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<FILING-DATE>20010328
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>NANOPHASE TECHNOLOGIES CORPORATION
<CIK>0000883107
<ASSIGNED-SIC>3390
<IRS-NUMBER>363687863
<STATE-OF-INCORPORATION>IL
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
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<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>000-22333
<FILM-NUMBER>1581700
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<BUSINESS-ADDRESS>
<STREET1>453 COMMERCE ST
<CITY>BURR RIDGE
<STATE>IL
<ZIP>60521
<PHONE>6303231200
</BUSINESS-ADDRESS>
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<STREET1>453 COMMERCE STREET
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<STATE>IL
<ZIP>60521
</MAIL-ADDRESS>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>c60965e10-k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>

<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------

                                   FORM 10-K

               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                         COMMISSION FILE NUMBER 0-22333

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

<TABLE>
<S>                                            <C>
                  DELAWARE                                      36-3687863
        (State or other jurisdiction                         (I.R.S. Employer
      of incorporation or organization)                     Identification No.)
</TABLE>

                1319 MARQUETTE DRIVE, ROMEOVILLE, ILLINOIS 60446
              (Address of principal executive offices) (zip code)

       Registrant's telephone number, including area code: (630) 323-1200

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                        PREFERRED STOCK PURCHASE RIGHTS

     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 [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ]  No [X]

     The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on March 20, 2001 was $84,709,008.

     The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 20, 2001 was 13,621,549.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Nanotechnology, as practiced by Nanophase Technologies Corporation
("Nanophase" or the "Company"), involves creating nanostructured materials by
controlling matter at the nanometer-size scale -- at the level of atoms and
molecules. Because these "nanostructures" are made with molecular building
blocks, they can be designed to exhibit novel and significantly improved
physical, chemical and mechanical properties.

     When the structural features are sized between individual molecules and
bulk materials -- in the range of about 10 to 100 nanometers -- the objects
often display physical attributes substantially different from those found in
bulk materials. As a result, the properties of nanocrystalline materials often
cannot be predicted from those seen at larger sizes, and nanoparticles can
exhibit novel properties. When it is possible to control particle size and
shape, it also is possible to enhance material properties and devise functions
beyond those normally found in a material.

     The Company's objective is to exploit its capabilities to efficiently
engineer and manufacture nanocrystalline materials. Nanophase does this by
providing value-enhanced solutions for commercial applications in multiple
global markets. Recognizing a need to offer enhanced performance and assist
customers with their product improvements, Nanophase targets markets in which a
practical solution may be found through using nanoengineered products. The
Company works closely with leaders in these target markets to identify their
material and performance requirements.

NANOCRYSTALLINE MATERIALS

     Nanocrystalline materials generally are made of particles that are less
than 100 nanometers (billionths of a meter) in diameter. They contain only
1,000s or 10,000s of atoms, rather than the millions or billions of atoms found
in larger size particles. The properties of nanocrystalline materials depend
upon the composition, size, shape, structure, and surface of the individual
particles. Nanophase's methods for engineering and manufacturing nanocrystalline
materials result in particles with a controlled size and shape, and surface
characteristics that behave differently from conventionally produced
larger-sized materials.

THE COMPANY'S TECHNOLOGIES

     Nanophase intends to maintain and grow its intellectual property position
in the rapidly emerging science of nanotechnology. The Company uses its
technologies to engineer and produce nanocrystalline materials designed for
specific product applications. These technologies include methods for the
synthesis, surface-treatment and dispersion of nanocrystals. Nanophase also is
engaged in ongoing research and technology-licensing activities that add to its
core technologies or provide complementary technologies. Management believes
that aggressively pursuing applications, inventions and patents will help it
maintain a technical and commercial leadership position.

MARKETING

     The Company markets and sells its products through a combination of
business development and sales activities in close collaborative relationships
with a lead customer in each market segment. Business development activities
include evaluation and qualification of potential markets, identification of the
lead customers within each market, and development a business strategy for
successful market penetration. Nanophase then forms a technical/marketing team
to provide the customer with an engineered solution to meet that company's
specific requirements. Nanophase tailors materials to provide specific solutions
required by its customers. Once a solution is established, application and
customer management is moved to a sales team that is organized along market
lines. The sales team is expected to increase revenue by selling product and
process solutions and broadening the customer base.

                                        2
<PAGE>   3

     The Company leverages its resources through partnerships with organizations
and individuals focused on market-specific or geography-specific areas. This
enhances Nanophase's ability to quickly develop lead customers and applications
for its products. For example, to promote a more rapid penetration into Japanese
markets, the Company continues to maintain its relationship with C. I. Kasei, a
division of Itochu Corporation ("CIK"). CIK develops, engineers and manufactures
products under license from the Company for use in multiple industrial markets.

     A limited number of key customers have initially accounted for a
substantial portion of the Company's commercial revenue. In particular, revenue
from BASF Corporation ("BASF") and CIK constituted approximately 68.5% and
10.0%, respectively, of the Company's 2000 revenue. The Company's customers are
significantly larger than, and are able to exert a high degree of influence
over, the Company. The loss of one of these key customers or the failure to
attract new customers could have a material adverse effect on the Company's
business, results of operations and financial condition.

     Dr. Richard W. Siegel, an internationally recognized scientific leader in
the nanotechnology field, is a significant resource for the Company. Nanophase
has a consulting contract with Dr. Siegel, who provides support for business
development and marketing activities. The Company also employs a number of
marketing representatives and third-party sales agents focused in specific
application areas, including conductive coatings, advanced ceramics and high
intensity lighting. Dr. Siegel is also a founder of the Company and is currently
serving as a Director of the Company.

     Nanophase also markets itself and its capabilities by 1) sponsorship,
attendance and presentations at advanced materials symposia; 2) publishing
articles in scientific journals, and 3) participating in industry trade shows
for its target markets. The Company also uses its Website, advertises in
selected industry and trade journals, and provides specification sheets,
corporate journals, and other marketing materials. In addition, Nanophase
routinely networks with Fortune 500 companies to display its technology and
uncover potential applications.

TECHNOLOGY AND ENGINEERING

     The Company's Technology and Engineering Group includes the research and
development and engineering functions. The near-term objective of Nanophase's
research and process-development activities is to gather core technologies that
have the capability to serve multiple markets and provide the technical basis
for significant company growth.

     Nanophase's total research and development expense, which includes all
expense relating to the technology and engineering group, during the years ended
December 31, 2000, 1999 and 1998 were $1,837,036, $1,456,126 and $1,504,127,
respectively. The Company's future success will depend in large part upon its
ability to keep pace with evolving advanced materials technologies and industry
standards, and the Company may be unable to do so.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     Nanophase relies on a combination of copyright, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect its intellectual property. In addition to obtaining patent
and trademarks based on the Company's inventions and products, Nanophase also
licenses third-party patents to expand its technology base. The Company
currently owns or licenses 29 United States and foreign patents and patent
applications. Nanophase's intellectual property rights, however, could be
challenged, invalidated or circumvented. The Company does not believe that its
products or processes infringe the intellectual property rights of others, but
such claims, if they are established, could result in material liabilities or
loss of business.

     The Company generally requires its employees, consultants, outside
scientific collaborators and other advisors to sign confidentiality and
noncompete agreements when their employment or consulting relationships begin.
These agreements generally provide that all confidential information developed
or made known to the individual during the course of that person's relationship
with the Company will be kept confidential, and not

                                        3
<PAGE>   4

be disclosed to third parties except in specific circumstances. In the case of
research employees, the agreements also provide that all inventions made by the
individual shall be the exclusive property of Nanophase. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or patent rights, or will provide
Nanophase with adequate remedies in the event of unauthorized use or disclosure
of such information. In addition, the Company's employees who have not entered
into non-compete agreements may become competitors when their employment at
Nanophase ends.

COMPETITION

     Within each of its targeted markets and product applications, Nanophase
faces current and potential competition from many chemical companies, as well as
the in-house capabilities of several of its current and potential customers. In
many markets, the Company has major competitors, some of which are larger and
more diversified than the Company. Although management believes its materials
and technologies are superior to those of its competitors, competitive companies
pose significant risks to Nanophase because they have substantially greater
financial and technical resources, larger research and development staffs, and
greater manufacturing and marketing capabilities.

     In addition, the number of development-stage companies involved in
nanocrystalline materials continues to grow posing significant and increasing
competitive risks. Many of these companies are associated with university or
national laboratories, and use chemical and physical methods to produce
nanocrystalline materials. Management believes that most of these companies are
engaged primarily in funded research, and is not aware that any of them have
commercial production capability; however, they may represent significant
competitive risks in the future.

GOVERNMENTAL REGULATIONS

     The manufacture and use of certain of the products that contain the
Company's nanocrystalline materials are subject to governmental regulation. As a
result, the Company is required to adhere to the current Good Manufacturing
Practices ("cGMP") requirements of the U.S. Food and Drug Administration ("FDA")
and similar regulations in other countries that include testing, control and
documentation requirements enforced by periodic inspections.

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

EMPLOYEES

     On December 31, 2000, the Company had a total of 54 full-time employees, 13
of whom hold advanced degrees. In the first quarter of 2001, the Company hired
Robert Haines, an experienced vice president of operations, to improve its
manufacturing and related operations. Nanophase is not subject to any collective
bargaining agreements, and management believes it has good relationships with
employees.

PROPERTIES

     Nanophase operates a 36,000 square-foot production, research and
headquarters facility in Romeoville, Illinois and a 20,000 square-foot
production facility in Burr Ridge, Illinois; both are Chicago suburbs. The
Company also leases offsite warehouse space from time to time. The Company's
operations in Burr Ridge are registered under ISO 9001, and management believes
that its manufacturing operations are in compliance with the cGMP requirements
of the FDA.

     The Romeoville facility houses the Company's headquarters, research and
development laboratories, and will be used for additional commercial and
pilot-scale manufacturing space in 2001. Nanophase leases its Romeoville
facility under an agreement whose initial term will expire in July 2006, with an
option to extend the lease for two additional periods of five years each. The
Burr Ridge facility has a quality control laboratory

                                        4
<PAGE>   5

designed for the dual purposes of validating operations to cGMP and ISO
standards, and production process control. This laboratory is equipped to handle
many routine analytical and in-process techniques the Company currently
requires. Nanophase leases its Burr Ridge facility under an agreement whose
initial term expired in September 1999. The Company has options to extend the
lease for up to five additional one-year terms and is currently in the second
additional one-year term, which expires in September 2001.

FORWARD-LOOKING STATEMENTS

     Nanophase Technologies Corporation wants to provide investors with more
meaningful and useful information. As a result, this Annual Report on Form 10-K
(the "Form 10-K") 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 on 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. Nanophase
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 2001 and beyond to
differ materially from those expressed in, or implied by, what appears here.
These risks, uncertainties and contingencies include, without limitation, demand
for and acceptance of the Company's nanocrystalline materials; the Company's
dependence on a limited number of key customers; the Company's limited
manufacturing capacity and experience; 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; the resolution of litigation in which the
Company is involved; and other risks set forth under The Company's previous
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect events
or circumstances after the date of this Form 10-K, or to reflect the occurrence
of unanticipated events.

ITEM 3. LEGAL PROCEEDINGS

     See Note 18 to the Financial Statements for additional information.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2000.

                                        5
<PAGE>   6

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol NANX. The following table sets forth, for the periods indicated, the
range of high and low sale prices for the Common Stock on the Nasdaq National
Market:

<TABLE>
<CAPTION>
                                                                HIGH      LOW
                                                               ------    -----
<S>                                                            <C>       <C>
Fiscal year ending December 31, 2000:
  First Quarter............................................    $22.06    $4.31
  Second Quarter...........................................     16.69     5.50
  Third Quarter............................................     17.50     8.13
  Fourth Quarter...........................................     15.25     8.38
Fiscal year ending December 31, 1999:
  First Quarter............................................      3.00     2.03
  Second Quarter...........................................      2.63     1.50
  Third Quarter............................................      2.72     1.50
  Fourth Quarter...........................................      5.75     1.63
</TABLE>

     On March 20, 2001, the last reported sale price of the Common Stock was
$6.22 per share, and there were approximately 118 holders of record of the
Common Stock.

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

     On August 25, 1999, the Company issued 24,500 shares of Common Stock to
Joseph Cross, the Company's Chief Executive Officer, as part of an arrangement
made to induce Mr. Cross to join the Company as its Chief Executive Officer.
Effective January 2000, the Company granted 3,177 shares of Common Stock to each
of the following directors of the Company for services performed in their
capacity as directors: Donald Perkins, Edward Hagenlocker, Jerry Pearlman and
Richard Siegel. Effective January 2001, the Company granted 1,361 shares of
Common Stock to each of the following directors of the Company for services
performed in their capacity as directors: Donald Perkins, Edward Hagenlocker,
James McClung, Jerry Pearlman and Richard Siegel. Each of the preceding
issuances were made in reliance on the exemption from registration found in
section 4(2) of the Securities Act of 1933.

     On November 26, 1997 the Company's Registration Statement on Form S-1 (File
No. 333-36937) relating to the Company's initial public offering of common stock
(the "Offering") was declared effective by the Securities and Exchange
Commission. Since the effective date, of its $28,837,936 of net proceeds from
the Offering, the Company has used approximately $2,800,000 for capital
expenditures primarily related to the further expansion of the Company's
existing manufacturing facility and the purchase of operating equipment and
approximately $8,735,000 for working capital and other general corporate
purposes. The remainder of the net proceeds has been invested by the Company,
pending its use, in short-term, investment grade, interest-bearing obligations.
At December 31, 2000, the Company had approximately $17,300,000 in cash, cash
equivalents and investments.

