Joseph Cross - CEO Jess Jankowski - CFO

Michael Lu Jim Lieberman

': ': Thank you. I would now like to turn the conference over to Joseph Cross, President and CEO. Mr. Cross, you may begin your conference. ': Thank you. I would now like to turn the conference over to Joseph Cross, President and CEO. Mr. Cross, you may begin your conference. ': Thank you. I would now like to turn the conference over to Joseph Cross, President and CEO. Mr. Cross, you may begin your conference.

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': ': ': ': ': ': ': ': ': ': ': ': For the six months of 2008 versus 2007 on the revenue side, we saw reductions of 880,000 from BASF, 570,000 ALTANA and architectural coatings customer, offset by a $640,000 increase from Rohm and Hass. This resulted in a net revenue decrease of just over a $1 million year-over-year. What this tells us about is the strengths of these underlying businesses is not obvious. We entered 2008 with a view toward year-over-year unit sales growth with our partners BASF and ALTANA; peppered by the fact that commodity pricing was receding and we expected dollar revenue might flatten, particularly for BASF in the form of commodity surcharge reductions. As a matter of fact 15 to 20% of the reduction in BASF 2008 revenue is due to lower commodity raw material pricing. For the balance of the reductions, we now believe that BASF and ALTANA left 2007 with significant inventory levels, which has met their previous views of their growth. These two partners along with their large architectural coatings customer also seem to be experiencing the impact of consumer sentiment and ongoing concerns about the economy on the industrial side as it impacts demand for their downstream products. ': ': When we secured the large architectural coatings customer, it took an innovative, collaborative process that brought us to comparable revenue stream that relies on the strength of both of our materials and our applications development expertise. This was a single event in our history that told us we could sell our materials effectively into new markets that we are seeking advantages unavailable elsewhere and at good margins. ': ': ': In terms of our revenue for the recent six months ended, BASF had made up to 37%, our architectural coatings customer 32%, Rohm and Hass 13%, and BYK Chemie accounted for 8% of total revenue. ': ': ': ': Moving down, R&D expenses were down 8% quarter-over-quarter and down 12% for the six months period. The bulk of these decreases were due to reductions in compensation expense that has been possible due to the migration of the business model for being more focused on application development than on broad new material development. We believe we are now doing more respective applications development with fewer better focused resources. SG&A expenses were up 12 and 16% respectively when comparing to three and six months periods in 2008 to those in 2007. Several anomalies and non0-recurring items have created this disparity, which amounted to 450,000 for the six month period. ': The Q1 2008 patent abandonment also contributed to 150,000 as a variant. And per due SEC guidance, audit fees were all expense than Q1 has earned versus being accrued evenly throughout 2007. This contributed 90,000 of the variants and should also be on the top half of the second half. Further we incurred 40,000 in recruiting cost for our new Director of Sales. Some of the other increases were due to added compensation mainly related to changes in the sales and marketing group, offset by reductions in consulting speech for 2008, given the extensive 2007 market study we commissioned. We also had some similar back and forth accrual timing issues at a smaller scale. Most of the increases in SG&A are easily explainable and not expected to recur for the rest of the year. On a GAAP basis, as reported, Nanophase lost $0.04 per share in Q2 of 2008 versus $0.01 per share in Q2 of 2007 with six month losses holding at $0.08 per share for 2007 and 2008. ': Moving to the balance sheet highlights, Nanophase ended Q2 with $15.8 million in cash and investments. Q3 inventories are up to 1.6 million, about 39% higher than last quarter. This increase largely relates to material for which we have orders and solid forecast, as well as the significant amount of raw material some of which comes via China that we ordered in advance for the summer Olympics to avoid logistics problems. Equipment and leasehold improvements amounted to about 300,000 for the first half of this year. And until our view of 2009 and beyond solidifies, we plan on limiting CapEx to a bear minimum. ': ':

