NANOPHASE TECHNOLOGIES CORPORATION (Form: 10-Q, Received: 08/12/2009 16:11:34)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-22333

Nanophase Technologies Corporation

(Exact name of registrant as specified in its charter)

Delaware

36-3687863

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1319 Marquette Drive, Romeoville, Illinois 60446

(Address of principal executive offices, and zip code)

Registrant’s telephone number, including area code: (630) 771-6708

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of August 7, 2009, there were 21,204,162 shares outstanding of common stock, par value $.01, of the registrant.

NANOPHASE TECHNOLOGIES CORPORATION

QUARTER ENDED JUNE 30, 2009

INDEX


		Page
PART I - FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Unaudited Balance Sheets as of June 30, 2009 and December 31, 2008	3

	Unaudited Statements of Operations for the three months ended June 30, 2009 and 2008 and the six months ended June 30, 2009 and 2008	4

	Unaudited Statements of Cash Flows for the six months ended June 30, 2009 and 2008	5

	Notes to Unaudited Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II - OTHER INFORMATION		20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	22

SIGNATURES		23

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

NANOPHASE TECHNOLOGIES CORPORATION

BALANCE SHEETS

(Unaudited)


	June 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	649,546		$	723,069
Investments		3,664,418			6,908,888
Trade accounts receivable, less allowance for doubtful accounts of $9,000 on June 30, 2009 and December 31, 2008		916,389			1,092,125
Other receivable		—			7,749
Inventories, net		1,095,395			1,154,207
Prepaid expenses and other current assets		436,346			482,452

Total current assets		6,762,094			10,368,490
Investments		5,340,000			5,340,000
Equipment and leasehold improvements, net		6,073,015			6,651,842
Other assets, net		39,872			39,765

	$	18,214,981		$	22,400,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of deferred other revenue		10,608			74,243
Current portion of capital lease obligations		8,089			22,211
Current portion of long-term debt, less unamortized debt discount		530,702			1,570,346
Accounts payable		424,248			356,853
Accrued expenses		1,445,641			1,493,262
Accrued severance		375,172			541,014

Total current liabilities		2,794,460			4,057,929


Long-term portion of capital lease obligations		5,081			9,219


Contingent liabilities		—			—

Stockholders’ equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding		—			—
Common stock, $.01 par value, 30,000,000 shares authorized; 21,204,162 and 21,188,912 shares issued and outstanding on June 30, 2009 and December 31, 2008, respectively		212,042			211,889
Additional paid-in capital		92,027,075			91,597,529
Accumulated deficit		(76,823,677	)		(73,476,469	)

Total stockholders’ equity		15,415,440			18,332,949

	$	18,214,981		$	22,400,097

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2009			As Adjusted 2008			2009			As Adjusted 2008
Revenue:
Product revenue, net	$	1,500,733		$	2,811,626		$	2,797,546		$	5,754,347
Other revenue		109,930			132,780			218,275			244,167

Net revenue		1,610,663			2,944,406			3,015,821			5,998,514

Operating expense:
Cost of revenue		1,430,363			1,836,276			2,745,287			3,836,484

Gross Profit		180,300			1,108,130			270,534			2,162,030

Research and development expense		381,075			416,239			785,119			854,934
Selling, general and administrative expense		1,051,343			1,529,643			2,051,510			3,104,387
Severance charges		—			—			794,069			—

Loss from operations		(1,252,118	)		(837,752	)		(3,360,164	)		(1,797,291	)
Interest income		24,291			80,788			58,294			248,010
Interest expense		(12,379	)		(33,142	)		(33,286	)		(71,559	)
Other, net		1,652			(2,074	)		(12,052	)		157

Loss before provision for income taxes		(1,238,554	)		(792,180	)		(3,347,208	)		(1,620,683	)
Provisions for income taxes		—			—			—			—

Net loss	$	(1,238,554	)	$	(792,180	)	$	(3,347,208	)	$	(1,620,683	)

Net loss per share-basic and diluted	$	(0.06	)	$	(0.04	)	$	(0.16	)	$	(0.08	)

Weighted average number of common shares outstanding		21,204,162			21,130,697			21,200,791			21,118,652

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended June 30,
	2009			As Adjusted 2008
Operating activities:
Net loss	$	(3,347,208	)	$	(1,620,683	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		640,065			626,100
Amortization of debt discount		25,304			28,197
Amortization of deferred revenue		(63,635	)		(63,636	)
Stock compensation expense		230,871			432,883
Charges for accelerated vesting of stock options		210,694			—
Loss on disposal of equipment		13,451			513
Abandonment of trademarks		—			37,214
Changes in assets and liabilities related to operations:
Trade accounts receivable		175,736			113,554
Other accounts receivable		7,749			—
Inventories		58,812			(486,396	)
Prepaid expenses and other assets		46,106			(129,137	)
Accounts payable		97,294			291,094
Accrued expenses		(228,395	)		52,379

Net cash used in operating activities		(2,133,156	)		(717,918	)


Investing activities:
Proceeds from disposal of equipment		24,000			1,800
Acquisition of equipment and leasehold improvements		(88,663	)		(206,950	)
Acquisition of trademarks		(1,341	)		—
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements		(35,625	)		(5,318	)
Purchases of investments		(72,813,032	)		(114,381,070	)
Sales of investments		76,057,502			115,645,528

Net cash provided by investing activities		3,142,841			1,053,990


Financing activities:
Principal payment on debt obligations, including capital leases		(1,083,208	)		(21,071	)
Proceeds from sale of common stock, net, and exercise of stock options		—			30,417

Net cash (used) provided by financing activities		(1,083,208	)		9,346

(Decrease) Increase in cash and cash equivalents		(73,523	)		345,418
Cash and cash equivalents at beginning of period		723,069			563,075

Cash and cash equivalents at end of period	$	649,546		$	908,493


Supplemental cash flow information:
Interest paid	$	19,994		$	42,626


Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$	5,726		$	93,638

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we” or “us”) reflect all adjustments (consisting 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 periods presented. Operating results for the three and six month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2008, as filed with the Securities and Exchange Commission.

(2) Description of Business

Nanophase is a nanomaterials developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterial products for use in a variety of diverse existing and developing markets: sunscreens, personal care, architectural coatings, industrial coating ingredients, abrasion-resistant applications, plastic additives, water filtration, DNA biosensors and a variety of polishing applications, including semiconductors and optics. New markets and applications are also being developed. We target markets in which we believe practical solutions may be found using nanoengineered products. We work with leaders in these targeted markets to identify and supply their material and performance requirements. The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation on November 30, 1997. The Company’s common stock trades on the NASDAQ Global Market under the symbol NANX.

We also recognize regular other revenue in connection with a promissory note to BYK Chemie and from a technology license. These activities are not expected to drive the long-term growth of the business. Both the deferred and license revenue are recognized as “other revenue” in the Company’s Statement of Operations, as they do not represent revenue directly from sales of our nanocrystalline materials.

(3) Change in Accounting Method

We decided to change the method of accounting for patent costs during the fourth quarter of 2008. We now expense patent costs instead of capitalizing them. Prior practice was to begin the legal process of applying for patents, then record all associated costs as intangible assets. If a patent were granted, the costs would continue to be capitalized and amortized over the estimated economic life of the patent. If a patent application were rejected or abandoned, the unamortized cost would then be expensed.

With the increase in time required to obtain a patent now extending to several years, it has become less likely that the invention underlying that patent would still be valuable to our business at the time of issuance. In addition, the lack of direct experience with patent assets protecting our products and revenue streams has caused us to reconsider our ability to assign value to such assets. In addition, we concluded that the rejection of certain claims following a protracted re-examination proceeding by the US Patent and Trademark Office that was finalized during 2008 would not materially harm our business. For these and other reasons, we believe that it is no longer reasonable to predict whether a patent will be granted, when it will be granted or whether all the claims in a granted patent ultimately will be upheld. Therefore, management believes it is preferable to expense all patent costs incurred as period costs. The expensing of patent costs as a period cost will more closely align these expenses with the time when we expect to recognize the related revenue from the patented technology.

