883107--3/15/2006--NANOPHASE_TECHNOLOGIES

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We have a limited operating history and may not be able to address difficulties encountered by early stage companies in new and rapidly evolving markets. We have a history of losses that may continue in the future. We depend on a small number of customers for a high percentage of our sales, and the loss of orders from a significant customer could cause a decline in revenue and/or increases in the level of losses incurred. Any downturn in the markets served by us would harm our business. Our products often have long adoption cycles, which could make it difficult to achieve market acceptance and makes it difficult to forecast revenues. We depend on collaborative development relationships with our customers and do not have a substantial direct sales force or an established distribution network apart from the distribution networks of our strategic partners. If we are unable to initiate or sustain such collaborative relationships or if the terms of these relationships limit the distribution of our products or if our strategic partners are unable to distribute our products efficiently, then we may be unable to independently develop, manufacture or market our current and future nanocrystalline materials or applications. If commodity metal prices increased at such a rate that we are unable to recover lost margins on a timely basis or that our products became uncompetitive in their current marketplaces, our financial and liquidity position and results of operations would be substantially harmed. If a catastrophe strikes either of our manufacturing facilities or if we were to lose our lease for either facility due to non-renewal or other unforeseen events, we may be unable to manufacture our materials to meet customers demands. If we are unable to expand our production capabilities to meet unexpected demand, we may be unable to manage our growth and our business would suffer. Protection of our intellectual property is limited and uncertain. Our industry is experiencing rapid changes in technology. If we are unable to keep pace with these changes, our business will not grow. Our market is highly competitive, and if we are unable to compete effectively, then our business will not grow. We may need to raise additional capital in the future. If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms or we may be required to transfer equipment to our largest customer. We depend on key personnel, and their unplanned departure could harm our business. We face potential product liability risks which could result in significant costs that exceed our insurance coverage, damage our reputation and harm our business. We are subject to governmental regulations. The costs of compliance and liability for noncompliance with governmental regulations could have a material adverse effect on our business, results of operations and financial condition. We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition could be beneficial to our stockholders. Future sales of our common stock by existing stockholders could negatively affect the market price of our stock and make it more difficult for us to sell stock in the future. Bradford T. Whitmore has significant influence on all matters requiring stockholder approval because he beneficially owns a large percentage of our common stock, and he may vote the common stock in ways with which our other stockholders disagree. We have been involved in litigation. If we are involved in similar litigation in the future, the expense of defending such litigation and the potential costs of judgments against us and the costs of maintaining insurance coverage could have a material adverse effect on our financial performance. Our stock price is volatile. Dilutive Effect of Private Placements. We have never paid dividends.

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883107--3/15/2006--NANOPHASE_TECHNOLOGIES_CORPORATION