

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes:

(1) To provide to the Underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.

(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

(3) For purposes of determining any liability under the Securities
Act, (i) the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective and (ii)
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 80

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
and State of Illinois on the 25th day of November, 1997.

NANOPHASE TECHNOLOGIES CORPORATION

By: /s/ ROBERT W. CROSS

------------------------------------
Robert W. Cross,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons on
November 25, 1997 in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>

/s/ ROBERT W. CROSS President, Chief Executive Officer (Principal Executive
- ------------------------------------------ Officer) and a Director
Robert W. Cross

/s/ DENNIS J. NOWAK Vice President--Finance and Administration, Chief
- ------------------------------------------ Financial Officer, Treasurer and Secretary (Principal
Dennis J. Nowak Financial and Accounting Officer)

* Chairman of the Board and Director
- ------------------------------------------
Leonard A. Batterson

* Director
- ------------------------------------------
Steven Lazarus

* Director
- ------------------------------------------
Richard W. Siegel

* Director
- ------------------------------------------
Robert W. Shaw. Jr.

* /s/ DENNIS J. NOWAK
- ------------------------------------------
Dennis J. Nowak
As Attorney-in-fact
</TABLE>

II-5
<PAGE> 81

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Nanophase Technologies Corporation

We have audited the financial statements of Nanophase Technologies
Corporation as of December 31, 1995 and 1996 and September 30, 1997, and for
each of the three years in the period ended December 31, 1996 and for the nine
month period ended September 30, 1997, and have issued our report thereon dated
October 24, 1997. Our audits also included the financial statement schedule
listed in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP
Chicago, Illinois Ernst & Young LLP
October 24, 1997

S-1
<PAGE> 82

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ---------------------- BALANCE AT
BEGINNING OF COSTS AND OTHER END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Deferred tax asset valuation account... $ 744,300 $ 509,700 $-- $-- $1,254,000
========== ========== === === ==========
Year ended December 31, 1995:
Deferred tax asset valuation account... $1,254,000 $1,015,000 $-- $-- $2,269,000
========== ========== === === ==========
Year ended December 31, 1996:
Deferred tax asset valuation account... $2,269,000 $2,081,000 $-- $-- $4,350,000
========== ========== === === ==========
Nine months ended September 30, 1997:
Allowance for doubtful accounts........ $ -- $ 46,976 $-- $-- $ 46,976
========== ========== === === ==========
Deferred tax asset valuation account... $4,350,000 $1,249,000 $-- $-- $5,599,000
========== ========== === === ==========
</TABLE>

S-2
<PAGE> 83

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
11 Statement regarding computation of per share earnings.
23.1 Consent of Ernst & Young LLP.
23.3 Consent of McAndrews, Held & Malloy, Ltd.
</TABLE>

<PAGE> 1

EXHIBIT 11

STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
(Unaudited)
<S> <C> <C> <C> <C> <C>
HISTORICAL:
Weighted average
common shares
outstanding 77,586 77,586 77,586 77,586 77,586

Net effect of dilutive stock options
based on the
treasury method 400,043 400,043 400,043 400,043 400,043
----------- ---------- ----------- ----------- -----------
Total 477,629 477,629 477,629 477,629 477,629

Net loss $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416)
Net income (loss) per
common share $ (2.70) $ (4.10) $ (11.68) $ (8.83) $ (6.92)

YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30,1997
----------------- -------------------
<S> <C> <C>
PRO FORMA:
Weighted average common shares outstanding 77,586 77,586
Weighted average preferred shares outstanding 6,758,094 7,585,514
Net effect of dilutive stock options based on the treasury method 400,043 400,043
----------- -----------
Total 7,235,723 8,063,143

Net income (loss) $(5,577,688) $(3,304,416)
Pro forma net loss per share $ (.77) $ (.41)

</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 24, 1997 in Amendment No. 4 to the
Registration Statement (Form S-1 File No. 333-36937) and related Prospectus of
Nanophase Technologies Corporation dated November 26, 1997 for the sale of
4,000,000 shares of its Common Stock.

/s/ ERNST & YOUNG LLP
Ernst & Young LLP

Chicago, Illinois
November 25, 1997

<PAGE> 1
EXHIBIT 23.3

[LETTERHEAD OF MCANDREWS, HELD & MALLOY, LTD.]

November 25, 1997

Robert W. Cross, President and
Chief Executive Officer
Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, Illinois 60521

Re: Form S-1 Registration Statement
Our File Nanophase/71297

We hereby consent to be named as an expert in the "Legal Matters" and
"Experts" sections of Amendment No. 4 to the Registration Statement on Form S-1
filed with the Securities and Exchange Commission by Nanophase Technologies
Corporation.

Very truly yours,

/s/ ROBERT W. FIESELER
---------------------------
Robert W. Fieseler