The change in accounting method to expense patent costs was completed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154 Accounting Changes and Error Corrections . The Company applied this change in accounting principal by retrospectively restating prior year financial statements.

The effect of the change in accounting method on operating results for the three and six month periods ended June 30, 2008 was as follows:


	Three months ended June 30, 2008
	As Originally Reported			As Adjusted for Accounting Change			Effect of Change
Statements of operations
Patent abandonment	$	—		$	—		$	—
Patent expense		—			13,552			(13,552	)
Amortization expense		11,426			2,071			9,355
Loss from operations		(833,555	)		(837,752	)		(4,197	)
Net loss		(787,983	)		(792,180	)		(4,197	)
Basic and diluted loss per share		(0.04	)		(0.04	)		—

	Six months ended June 30, 2008
	As Originally Reported			As Adjusted for Accounting Change			Effect of Change
Statements of operations
Patent abandonment	$	130,836		$	—		$	130,836
Patent expense		—			34,607			(34,607	)
Amortization expense		23,018			4,120			18,898
Loss from operations		(1,912,418	)		(1,797,291	)		115,127
Net loss		(1,735,810	)		(1,620,683	)		115,127
Basic and diluted loss per share		(0.08	)		(0.08	)		—

The effect of the change in accounting method on the statements of cash flows for the six months ended June 30, 2008 was as follows:


	Six months ended June 30, 2008
	As Originally Reported			As Adjusted for Accounting Change			Effect of Change
Net loss	$	(1,735,810	)	$	(1,620,683	)	$	115,127
Depreciation and amortization		644,998			626,100			(18,898	)
Patent/trademark abandonment charges		168,050			37,214			(130,836	)

Net cash used in operating activities		(683,311	)		(717,918	)		(34,607	)

Acquisition of patents		(34,607	)		—			34,607

Net cash provided by investing activities		1,019,383			1,053,990			34,607

Increase in cash and cash equivalents		345,418			345,418			—
Cash and cash equivalents, January 1, 2008		563,075			563,075			—

Cash and cash equivalents, June 30, 2008	$	908,493		$	908,493		$	—

(4) Financial Instruments

The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

•

Level 1 : Unadjusted quoted prices in active markets for identical assets and liabilities.

•

Level 2 : Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

•

Level 3 : Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

As of June 30, 2009, the fair values of our financial assets are approximately categorized as follows:


	Total		Level 1		Level 2		Level 3
*Financial Assets*
Auction rate securities ^(a)	$	5,340,000	$	—	$	—	$	5,340,000
Available-for-sale securities ^(b)		3,634,000		3,634,000		—		—
Held-to-maturity investments ^(c)		30,000		30,000		—		—

	$	9,004,000	$	3,664,000	$	—	$	5,340,000

There are no financial liabilities adjusted to fair value as of June 30, 2009.

(a)	Based on defined rates for auction rate securities dependent on the participation of willing buyers (see Note 5).

(b)	Based on the price of United States treasury bills.

(c)	Based on stated bank rates.

On January 1, 2009 we adopted the provisions of SFAS 157-2 for our nonfinancial assets and liabilities that are not required to be measured at fair value on a recurring basis. The adoption of SFAS 157-2 for our nonfinancial assets and liabilities did not have a significant effect on our results of operations or financial condition.

(5) Investments

Investments on June 30, 2009 and December 31, 2008 were comprised of auction rate securities, United States treasury bills, certificates of deposit and a money market fund. Included in these investments are certificates of deposit in the amount of $30,000, which are pledged as collateral, primarily for the Company’s rent in 2009 and 2008, and is restricted as to withdrawal or usage. Investments held in short-term auction rate securities and certificates of deposit have maturity days of less than 30 days. The Company’s investments on June 30, 2009 and December 31, 2008 were as follows:


	June 30, 2009		December 31, 2008
United States treasury bills	$	3,633,485	$	6,875,982
Certificates of deposit		30,000		30,000
Accrued interest		933		2,906

		3,664,418		6,908,888
Auction rate securities		5,340,000		5,340,000

	$	9,004,418	$	12,248,888

As of June 30, 2009, our remaining investments in auction rate securities (“ARS”) totaled $5.34 million, net of impairment charge. These ARS holdings in the Company’s investment portfolio have experienced “failed auctions” due to a lack of available buyers for them on their expected auction dates. An auction failure means that parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate. Despite these failed auctions, there have been no defaults on the underlying securities and investment income on these ARS holdings. They have been issued through the Federal Family Education Loan Program (“FFELPs Loans”) and carry an AAA credit rating. These FFELPs Loans are guaranteed to 97% of their $6 million value by the Department of Education and we are not aware of any defaults or threatened defaults by any of the underlying securities, the risk of which we believe to be very low. However, these failed auctions have caused us to change the level of inputs to determine their fair values. These values were estimated as of December 31, 2008 by an independent appraisal firm, Houlihan, Smith & Company, Inc., using a discounted cash flow model. Since these inputs were not observable they are classified as Level 3 inputs (see Note 4). As a result, for the period ended December 31, 2008, we recognized an “other than temporary impairment loss” on the ARS’s in the amount of $660,000, thus reducing the $6 million in nominal value to $5.34 million in net carrying value. We believe that the fair value estimates made for the year ended December 31, 2008 have not changed through June 30, 2009, and therefore, no changes to the carrying value of these investments have been made. We will continue to monitor the creditworthiness of the companies underwriting these securities and make any adjustments we deem necessary to reflect the fair value of these securities.

It is our intention to sell these instruments for as close to their $6 million value as possible as soon as we are able to do so. However, because we cannot ascertain when we may ultimately sell these instruments, and they have stated maturities in excess of one year, we have classified these securities as long-term on the June 30, 2009 balance sheet. Additional information about these securities, all with maturities in excess of 10 years, includes:

1. $2 million principal value Brazos Higher Ed Auth 2006 A, which we value at $1.8 million based on a 5-6% liquidity premium and a very low risk of default. This instrument matures 12/1/2042 and carries a variable coupon interest rate (2% as of date of this filing, which has been impacted by depressed benchmark rates). This obligation is insured and collateralized by student loans.

2. $2 million principal value Connecticut Student Loan Foundation 2004 A-6, which we value at $1.8 million based on a 5-6% liquidity premium and a very low risk of default. This instrument matures 6/1/2034 and carries a variable coupon interest rate (0-3% recent range; low end of range as of this filing due to depressed benchmark rates). This obligation is insured and collateralized by student loans.

3. $2 million principal value Illinois Student Assistance Ser VIII-1, which we value at $1.8 million based on a 5-6% liquidity premium and a very low risk of default. This instrument matures 6/1/2045 and carries a variable coupon interest rate (0-2% recent range; low end of range as of this filing due to depressed benchmark rates). This obligation is insured and collateralized by student loans.

(6) Inventories

Inventories consist of the following:


	June 30, 2009			December 31, 2008
Raw materials	$	174,576		$	183,150
Finished goods		963,466			1,013,704

		1,138,042			1,196,854
Allowance for excess inventory quantities		(42,647	)		(42,647	)

	$	1,095,395		$	1,154,207

(7) Share-Based Compensation

The Company follows SFAS 123(R), Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options of $113,619 and $207,415 for the three and six month periods ended June 30, 2009, compared to $185,638 and $338,141 for the same periods in 2008. The Company also recognized stock compensation expense related to accelerated vesting of stock options pursuant to severance agreements in the amount of $0 and $210,694 during the three and six month periods ended June 30, 2009, respectively.

As of June 30, 2009, there was approximately $402,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 4.6 years.