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements and related notes
thereto appearing elsewhere in this Form 10-K and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected

                                        6
<PAGE>   7

financial data set forth below as of, and for, each of the years in the
five-year period ended December 31, 2000 have been derived from the audited
financial statements of the Company.

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                           ----------------------------------------------------------------------
                              2000          1999           1998           1997           1996
                           ----------    -----------    -----------    -----------    -----------
<S>                        <C>           <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS
  DATA:
Product revenue..........  $3,824,159    $ 1,128,861    $ 1,140,845    $   924,763    $   249,017
Other revenue............     449,194        295,986        162,944      2,798,729        236,019
Governmental research
  contracts..............          --             --             --             --        110,770
                           ----------    -----------    -----------    -----------    -----------
Total revenue............   4,273,353      1,424,847      1,303,789      3,723,492        595,806
Cost of revenue..........   4,754,485      2,610,667      3,221,996      3,935,766      4,019,484
Research and development
  expense................   1,837,036      1,456,126      1,504,127        990,331        677,284
Selling, general and
  administrative
  expense................   3,388,758      3,641,736      3,594,946      2,074,728      1,661,504
                           ----------    -----------    -----------    -----------    -----------
Total operating
  expense................   9,980,279      7,708,529      8,321,069      7,000,825      6,358,272
                           ----------    -----------    -----------    -----------    -----------
Operating loss...........  (5,706,926)    (6,283,682)    (7,017,280)    (3,277,333)    (5,762,466)
Interest income..........   1,188,599      1,166,615      1,539,400        204,863        184,778
Provision for income
  taxes..................          --             --       (156,000)            --             --
                           ----------    -----------    -----------    -----------    -----------
Net loss.................  $4,518,327    $(5,117,067)   $(5,633,880)   $(3,072,470)   $(5,577,688)
                           ==========    ===========    ===========    ===========    ===========
Net loss per share-basic
  and diluted............  $    (0.34)   $     (0.40)   $     (0.45)
                           ==========    ===========    ===========
Shares used in computing
  the net loss per
  share..................  13,390,741     12,690,483     12,416,305
</TABLE>

<TABLE>
<CAPTION>
                                                     AS OF DECEMBER 31,
                           ----------------------------------------------------------------------
                              2000           1999           1998           1997           1996
                           -----------    -----------    -----------    -----------    ----------
<S>                        <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Cash and cash
  equivalents............  $   473,036    $   624,509    $   363,394    $ 3,988,368    $  617,204
Working capital..........   18,356,349     21,831,264     26,535,018     32,038,915     3,070,789
Total assets.............   23,830,163     25,677,539     30,453,988     36,196,569     5,539,634
Total stockholders'
  equity.................   21,007,745     24,161,323     29,107,590     34,651,334     5,110,450
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
"Item 6. Selected Financial Data," risks discussed in other filings made by the
Company with the Securities and Exchange Commission, and the financial
statements and related notes thereto appearing elsewhere in this Form 10-K. When
used in the following discussions, the words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and contingencies that could cause actual results,
performance or achievements to differ materially from those expressed in, or
implied by, such statements.

OVERVIEW

     From its inception in November 1989 through December 31, 1996, the Company
was in the development stage. During that period, the Company primarily focused
on the development of its manufacturing processes in order to transition from
laboratory-scale to commercial-scale production. As a result, the Company
developed an operating capacity to produce significant quantities of its
nanocrystalline materials for

                                        7
<PAGE>   8

commercial sale. The Company was also engaged in the development of commercial
applications and formulations and the recruiting of marketing, technical and
administrative personnel. Since January 1, 1997, the Company has been engaged in
commercial production and sales of its nanocrystalline materials, and the
Company no longer considers itself in the development stage. All of the
Company's revenue since January 1, 1997 has been generated through commercial
sources. From inception through December 31, 2000, the Company was primarily
capitalized through the private offering of approximately $19,558,000 of equity
securities and its initial public offering of $28,838,000 of Common Stock, each
net of issuance costs. The Company has incurred cumulative losses of $29,013,945
from inception through December 31, 2000.

RESULTS OF OPERATIONS

     YEARS ENDED DECEMBER 31, 2000 AND 1999

     Revenue is recorded when the Company ships products, when specific
milestones are met regarding development arrangements or when the Company
licenses its technology and transfers proprietary information. Total revenue
increased to $4,273,353 in 2000, compared to $1,424,847 in 1999. The increase in
total revenue between 2000 and 1999 was primarily attributed to a $2,695,298
increase in product revenue and a $153,208 increase in other revenue. Product
revenue increased to $3,824,159 in 2000, compared to $1,128,861 in 1999. Other
revenue increased to $449,194 in 2000, compared to $295,986 in 1999. Revenue
from two major customers constituted approximately 78.5% of the Company's 2000
revenue. In particular, revenue from BASF and CIK constituted approximately
68.5% and 10.0%, respectively, of the Company's 2000 revenue.

     Cost of revenue generally includes costs associated with commercial
production, customer development arrangements, the transfer of technology, and
licensing fees. Cost of revenue increased to $4,754,485 in 2000, compared to
$2,610,667 in 1999. The increase in cost of revenue was generally attributed to
increased product sales, somewhat offset by efficiencies in the manufacture of
the Company's products and a reduction in the allowance for excess quantities in
inventory in 2000 as a result of the sale of inventories for which an allowance
had previously been provided. Cost of revenue as a percentage of total revenue
decreased in 2000, compared to the same period in 1999, due primarily to the
increase in total revenue.

     Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense increased to $1,837,036 in 2000,
compared to $1,456,126 in 1999. The increase in research and development expense
was primarily attributed to additional salaries for newly hired research
personnel and increases in internal costs regarding the development of new
formulations and product applications. These increases were partially offset by
a reduction in recruiting and relocation expenses in 2000 and non-recurring
payments to a former officer relating to a restructuring in 1999. The Company
expects to further increase its research and development expense in 2001 in
connection with its plans to continue to enhance and expand its product lines,
technologies and manufacturing processes.

     Selling, general and administrative expense decreased to $3,388,758 in
2000, compared to $3,641,736 in 1999. The net decrease was primarily attributed
to non-recurring restructuring costs, including payments to former officers in
1999, and decreased legal expenses in 2000. These decreases were partially
offset in 2000 by additional rent expense relating to the Company's new
facility, and increased investor relations and printing costs.

     Interest income increased to $1,188,599 in 2000, compared to $1,166,615 in
1999. This increase was primarily due to an increase in investment yields which
was somewhat offset by a reduction in funds available for investment.

     There was no income tax expense for the years ended December 31, 2000 and
1999.

     YEARS ENDED DECEMBER 31, 1999 AND 1998

     Total revenue increased to $1,424,847 in 1999, compared to $1,303,789 in
1998. The increase in total revenue between 1999 and 1998 was primarily
attributed to a $133,042 increase in other revenue offset by a

                                        8
<PAGE>   9

$11,984 reduction in product revenue. Product revenue decreased to $1,128,861 in
1999, compared to $1,140,845 in 1998. Other revenue increased to $295,986 in
1999, compared to $162,944 in 1998. Revenue from three major customers
constituted 53.4% of the Company's 1999 revenue. In particular, revenue from (1)
CIK, (2) a cosmetics customer and (3) a ceramics customer constituted
approximately 33.8%, 9.9%, and 9.7%, respectively, of the Company's 1999
revenue. The Company does not currently anticipate future revenue from either
the cosmetics customer or the ceramics customer. Cost of revenue decreased to
$2,610,667 in 1999, compared to $3,221,996 in 1998. The decrease in cost of
revenue was generally attributed to cost reduction activities and efficiencies
in the manufacture of the Company's products, decreased ceramic superplastic
forming costs, and a smaller increase in the allowance for excess quantities in
inventory in 1999 than in 1998. Cost of revenue as a percentage of total revenue
decreased in 1999, compared to the same period in 1998, due primarily to the
factors discussed above.

     Research and development expense decreased to $1,456,126 in 1999, compared
to $1,504,127 in 1998. The decrease in research and development expense was
primarily attributed to the lack of costs relating to arrangements with outside
parties to further develop end-use products utilizing nanocrystalline materials,
versus $745,000 of such costs in 1998, offset by increases in salaries, related
recruiting and relocation, and payments to a former officer.

     Selling, general and administrative expense increased to $3,641,736 in
1999, compared to $3,594,946 in 1998. The net increase was primarily attributed
to costs associated with an organizational restructuring, including recording
amounts due to former officers and non-cash stock compensation charges relating
to the revision of vesting schedules for options previously granted to such
officers, associated legal and professional fees, and severance to other
employees. These increases were somewhat offset by an adjustment of estimated
amounts related to contingent liabilities, a reduction in recruiting and
relocation costs, and a reduction in bad debt expense.

     Interest income decreased to $1,166,615 in 1999, compared to $1,539,400 in
1998. This decrease was primarily due to a reduction in funds available for
investment compounded by a reduction in investment yields.

     There was no income tax expense in 1999, compared to $156,000 in 1998. The
1998 expense was due to the foreign taxes withheld from license fees received
from CIK. The payment of such taxes creates a foreign tax credit which may be
available to offset federal income taxes when the Company generates taxable
income.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash, cash equivalents and investments amounted to
$17,304,757 at December 31, 2000, compared to $21,840,677 at December 31, 1999.
The net cash used in the Company's operating activities was $5,127,473,
$4,335,648, and $3,859,019 for the years ended December 31, 2000, 1999, and
1998, respectively. The net cash used in operating activities for the year ended
December 31, 2000 was primarily for the further development of product
applications, the funding of research and development activities, sales efforts,
and the funding of trade receivables, and prepaid expenses, offset by increases
in accounts payable and a decrease in the other receivable. Net cash provided by
investing activities, which is due to maturities of securities offset somewhat
by capital expenditures and purchases of securities, amounted to $2,560,824,
$4,550,288, and $143,909, for the years ended December 31, 2000, 1999, and 1998,
respectively. Capital expenditures, primarily related to the further expansion
of the Company's existing manufacturing facilities and the purchase of operating
equipment, amounted to $1,823,623, $504,061, and $470,425 for the years ended
December 31, 2000, 1999, and 1998, respectively. Net cash provided by financing
activities, which related to the issuance of shares of Common Stock pursuant to
the exercise of options and warrants, a promissory note, and an insurance
finance agreement amounted to $2,415,176 for the year ended December 31, 2000,
compared to $46,475 for the year ended December 31, 1999, which related to the
exercise of options for 170,876 shares of common stock, and $90,136 for the year
ended December 31, 1998 which related to the exercise of options for 128,356
shares of common stock.

     In 2000, the Company borrowed $650,000 from BASF, as part of a $1.3 million
promissory note, in order to finance the construction of a coating line in its
Romeoville, Illinois facility. The note bears interest at 8.45% per annum with
the first payment commencing on June 1, 2001. Payments are to be made on a per
kilogram
                                        9
<PAGE>   10

basis, as invoiced. Any remaining outstanding balance at June 1, 2004 shall
become payable on demand at that time. The Company also financed $486,000 in
insurance premiums. This agreement bears interest at 8.53% per annum through
September 2001. In September 2001, the interest rate will be adjusted to the
30-Day LIBOR rate plus 1.84%. Expected monthly payments will be approximately
$26,000 through July 2002.

     The Company believes that cash on hand, together with the remaining net
proceeds from the Company's initial public offering of common stock and interest
income thereon, will be adequate to fund the Company's current operating plans.
The Company's actual future capital requirements will depend, however, on many
factors, including customer acceptance of the Company's current and potential
nanocrystalline materials and product applications, continued progress in the
Company's research and development activities and product testing programs, the
magnitude of these activities and programs, and the costs necessary to increase
and expand the Company's manufacturing capabilities and to market and sell the
Company's materials and product applications. Depending on future requirements,
the Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or additional licensing
agreements. Additional financing may not be available on acceptable terms or at
all, and any such additional financing could be dilutive to the Company's
stockholders.

     At December 31, 2000, the Company had a net operating loss carryforward of
approximately $32.1 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. If not utilized, the carryforward expires
at various dates between 2005 and 2015. 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, the Company has concluded that it is
likely that some portion of this carryforward will expire before ultimately
becoming available to reduce income tax liabilities. At December 31, 2000, the
Company also had a foreign tax credit carryforward of $156,000, which could be
used as an offsetting tax credit to reduce U.S. income taxes. The foreign tax
credit will expire in 2013 if not utilized before that date.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company does not have any material market risk sensitive instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and financial statement schedule, with the report
of independent auditors listed in Item 14 are included in this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                        10
<PAGE>   11

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information in response to this item is incorporated by reference from
the "Proposal No. 1 -- Election of Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Compliance" sections of the Definitive Proxy
Statement to be filed with the Commission in connection with the Company's 2001
Annual Meeting of Stockholders (the "2001 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

     The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "Executive Compensation and
Certain Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "Security Ownership of
Management and Principal Stockholders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "Executive Compensation and
Certain Transactions."

                                        11
<PAGE>   12

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this Form 10-K:

        1. The following financial statements of the Company, with the report of
           independent auditors, are filed as part of this Form 10-K:

          Report of Ernst & Young LLP, Independent Auditors Balance Sheets as of
           December 31, 2000 and 1999
          Statements of Operations for the Years Ended December 31, 2000, 1999
           and 1998
          Statements of Stockholders' Equity for the Years Ended December 31,
           2000, 1999 and 1998
          Statements of Cash Flows for the Years Ended December 31, 2000, 1999
           and 1998
           Notes to Financial Statements

        2. The following financial statement schedule of the Company is filed as
           part of this Form 10-K:

           Schedule II -- Valuation and Qualifying Accounts

           All other financial schedules are omitted because such schedules are
           not required or the information required has been presented in the
           aforementioned financial statements.