': See the first six months Nanophase achieved a customer complaint rate of zero and a customer service level worth 99.9%. This is generally regarded as world class product and service quality, an attribute that clearly differentiates Nanophase in the market. As we have repeatedly demonstrated since 1999, we continue to improve product cost which is clearly demonstrated in our increasing gross margins by improving up on our current assets and improving product quality. Based on our Lean Six Sigma manufacturing methodology, we have now improved product quality to Six Sigma for our largest volume products. This represents quality level of 99.9999% essentially zero defects. Simultaneously, we have increased product yields by 6% further reducing costs and improving gross margins. ': ': ': RHEM has stated that it is in the final stages of closing new business for our alumina based slurry, which is a new product for our partnership. And as such, would represent a new revenue stream for Nanophase. We are unable to speculate on the timing of this, but we are optimistic that it may occur in the near term, but obviously until an order is received, it is still speculative. RHEM is also starting field trials of a new Nanophase cerium-based slurry in the next 30 to 60 days with a major semiconductor manufacturer, which is a positive development for the new product. We are optimistic for success and we will support RHEM, however needed. In summary, RHEM is moving forward and we are optimistic for continuing revenue growth in the CMP area. ': RHEM has stated that it is in the final stages of closing new business for our alumina based slurry, which is a new product for our partnership. And as such, would represent a new revenue stream for Nanophase. We are unable to speculate on the timing of this, but we are optimistic that it may occur in the near term, but obviously until an order is received, it is still speculative. RHEM is also starting field trials of a new Nanophase cerium-based slurry in the next 30 to 60 days with a major semiconductor manufacturer, which is a positive development for the new product. We are optimistic for success and we will support RHEM, however needed. In summary, RHEM is moving forward and we are optimistic for continuing revenue growth in the CMP area. ': Our largest architectural paint customer is seeing continued success with our nanomaterial based formulation and have stated they are pleased with market adoption, customer acceptance and growth. One year after market introduction, the new product launch has been successful and we are optimistic about continuing growth in the future. We are also involved in a specific new product development with this customer that appears promising at this time and if successful would represent a new revenue source for Nanophase. As you maybe aware, architectural coating companies have public announced as recently as last week, revenue and financial impacts from the housing market and the consumer slowdown in US. While our customers forecast for the second half of 2008 is essentially to our expectation entering the year. We remain cautious given current market conditions and uncertainties in the second half of 2008. ': Relative to the new business we are actively involved with several opportunities in various markets, examples includes, solar energy, animal hygiene, current electronics, lighting, natural rubber, latex products, SPF clothing, liquid cooling, (inaudible) exterior wood products and several others. ': Relative to the new business we are actively involved with several opportunities in various markets, examples includes, solar energy, animal hygiene, current electronics, lighting, natural rubber, latex products, SPF clothing, liquid cooling, (inaudible) exterior wood products and several others. ': ': ': ': ': ': ': This concludes our prepared remarks and we are available for your questions at this time.

(Operator Instructions). Your first question comes from [Michael Lu].

Hi Jess.

Hey Michael.

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Okay. And the other question I had is you had mentioned that you expect revenues to be flat in the second half of this year or in 3Q and 4Q relative to the second quarter. But if we look on an annualized basis, that only amounts to like a single digit type of decline on a full year-over-year comp, and you have also indicated being more like 10 to 15% decline. Could you just clarify that?

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Okay.

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Okay. Great, thank you.

Your next question comes from [Jim Lieberman].

The promising opportunities and the improving environment regarding Rohm and Haas. And is it possible that…

Jim we missed the first part of what you were saying.

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And I have one more questions. Could you mention that the UV exterior wood based products, you missed the clear cuttings. Is that something, do you have any clear picture of when it may hit the market?

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Thank you very much.

Thank you.

(Operator Instructions). At this time there are no further questions. Mr. Cross do you have any closing remarks.

We thank you for you attention and we look forward to talking to you next quarter. Thank you.

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