Employees Stock Options and Stock Grants

During the six months ended June 30, 2009, no shares of common stock were issued pursuant to option exercises compared to 16,667 shares for the same period in 2008. For the six months ended June 30, 2009, 310,500 shares of stock options were granted compared to 330,000 for the same period in 2008. For the six months ended June 30, 2009, 173,400 shares of stock options were forfeited, primarily due to the departure of Company executives as described in Note 10, compared to 11,601 shares for the same period in 2008.

Restricted Stock

For the three months ended June 30, 2009, the Company granted its outside directors stock appreciation rights (SAR’s) totaling 15,250 shares, under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. The fair value of the awards granted was $11,866 and is included in stock-based compensation expense for the three months ended June 30, 2009. In addition, the SAR’s granted vested immediately and are payable upon the directors’ removal or resignation from the position of director.

For the three months ended June 30, 2009 and 2008, respectively, the Company granted its outside directors shares of deferred common stock totaling none and 14,328 shares, under the Company’s 2005 Non-Employee Director Restricted Stock Plan. For the six months ended June 30, 2009 and 2008, those numbers were 15,250 and 25,962, respectively. However, each outside director elected to defer receipt of the restricted stock until the termination of his or her services to the Company. The deferral of restricted stock is being accounted for under the Company’s Non-Employee Director Deferred Compensation Plan. The fair value of awards granted was $11,590 and $90,000 for the restricted share rights and included in stock-based compensation expense for the six months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009, the Company does not have any unvested restricted stock or performance shares outstanding.

We used an estimated forfeiture rate of 4.41% for performance shares for the six month period ended June 30, 2008. For the three and six months ended June 30, 2008, the stock-based compensation expense (recovery) was $5,780 and $11,538 for the restricted share rights. For the three and six months ended June 30, 2008, the stock-based compensation (recovery) expense was ($5,962) and ($7,326) for the performance share rights totaling ($182) and ($4,444) in stock-based compensation expense. There was no expense or recovery for these items during 2009.

For the six months ended June 30, 2009, 310,500 options were granted. The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for the periods presented:


For the three months ended	June 30, 2009			June 30, 2008
Weighted-average risk-free interest rates:		2.81	%		3.45	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		78.50	%		75.00	%
Weighted-average fair value of the options granted:	$	.75		$	2.25

For the six months ended	June 30, 2009			June 30, 2008
Weighted-average risk-free interest rates:		2.81	%		3.44	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		78.50	%		75.08	%
Weighted-average fair value of the options granted:	$	.75		$	2.26

(8) Significant Customers and Contingencies

Revenue from two customers constituted approximately 62% and 23%, respectively, of the Company’s total revenue for the three months ended June 30, 2009, as compared to 58% and 20%, respectively, of the Company’s total revenue for the six months ended June 30, 2009. No other customer was individually significant for either period. Amounts included in accounts receivable on June 30, 2009 relating to these customers were approximately $502,000 and $185,000, respectively. Revenue from these two

customers constituted approximately 37% and 32% respectively, of the Company’s total revenue for the three months ended June 30, 2008, as compared to 37% and 32%, respectively, of the Company’s total revenue for the six months ended June 30, 2008. Amounts included in accounts receivable on June 30, 2008 relating to these customers were approximately $435,000 and $315,000 respectively.

We currently have supply agreements with BASF Corporation (“BASF”), our largest customer, and a technology development agreement with Altana Chemie, that have contingencies outlined in them which could potentially result in the license of technology and/or the sale of production equipment, providing capacity sufficient to meet the customer’s production needs, from the Company to the customer, if triggered by the Company’s failure to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of these supply agreements with BASF “trigger” a technology transfer (license and, optionally, an equipment sale) in the event (a) that earnings of the Company for a twelve month period ending with its most recently published quarterly financial statements are less than zero and its cash and cash equivalent investments are less than $2,000,000, (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000, or (c) of the Company’s insolvency, as further defined within the agreement. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at 115% of the equipment’s net book value. Under another of our supply agreements with BASF, upon the Company’s breach of its contractual obligations to BASF, we would be required to sell BASF certain production equipment at the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value.

We believe that we have sufficient cash and investment balances, including the value of the ARS portfolio and the potential value implicit in our debt-free balance sheet as of July 2009, to avoid the first triggering event under the supply agreement with BASF through 2010 and beyond. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using the Company’s technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF or our technology development agreement with Altana Chemie. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success and could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on the Company.

(9) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $80,000 and $328,000 for the three and six months ended June 30, 2009 compared to $156,000 and $448,000 for the same periods in 2008. As part of its revenue from international sources, we recognized approximately $172,000 in product revenue from several German companies and $150,000 in other revenue from a technology license fee from a Japanese licensee for the six months ended June 30, 2009. Revenue from these same international sources approximated $220,000 and $150,000 for the same period in 2008.

The Company’s operations comprise a single business segment and all of our long-lived assets are located within the United States.

(10) Severance Charges

In the first quarter of 2009, we announced the resignations of Mr. Robert Haines, our then-current Vice-President of Operations, and Dr. Richard Brotzman, our then-current Chief Technology Officer. Additionally, we eliminated twelve positions within the Operations group as a result of a reorganization plan implemented to align the organization with current demand based upon current economic conditions and the Company’s shift in strategy to develop a more customer-focused direct selling approach. During this process, management continues to seek to build its marketing and applications development capabilities. As a result of these resignations, the Company incurred a total of $794,069 of cash and non-cash severance charges. Included in these charges were salaries and benefits, accelerated vesting of stock options (non-cash) and other expenses. Of these charges, approximately $211,000 or 27% were related to the accelerated vesting of stock option which have no cash impact and are expected to have a minimal dilutive effect if any.

(11) Recently Adopted Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), Business Combinations . This Statement provides greater consistency in the accounting and financial reporting for business combinations. SFAS 141(R) establishes new disclosure requirements and, among other things, requires the acquiring entity in a business combination to record contingent consideration payable, to expense transaction costs, and to recognize all assets acquired and liabilities assumed at acquisition-date fair value. This standard is effective for the beginning of the Company’s first fiscal year beginning after December 15, 2008. SFAS 141(R) will have a significant impact on the accounting for future business combinations after the effective date and will impact financial statements both on the acquisition date and subsequent periods. We adopted the provisions of SFAS 141(R) during the first quarter 2009 and will apply its provisions for any future business combinations.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements . SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements , to establish accounting and reporting standards for the minority or noncontrolling interests in a subsidiary or variable interest entity and for the deconsolidation of a subsidiary or variable interest entity. Minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. It also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary and requires expanded disclosures. SFAS 160 is effective for the beginning of the Company’s first fiscal year beginning after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. We adopted the provisions of SFAS 160 during the first quarter 2009 and it had no impact on our financial position or results of operations.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS 133. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to discuss the underlying risks that an entity intends to manage as well as accounting designation. This Statement is effective for fiscal years beginning after November 15, 2008. We adopted the provisions of SFAS 161 the first quarter 2009 and it had no effect on our financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 is effective on a prospective basis for interim or annual periods ending after June 15, 2009. We adopted the provisions of SFAS 165 this quarter and it had no effect on our financial position or results of operations. We evaluated for disclosure any subsequent events through the August 12, 2009 filing date of this Quarterly Report on Form 10-Q, and determined there are no material events that warrant disclosure.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Nanophase is a nanomaterials developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterials for use in a variety of diverse markets: sunscreens, architectural coatings, industrial coatings, ingredients, personal care, abrasion-resistant applications, plastics additives, water filtration, DNA biosensors and a variety of polishing applications, including semiconductors and optics. We target markets in which we feel practical solutions may be found using nanoengineered products. Toward that end, we work closely with leaders in these target markets to identify their material and performance requirements and market material solutions to various end-use applications manufacturers. More recently developed technologies have made certain new products possible and opened potential new markets. We have added a large number of potential customers to our sales funnel during the past six months, many with new applications for our material technologies, and are in various stages of qualification with them. Some of these qualification cycles may take as little as six months, while others may take 2-4 years, if not longer.