        3. The following exhibits are filed with this Form 10-K or incorporated
           by reference as set forth below.

<TABLE>
<CAPTION>
           EXHIBIT
           NUMBER
           -------
           <C>       <S>
            2        Plan and Agreement of Merger dated as of November 25, 1997
                     by and between the Company and its Illinois predecessor,
                     incorporated by reference to Exhibit 2 to the Company's
                     Annual Report on Form 10-K for the year ended December 31,
                     1997 (the "1997 10-K").
            3.1      Certificate of Incorporation of the Company, incorporated by
                     reference to Exhibit 3.1 to the 1997 10-K.
            3.2      Bylaws of the Company, incorporated by reference to Exhibit
                     3.2 to the 1997 10-K.
            4.1      Specimen stock certificate representing Common Stock,
                     incorporated by reference to Exhibit 4.1 to the Company's
                     Registration Statement on Form S-1 (File No. 333-36937) (the
                     "IPO S-1").
            4.2      Form of Warrants, incorporated by reference to Exhibit 4.2
                     to the IPO S-1.
            4.3      Rights Agreement dated as of October 28, 1998 by and between
                     the Company and LaSalle National Bank, incorporated by
                     reference to Exhibit 1 to the Company's Registration
                     Statement on Form 8-A, filed October 28, 1998.
            4.4      Certificate of Designation of Series A Junior Participating
                     Preferred Stock incorporated by reference to Exhibit 4.4 to
                     the Company's Annual Report on Form 10-K for the year ended
                     December 31, 1998 (the "1998 10-K").
           10.1      The Nanophase Technologies Corporation Amended and Restated
                     1992 Stock Option Plan, as amended (the "Stock Option
                     Plan"), incorporated by reference to Exhibit 10.1 to the IPO
                     S-1.
           10.2      Form of Indemnification Agreement between the Company and
                     each of its directors and executive officers, incorporated
                     by reference to Exhibit 10.2 to the IPO S-1.
           10.3      Amended and Restated Registration Rights Agreements dated as
                     of March 16, 1994, as amended, incorporated by reference to
                     Exhibit 10.2 to the IPO S-1.
           10.4      License Agreement dated June 1, 1990 between the Company and
                     ARCH Development Corporation, as amended, incorporated by
                     reference to Exhibit 10.7 to the IPO S-1.
</TABLE>

                                        12
<PAGE>   13

<TABLE>
<CAPTION>
           EXHIBIT
           NUMBER
           -------
           <C>       <S>
           10.5      License Agreement dated October 12, 1994 between the Company
                     and Hitachi, incorporated by reference to Exhibit 10.8 to
                     the IPO S-1.
           10.6      License Agreement dated May 31, 1996 between the Company and
                     Research Development Corporation of Japan, incorporated by
                     reference to Exhibit 10.9 to the IPO S-1.
           10.7      License Agreement dated April 1, 1996 between the Company
                     and Cornell Research Foundation, incorporated by reference
                     to Exhibit 10.10 to the IPO S-1.
           10.8*     Consulting and Stock Purchase Agreement between Richard W.
                     Siegel and the Company dated as of May 9, 1990, as amended
                     February 13, 1991, November 21, 1991 and January 1, 1992,
                     incorporated by reference to Exhibit 10.11 to the IPO S-1.
           10.9      Lease Agreement between the Village of Burr Ridge and the
                     Company, dated September 15, 1994, incorporated by reference
                     to Exhibit 10.12 to the IPO S-1.
           10.10     Distribution Agreement between the Company and C.I. Kasei,
                     Ltd., (a subsidiary of Itochu Corporation) dated as of
                     October 30, 1996, incorporated by reference to Exhibit 10.15
                     to the IPO S-1.
           10.11     Supply Agreement between the Company and Schering-Plough
                     HealthCare Products, Inc. dated as of March 15, 1997,
                     incorporated by reference to Exhibit 10.17 to the IPO S-1.
           10.12     License Agreement between the Company and C.I. Kasei Co.,
                     Ltd. (a subsidiary of Itochu Corporation) dated as of
                     December 30, 1997, incorporated by reference to Exhibit
                     10.17 to the 1997 10-K.
           10.13*    Employment Agreement dated as of September 3, 1996 between
                     the Company and Dennis J. Nowak, incorporated by reference
                     to Exhibit 10.5 to the IPO S-1.
           10.14*    Consulting Agreement dated as of June 25, 1999 between the
                     Company and Dennis J. Nowak incorporated by reference to
                     Exhibit 10.14 to the 1999 10-K.
           10.15*    Employment Agreement dated as of November 9, 1999 between
                     the Company and Joseph Cross, incorporated by reference to
                     Exhibit 10.15 to the 1999 10-K.
           10.16*    Employment Agreement dated as of February 15, 1999 between
                     the Company and Gina Kritchevsky, incorporated by reference
                     to Exhibit 10.18 to the 1998 10-K.
           10.17*    Employment Agreement dated as of March 15, 1999 between the
                     Company and Daniel S. Bilicki, incorporated by reference to
                     Exhibit 10.19 to the 1998 10-K.
           10.18*    Employment Agreement dated as of June 1, 1999 between the
                     Company and Donald Freed incorporated by reference to
                     Exhibit 10.19 to the 1999 10-K.
           10.19*    Form of Options Agreement under the Stock Option Plan,
                     incorporated by reference to Exhibit 4.5 to the Company's
                     Registration Statement on Form S-8 (File No. 333-53445).
           10.20*    Consulting and Severance Agreement dated October 28, 1998
                     between the Company and John C. Parker, incorporated by
                     reference to Exhibit 10.21 to the 1998 10-K.
           10.21**   Zinc Oxide Supply Agreement dated as of September 16, 1999
                     between the Company and BASF Corporation, as assignee,
                     incorporated by reference to Exhibit 10.22 to the 1999 10-K.
           10.22*    Employment Agreement dated as of November 2, 2000 between
                     the Company and Robert Haines.
           10.23     Lease Agreement between Centerpointe Properities Trust and
                     the Company, dated June 15, 2000.
</TABLE>

                                        13
<PAGE>   14

<TABLE>
<CAPTION>
           EXHIBIT
           NUMBER
           -------
           <C>       <S>
           10.24***  Amendment No. 1 to Zinc Oxide Supply Agreement dated as of
                     January, 2001 between the Company and BASF Corporation.
           10.25     Promissory Note dated as of September 14, 2000 between the
                     Company and BASF Corporation.
           11        Statement regarding computation of loss per share.
           23        Consent of Ernst & Young LLP.
</TABLE>

---------------
        *   Management contract or compensatory plan or arrangement.

        **  Confidentiality previously requested for portions of this agreement.
            The Company has disclosed that such agreement is with BASF
            Corporation, as assignee.

        *** Confidentially requested, confidential portions have been omitted
            and filed separately with the Commission as required by Rule 24b-2.

     (b) Reports on Form 8-K:

     None.

                                        14
<PAGE>   15

                       NANOPHASE TECHNOLOGIES CORPORATION

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Ernst & Young LLP, Independent Auditors...........    F-2
Balance Sheets as of December 31, 2000 and 1999.............    F-3
Statements of Operations for the years ended December 31,
  2000, 1999 and 1998.......................................    F-4
Statements of Stockholders' Equity..........................    F-5
Statements of Cash Flows for the years ended December 31,
  2000, 1999 and 1998.......................................    F-6
Notes to the Financial Statements...........................    F-7
</TABLE>

                                       F-1
<PAGE>   16

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Nanophase Technologies Corporation

     We have audited the accompanying balance sheets of Nanophase Technologies
Corporation as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. Our audit also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nanophase Technologies
Corporation at December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set therein.

                                          /s/ Ernst & Young LLP
                                          Ernst & Young LLP
Chicago, Illinois
February 2, 2001

                                       F-2
<PAGE>   17

                       NANOPHASE TECHNOLOGIES CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   AS OF DECEMBER 31,
                                                              ----------------------------
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $    473,036    $    624,509
  Investments...............................................    16,831,721      21,216,168
  Trade accounts receivable, less allowance for doubtful
     accounts of $81,450 in 2000 and $120,000 in 1999.......     1,238,334         401,826
  Other receivable, net.....................................       144,818         247,841
  Inventories, net..........................................       892,674         766,778
  Prepaid expenses and other current assets.................       770,200          90,358
                                                              ------------    ------------
     Total current assets...................................    20,350,783      23,347,480
Equipment and leasehold improvements, net...................     3,266,245       2,152,413
Other assets, net...........................................       213,135         177,646
                                                              ------------    ------------
                                                              $ 23,830,163    $ 25,677,539
                                                              ============    ============
            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Short-term borrowings.....................................  $    285,316    $         --
  Accounts payable..........................................       824,338         615,818
  Accrued expenses..........................................       884,780         900,398
                                                              ------------    ------------
     Total current liabilities..............................     1,994,434       1,516,216
Long-term debt..............................................       827,984              --
CONTINGENT LIABILITIES:.....................................            --              --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 24,088 authorized and no
  shares issued and outstanding.............................            --              --
Common stock, $.01 par value; 25,000,000 shares authorized;
  13,593,914 and 12,764,058 shares issued and outstanding at
  December 31, 2000 and December 31, 1999, respectively.....       135,939         127,641
Additional paid-in capital..................................    49,885,751      48,529,300
Accumulated deficit.........................................   (29,013,945)    (24,495,618)
                                                              ------------    ------------
     Total stockholders' equity.............................    21,007,745      24,161,323
                                                              ------------    ------------
                                                              $ 23,830,163    $ 25,677,539
                                                              ============    ============
</TABLE>

                (See accompanying Notes to Financial Statements)
                                       F-3
<PAGE>   18

                       NANOPHASE TECHNOLOGIES CORPORATION
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                          -----------------------------------------
                                                             2000           1999           1998
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
REVENUE:
  Product revenue.....................................    $ 3,824,159    $ 1,128,861    $ 1,140,845
  Other revenue.......................................        449,194        295,986        162,944
                                                          -----------    -----------    -----------
       Total revenue..................................      4,273,353      1,424,847      1,303,789
OPERATING EXPENSE:
  Cost of revenue.....................................      4,754,485      2,610,667      3,221,996
  Research and development expense....................      1,837,036      1,456,126      1,504,127
  Selling, general and administrative expense.........      3,388,758      3,641,736      3,594,946
                                                          -----------    -----------    -----------
       Total operating expenses.......................      9,980,279      7,708,529      8,321,069
                                                          -----------    -----------    -----------
  Loss from operations................................     (5,706,926)    (6,283,682)    (7,017,280)
  Interest income.....................................      1,188,599      1,166,615      1,539,400
                                                          -----------    -----------    -----------
  Loss before provision for income taxes..............     (4,518,327)    (5,117,067)    (5,477,880)
  Provision for income taxes..........................             --             --       (156,000)
                                                          -----------    -----------    -----------
  Net loss............................................    $(4,518,327)   $(5,117,067)   $(5,633,880)
                                                          ===========    ===========    ===========
  Net loss net per share-basic and diluted............    $     (0.34)   $     (0.40)   $     (0.45)
                                                          ===========    ===========    ===========
  Weighted average number of common shares
     outstanding......................................     13,390,741     12,690,483     12,416,305
                                                          ===========    ===========    ===========
</TABLE>

                (See accompanying Notes to Financial Statements)
                                       F-4
<PAGE>   19

                       NANOPHASE TECHNOLOGIES CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                         PREFERRED STOCK             COMMON STOCK        ADDITIONAL
                                    -------------------------   ----------------------     PAID-IN     ACCUMULATED
           DESCRIPTION                SHARES        AMOUNT        SHARES       AMOUNT      CAPITAL       DEFICIT         TOTAL
           -----------                ------        ------        ------       ------    ----------    -----------    -----------
<S>                                 <C>          <C>            <C>           <C>        <C>           <C>            <C>
Balance as of January 1, 1998.....          --             --    12,277,467    122,775    48,273,230    (13,744,671)   34,651,334
  Exercise of stock options.......          --             --       128,356      1,283        88,853             --        90,136
  Exercise of warrants............          --             --       162,868      1,629        (1,629)            --            --
  Net loss for the year ended
    December 31, 1998.............          --             --            --         --            --     (5,633,880)   (5,633,880)
                                    ----------   ------------   -----------   --------   -----------   ------------   -----------
Balance as of December 31, 1998...          --             --    12,568,691    125,687    48,360,454    (19,378,551)   29,107,590
                                    ----------   ------------   -----------   --------   -----------   ------------   -----------
  Exercise of stock options.......          --             --       170,867      1,709        44,766             --        46,475
  Stock Compensation..............          --             --        24,500        245       124,080             --       124,325
  Net loss for the year ended
    December 31, 1999.............          --             --            --         --            --     (5,117,067)   (5,117,067)
                                    ----------   ------------   -----------   --------   -----------   ------------   -----------
Balance as of December 31, 1999...          --             --    12,764,058    127,641    48,529,300    (24,495,618)   24,161,323
                                    ----------   ------------   -----------   --------   -----------   ------------   -----------
  Exercise of stock options.......          --             --       444,569      4,445     1,147,431             --     1,151,876
  Stock compensation..............          --             --       372,579      3,726       146,274             --       150,000
  Exercise of warrants............          --             --        12,708        127        62,746             --        62,873
  Net loss for the year ended
    December 31, 2000.............          --             --            --         --            --     (4,518,327)   (4,518,327)
                                    ----------   ------------   -----------   --------   -----------   ------------   -----------
Balance as of December 31, 2000...          --   $         --    13,593,914   $135,939   $49,885,751   $(29,013,945)  $21,007,745
                                    ==========   ============   ===========   ========   ===========   ============   ===========
</TABLE>