On August 25, 2006, the Company sold, in a private placement to Rohm and Haas Electronic Materials CMP Holdings, Inc., 847,918 shares of common stock at $5.90 per share and received gross proceeds of $5.0 million. In accordance with our agreement, we plan to file a registration statement for these shares on Form S-3 during 2009.

Our revenue depends largely on the performance of the consumer products and exterior coatings markets. Both have been impacted by the global recession and the focus of firms that are or might be our customers to reduce their inventories and focus on cheaper products that are less likely to contain our higher performance materials. The exterior coatings market is further directly impacted by the housing industry, which has suffered a severe negative trend and is only recently showing signs of stabilizing. It is our intention to broaden our market reach to avoid excessive reliance on any particular customer or industry. We are doing this by addressing several market segments with targeted solutions.

Results of Operations

Total revenue decreased to $1,610,663 and $3,015,821 for the three and six months ended June 30, 2009, compared to $2,944,406 and $5,998,514 for the same periods in 2008. A substantial majority of the our revenue for the three and six month periods ended June 30, 2009 is from our two largest customers. See Note 8 to the Financial Statements for additional information regarding the revenue the Company derived from these customers for the three and six month periods ended June 30, 2009. Product revenue decreased to $1,500,733 and $2,797,546 for the three and six months ended June 30, 2009, compared to $2,811,626 and $5,754,347 for the same periods in 2008. The decrease in product revenue was primarily attributed to decreased sales from our largest customer, a portion of which management attributes to an aggressive inventory reduction program that has been felt across our and many other industries, and a decrease in sales to its largest architectural coatings customer, which may have been impacted by inventory cost control issues and the current state of the housing market, as well as decreased sales to Rohm and Haas Electronic Materials and BYK-Chemie. We and BASF currently have a technology agreement in place that has led to the joint development of the second generation of sunscreen nanomaterials for other potential personal care applications.

Other revenue decreased to $109,930 and $218,275 for the three and six months ended June 30, 2009, compared to $132,780 and $244,167 for the same periods in 2008. This decrease was primarily attributed to recognizing revenue during an evaluation agreement with a customer during 2008.

The majority of the total revenue generated during the six-month period ended June 30, 2009 was from our largest customer in healthcare (sunscreens), from an application in architectural coatings (our second largest customer) and from sales to several smaller customers.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreased to $1,430,363 and $2,745,287 for the three and six months ended June 30, 2009, compared to $1,836,276 and $3,836,484 for the same periods in 2008. The decrease in cost of revenue was generally attributed to decreased revenue volume, along with decreases in commodity metals pricing, reduction in manufacturing overhead and the continued efficiencies in reducing our remaining variable manufacturing costs for nanomaterials. These decreases were partially offset by inefficiencies due to decreased utilization of production assets. We expect to continue new nanomaterial development, primarily using our NanoArc ^® synthesis and dispersion technologies, for targeted applications and new markets through 2009 and beyond. Even at current revenue levels we have generated a positive gross margin, though margins have been impeded by not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. We eliminated twelve positions within the Operations group as a result of a cost savings initiative implemented in the first quarter of 2009 that we expect will have a positive near-term impact on margins. Management continues to believe that the current fixed manufacturing cost structure is sufficient to support significantly higher levels of production, given current revenue mix and resultant product revenue. The extent to which margins continue to grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to manage costs and our ability to pass commodity market-driven raw materials increases on to its customers. With product revenue volume increases, more of our fixed manufacturing costs would be absorbed, leading to increased margins. We expect to continue to focus on reducing controllable variable product manufacturing costs through 2009 and beyond, with potential offsetting increases in the commodity metals markets, but may or may not continue to see absolute dollar gross margin growth through 2009 and beyond, dependent upon the factors discussed above.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new product applications and coating formulations and the cost of enhancing the Company’s manufacturing processes. In another example, we have been and continue to be engaged in research to enhance our ability to disperse material in a variety of organic and inorganic media for use as coatings and polishing materials. Much of this work has led to several new products and additional potential new products for use by BYK-Chemie and other customers of Nanophase.

Now that we have demonstrated the capability to produce pilot quantities of mixed-metal oxides in a single crystal phase, we do not expect development of further variations on these materials to present material technological challenges. Many of these materials exhibit performance characteristics that can enable them to serve in various catalytic applications. Management is now working on several related commercial opportunities. We expect that this technique should not be difficult to scale to large quantity commercial volumes once application viability and firm demand are established. We also have an ongoing advanced engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing nanomaterials, as dictated by our customer-driven marketing strategy. We are not certain when or if any significant revenue will be generated from the production of the materials described above.

Research and development expense decreased to $381,075 and $785,119 for the three and six months ended June 30, 2009, compared to $416,239 and $854,934 for the same periods in 2008. The decrease in research and development expense was largely attributed to reduction in salary and stock compensation (non-cash) expenses. We do not expect research and development expense to increase significantly in 2009.

Selling, general and administrative expense decreased to $1,051,343 and $2,051,510 for the three and six months ended June 30, 2009, compared to $1,529,643 and $3,104,387 for the same periods in 2008. The net decrease, quantified for the six month period, was primarily attributed to decreases in salary expense ($590,000), legal fees ($180,000) and non-cash stock compensation ($125,000) expenses. These decreases were partially offset by increased consulting fees ($44,000).

In the first quarter of 2009, we announced the resignations of Mr. Robert Haines, our then-current Vice-President of Operations, and Dr. Richard Brotzman, our then-current Chief Technology Officer. Additionally, we eliminated twelve positions within the Operations group as a result of a reorganization plan implemented to align the organization with current demand based upon current economic conditions and the Company’s shift in strategy to develop a more customer-focused direct selling approach. During this process, management continues to seek to build its marketing and applications development capabilities. As a result of the above resignations, the Company incurred a total of $794,069 of cash and non-cash severance charges. Included in these charges were salaries and benefits, accelerated vesting of stock options (non-cash) and other expenses. Of these charges, approximately $211,000 or 27% were related to the accelerated vesting of stock option which have no cash impact and are expected to have a minimal dilutive effect if any. We believe that the impact of all cost savings and realignment measures over the past twelve months will be an annual savings of approximately $2 million.

Interest income decreased to $24,291 and $58,294 for the three and six months ended June 30, 2009, compared to $80,788 and $248,010 for the same period in 2008. The decrease was primarily due to severely decreased investment yields and decreases in funds available for investment.

Inflation

Management believes inflation has not had a material effect on the Company’s operations or on its financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of the Company’s costs of operations, may have a material effect on the Company’s operations and financial position in 2009 and beyond, if we are unable to pass through any increases.

Liquidity and Capital Resources

Our cash, cash equivalents and short-term investments amounted to $4,313,964 on June 30, 2009, compared to $7,631,957 on December 31, 2008 and $9,789,879 on June 30, 2008. On June 30, 2008, we reclassified our auction rate securities in the amount of $6 million from current to long-term investments. Additional discussion on these auction rate securities (ARS) is below. The net cash used in our operating activities was $2,133,156 for the six months ended June 30, 2009, compared to $717,918 for the same period in 2008, which is a direct result of a significant decrease in revenue (approximately $3 million), partially offset by certain cost savings initiatives described previously. Net cash provided by investing activities, which is due to maturities of securities and to a lesser extent capital expenditures offset partially by purchases of securities, amounted to $3,142,841 for the six months ended June 30, 2009 compared to $1,053,990 for the same period in 2008. Capital expenditures amounted to $88,663 and $206,950 for the six months ended June 30, 2009 and 2008, respectively. Net cash used in financing activities is due to principal payments on an equipment loan from BYK-Chemie and capital lease obligations amounting, in total, to $1,083,208 for the six months ended June 30, 2009 compared to $9,346 of net cash provided primarily by the issuance of shares of common stock pursuant to the exercise of options for the same period in 2008.

On July 2, 2007, we issued and sold 1,900,000 shares of common stock pursuant to a registration statement filed on May 22, 2007 and declared effective by the SEC on May 31, 2007 to certain institutional investors at a purchase price of $5.92 per share, for an aggregate purchase price of $11.2 million and net proceeds of approximately $10.5 million.

Our supply agreement with our largest customer contains several financial covenants which could potentially impact our liquidity. The most restrictive financial covenants under this agreement require that we maintain a minimum of $2 million in cash and cash equivalent investments, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering a transfer of certain technology and sale of related equipment to this customer. It is, of course, in our best interest to avoid such a transfer. We had approximately $ 4.3 million in cash, cash equivalents and current investments (excluding ARS) on June 30, 2009. In addition, we had a gross value of $6 million of ARS as of that date that could be sold at a discount or used to obtain funding, as discussed below. Our debt position renders the acceleration issue inapplicable to our current situation, indeed we became debt-free when our final loan payment was made during July 2009. This supply agreement and its covenants are more fully described in Note 8 to our Financial Statements.

For many reasons, our cash position has decreased significantly during the past year. Customers have more aggressively reduced their inventories, which has decreased our order flow. We have started to see this pattern reverse slightly, but customers remain very concerned about managing inventory levels. We have also seen certain customers more inclined to focus on cost than performance, which has impeded new formulation development that may include our materials, as well as pressure on existing customers to reduce the amount of material purchased from us in an attempt to control short term costs. In addition, we have expended significant efforts in trying to qualify for new markets. While we believe this to be the right course of action for future revenue growth, the early stages of this process tend to result in trial activity, which we expect to become commercial revenue over time. Some industries require two or more years of qualification prior to potential acceptance. For this reason we have begun the qualification process with several potential customers in a number of industries, and continue to look for market applications for which we can begin this qualification process. We have also repaid more than $1 million in debt during 2009, with our final payment made during July 2009. While these payments have reduced our cash position, they have left us debt-free as of July 2009, and the lack of these payments in the future will reduce the related cash outflows we experienced during 2009.

We adapted our business during the past twelve months to be more lean and efficient. This has reduced the cost of running our business, and will be even more apparent once severance payments have concluded (see footnote 10 on severance). This cost reduction has helped us withstand the drop in our commercial revenue, and we expect will help optimize our financial performance with increases in revenue that we expect.

We believe that cash from operations, cash and equivalents and investments on hand, including the value of the ARS portfolio, will be adequate to fund our operating plans through 2010 and for the foreseeable future. The Company’s actual future capital requirements in 2009 and beyond will depend, however, on many factors, including customer acceptance of our current and potential nanomaterials and product applications, continued progress in our research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell our materials and product applications. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant business growth with existing customers. We expect that capital spending relating to currently known capital needs for the remainder of 2009 will be less than $250,000 but could be even greater due to the factors discussed above.

As of August 2009, our remaining investments in auction rate securities (“ARS”) totaled $5.34 million, net of impairment charge. These ARS holdings in the Company’s investment portfolio have experienced “failed auctions” due to a lack of available buyers for them on their expected auction dates. An auction failure means that parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event there is a failed auction the indenture governing the security requires the

issuer to pay interest at a contractually defined rate. Despite these failed auctions, there have been no defaults on the underlying securities and investment income on these ARS holdings. They have been issued through the Federal Family Education Loan Program (“FFELPs Loans”) and carry an AAA credit rating. These FFELPs Loans are guaranteed to 97% of their $6 million value by the Department of Education. However, these failed auctions have caused us to change the level of inputs to determine their fair values. These values were estimated as of December 31, 2008 by an independent appraisal firm, Houlihan, Smith & Company, Inc., using a discounted cash flow model. Since these inputs were not observable they are classified as Level 3 inputs (see Note 4). As a result, for the period ended December 31, 2008, we recognized an “other than temporary impairment loss” on the ARS’s in the amount of $660,000, thus reducing the $6 million in nominal value to $5.34 million in net carrying value. We believe that the fair value estimates made for the year ended December 31, 2008 have not changed through June 30, 2009, and therefore, no changes to the carrying value of these investments have been made. We will continue to monitor the creditworthiness of the companies underwriting these securities and make any adjustments we deem necessary to reflect the fair value of these securities.

It is our intention to sell these instruments for as close to their $6 million value as possible as soon as we are able to do so. However, because we cannot ascertain when we may ultimately sell these instruments, and they have nominal maturity in excess of one year, we have classified these securities as long-term on the June 30, 2009 balance sheet.

Should events arise that make it appropriate for us to seek additional financing, such additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our stockholders. Such a financing could be necessitated by such things as the loss of existing customers; currently unknown capital requirements in light of the factors described above; new regulatory requirements that are outside our control; the need to meet previously discussed cash requirements to avoid a triggering event; or various other circumstances coming to pass that are currently not anticipated by the Company.

On June 30, 2009, we had a net operating loss carryforward of approximately $80.6 million for income tax purposes. Because the Company may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code in connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. A layer of the carryforward expired in 2008 and another is expected to expire in 2009. If not utilized, the remaining carryforward will expire at various dates between January 1, 2010 and December 31, 2028. As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities.

Off-Balance Sheet Arrangements

The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

Credit Environment

The credit markets continue to be volatile and have experienced a shortage in overall liquidity due to the sub-prime lending industry. The Company neither engages in any business activities in the mortgage industry, nor does it hold mortgage-backed securities in its investment portfolio. Overall the liquidity shortage in the marketplace includes Auction Rate Securities. We believe we have sufficient liquidity from cash and investment accounts to satisfy 2009 operational needs. See Notes 4 and 5 to the financial statements and Liquidity and Capital Resources in Management’s Discussion and Analysis for a further discussion of liquidity issues.

Safe Harbor Provision

Nanophase wants to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the “Form 10-Q”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company’s current expectations of the future results of its operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company has tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company’s actual results, performance or achievements in 2009 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: a decision by a customer to cancel a purchase order or supply agreement in light of the Company’s dependence on a limited number of key customers; uncertain demand for, and acceptance of, the Company’s nanocrystalline materials; the Company’s limited manufacturing capacity and product mix flexibility in light of customer demand; the Company’s limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company’s dependence on patents and protection of proprietary information; and the resolution of litigation in which the Company may become involved. Readers of this Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4.

Controls and Procedures

Disclosure controls

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2009 was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is made known to management and others, as appropriate, to allow timely decisions regarding required disclosures.

Internal control over financial reporting

The Company’s management, including the CEO and CFO, confirm that there was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required for a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

The 2009 Annual Meeting of Stockholders of the Company was held on July 22, 2009.

The stockholders voted to re-elect three Class III directors to the Company’s Board of Directors. Results of the voting were as follows:


Directors	For	Authority Withheld	Abstentions	Broker Non-Votes
Donald S. Perkins	14,674,176	1,681,465	—	—
Jerry K. Pearlman	14,614,901	1,740,740	—	—
George A. Vincent, III	14,701,291	1,654,350	—	—

James A. Henderson, James A. McClung, R. Janet Whitmore, Dr. Richard W. Siegel and Jess A. Jankowski continued their terms of office as directors of the Company after the 2009 Annual Meeting of Stockholders.

To ratify the appointment by the Company’s Audit and Finance Committee of McGladrey & Pullen, LLP as the independent auditors of the Company’s financial statements for the year ended December 31, 2009. Results of the voting were as follows:


For	Against	Abstentions	Broker Non-Votes
15,954,703	289,653	111,285	—

Item 5. Other Information

Effective August 12, 2009, the Company entered into an employment agreement (“Employment Agreement”) with Jess Jankowski in connection with his services as President and Chief Executive Officer of the Company.