                (See accompanying Notes to Financial Statements)

                                       F-5
<PAGE>   20

                       NANOPHASE TECHNOLOGIES CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                -----------------------------------------------
                                                    2000             1999             1998
                                                -------------    -------------    -------------
<S>                                             <C>              <C>              <C>
OPERATING ACTIVITIES:
Net loss......................................  $  (4,518,327)   $  (5,117,067)   $  (5,633,880)
  Adjustments to reconcile net loss to cash
     used in operating activities:
     Depreciation and amortization............        722,877          678,749          491,098
     Stock compensation expense...............         62,873          124,325               --
     Allowance for excess inventory
       quantities.............................       (168,627)          69,581          190,633
     Provision for asset write-down...........             --           61,011               --
  Changes in assets and liabilities related to
     operations:
     Trade accounts receivable................       (836,508)         (85,498)       1,325,161
     Other receivable.........................        103,023         (247,841)              --
     Inventories..............................         42,731            2,466          (72,155)
     Prepaid expenses and other assets........       (728,417)           8,807           38,961
     Accounts payable.........................        208,520          202,440         (517,019)
     Accrued expenses.........................        (15,618)         (32,621)         318,182
                                                -------------    -------------    -------------
Net cash used in operating activities.........     (5,127,473)      (4,335,648)      (3,859,019)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
  improvements................................     (1,823,623)        (504,061)        (470,425)
Purchases of held-to-maturity investments.....   (132,457,935)    (126,819,265)    (182,750,264)
Maturities of held-to-maturity investments....    136,842,382      131,873,614      183,364,598
                                                -------------    -------------    -------------
Net cash (used in) provided by investing
  activities..................................      2,560,824        4,550,288          143,909
FINANCING ACTIVITIES:
Principal payment on debt obligation..........        (22,700)              --               --
Proceeds from borrowings......................      1,136,000               --               --
Proceeds from sale of common stock............      1,301,876           46,475           90,136
                                                -------------    -------------    -------------
Net cash provided by financing activities.....      2,415,176           46,475           90,136
                                                -------------    -------------    -------------
Increase (decrease) in cash and cash
  equivalents.................................       (151,473)         261,115       (3,624,974)
Cash and cash equivalents at beginning of
  period......................................        624,509          363,394        3,988,368
                                                -------------    -------------    -------------
Cash and cash equivalents at end of period....  $     473,036    $     624,509    $     363,394
                                                =============    =============    =============
</TABLE>

                (See accompanying Notes to Financial Statements)
                                       F-6
<PAGE>   21

                       NANOPHASE TECHNOLOGIES CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

     The Company was incorporated on November 30, 1989, for the purpose of
developing nanocrystalline materials for commercial production and sale in
domestic and international markets.

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

     Revenue from international sources approximated $587,500, $573,300, and
$347,500 for the years ended December 31, 2000, 1999, and 1998, respectively.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CASH EQUIVALENTS

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

     INVESTMENTS

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

     ACCOUNTS RECEIVABLE

     Credit evaluations of customers are ongoing and collateral or other
security is generally not required on accounts receivable. An allowance for
doubtful accounts is maintained at a level management believes is sufficient to
cover potential credit losses.

     INVENTORY

     Inventory is stated at the lower of cost, maintained on a first in, first
out basis, or market. The Company has recorded allowances to reduce inventory
relating to excess quantities of certain materials. Although materials subject
to this allowance remain in good condition, the quantities on hand exceed the
Company's short-term needs.

     EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Equipment is stated at cost and is being depreciated over its estimated
useful life (3-7 years) using the straight-line method. Leasehold improvements
are stated at cost and are being amortized using the straight-line method over
the shorter of the useful life of the asset or the term of the lease (4-16
years).

     PATENT COSTS

     Patent costs are included in other assets and are being amortized over the
life of the respective patent using the straight-line method.

                                       F-7
<PAGE>   22
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     USE OF ESTIMATES

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

     PRODUCT REVENUE

     Product revenue consists of sales of product which are recorded as
shipments are made by the Company and risk of loss transfers to the customer.

     OTHER REVENUE

     Other revenue consists of revenue from research and development
arrangements with non-governmental entities, fees from the transfer of
technology and related royalties. Research and development arrangements include
both cost-plus and fixed fee agreements and such revenue is recognized when
specific milestones are met under the arrangements. Fees related to the transfer
of technology are recognized when the transfer of technology to the acquiring
party is completed and the Company has no further significant obligation.
Royalties are recognized when earned per the contractual arrangement.

     SHIPPING AND HANDLING COST

     Shipping and handling costs are included in cost of goods sold.

     INCOME TAXES

     The Company accounts for income taxes using the liability method. As such,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are calculated using the enacted tax rates and laws that are
expected to be in effect when the anticipated reversal of these differences is
scheduled to occur.

     EMPLOYEE STOCK OPTIONS

     As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (FASB 123), the Company accounts for
stock options granted to employees in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25). As long as the exercise
price of the options granted equals the estimated fair value of the underlying
stock on the measurement date, no compensation expense is recognized by the
Company for these options. FASB 123, established an alternative fair value
method of accounting for stock-based compensation plans. As required by FASB 123
for companies using APB No. 25 for financial reporting purposes, the Company
makes pro forma disclosures regarding the impact on net loss of using the fair
value method of FASB Statement No. 123.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                       F-8
<PAGE>   23
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     NET LOSS PER SHARE

     Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common equivalent shares of 961,207 for
2000, 483,927 for 1999, and 967,549 for 1998 are not included in the per share
calculations because the effect of their inclusion would be anti-dilutive.

     ADOPTION OF ACCOUNTING PRINCIPLES

     The Company is required to adopt Statement of Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
as amended by SFAS No. 137 and 138, effective January 1, 2001. SFAS No. 133
requires all derivatives to be recognized in the statement of financial position
as either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. Management believes the adoption of SFAS No. 133
will not have a material effect on the financial position or results of
operations of the Company.

(3) INVESTMENTS

     Investments consist of government bonds and commercial paper with an
approximate fair value of $16,838,000 and $21,113,000 at December 31, 2000 and
1999, respectively. All investments have been classified as held-to-maturity and
mature in the subsequent year.

(4) INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                             AS OF DECEMBER 31,
                                                          ------------------------
                                                             2000          1999
                                                          ----------    ----------
<S>                                                       <C>           <C>
Raw materials.........................................    $  328,786    $  257,485
Finished goods........................................       655,475       769,507
                                                          ----------    ----------
                                                             984,261     1,026,992
Allowance for excess quantities.......................       (91,587)     (260,214)
                                                          ----------    ----------
                                                          $  892,674    $  766,778
                                                          ==========    ==========
</TABLE>

(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31,
                                                        --------------------------
                                                           2000           1999
                                                        -----------    -----------
<S>                                                     <C>            <C>
Machinery and equipment.............................    $ 3,137,182    $ 3,072,978
Office equipment....................................        292,202        226,760
Office furniture....................................         69,230         43,580
Leasehold improvements..............................        873,317        729,505
Construction in progress............................      1,524,515             --
                                                        -----------    -----------
                                                          5,896,446      4,072,823
Less: Accumulated depreciation and amortization.....     (2,630,201)    (1,920,410)
                                                        -----------    -----------
                                                        $ 3,266,245    $ 2,152,413
                                                        ===========    ===========
</TABLE>

                                       F-9
<PAGE>   24
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Depreciation expense was $709,792, $673,728, and $486,444 for the years
ended December 31, 2000, 1999, and 1998, respectively.

(6) LONG-TERM DEBT

     In November 2000, the Company entered into a three-year promissory note,
held by its largest customer, in the amount of $1,293,895 for the construction
of a coating line at the Company's Romeoville, Illinois facility. At December
31, 2000, borrowings against this note were $650,000. The note bears interest at
8.45% per annum with the first payment commencing on June 1, 2001. Payments are
to be made at a rate of $1.37 per kilogram of coated material invoiced, with any
remaining outstanding balance at June 1, 2004 becoming payable on demand at that
time.

     In December 2000, the Company financed $486,000 in insurance premiums. The
agreement bears interest at 8.53% per annum through September 2001. In September
2001, the interest rate will be adjusted to the 30 Day LIBOR rate plus 1.84%.
Expected monthly payments will be approximately $26,000 through July 2002.

(7) LEASE COMMITMENTS

     During the year ended December 31, 2000, the Company entered into a
six-year term operating lease with multiple renewable options for its operating
facility. The lease is a net lease which requires the payment of executory costs
such as real estate taxes, insurance, and maintenance.

     The Company also leases manufacturing and office space under an agreement
that will expire in September 2001. Monthly minimum lease payments amount to
$8,800 for this facility.

     The following is a schedule of future minimum lease payments as required
under the above operating leases:

<TABLE>
<S>                                                             <C>
Year ending December 31:
2001........................................................    $  346,265
2002........................................................       284,293
2003........................................................       292,815
2004........................................................       301,601
2005........................................................       310,651
2006........................................................       184,345
                                                                ----------
Total minimum payments required:............................    $1,719,970
                                                                ==========
</TABLE>

     Rent expense under these leases amounted to $243,356, $190,832, and
$191,995 for the years ended December 31, 2000, 1999, and 1998, respectively.

(8) ACCRUED EXPENSES

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                                      -------------------------
                                                         2000          1999
                                                      -----------   -----------
<S>                                                   <C>           <C>
Accrued payroll and related expenses................  $   534,994   $   364,911
Accrued professional services.......................      122,768       133,923
Other...............................................      227,018       220,499
Accrued payments to former officers.................           --       181,065
                                                      -----------   -----------
                                                      $   884,780   $   900,398
                                                      ===========   ===========
</TABLE>

                                       F-10
<PAGE>   25
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) RESEARCH AND DEVELOPMENT ARRANGEMENTS

     The Company is party to a number of research and development arrangements
with commercial entities. These arrangements are generally short-term in nature
and provided $10,500, $197,500, and $160,984 of revenues for the years ended
December 31, 2000, 1999, and 1998, respectively.

(10) LICENSE AGREEMENTS

     The Company was granted a non-exclusive license by a third party to make,
use, and sell products of the type claimed in two U.S. patents. In consideration
for this license, the Company agreed to pay royalties of 1% of net sales, as
defined, and made an advance royalty payment of $17,500. Royalties under this
agreement amounted to approximately $24,200, $12,900, and $9,900 for the years
ended December 31, 2000, 1999, and 1998, respectively

     The Company was granted a non-exclusive license by a third party to produce
and sell ultrafine powders of metal and ceramics claimed in four U.S. patents.
In consideration for this license, the Company agreed to pay $14,000 as an
initial payment, and pay royalties of 3% of net proceeds of sales of the
product, as defined. Royalties under this agreement amounted to approximately
$0, $37,900, and $12,100 for the years ended December 31, 2000, 1999, and 1998,
respectively.

     In December 1997, the Company entered into a license agreement whereby the
Company granted a royalty-bearing exclusive right and license, as defined, to
purchase, make, use and sell nanocrystalline materials to C. I. Kasei, a
division of Itochu Corporation ("CIK"). Under this agreement, the Company also
will earn royalties on net sales of manufactured products containing
nanocrystalline materials. The agreement also provided for minimum sales targets
and minimum royalty payments to maintain exclusivity. The agreement expires on
March 31, 2013 unless earlier terminated as provided therein. The Company
recorded royalty revenues, classified as "Other Revenue" on the Statements of
Operations, under this agreement of $300,000, $4,417, and $1,690 for the years
ended December 31, 2000, 1999, and 1998, respectively. For 1999 and 1998, the
Company allowed CIK to purchase additional product as a substitute for its
minimum royalty requirements.

(11) INCOME TAXES

     The Company has net operating loss carryforwards for tax purposes of
approximately $32,100,000 at December 31, 2000, which expire between 2005 and
2015. The Company has not paid income taxes since inception. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred income taxes consist of the following:

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                                     --------------------------
                                                         2000          1999
                                                     ------------   -----------
<S>                                                  <C>            <C>
DEFERRED TAX ASSETS:
  Net operating loss carryforwards.................  $ 12,498,000   $ 8,932,000
  Foreign tax credit carryforward..................       156,000       156,000
  Start-up cost capitalized for income tax
     purposes......................................            --        41,000
  Inventory and other allowances...................        67,000       148,000
  Excess book depreciation.........................       179,000       113,000
  Other accrued costs..............................       189,000       203,000
                                                     ------------   -----------
     Total deferred tax assets.....................  $ 13,089,000     9,593,000
  Less: Valuation allowance........................  ($13,089,000)   (9,593,000)
                                                     ------------   -----------
Deferred income taxes..............................  $         --   $        --
                                                     ============   ===========
</TABLE>

                                       F-11
<PAGE>   26
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The valuation allowance increased $1,712,000 for the year ended December
31, 2000 due principally to the increase in the net operating loss carryforward
and uncertainty as to whether future taxable income will be generated prior to
the expiration of the carryforward period. Under the Internal Revenue Code,
certain ownership changes, including the prior issuance of preferred stock and
the Company's public offering of common stock, may subject the Company to annual
limitations on the utilization of its net operating loss carryforward.

     As a result of certain transactions with third parties operating in foreign
countries, the Company may be subject to the withholding and payment of foreign
income taxes as transactions are completed. Under the Internal Revenue Code,
foreign tax payments may be used to offset federal income tax liabilities when
incurred, subject to certain limitations. At December 31, 2000, the Company has
a foreign tax credit carryforward of $156,000.

(12) CAPITAL STOCK

     In October 1998, the Company declared a dividend of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of Company common stock on
November 10, 1998. The Rights are not presently exercisable. Each Right entitles
the holder, upon the occurrence of certain specified events, to purchase from
the Company one ten-thousandth of a share of the Company's Series A Junior
Participating Preferred Stock at a purchase price of $25 per one ten-thousandth
of a share (the "Purchase Price"). The Rights further provide that each Right
will entitle the holder, upon the occurrence of certain specified events, to
purchase from the Company, common stock having a value of twice the Purchase
Price and, upon the occurrence of certain other specified events, to purchase
from another entity into which the Company is merged or which acquires 50% or
more of the Company's assets or earnings power, common stock of such other
entity having a value of twice the Purchase Price. In general, the Rights may be
redeemed by the Company at a price of $0.01 per Right. The Rights expire on
October 28, 2008.

     At December 31, 2000, 2,500 shares of authorized but unissued Preferred
Stock have been reserved for future issuance regarding the Rights. In addition,
authorized but unissued shares of common stock have been reserved for future
issuance as follows:

<TABLE>
<S>                                                                <C>
Warrants....................................................          28,949
Options.....................................................       1,970,815
                                                                   ---------
                                                                   1,999,764
                                                                   =========
</TABLE>

(13) STOCK OPTIONS AND WARRANTS

     The Company has entered into stock option agreements with certain officers,
employees, directors and three Advisory Board members. At December 31, 2000, the
Company had outstanding options to purchase 1,451,681 shares of common stock.
The stock options generally expire ten years from the date of grant. Of the
total number of options granted 861,076 of the outstanding options vest over a
five-year period, 531,166 vest over a three-year period from their respective
grant dates and 59,439 vest on the eighth anniversary following their grant
date. For the year ended December 31, 2000, the Company recognized $62,873 in
stock compensation expense related to the grant of 12,708 shares of stock to
four directors. For the year ended December 31, 1999, the Company recognized
$124,325 in stock compensation expense related to the grant of 24,500 shares of
stock to an officer and to the extension of stock option vesting periods for
three former officers.

                                       F-12
<PAGE>   27
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Exercise prices are determined by the Board of Directors and equal the
estimated fair values of the Company's common stock at the grant date. The table
below summarizes all option activity through December 31, 2000:

<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                                                   NUMBER OF                             AVERAGE EXERCISE
                                                    OPTIONS        EXERCISE PRICE             PRICE
                                                   ---------       ---------------       ----------------
<S>                                                <C>             <C>                   <C>
Outstanding at January 1, 1998.................    1,438,989       $ .112 - 5.181             $2.471
Options granted during 1998....................      521,400        2.938 - 5.750              3.694
Options exercised during 1998..................     (128,356)       .112 - 3.886                .702
Options canceled during 1998...................      (50,648)       3.813 - 3.886              3.874
                                                   ---------
Outstanding at December 31, 1998...............    1,781,385        .112 - 5.750               2.916
Options granted during 1999....................      417,000        1.750 - 5.000              2.115
Options exercised during 1999..................     (170,867)       .112 - 1.727                .272
Options canceled during 1999...................     (174,274)       .432 - 5.250               3.641
                                                   ---------
Outstanding at December 31, 1999...............    1,853,244        .112 - 5.750               2.911
Options granted during 2000....................      335,675       6.312 - 11.625              7.777
Options exercised during 2000..................     (444,569)       .432 - 5.750               2.732
Options canceled during 2000...................     (292,669)       1.727 - 7.687              3.732
                                                   ---------
Outstanding at December 31, 2000...............    1,451,681        .112 - 11.625              3.876
                                                   =========
</TABLE>

     Information with respect to stock options outstanding and stock options
exercisable at December 31, 2000 follows:

<TABLE>
<CAPTION>
                                                                 OPTIONS OUTSTANDING
                                              ----------------------------------------------------------
                                                                      WEIGHTED-AVERAGE
                                                     NUMBER              REMAINING          WEIGHTED-
                                                  OUTSTANDING         CONTRACTUAL LIFE       AVERAGE
                                              AT DECEMBER 31, 2000        (YEARS)         EXERCISE PRICE
                                              --------------------    ----------------    --------------
<S>                                           <C>                     <C>                 <C>
Range of Exercise Prices
$0.112-0.432..............................            71,150               3.515              $0.354
$1.727-2.375..............................           420,700               7.634               1.895
$2.813-3.886..............................           621,666               6.873               5.951
$5.000-6.313..............................            28,740               8.023               5.616
$7.625-11.625.............................           309,425               9.405               7.824
                                                   ---------
                                                   1,451,681
                                                   =========
</TABLE>

<TABLE>
<CAPTION>
                                                                 OPTIONS EXERCISABLE
                                              ----------------------------------------------------------
                                                     NUMBER                                 WEIGHTED-
                                                  EXERCISABLE                                AVERAGE
                                              AT DECEMBER 31, 2000                        EXERCISE PRICE
                                              --------------------                        --------------
<S>                                           <C>                     <C>                 <C>
Range of Exercise Prices
$0.112-0.432..............................            71,150                                  $0.354
$2.813-3.886..............................           153,520                                   1.814
$5.000-6.313..............................           314,791                                   3.697
$7.625-11.625.............................            10,072                                   5.172
                                                   ---------
                                                     549,533
                                                   =========
</TABLE>

                                       F-13
<PAGE>   28
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with the issuance of Series C convertible preferred stock in
1993, the Company issued common stock purchase warrants for 662,287 shares at no
additional cost to the Series C convertible preferred stockholders. At the
Company's initial public offering on November 26, 1997, all preferred stock
shares were converted to common stock shares. These warrants have an exercise
price of $1.123 per share and expire upon the tenth anniversary of issuance. In
July of 1998, 232,491 warrants were converted, via a cashless exchange, into
162,868 shares of common stock. No warrants were converted in 1999. For the year
ended December 31, 2000, 400,847 warrants were converted to common stock, of
which 267,231 warrants were converted, via a cashless exchange into 238,963
shares of common stock, and 133,616 warrants were exercised for $150,000. At
December 31, 2000, 28,949 warrants remain outstanding.

     The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB No. 123 requires use
of option valuation models that were not developed for the use in valuing
employee stock options. Pro forma information regarding net income is required
by FASB No. 123, which also requires that the information be determined as if
the Company had accounted for the employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for the years ended December
31, 2000, 1999, and 1998: U.S. government zero coupon 7-year bond interest rates
ranging from 4.6% to 6.9%, depending upon the specific grant date of the
options; a dividend yield of zero percent; and a weighted-average expected life
of the option of 7 years. The volatility factor used was 25%. The weighted
average fair value of the options granted during 2000, 1999, and 1998 was
$3.263, $0.885, and $ 1.505 per share, respectively.

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

     For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the respective
option. Because FASB No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma impact will not be fully reflected until 2002.
The Company's pro forma net loss would be $4,789,332, $5,456,516, and $5,922,570
and the pro forma net loss per share, basic and diluted, would be $0.36, $0.43,
and $0.48 for the years ended December 31, 2000, 1999, and 1998, respectively.

(14)  401(K) PROFIT-SHARING PLAN

     The Company has a 401(k) profit-sharing plan covering substantially all
employees who meet defined service requirements. The plan provides for deferred
salary contributions by the plan participants and a maximum contribution by the
Company not to exceed 3% of the participant's salary. In 2000, the Company
contribution under this plan was $42,026. There was no contribution in 1999 or
1998.

(15)  RELATED PARTY TRANSACTIONS

     The Company has an ongoing consulting agreement with a
director/stockholder. Payments under this agreement amount to $2,000 per month.

                                       F-14
<PAGE>   29
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(16)  SIGNIFICANT CUSTOMERS

     Revenue from two customers constituted approximately 68.5% and 10.0%,
respectively, of the Company's 2000 revenue. Revenue from three customers
constituted approximately 33.8%, 9.9%, and 9.7%, respectively, of the Company's
1999 revenue. Revenue from four customers constituted approximately 16.9%,
14.0%, 13.4% and 11.5% respectively, of the Company's 1998 revenue.

(17)  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                           FIRST         SECOND          THIRD         FOURTH
                                          QUARTER        QUARTER        QUARTER        QUARTER
                                        -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>
2000
Total revenue.......................    $   618,921    $ 1,105,336    $ 1,354,951    $ 1,194,145
Loss from operations................     (1,717,784)    (1,552,282)    (1,024,466)    (1,412,394)
Net loss............................     (1,434,559)    (1,252,767)      (715,241)    (1,115,760)
Basic and diluted loss per share....          (0.11)         (0.09)         (0.05)         (0.08)
1999
Total revenue.......................    $   324,998    $   329,211    $   365,197    $   405,441
Loss from operations................     (1,864,951)    (1,869,641)    (1,572,137)      (976,953)
Net loss............................     (1,575,902)    (1,582,033)    (1,287,012)      (672,120)
Basic and diluted loss per share....          (0.13)         (0.12)         (0.10)         (0.05)
</TABLE>

(18)  CONTINGENT LIABILITIES

     Five separate complaints were filed in the United States District Court for
the Northern District of Illinois, each alleging that the Company, certain of
its officers and directors, and the underwriters of the Company's initial public
offering of Common Stock (the "Offering") are liable under the federal
Securities Act of 1933 for making supposedly negligent or reckless material
misstatements or omissions of fact in the Registration Statement and Prospectus
relating to the Offering. A consolidated complaint was filed in those cases in
October 1998. The consolidated complaint alleges that the action should be
maintained as (i) a plaintiff class action on behalf of certain persons who
purchased the Common Stock from November 26, 1997 through January 8, 1998, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. The consolidated
complaint also seeks rescission of plaintiffs' purchases of the Common Stock. In
October 1999, the Court granted in part and denied in part defendants' motions
to dismiss the consolidated complaint. In its ruling, the Court in part found
that plaintiffs who did not purchase their Common Stock during the Offering
could not sue under Section 12(a)(2) of the Securities Act of 1933. Each
defendant's respective answer to the remaining claims in the consolidated
complaint was filed in November 1999.

     Following certain discovery, the Company agreed to settle all claims
against all defendants in the consolidated complaint for $4,025,000. The
settlement is not an admission of liability by any party. Because the settlement
has been funded by the Company's directors and officers liability insurance, the
settlement payment will not have a material adverse effect on the Company's
financial condition or results of operations. The Court ordered preliminary
approval of the settlement on December 6, 2000. The settlement remains subject
to the Court's final approval at a hearing scheduled for March 27, 2001.

     The above-described settlement will not resolve a separate complaint filed
in the Northern District of Illinois in November 1998, alleging that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal Securities Exchange Act of 1934
for making supposedly fraudulent material misstatements and omissions of fact in
connection with the solicitation
                                       F-15
<PAGE>   30
                       NANOPHASE TECHNOLOGIES CORPORATION
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of certain former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering. The complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. In March 1999, the
preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. All defendants subsequently filed a
motion to dismiss the preferred stockholders' complaint. In August 2000, the
Court denied that motion, finding that the preferred stockholders' allegations
were pleaded sufficiently to permit their claims to proceed. Each defendant's
respective answer to the preferred stockholders' complaint was filed in
September 2000. Discovery currently is pending.

     Pursuant to the underwriting agreement for the Offering, the Company has
agreed to pay the underwriters' attorneys' fees in all the above-described
litigation. The Company and the defendant directors and officers each have
retained counsel and intend to defend vigorously against the preferred
stockholders' complaint. Although the Company believes that the allegations of
the preferred stockholders' complaint are without merit, it is not feasible for
the Company to predict at this time the outcome of this litigation or whether
its resolution could have a material adverse effect on the Company's results of
operations or financial condition.

                                       F-16
<PAGE>   31

                                                                     SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                       ADDITIONS
                                         ---------------------------------------------------------------------
                                          BALANCE
                                         BEGINNING     COSTS AND      OTHER                       BALANCE AT
             DESCRIPTION                 OF PERIOD      EXPENSES     ACCOUNTS    DEDUCTIONS      END OF PERIOD
             -----------                 ---------     ---------     --------    ----------      -------------
<S>                                      <C>           <C>           <C>         <C>             <C>
Year ended December 31, 1998:
Allowance for doubtful accounts......    $   19,276    $  125,623     $5,005      $ 64,904(1)     $    85,000
                                         ==========    ==========     ======      ========        ===========
Allowance for excess inventory
  quantities accounts................    $       --    $  190,633     $   --      $     --        $   190,633
                                         ==========    ==========     ======      ========        ===========
Deferred tax asset valuation
  account............................    $5,360,000    $2,303,000     $   --      $     --        $ 7,663,000
                                         ==========    ==========     ======      ========        ===========
Year ended December 31, 1999:
Allowance for doubtful accounts......    $   85,000    $   54,068     $   --      $ 19,068(1)     $   120,000
                                         ==========    ==========     ======      ========        ===========
Allowance for excess inventory
  quantities accounts................    $  190,633    $   69,581     $   --      $     --        $   260,214
                                         ==========    ==========     ======      ========        ===========
Deferred tax asset valuation
  account............................    $7,663,000    $1,930,000     $   --      $     --        $ 9,593,000
                                         ==========    ==========     ======      ========        ===========
Year ended December 31, 2000:
                                         ==========    ==========     ======      ========        ===========
Allowance for doubtful accounts......    $  120,000    $       --     $   --      $ 38,550(1)     $    81,450
                                         ==========    ==========     ======      ========        ===========
Allowance for excess inventory
  quantities accounts................    $  260,214    $       --     $   --      $168,627(2)     $    91,587
                                         ==========    ==========     ======      ========        ===========
Deferred tax asset valuation
  account............................    $9,593,000    $3,496,000     $   --      $     --        $13,089,000
                                         ==========    ==========     ======      ========        ===========
</TABLE>

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

(1) Uncollectible accounts written off.