Pursuant to the terms of the Employment Agreement, a copy of which is attached hereto as Exhibit 10.3, Mr. Jankowski will receive an annual base salary of not less than $275,000. In addition, Mr. Jankowski will be eligible for discretionary bonuses for services to be performed as an executive officer of the Company based on performance and achieving milestones approved by the Board of Directors of the Company (the “Board”).

Mr. Jankowski will be eligible for such stock options and other equity compensation as the Board deems appropriate, subject to the provisions of the Company’s 2004 Equity Compensation Plan (the “Plan”). Mr. Jankowski will also be entitled to the employee benefits made available by the Company generally to all other executive officers of the Company, subject to the terms and conditions of the Company’s employee benefit plan in effect from time to time.

In the event Mr. Jankowski’s employment is terminated other than for Cause, as defined in the Employment Agreement, Mr. Jankowski will receive a sum equal to Mr. Jankowski’s base salary in effect at the time of termination for 52 full weeks after the effective date of termination, payable in proportionate amounts on the Company’s regular pay cycle for professional employees, provided that Mr. Jankowski signs, without subsequent revocation, a Separation Agreement and Release in a form acceptable to the Company. In addition, all stock options granted to Mr. Jankowski prior to termination will become fully vested and exercisable in accordance with the applicable option grant agreement and the Plan. If he is terminated for Cause, or if he resigns as an employee of the Company, Mr. Jankowski will not be entitled to any severance or other benefits accruing after the term of the Employment Agreement and such rights will be forfeited immediately upon the end of such term.

If, within two years after the occurrence of a Change in Control, as defined in the Employment Agreement, Mr. Jankowski’s employment is terminated other than for Cause, his responsibilities or annual compensation are materially reduced without his prior consent, or the Company ceases to be publicly held (each, a “Trigger”), then, subject to Mr. Jankowski signing, without subsequently revoking, a Separation Agreement and Release in a form acceptable to the Company, Mr. Jankowski will receive a sum equal to his base salary for 104 full weeks after the date the Trigger occurs. In addition, all stock options granted to Mr. Jankowski prior to the Trigger will become fully vested and exercisable in accordance with the applicable option grant agreement and the Plan.

The foregoing summary of the material provisions of the Employment Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to all provision of the described agreement.

Item 6. Exhibits


Exhibit 10.1*		Nanophase Technologies Corporation’s Amended and Restated 2006 Stock Appreciation Rights Plan, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed April 9, 2009.

Exhibit 10.2*		Employment Agreement dated June 24, 2009 between the Company and Frank Cesario, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 26, 2009.

Exhibit 10.3*		Employment Agreement effective August 12, 2009 between the Company and Jess Jankowski.

Exhibit 23.1		Consent of Houlihan Smith & Company Inc., dated August 4, 2009.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) under the Exchange Act.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.

Exhibit 32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

*	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	NANOPHASE TECHNOLOGIES CORPORATION

Date: August 12, 2009	By:	/s/ JESS A. JANKOWSKI
		Jess A. Jankowski
		President, Chief Executive Officer (principal executive officer) and a Director

Date: August 12, 2009	By:	/s/ FRANK J. CESARIO
		Frank J. Cesario
		Chief Financial Officer (principal financial and chief accounting officer)

Exhibit 10.3

EMPLOYMENT AGREEMENT

Employment Agreement dated and effective as of August 12, 2009 (this “ Agreement ”), between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (with its successors and assigns, referred to as the “ Company ”), and Jess Jankowski, (referred to as “ Executive Officer ”).

Preliminary Statement

The Company desires to continue employing Executive Officer, and Executive Officer wishes to continue being employed by the Company, upon the terms and subject to the conditions set forth in this Agreement. The Company and Executive Officer also wish to enter into the other covenants set forth in this Agreement, all of which are related to Executive Officer’s continued employment with the Company. In consideration of the mutual promises and covenants stated below, Executive Officer and the Company therefore agree as follows:

Agreement

1. Employment for Term . The Company employs Executive Officer, and Executive Officer hereby accepts employment as an Executive Officer of the Company, beginning on August 12, 2009, and renewing automatically on an annual basis until terminated pursuant to Section 7 below (the “ Term ”).

2. Position and Duties . During the Term, Executive Officer shall serve as President and Chief Executive Officer, and shall report to the Board of Directors (the “ Board ”) of the Company. During the Term, Executive Officer shall also hold such additional positions and titles as the Board may determine from time to time. During the Term, Executive Officer shall devote substantially all of his business time and best efforts to his duties as an Executive Officer of the Company.

3. Signing Benefits . In consideration of and in reliance upon Executive Officer’s execution of this Agreement, and based entirely upon Executive Officer’s acceptance of the duties and obligations to the Company under this Agreement (specifically including, without limitation, Executive Officer’s obligations under the covenants in Section 9, and the restrictions in Section 10 of the Agreement), the Company shall provide Executive Officer with signing benefits including:

(a) the following Severance Benefits if the Company ends the Term for reasons other than “Cause” (as defined in Section 8(a)) and Executive Officer signs, without subsequent revocation, a Separation Agreement and Release in a form acceptable to the Company: (i) the Company shall pay Executive Officer a sum equal in annual amount to Executive Officer’s base salary in effect at the time of termination during the period (the “ Severance Period ”) of 52 full weeks after the effective date of termination, payable in proportionate amounts on the Company’s regular pay cycle for executive employees and (if the last day of the Severance Period is not the last day of a pay period) on the last day of the Severance Period, and (ii) all stock options granted to Executive Officer prior to termination shall become fully vested, and shall become exercisable (by Executive Officer, or upon his death or disability, by his

heirs, beneficiaries and personal representatives) in accordance with the applicable option grant agreement and the Company’s 2004 Equity Compensation Plan (the “ Plan ”) or such predecessor or successor stock option plan as may govern any particular option grant agreement.

(b) the benefits arising from a Change In Control (as defined in Section 11(b) ).

4. Compensation .

(a) Base Salary . The Company shall pay Executive Officer a base salary, beginning on the first day of the Term and ending on the last day of the Term, of not less than $275,000 per annum, payable on the Company’s regular pay cycle for professional employees. Executive Officer may be entitled to additional compensation for his services as a member of the Board, as determined by the Board in its sole discretion.

(b) Bonus Payment . Executive Officer will be eligible for discretionary bonuses for services to be performed as an Executive Officer of the Company based on performance milestones agreed upon by the Board.

(c) Stock Options. Subject to the provisions of the Company’s Plan, and as determined by the Board in its sole discretion, Executive Officer shall be eligible for such stock options and other equity compensation as the Board deems appropriate.

(d) Other and Additional Compensation . Section 4(a) establishes the minimum salary level for Executive Officer during the Term, and shall not preclude the Board from awarding Executive Officer a higher salary at any time, nor shall it preclude the Board from awarding Executive Officer bonuses or other compensation in the discretion of the Board.

5. Employee Benefits . During the Term, Executive Officer shall be entitled to the employee benefits made available by the Company generally to all other Executive Officers of the Company, subject to all the terms and conditions of the Company’s employee benefit plans in effect from time to time. Executive Officer shall be entitled to five (5) weeks of paid vacation during each year of the Term, subject to the Company’s vacation policy in effect from time to time.

6. Expenses . The Company shall reimburse Executive Officer for actual out-of-pocket expenses reasonably incurred by Executive Officer in performing services as an Executive Officer of the Company in accord with the Company’s policy for such reimbursements in effect from time to time.

7. Termination .

(a) General . The Term shall end (i) immediately upon Executive Officer’s death, or (ii) upon Executive Officer becoming disabled (within the meaning of the Americans With Disabilities Act of 1991, as amended) and unable to perform fully all essential functions of his job, with or without reasonable accommodation, for a period of 150 calendar days. Either Executive Officer or the Company may end the Term at any time for any reason or no reason, with or without Cause, in the absolute discretion of Executive

Officer or the Board (but subject to each party’s obligations under this Agreement), provided that Executive Officer will provide the Company with at least two (2) weeks prior written notice of Executive Officer’s resignation from his position as an employee with the Company. Upon receipt of such written notice, the Company, in its sole discretion, may accelerate the effective date of the resignation to such date as the Company deems appropriate, provided that Executive Officer shall receive the compensation required under Section 4(a) of this Agreement for a full two (2) week period.

(b) Notice of Termination . If the Company ends the Term, it shall give Executive Officer at least two (2) weeks prior written notice of the termination, including a statement of whether the termination was for “Cause” (as defined in Section 8(a) below). Upon delivery of such written notice, the Company, in its sole discretion, may accelerate the effective date of such termination to such date as the Company deems appropriate, provided that Executive Officer shall receive the compensation required under Section 4(a) of this Agreement for a full two (2) week period. The Company’s failure to give notice under this Section 7(b) shall not, however, affect the validity of the Company’s termination of the Term or Executive Officer’s employment, nor shall the lack of such notice entitle Executive Officer to any rights or claims against the Company other than those arising from Executive Officer’s right to receive the compensation required under Section 4(a) of this Agreement for a full two (2 week period.

8. Severance Benefits .

(a) “Cause” Defined . “Cause” means (i) willful or gross malfeasance or misconduct by Executive Officer in connection with Executive Officer’s employment; (ii) Executive Officer’s negligence in performing any of Executive Officer’s duties under this Agreement; (iii) Executive Officer’s conviction of, or entry of a plea of guilty or nolo contendere with respect to, any felony or misdemeanor reflecting upon Executive Officer’s honesty; (iv) Executive Officer’s breach of any written policy applicable to all employees adopted by the Company concerning conflicts of interest, political contributions, standards of business conduct or fair employment practices, procedures with respect to compliance with securities laws or any similar matters, or adopted pursuant to the requirements of any government contract or regulation; or (v) breach by Executive Officer of any of the material terms and conditions of this Agreement.

(b) Termination without Cause . If the Company ends the Term other than for Cause, Executive Officer shall receive the Severance Benefits provided under Section 3(a ) of this Agreement, provided that Executive Officer signs, without subsequent revocation, a Separation Agreement and Release in a form acceptable to the Company.

(c) Termination for Any Other Reason . If the Company ends the Term for Cause, or if Executive Officer resigns as an employee of the Company, then the Company shall have no obligation to pay Executive Officer any amount, whether for salary, benefits, bonuses, or other compensation or expense reimbursements of any kind, accruing after the end of the Term, and such rights shall, except as otherwise required by law (or, with respect to the Options, as set forth in the Plan or the applicable option grant agreements), be forfeited immediately upon the end of the Term.

9. Additional Covenants .

(a) Confidentiality . Executive Officer confirms his acceptance of all his obligations under that certain Confidential Information and Proprietary Rights Agreement between Executive Officer and the Company dated as of November 28, 1995.

(b) “Non-Competition Period” Defined. “Non-Competition Period” means the period beginning at the end of the Term and ending twelve (12) months thereafter.

(i) Executive Officer acknowledges that: [a] the Company will rely upon Executive Officer to help maintain and grow the Company’s business and related functions; [b] Executive Officer will have business relationships on the Company’s behalf with the Company’s significant customers, suppliers and vendors with whom the Company has exclusive, long-term or near-permanent relationships; and [c] Executive Officer will have access to, use or control of highly valuable non-public tangible confidential information about the Company’s developed and developing technology, inventions, equipment, methods and know-how concerning nanomaterials production, coating and marketing, as well as highly valuable non-public tangible and non-tangible proprietary information about the Company’s finances, pending transactions, customer identity and Customer dealings.

(ii) For the foregoing reasons, and in consideration of the benefits available to Executive Officer under Sections 3(a), 3(b), 7(a), 7(b), 8(b), and 11(b) of this Agreement, Executive Officer covenants that both during the Term of this Agreement and the subsequent Non-Competition Period, Executive Officer shall not in any manner, directly or indirectly:

[A] Engage in, be financially interested in, represent, render advice or service of any kind to, or be employed by or in any way affiliated with, any other business (conducted for profit or not for profit) which is materially engaged in developing, producing, coating, refining, marketing, supplying or selling nanocrystalline materials (including powders, dispersions and coatings) (a “Prohibited Business”), (a) where such Prohibited Business is located or conducted within a radius of fifty (50) miles from any of the Company’s facilities where Executive Officer has worked or over which Executive Officer has exercised any form of supervisory authority during a period of twelve (12) months before the date of Executive Officer’s termination; or (b) where Executive Officer provides a Prohibited Business with services the same as or similar to those he provided to the Company and such Prohibited Business, regardless of its location, is either Cabot Corporation; Cabot Microelectronics Corporation; DeGussa Corporation; NanoDynamics, Inc; NanoProducts Corporation; Nanotechnologies, Inc.; NanoMaterials Technology Pte, LTD; Nanogate, SDC Materials; Primet Precision Materials, Inc.; ItN Nanovation; Nanux, Inc.; PPG Industries; or Nanomaterials Company.

[B] Whether on Executive Officer’s own behalf or on behalf of any other person or entity, (a) contact, solicit, accept business from, disrupt or in any way interfere with the Company’s business relationship with any person or entity that was a

customer, supplier or vendor of the Company during Executive Officer’s employment, with respect to the type of business done by the Company, or (b) contact, solicit or attempt to solicit for employment or engagement any persons who were officers, employees or contractors of the Company at any time within a 180-day period before the date of Executive Officer’s termination.

(iii) The restrictions in Section 9(c)(ii) shall not preclude Executive Officer from owning up to three percent (3%) of the voting securities of any Prohibited Business whose voting securities are registered under Section 12(g) of the Securities Exchange Act of 1934.

(d) Remedies.

(i) Injunctions . In view of Executive Officer’s access to the Company’s confidential information, and in consideration of the value of such property to the Company, Executive Officer agrees that the covenants in this Section 9 are necessary to protect the Company’s interests in its proprietary information and trade secrets, and to protect and maintain customer and supplier relationships, both actual and potential, which Executive Officer would not have had access to or involvement in but for his employment with the Company. Executive Officer confirms that enforcement of the covenants in this Section 9 will not prevent him from earning a livelihood. Executive Officer further agrees that in the event of his actual or threatened breach of any covenant in this Section 9, the Company would be irreparably harmed and the full extent of injury resulting therefrom would be impossible to calculate, and the Company therefore will not have an adequate remedy at law. Accordingly, Executive Officer agrees that temporary and permanent injunctive relief are appropriate remedies against such breach, without bond or security; provided, however, that nothing herein shall be construed as limiting any other legal or equitable remedies available to the Company.

(ii) Enforcement . Executive Officer shall pay all costs and expenses (including, without limitation, court costs, investigation costs, expert witness and attorneys’ fees) incurred by the Company in connection with its successfully enforcing its rights under this Agreement. The Company shall have the right to disclose the contents of this Agreement or to deliver a copy of it to any person or entity whom the Company believes the Executive Officer has solicited in violation of this Agreement.

(iii) Arbitration . No dispute arising from Executive Officer’s actual or threatened breach of any covenant in this Section 9 shall be subject to arbitration. However, any other dispute or claim arising from any other provision of this Agreement, or relating to Executive Officer’s employment (whether based on statute, ordinance, regulation, contract, tort or otherwise), shall be submitted to arbitration before a single arbitrator pursuant to the Employment Arbitration Rules of the American Arbitration Association. Any such arbitration shall be conducted in Chicago, Illinois. An arbitration award rendered under this Section 9(d)(iii) shall be final and binding on the parties and may be submitted to any court of competent jurisdiction for entry of a judgment thereon in accord with the Federal Arbitration Act or the Illinois Arbitration Act.