(2) Reduction in inventory allowance as a result of the sale of inventories for
    which an allowance had previously been provided.

                                       S-1
<PAGE>   32

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of
March, 2001.

                                          NANOPHASE TECHNOLOGIES CORPORATION

                                          By:       /s/ JOSEPH CROSS
                                            ------------------------------------
                                                        Joseph Cross
                                               President and Chief Executive
                                                           Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th day of March, 2000.

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

                /s/ JOSEPH CROSS                    President, Chief Executive Officer (Principal
------------------------------------------------    Executive Officer) and a Director
                  Joseph Cross

               /s/ JESS JANKOWSKI                   Acting Chief Financial Officer, Corporate
------------------------------------------------    Controller, Treasurer and Secretary (Principal
                 Jess Jankowski                     Financial and Accounting Officer)

             /s/ DONALD S. PERKINS                  Chairman of the Board and Director
------------------------------------------------
               Donald S. Perkins

           /s/ EDWARD E. HAGENLOCKER                Director
------------------------------------------------
             Edward E. Hagenlocker

              /s/ JAMES A. MCCLUNG                  Director
------------------------------------------------
                James A. McClung

               /s/ JERRY PEARLMAN                   Director
------------------------------------------------
                 Jerry Pearlman

               /s/ RICHARD SIEGEL                   Director
------------------------------------------------
                 Richard Siegel
</TABLE>
<PAGE>   33

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>        <S>

 2         Plan and Agreement of Merger dated as of November 25, 1997
           by and between the Company and its Illinois predecessor,
           incorporated by reference to Exhibit 2 to the Company's
           Annual Report on Form 10-K for the year ended December 31,
           1997 (the "1997 10-K").
 3.1       Certificate of Incorporation of the Company, incorporated by
           reference to Exhibit 3.1 to the 1997 10-K.
 3.2       Bylaws of the Company, incorporated by reference to Exhibit
           3.2 to the 1997 10-K.
 4.1       Specimen stock certificate representing Common Stock,
           incorporated by reference to Exhibit 4.1 to the Company's
           Registration Statement on Form S-1 (File No. 333-36937) (the
           "IPO S-1").
 4.2       Form of Warrants, incorporated by reference to Exhibit 4.2
           to the IPO S-1.
 4.3       Rights Agreement dated as of October 28, 1998 by and between
           the Company and LaSalle National Bank, incorporated by
           reference to Exhibit 1 to the Company's Registration
           Statement on Form 8-A, filed October 28, 1998.
 4.4       Certificate of Designation of Series A Junior Participating
           Preferred Stock incorporated by reference to Exhibit 4.4 to
           the Company's Annual Report on Form 10-K for the year ended
           December 31, 1998 (the "1998 10-K").
10.1       The Nanophase Technologies Corporation Amended and Restated
           1992 Stock Option Plan, as amended (the "Stock Option
           Plan"), incorporated by reference to Exhibit 10.1 to the IPO
           S-1.
10.2       Form of Indemnification Agreement between the Company and
           each of its directors and executive officers, incorporated
           by reference to Exhibit 10.2 to the IPO S-1.
10.3       Amended and Restated Registration Rights Agreements dated as
           of March 16, 1994, as amended, incorporated by reference to
           Exhibit 10.2 to the IPO S-1.
10.4       License Agreement dated June 1, 1990 between the Company and
           ARCH Development Corporation, as amended, incorporated by
           reference to Exhibit 10.7 to the IPO S-1.
10.5       License Agreement dated October 12, 1994 between the Company
           and Hitachi, incorporated by reference to Exhibit 10.8 to
           the IPO S-1.
10.6       License Agreement dated May 31, 1996 between the Company and
           Research Development Corporation of Japan, incorporated by
           reference to Exhibit 10.9 to the IPO S-1.
10.7       License Agreement dated April 1, 1996 between the Company
           and Cornell Research Foundation, incorporated by reference
           to Exhibit 10.10 to the IPO S-1.
10.8*      Consulting and Stock Purchase Agreement between Richard W.
           Siegel and the Company dated as of May 9, 1990, as amended
           February 13, 1991, November 21, 1991 and January 1, 1992,
           incorporated by reference to Exhibit 10.11 to the IPO S-1.
10.9       Lease Agreement between the Village of Burr Ridge and the
           Company, dated September 15, 1994, incorporated by reference
           to Exhibit 10.12 to the IPO S-1.
10.10      Distribution Agreement between the Company and C.I. Kasei,
           Ltd., (a subsidiary of Itochu Corporation) dated as of
           October 30, 1996, incorporated by reference to Exhibit 10.15
           to the IPO S-1.
10.11      Supply Agreement between the Company and Schering-Plough
           HealthCare Products, Inc. dated as of March 15, 1997,
           incorporated by reference to Exhibit 10.17 to the IPO S-1.
10.12      License Agreement between the Company and C.I. Kasei Co.,
           Ltd. (a subsidiary of Itochu Corporation) dated as of
           December 30, 1997, incorporated by reference to Exhibit
           10.17 to the 1997 10-K.
</TABLE>
<PAGE>   34

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>        <S>
10.13*     Employment Agreement dated as of September 3, 1996 between
           the Company and Dennis J. Nowak, incorporated by reference
           to Exhibit 10.5 to the IPO S-1.
10.14*     Consulting Agreement dated as of June 25, 1999 between the
           Company and Dennis J. Nowak incorporated by reference to
           Exhibit 10.14 to the 1999 10-K.
10.15*     Employment Agreement dated as of November 9, 1999 between
           the Company and Joseph Cross, incorporated by reference to
           Exhibit 10.15 to the 1999 10-K.
10.16*     Employment Agreement dated as of February 15, 1999 between
           the Company and Gina Kritchevsky, incorporated by reference
           to Exhibit 10.18 to the 1998 10-K.
10.17*     Employment Agreement dated as of March 15, 1999 between the
           Company and Daniel S. Bilicki, incorporated by reference to
           Exhibit 10.19 to the 1998 10-K.
10.18*     Employment Agreement dated as of June 1, 1999 between the
           Company and Donald Freed incorporated by reference to
           Exhibit 10.19 to the 1999 10-K.
10.19*     Form of Options Agreement under the Stock Option Plan,
           incorporated by reference to Exhibit 4.5 to the Company's
           Registration Statement on Form S-8 (File No. 333-53445).
10.20*     Consulting and Severance Agreement dated October 28, 1998
           between the Company and John C. Parker, incorporated by
           reference to Exhibit 10.21 to the 1998 10-K.
10.21**    Zinc Oxide Supply Agreement dated as of September 16, 1999
           between the Company and BASF Corporation, as assignee,
           incorporated by reference to Exhibit 10.22 to the 1999 10-K.
10.22*     Employment Agreement dated as of November 2, 2000 between
           the Company and Robert Haines.
10.23      Lease Agreement between Centerpointe Properities Trust and
           the Company, dated June 15, 2000.
10.24***   Amendment No. 1 to Zinc Oxide Supply Agreement dated as of
           January, 2001 between the Company and BASF Corporation.
10.25      Promissory Note dated as of September 14, 2000 between the
           Company and BASF Corporation.
11         Statement regarding computation of loss per share.
23         Consent of Ernst & Young LLP.
</TABLE>

---------------
  * Management contract or compensatory plan or arrangement.

 ** Confidentiality previously requested for portions of this agreement. The
    Company has disclosed that such agreement is with BASF Corporation, as
    assignee.

*** Confidentially Requested, confidential portions have been omitted and filed
    separately with the Commission as required by Rule 24b-2.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>2
<FILENAME>c60965ex10-22.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT FOR ROBERT HAINES
<TEXT>

<PAGE>   1
                                                                 EXHIBIT 10.22

                              EMPLOYMENT AGREEMENT

     Employment Agreement dated and effective as of November 2, 2000 (this
"Agreement"), between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation
(with its successors and assigns, referred to as the "Company"), and Robert
Haines (referred to as "Executive").

                              PRELIMINARY STATEMENT

     The Company desires to employ Executive, and Executive wishes to be
employed by the Company, upon the terms and subject to the conditions set forth
in this Agreement, all of which are related to Executive's employment with the
Company. Executive and the Company therefore agree as follows:

                                    AGREEMENT

     1. EMPLOYMENT FOR TERM. The Company hereby employs Executive, and Executive
hereby accepts employment with the Company, beginning on January 22, 2001 and
continuing until terminated pursuant to Section 6 below (the "Term").

     2. POSITION AND DUTIES. During the Term, Executive shall serve as the Vice
President, Operations of the Company and shall report to the President or Chief
Executive Officer of the Company. During the Term, Executive shall also hold
such additional positions and titles as the Board of Directors of the Company
(the "Board") may determine from time to time. During the Term, Executive shall
devote substantially all of his business time and best efforts to Executive's
duties as an employee and officer of the Company.

     3. COMPENSATION.

        (a) BASE SALARY. The Company shall pay Executive a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less than $160,000 per annum, payable on the Company's regular pay cycle
for professional employees.

        (b) BONUS PAYMENT. Executive will be eligible for bonuses of up to
forty percent (40%) of his base salary for services to be performed as an
officer and employee of the Company in calendar year 2002 and subsequent years
based on performance milestones agreed upon by Executive and the Chief Executive
Officer of the Company and approved by the Board.

        (c) STOCK OPTIONS. Subject to the provisions of the Company's Amended
and Restated 1992 Stock Option Plan ("Plan"), and as determined by the Board in
its sole discretion, Executive shall be eligible for such annual stock option
grants as the Chief Executive Officer and Board deems appropriate.

        (d) INITIAL STOCK OPTIONS. Upon joining the Company, executing this
agreement and successfully passing the Company's mandatory drug screening,
whichever occurs later, subject to the provisions of the Company's Amended and
Restated 1992 Stock Option Plan


<PAGE>   2



("Plan"), the Company will award Executive 30,000 stock options that vest over
five years at an option price as to be determined at the lowest price traded on
the market as of January 22, 2001.

        (e) RELOCATION REIMBURSEMENTS. The Company agrees to pay to or on
behalf of Executive the following costs and expenses, as and when incurred by
Executive or otherwise as specifically set forth below, subject to receipt by
the Company of appropriate documentation or other evidence of expenses: (i)
reasonable out-of-pocket expenses incurred by Executive in the physical move of
his family and household from his current residence to the Chicago Metropolitan
area (including transport of automobiles and packing expenses); (ii)
out-of-pocket cost for reasonable living expenses, including housing, food,
utilities and a rental automobile, for the period commencing on or about January
22, 2001 until July 22, 2001, or until Executive completes relocation, whichever
is earlier; (iii) out-of-pocket economy class commuting costs ( including air
travel and parking expenses) to and from his current residence and Chicago,
Illinois, each weekend for the period defined in (ii) providing that Executive
exercises reasonable diligence to book such flights with adequate advance to
obtain the lowest possible reasonable fares; (iv) reimbursement for
out-of-pocket economy-class travel expenses, rental automobile, and economy
lodging for Executive and family for up to two (2) trips in connection with the
relocation to obtain suitable housing; (v) realtor fees, attorney's fees, and
closing costs actually paid by Executive and related to the sale by Executive of
his current residence, in the aggregate amount not to exceed 7% of the gross
sales price of such residence; (vi) attorney fees, loan origination not to
exceed 1% of purchase price, application fees, and closing costs actually paid
by Executive and related to purchase by Executive of a primary residence in the
Chicago Metropolitan area (reimbursed expenses do not include prepaid taxes or
escrow amounts), payable on or before July 22, 2001, unless a later date is
agreed upon by Executive and the CEO; (vii) two months salary ($26,667) as a
reimbursement for incidental expenses and costs incurred by Executive in the
relocation of his family to the Chicago Metropolitan area payable within thirty
(30) day after the physical relocation of his family; and (viii) except for
moving expenses reimbursed by the Company which do not constitute taxable income
to the Executive for Federal income tax purposes and the amount specified in
subsection 3(e)(vii), reimbursements will be grossed-up to cover Federal and
state taxes to make the moving costs tax neutral to the Executive for the tax
year 2001.

        (f) OTHER AND ADDITIONAL COMPENSATION. Sections 3(a), 3(b) and
3(c) establish minimum salary, bonus and option grant levels for Executive
during the Term, and shall not preclude the Board from awarding Executive a
higher salary or more stock options at any time, nor shall they preclude the
Board from awarding Executive additional bonuses or other compensation in the
discretion of the Board.

     4. EMPLOYEE BENEFITS. During the Term, Executive shall be entitled to the
employee benefits made available by the Company generally to all other employees
of the Company, and shall be entitled to four (4) weeks of vacation annually,
subject to adjustment based on subsequent changes in the Company's vacation
policy in effect from time to time applicable to the Company's officers
generally.

     5. EXPENSES. The Company shall reimburse Executive for actual out-of-pocket
expenses reasonably incurred by him in the performance of his services as an
officer and employee of the Company in accordance with the Company's policy for
such reimbursements


<PAGE>   3




applicable to employees generally, and upon receipt by the
Company of appropriate documentation and receipts for such expenses.

     6. TERMINATION.

        (a) GENERAL. The Term shall end (i) immediately upon Executive's death,
or (ii) upon Executive 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 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 or the Board (but subject to each party's obligations
under this Agreement), provided that Executive will provide the Company with at
least thirty (30) days' prior written notice of Executive's resignation from
Executive's positions as an officer and 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 shall receive the compensation required under Section 3
of this Agreement for a full thirty (30) day period.