10. Limitation On Claims . EXECUTIVE OFFICER AGREES THAT HE WILL NOT COMMENCE ANY ACTION OR SUIT RELATING TO MATTERS ARISING OUT OF HIS EMPLOYMENT WITH THE COMPANY (IRRESPECTIVE OF

WHETHER SUCH ACTION OR SUIT ARISES OUT OF THE PROVISIONS OF THIS AGREEMENT) LATER THAN SIX MONTHS AFTER THE FIRST TO OCCUR OF (A) THE DATE SUCH CLAIM INITIALLY ARISES, OR (B) THE DATE EXECUTIVE OFFICER’S EMPLOYMENT TERMINATES FOR ANY REASON WHATSOEVER. EXECUTIVE OFFICER EXPRESSLY WAIVES ANY APPLICABLE STATUTE OF LIMITATION TO THE CONTRARY.

11. Successors and Assigns .

(a) Executive Officer . This Agreement is a personal contract, and the rights and interests that this Agreement accords to Executive Officer may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by Executive Officer. Except to the extent contemplated in Section 3(a)(ii) above, Executive Officer shall not have any power of anticipation, alienation or assignment of the payments contemplated by this Agreement, all rights and benefits of Executive Officer shall be for the sole personal benefit of Executive Officer, and no other person shall acquire any right, title or interest under this Agreement by reason of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings against Executive Officer. Except as so provided, this Agreement shall inure to the benefit of and be binding upon Executive Officer and Executive Officer’s personal representatives, distributees and legatees.

(b) The Company . This Agreement shall be binding upon the Company and inure to the benefit of the Company and its successors and assigns, including but not limited to any person or entity that may acquire all or substantially all of the Company’s assets or business or with which the Company may be consolidated or merged. This Agreement shall continue in full force and effect in the event the Company has or becomes subject to a “Change In Control,” defined solely for purposes of this Section 11(b) as any event or series of events which result in any of the following: (i) one person or entity, or a group of persons or entities affiliated in any way, acquiring any right of ownership or control over more than fifty percent (50%) of the Company’s stock; (ii) a sale or disposal of all or substantially all of the Company’s assets; (iii) the Company’s merging or consolidating, otherwise combining or affiliating with another business; (iv) the Company’s dissolving or liquidating; or (v) more than a fifty percent (50%) change in the membership of the Company’s Board of Directors during any contiguous period of fourteen (14) months, if that such change in membership occurs without the concurrence or affirmative recommendation of the then-current Board of Directors. If, within two (2) years after the occurrence of any transaction(s) or other event(s) resulting in a Change In Control, Executive Officer’s employment with the Company is terminated without cause (as defined in Section 8(a) of this Agreement), his responsibilities or annual compensation are materially reduced without his prior consent, or the Company ceases to be publicly held ( i.e. , no longer subject to the periodic filing requirements of the Securities Exchange Act of 1934) (each such circumstance being a “Trigger”), then, subject to Executive Officer signing, without subsequent revocation, a separation agreement and release in a form acceptable to the Company: [a] the Company shall pay Executive Officer a sum equal in annual amount to Executive Officer’s base salary in effect at the time the Trigger occurs for 104 full weeks after the date the Trigger occurs, payable in proportionate amounts on the Company’s regular pay cycle for executive employees; and [b] any stock options, restricted or performance shares granted to Executive Officer prior to the date the Trigger occurs shall become fully vested and shall immediately become exercisable in accordance with the applicable option or share grant and the Plan. At Executive Officer’s unilateral option, the Company’s obligations under this Agreement shall cease if the

successor to the Company, the purchaser or acquirer either of the Company or of all or substantially all of its assets, or the entity with which the Company has affiliated, shall assume in writing the Company’s obligations under this Agreement (and deliver an executed copy of such assumption to Executive Officer), in which case such successor or purchaser, but not the Company, shall thereafter be the only party obligated to perform the obligations that remain to be performed on the part of the Company under this Agreement.

12. Entire Agreement . This Agreement and the other agreements referenced herein represent the entire agreement between the parties concerning Executive Officer’s employment with the Company and supersede all prior negotiations, discussions, understandings and agreements, whether written or oral, between Executive Officer and the Company relating to the subject matter of this Agreement.

13. Amendment or Modification, Waiver . No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing signed by Executive Officer and by a duly authorized officer of the Company other than Executive Officer. No waiver by any party to this Agreement of any breach by another party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time.

14. Notices . Any notice provided for in this Agreement must be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested), sent by reputable overnight courier service (charges prepaid), or by facsimile to the recipient at the address below indicated:


To the Company:		Nanophase Technologies Corporation
		1319 Marquette Drive
		Romeoville, IL 60446
		Attn: Vice-President, Human Resources & Employee Relations
		Facsimile: (630) 771-6775

To Executive Officer:		Jess Jankowski

or such other address or facsimile number, or to the attention of such other person as the recipient shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so personally delivered, or one day after deposit, if sent by courier, when confirmed received if sent by facsimile, or if mailed, five days after deposit in the U.S. first-class mail, postage prepaid.

15. Severability . If any provision of this Agreement shall be determined by any court of competent jurisdiction to be unenforceable to any extent, the remainder of this Agreement shall not be affected, but shall remain in full force and effect If any provision of this Agreement containing restrictions is held to cover an area or to be for a length of time that is unreasonable or in any other way is construed to be invalid, such provision shall not be determined to be entirely of no effect; instead, it is the intention and

desire of both the Company and Executive Officer that any court of competent jurisdiction shall interpret or reform this Agreement to provide for a restriction having the maximum enforceable area, time period and such other constraints or conditions as shall be enforceable under the applicable law.

16. Survivorship . The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

17. Headings . All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience of reference, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph.

18. Withholding Taxes . All salary, benefits, reimbursements and any other payments to Executive Officer under this Agreement shall be subject to all applicable payroll and withholding taxes and deductions required by any law, rule or regulation of any federal, state or local authority.

19. Applicable Law: Jurisdiction . The laws of the State of Illinois shall govern the interpretation of the terms of this Agreement, without reference to rules relating to conflicts of law.


NANOPHASE TECHNOLOGIES CORPORATION

By:		/s/ Jerry Pearlman
		Jerry Pearlman
		Its: Chairman of the Compensation & Governance
		Committee of the Board of Directors

/s/ Jess Jankowski
		Jess Jankowski

Exhibit 23.1

LOGO

We consent to the inclusion in the Quarterly Report of Nanophase Technologies Corporation and subsidiaries on Form 10-Q for the period ended June 30, 2009 of references to our Valuation Report relating to the estimation of fair value of certain auction rate securities held by the Company as of June 30, 2009 and to references to our firm’s name therein.

LOGO

Houlihan Smith & Company, Inc.

Chicago, Illinois

August 04, 2009

Exhibit 31.1

Certification of the Chief Executive Officer

Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Exchange Act

I, Jess Jankowski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of then end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2009

/s/ JESS A. JANKOWSKI

Jess A. Jankowski

Chief Executive Officer

Exhibit 31.2

Certification of the Chief Financial Officer

Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Exchange Act

I, Frank Cesario, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2009

/s/ FRANK J. CESARIO

Frank J. Cesario

Chief Financial Officer

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with this quarterly report of Nanophase Technologies Corporation (the “Company”) on Form 10-Q for the quarter ending June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jess A. Jankowski, Chief Executive Officer of the Company, and Frank J. Cesario, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 12, 2009

/s/ Jess A. Jankowski

Jess A. Jankowski

Chief Executive Officer

/s/ Frank J. Cesario

Frank J. Cesario

Chief Financial Officer

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