        (b) NOTICE OF TERMINATION. If the Company ends the Term, it shall give
Executive at least thirty (30) days prior written notice of the termination,
including a statement of whether the termination was for "Cause" (as defined in
Section 7(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 shall receive the
compensation required under Section 3 of this Agreement for a full thirty (30)
day period. The Company's failure to give notice under this Section 6(b) shall
not, however, affect the validity of the Company's termination of the Tern or
Executive's employment, nor shall the lack of such notice entitle Executive to
any rights or claims against the Company other than those arising from
Executive's right to receive the compensation required under Section 3 of this
Agreement for a full thirty (30) day period.

     7. SEVERANCE BENEFITS.

        (a) "CAUSE" DEFINED. "Cause" means (i) willful and gross malfeasance or
misconduct by Executive in connection with Executive's employment; (ii)
Executive's gross negligence in performing any of Executive's duties undue this
Agreement; (iii) Executive's conviction of, or entry of a plea of guilty or nolo
contendere with respect to, any felony or misdemeanor reflecting upon
Executive's honesty; (iv) Executive's gross and willful 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 of any of the
material terms or conditions of this Agreement.

        (b) TERMINATION WITHOUT CAUSE. If the Company ends the Term other than
for Cause, or if the Term ends due to Executive's death or disability under
Section 6(a) of this Agreement, subject to Executive's complying with his
obligations under this Agreement, (i) the Company shall pay Executive an amount
equal in annual amount to Executive's base salary in



<PAGE>   4




effect at the time of termination during the period (the "Severance Period") of
fifty-two (52) full weeks after the effective date of termination, payable in
proportionate amounts on the Company's regular pay cycle for professional
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) any stock options
granted to Executive prior to termination shall become fully vested, and shall
become exercisable (by Executive, or upon his death or disability, by his heirs,
beneficiaries and personal representatives) in accordance with the applicable
option grant agreement and the Plan.

        (c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for
Cause, or if Executive resigns as an employee or officer of the Company, then
the Company shall have no obligation to pay Executive 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.

     8. ADDITIONAL COVENANTS.

        (a) CONFIDENTIALITY. Executive agrees to execute the Company's standard
form of Confidential Information and Proprietary Rights Agreement promptly upon
execution of this Agreement.

        (b) "NON-COMPETITION PERIOD" DEFINED. "Non-Competition Period" means
the period beginning at the end of the Term and ending two years thereafter.

        (c) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Executive
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company relies upon Executive for the development and
growth of its business and related functions, and that he will develop personal
relationships with significant customers and suppliers of the Company and have
control of confidential information concerning, and lists of customers of, the
Company. Executive further acknowledges that the business of the Company is
international in scope and cannot be confined to any particular geographic area.
For the foregoing reasons, and in consideration of the befits available to
Executive under Sections 3, 6(a) and 7(b) of this Agreement, Executive covenants
and agrees that during both the Term of this Agreement and the subsequent
Non-Competition Period, Executive shall not, in any manner, directly or
indirectly, engage in, be financially interested in, represent, render any
advice or services to, or be employed by, or otherwise affiliated with, any
other business (conducted for profit or not for profit) which is principally or
materially engaged in or is competitive with the Company's business of
developing, producing, coating, refining, forming, marketing, supplying or
selling nanocrystalline and ultrafine powders. For the reasons acknowledged by
Executive at the beginning of this Section 8(c), Executive additionally
covenants and agrees that during the Non-Competition Period, Executive shall
not, directly or indirectly, whether on his own behalf or on behalf of any other
person or entity, in any manner (A) contact, accept or solicit the business of
any person or entity that was a customer, supplier or contractor of or to the
Company for the purpose of obtaining business of the type performed by the
Company, or (B) contact, accept or solicit or attempt to solicit for employment
or engagement any persons who were officers or employees of the Company upon the
date of termination of his employment or at any time during



<PAGE>   5


a 180 day period preceding the date of termination, or aid any person or entity
in any attempt to hire or engage any such officers or employees of the Company.
The foregoing restrictions shall not preclude Executive from the ownership of
not more than three percent (3%) of the voting securities of any corporation
whose voting securities are registered under Section 12(g) of the Securities
Exchange Act of 1934, even if its business competes with that of the Company.

        (d) REMEDIES.

            (i)   INJUNCTION. In view of Executive's access to the Company's
confidential information, and in consideration of the value of such property to
the Company, Executive acknowledges that the covenants contained in this Section
8 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 would not have had
access to or involvement in but for his employment with the Company. Executive
confirms that enforcement of the covenants in Section 8 will not prevent him
from earning a livelihood. Executive further agrees that in the event of his
actual or threatened breach of any covenant in this Section 8, the Company would
be irreparably harmed and the full extent of resulting injury would be
impossible to calculate, and the Company therefore will not have an adequate
remedy at law. Accordingly, Executive agrees that temporary and permanent
injunctive relief are appropriate remedies for any such breach, without bond or
security; provided that nothing herein shall be construed as limiting any other
legal or equitable remedies available to the Company.

            (ii)  ENFORCEMENT. Executive 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 the Company's
successfully enforcing its rights under this Agreement. The Company shall be
entitled to disclose the contents of this Agreement or to deliver a copy of it
to any person or entity whom the Company believes Executive has solicited in
violation of this Agreement.

            (iii) ARBITRATION. No dispute arising from Executive's actual or
threatened breach of any covenant in this Section 8 shall be subject to
arbitration. However, any other dispute or claim arising from any other
provision of this Agreement, or relating to Executive's employment or service as
an officer (whether based on statute, 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 8(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 Illinois Arbitration Act or the Federal
Arbitration Act.

     9. SUCCESSORS AND ASSIGNS.

        (a) EXECUTIVE. This Agreement is a personal contract, and the rights and
interests that this Agreement accords to Executive may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by Executive. Except to the
extent contemplated in Sections 7(b) and 7(c) above, Executive shall not have
any power of anticipation, alienation or



<PAGE>   6



assignment of the payments contemplated by this Agreement, all rights and
benefits of Executive shall be for the sole personal benefit of Executive, 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. Except as so provided, this Agreement shall inure
to the benefit of and be binding upon Executive and Executive'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 sells all or substantially all of its assets, merges or
consolidates, otherwise combines or affiliates with another business, dissolves
and liquidates, or otherwise sells or disposes of substantially all of its
assets. The Company's obligations under this Agreement shall cease, however, if
the successor to the Company, the purchaser or acquiror 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), 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.

     10. ENTIRE AGREEMENT. This Agreement and the other agreements referenced
herein represent the entire agreement between the parties concerning Executive's
employment with the Company and supersedes all prior negotiations, discussions,
understandings and agreements, whether written or oral, between Executive and
the Company relating to the subject matter of this Agreement. The parties
specifically agree that upon the Company's execution of this Agreement, the
Company shall have no further obligations of any kind to Executive under any
prior employment agreement between the parties, including that certain
employment agreement dated March 15, 1999.

     11. 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 and by a duly authorized officer of the Company other than
Executive. 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.

     12. 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:  Chief Executive Offices
                       Facsimile:  (630) 323-1221



<PAGE>   7


     To Executive:     Robert Haines
                       4712 Myers Lane
                       Harrisburg, NC  28075

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.

     13. 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 too broad or to any extent invalid, such
provision shall not be determined to be entirely of no effect; instead, it is
the intention of both the Company and Executive 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.

     14. 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.

     15. 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.

     16. WITHHOLDING TAXES. All salary, benefits, reimbursements and any other
payments to Executive 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.

     17. 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.

     18. LIMITATION ON CLAIMS. EXECUTIVE AGREES THAT HE WILL NOT COMMENCE ANY
ACTION, CLAIM OR SUIT RELATING TO MATTERS ARISING FROM HIS EMPLOYMENT WITH THE
COMPANY (IRRESPECTIVE OF WHETHER SUCH ACTION, CLAIM OR SUIT ARISES FROM THE
TERMS OF THIS AGREEMENT) LATER THAN SIX MONTHS AFTER THE FIRST TO OCCUR OF (a)
THE DATE SUCH CLAIM INITIALLY ARISES OR (b) THE DATE OF TERMINATION OF
EMPLOYMENT FOR ANY REASON WHATSOEVER. EXECUTIVE EXPRESSLY WAIVES ANY APPLICABLE
STATUTE OF LIMITATION TO THE CONTRARY.



<PAGE>   8


     IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.

                                  NANOPHASE TECHNOLOGIES CORPORATION



                                  By: /s/  Joseph Cross
                                      -----------------------------------------
                                      Joseph Cross
                                      Chief Executive Officer



                                      /s/ Robert Haines
                                      -----------------------------------------
                                      Robert Haines



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>3
<FILENAME>c60965ex10-23.txt
<DESCRIPTION>LEASE AGREEMENT
<TEXT>

<PAGE>   1
                                                                  EXHIBIT 10.23



                                                              Property Address:
                                                           1319 Marquette Drive
                                                           Romeoville, Illinois

                            INDUSTRIAL BUILDING LEASE

     THIS LEASE is made as of this 15th day of June, 2000 between CP FINANCING
TRUST, a Maryland real estate financing trust ("Landlord"), and NANOPHASE
TECHNOLOGIES, INC., a Delaware corporation ("Tenant").

                                   ARTICLE I
                                  LEASE TERMS

     SECTION 1.1. DEFINITIONS. In addition to the other terms, which are
elsewhere defined in this Lease, the following terms and phrases, whenever used
in this Lease shall have the meanings set forth in this Subsection, and only
such meanings, unless such meanings are expressly contradicted, limited or
expanded elsewhere herein.

          A. BASE RENT SCHEDULE:
             -----------------------------------------------------------------
                      PERIOD                    ANNUAL BASE      MONTHLY BASE
                                                   RENT              RENT
             -----------------------------------------------------------------
             Commencement Date-July 31, 2001    $272,604.00       $22,717.00
             -----------------------------------------------------------------
             August 1, 2001-July 31, 2002       $280,782.12       $23,398.51
             -----------------------------------------------------------------
             August 1, 2002-July 31, 2003       $289,205.58       $24,100.47
             -----------------------------------------------------------------
             August 1, 2003-July 31, 2004       $297,881.75       $24,823.48
             -----------------------------------------------------------------
             August 1, 2004-July 31, 2005       $306,818.20       $25,568.18
             -----------------------------------------------------------------
             August 1, 2005-July 31, 2006       $316,022.75       $26,335.23
             -----------------------------------------------------------------

          B. COMMENCEMENT DATE: June 15, 2000

          C. INITIAL DEPOSIT: $5,200.00

             (i)      Initial Tax Deposit:  $5,000.00

             (ii)     Initial insurance Deposit:  $200.00

          D. INITIAL TERM: The initial six (6) year term, commencing as of the
     Commencement Date.

          E. LANDLORD'S BROKER: Cawley Chicago Real Estate


<PAGE>   2


          F. MAILING ADDRESS (LANDLORD):
             1808 Swift Road
             Oak Brook, Illinois  60690
             Attn:  Michael M. Mullen

             MAILING ADDRESS (TENANT):
             1319 Marquette Drive
             Romeoville, Illinois  60446

          G. OPTION TO RENEW: See Section XXXV.

          H. SECURITY DEPOSIT: $30,000.00

          I. TENANT'S BROKER: JSQ, Inc.

          J. TERM: The Initial Term as same may be extended or sooner
             terminated.

          K. TERMINATION DATE:  July 31, 2006.

          L. USE: Manufacturing, warehouse, distribution and storage of
             nanocrystalin, ceramic and metal powders, dry, coated and
             disbursed in liquids (such as oil and silicone) and related
             research, development and ancillary uses.

     SECTION 1.2. SIGNIFICANCE OF DEFINITIONS. Each reference in this Lease to
any of the Definitions contained in Section 1.1 of this Article shall be deemed
and construed to incorporate all of the terms provided under each such
Definition.

     SECTION 1.3. ENUMERATION OF EXHIBITS. The exhibits in this Section and
attached to this Lease are incorporated in this Lease by this reference and are
to be construed as a part of this Lease.

          EXHIBIT "A" - Legal Description
          EXHIBIT "B" - Form of Estoppel Certificate
          EXHIBIT "C" - Form of SNDA
          EXHIBIT "D" - Permitted Exceptions

                                   ARTICLE II
                                    PREMISES

     SECTION 2.1. LEASE. Landlord, for and in consideration of the rents herein
reserved and of the covenants and agreements herein contained on the part of
Tenant to be kept, observed and performed, does by these presents, lease to
Tenant, and Tenant hereby leases from Landlord, the real estate located at 1319
Marquette, Romeoville, Illinois, and legally described on Exhibit "A" attached
hereto and by this reference incorporated herein ("Land"), together with all
improvements now located or hereafter constructed thereon ("Improvements") (the
Land and the Improvements are sometimes collectively referred to as the
"Premises"), subject to covenants,


<PAGE>   3



conditions, agreements, easements, encumbrances and restrictions affecting the
Land and the Improvements thereon ("Restrictions").

                                  ARTICLE III
                                      TERM

     SECTION 3.1. TERM. The Initial Term of this Lease shall commence on the
Commencement Date and shall end on the Termination Date, unless sooner
terminated as hereinafter set forth.

                                   ARTICLE IV
                          CONDITION OF DEMISED PREMISES

     SECTION 4.1. CONDITION OF PREMISES. Subject to Landlord's obligation to
complete Landlord's Work as set forth in Section 4.2 below, Tenant agrees to
accept the Premises in an absolutely "as-is" condition, and Tenant acknowledges
that Landlord, its agents, attorneys, representatives and employees have not and
do not make any representations or warranties, express or implied, to Tenant
regarding the Premises, including, but not limited to: (i) the zoning of the
Premises; (ii) the condition of any underground, above ground or surface
improvements; (iii) the size, area, use or type of the Premises or the fitness
of the Premises for any intended or particular use; (iv) the nature of the soil
on and underlying the Premises or its suitability for development or any other
use thereof; (v) any financial information pertaining to the operation of the
Premises; (vi) the status of any requirements or obligations imposed, implied or
to be undertaken by the owner or developer of the Premises pursuant to any
zoning, subdivision, development laws or agreements with any governmental
entities; (vii) the presence or absence of any toxic wastes, hazardous materials
or structural defects in, on or under the Premises or any improvements thereon;
or (viii) the presence or absence of any rights of any governmental authority,
or of owners of property in the vicinity of the Premises, to obtain
reimbursement, recapture or special assessments from any owner of the Premises
for all or a portion of the cost of any utilities, roads or other improvements
heretofore or hereafter located on or in the vicinity of the Premises (and if
such rights exist, Tenant agrees to pay all sums due pursuant thereto, it being
expressly acknowledged and agreed that, Tenant hereby waives any claim Tenant
may have or may hereafter acquire against Landlord, its agents, attorneys,
representatives or employees for said costs), any and all such representations
and warranties, express or implied, being hereby expressly waived by Tenant and
disclaimed by Landlord. Tenant waives any claim that may exist for patent and/or
latent defects or for mutual or unilateral mistake of fact. Except as set forth
in Section 4.2 below, no promise of Landlord to alter, remodel, decorate, clean
or improve the Premises or any portion thereof and no representation respecting
the condition of the Premises or any portion thereof have been made by Landlord
to Tenant.

     SECTION 4.2. LANDLORD'S WORK. Landlord warrants that, as of the
Commencement Date, the roof shall not contain any leaks and the HVAC,
mechanical, electrical and plumbing systems shall be in working order. As soon
as practicable after the Commencement Date (which shall include the availability
of asphalt) Landlord shall repair the cracks and resurface the parking lot of
the Building.




<PAGE>   4


                                   ARTICLE V
                                      RENT

     SECTION 5.1. BASE RENT. Subject to the terms of Section 5.2 hereof, in
consideration of the leasing aforesaid, Tenant agrees to pay Landlord, without
offset or deduction (except for abatements provided in Sections 5.3 and 11.1
hereof), base rent for the Initial Term ("Base Rent"), payable monthly in
advance in the amount of the Monthly Base Rent set forth in the Base Rent
Schedule commencing on the Commencement Date and continuing on the first (1st)
day of each month thereafter for the balance of the Term of this Lease, and in
addition thereto, shall pay such charges as are herein described as "Additional
Rent". The term "Rent" when used in this Lease shall include all Base Rent
payable under this Section 5.1., as well as the charges herein described as
Additional Rent. All Rent payable hereunder shall be payable to Landlord at 135
S. LaSalle Street, Dept. 2023, Chicago, Illinois 60674-2023, or as Landlord may
otherwise from time to time designate in writing.

     SECTION 5.2. INTEREST AND LATE CHARGES ON LATE PAYMENTS. Tenant
acknowledges that its late payment of any Rent will cause Landlord to incur
certain costs and expenses not contemplated under this Lease, the exact amount
of which is extremely difficult or impracticable to fix. Such costs and expenses
will include, without limitation, loss of use of money, administrative and
collection costs and processing and accounting expenses. Therefore, on the third
(3rd) occasion during any calendar year on which any installment of monthly Base
Rent is not received by Landlord when due or any other sum due hereunder is not
paid when due after any applicable notice and cure periods, Tenant shall
immediately pay to Landlord a late charge equal to three percent (3%) of the
unpaid amount and on each subsequent such occasion during any calendar year, the
late charge shall increase by an amount equal to one percent (1%) of the unpaid
amount. By way of example, in the event five (5) payments are late during a
single calendar year, there would be no late charge for the first two late
payments, 3% for the third, 4% for the fourth and 5% for the fifth. Such late
charge is in addition to any interest due as set forth below. Landlord and
Tenant agree that this late charge represents a reasonable estimate of costs and
expenses incurred by Landlord from, and is fair compensation to Landlord for,
its loss suffered, by such non-payment by Tenant. In addition to the foregoing,
Rent not paid within thirty (30) days of the date when due after any applicable
notice and cure periods shall bear interest from the date when the same is
payable under the terms of this Lease until the same shall be paid at an annual
rate of interest equal to the rate of interest announced from time to time by
Bank One ("Bank One") as its Corporate Base Rate, plus three percent (3%),
unless a lesser rate shall then be the maximum rate permissible by law, in which
event said lesser rate shall be charged ("Lease Interest Rate"). The term
"Corporate Base Rate" means that rate of interest announced by Bank One from
time to time as its "Corporate Base Rate" of interest, changing automatically
and simultaneously with each change in the Corporate Base Rate made by Bank One
from time to time. Any publication issued or published by Bank One from time to
time or a certificate signed by an officer of Bank One stating its Corporate
Base Rate as of a date shall be conclusive evidence of the Corporate Base Rate
on that date. Acceptance of the late charge shall not constitute a waiver of
Tenant's default with respect to such non-payment by Tenant or prevent Landlord
from exercising any other rights and remedies available to Landlord under this
Lease. Failure to pay the late charge shall constitute a default under this
Lease.


<PAGE>   5


     SECTION 5.3. RENT ABATEMENT. Notwithstanding anything to the contrary
contained in this Article V, so long as Tenant is not in default under the terms
and conditions of this Lease, Tenant shall be entitled to an abatement of Base
Rent from the Commencement Date through July 31, 2000 ("Abatement Period").

                                   ARTICLE VI
                              TAXES AND IMPOSITIONS

     SECTION 6.1. TAXES. Tenant further agrees to pay, as Additional Rent for
the Premises, all Taxes (as hereinafter defined) which accrue during the Term of
this Lease, and are levied, assessed or become a lien imposed upon the Premises
or any part thereof. Such Additional Rent shall be payable notwithstanding the
fact that the amount of such Taxes may not be ascertainable or due and payable
until after the expiration of the Term of this Lease; provided, however, that
the Taxes levied against the Premises shall be prorated between Landlord and
Tenant for the first and last year of the Initial Term hereof as of the
Commencement Date, and as of the date of expiration of the Term of this Lease
for the last year of said Term, all on the basis of the most recent
ascertainable taxes as applied to the most recent assessed valuation of the
Premises. Tenant shall be responsible for all increases in Taxes based upon
Tenant's occupancy of the Premises. After the expiration of the Term hereof,
including any extensions thereof, Tenant hereby agrees to reprorate Taxes. In
the event of any increase in Taxes from the Taxes reflected on the proration
made upon the expiration of the Term of this Lease, Tenant agrees to immediately
pay to Landlord such sums as reflected by such reproration. Benefit may be taken
by Tenant of the provisions of any statute or ordinance permitting any special
assessment to be paid over a period of years; provided, however, that Tenant
shall pay all installments of special assessments due during the Term hereof
provided the same relate to the Term hereof. Tenant shall, in addition to the
foregoing, pay any new Tax of a nature not presently in effect but which may
hereafter be levied or assessed upon Landlord or upon the Premises or imposed as
a lien upon the Premises, if such Tax shall be based upon or arise out of the
ownership, use or operation of the Premises; provided, however, that for the
purpose of computing Tenant's liability for such new type of Tax, the Premises
shall be deemed the only property of Landlord. Tenant's obligations under this
Section hall survive the expiration or termination of this Lease. As used
herein, "Taxes" means real estate taxes, assessments, sewer rents, rates and
charges, permit and license fees, transit taxes, taxes based upon the receipt of
rent, and any other federal, state or local governmental charge, general,
special, ordinary or extraordinary, which may now or hereafter be assessed,
accrue or become a lien against the Premises or any portion thereof in any year
during the Term of this Lease, and also shall include any personal property
taxes (attributable to the year in which paid) imposed upon the furniture,
fixtures, machinery, equipment, apparatus, systems and appurtenances used in
connection with the operation of the Premises and any fine, penalty, interest or
cost that may be added to the foregoing as a result of Tenant's nonpayment of
Landlord's invoice therefor.

     Nothing contained herein shall be construed to require Tenant to pay any
franchise, inheritance, estate, succession or transfer tax of Landlord or any
income or excess profits tax assessed upon or in respect of all income of
Landlord or chargeable to or required to be paid by Landlord unless such tax
shall be specifically levied against the rental income of Landlord derived
hereunder (as opposed to a general income tax), which tax shall be paid by
Tenant as



<PAGE>   6



part of Taxes hereunder provided said rental income shall be considered as the
sole income of Landlord.

     SECTION 6.2. UTILITIES. Commencing as of the Commencement Date, Tenant
shall pay, directly to the appropriate supplier, all costs of natural gas,
electricity, heat, light, power, sewer service, telephone, water, refuse
disposal and other utilities and services supplied to the Premises. Landlord
shall, at Landlord's sole cost and expense, separately meter the Premises.
Landlord shall not in any way be liable or responsible to Tenant for any cost or
damage or expense which Tenant may sustain or incur if either the quality or
character of such service is changed or is no longer available or suitable for
Tenant's requirements.

     SECTION 6.3. EXPENSES. Tenant further agrees to pay as Additional Rent for
the Premises an annual administrative charge equal to one and one half percent
(1.5%) of the Annual Base Rent payable by Tenant pursuant to the Base Rent
Schedule.

     SECTION 6.4. DEPOSITS. As security for the obligations contained in
Sections 6.1., 6.3. and 10.3. hereof, Tenant shall deposit monthly with
Landlord, or such other entity as Landlord may designate, on the first (1st) day
of each and every month of the Term, a sum equal to one twelfth (1/12) of
Landlord's estimate of the current amount of Taxes levied with respect to the
Premises, Insurance Premiums (as hereinafter defined) and Expenses. All monthly
deposits need not be kept separate and apart by Landlord and shall be held by
Landlord in such account or accounts as may be authorized by the then current
state or federal banking laws, rules or regulations. The monthly deposits shall
be used as a fund to be applied, to the extent thereof, to the payment of Taxes,
Expenses and Insurance Premiums, as the same become due and payable. The
existence of said fund shall not limit or alter Tenant's obligation to pay the
Taxes, Expenses and Insurance Premiums for which the fund was created. Tenant
shall not be entitled to interest on said fund. Tenant shall pay Landlord as its
monthly deposit for the period commencing on the Commencement Date and
terminating on the December 31st immediately thereafter the Initial Deposit. On
or prior to each December 31st occurring within the Term, Landlord shall advise
Tenant as to Landlord's estimate of the monthly deposits that will be required
for the next Lease Year (as hereinafter defined).

     SECTION 6.5. ADJUSTMENT STATEMENT. As soon as reasonably feasible after the
expiration of each calendar year contained within the Term ("Lease Year"),
Landlord will furnish Tenant a statement ("Adjustment Statement") showing the
following:

               (i)   Actual Taxes, Insurance Premiums and Expenses for the
          Lease Year last ended and the amount of Taxes, Insurance Premiums and
          Expenses payable by Tenant for such Lease Year;

               (ii)  The amount of Additional Rent due Landlord for the Lease
          Year last ended, less credits for monthly deposits paid, if any; and

               (iii) The monthly deposits due in the current Lease Year.

     SECTION 6.6. PAYMENTS. Within thirty (30) days after Tenant's receipt of
each Adjustment Statement, Tenant shall pay to Landlord:


<PAGE>   7


               (i)   The amount of Additional Rent shown on said Adjustment
          Statement to be due Landlord for the Lease Year last ended; plus

               (ii)  The amount, which when added to the monthly deposits
          theretofore paid in the current Lease Year would provide that
          Landlord has then received such portion of the monthly deposits as
          would have theretofore been paid to Landlord had Tenant paid one
          twelfth (1/12) of the monthly deposits, for the current Lease Year, to
          Landlord monthly on the first day of each month of such Lease Year.

During the last Lease Year, Landlord may include in the monthly deposits its
estimate of the Additional Rent which may not be finally determined until after
the expiration of the Term. Tenant's obligation to pay such Additional Rent
shall survive the Term.

     SECTION 6.7. PAYMENT ADJUSTMENTS. Tenant's payment of the monthly deposits
for each Lease Year shall be credited against the Additional Rent for such Lease
Year. If the monthly deposits paid by Tenant for any Lease Year exceed the
Additional Rent due for such Lease Year, then Landlord shall give a credit to
Tenant in an amount equal to such excess against the Additional Rent due for the
next succeeding Lease Year, except that if any such excess relates to the last
Lease Year of the Term, then, provided that no default of Tenant exists
hereunder, Landlord shall refund such excess to Tenant at the time the actual
amounts of Additional Rent are known which, with respect to Taxes, shall be
deemed to be the issuance of a final tax bill. The obligation of Landlord to
refund such excess shall survive the expiration of the Term of this Lease.

     SECTION 6.8. RIGHT TO PAY. Landlord shall, at its option, have the right,
without notice to Tenant, at all times during the Term to pay any such Taxes not
timely paid by Tenant, and, subject to any applicable notice and grace period,
the amounts so paid, including reasonable expenses, shall be so much Additional
Rent due at the next rent day after any such payments, with interest at the
Lease Interest Rate from the date of payment thereof.

     SECTION 6.9. LANDLORD'S CONTEST OF TAXES. To the extent Landlord desires,
in Landlord's reasonable business judgment, to contest the imposition of any
Taxes against the Land and Improvements, Landlord shall proceed with such
protest in accordance with applicable law. Tenant agrees Taxes shall include all
of Landlord's reasonable costs and expenses, including legal fees and court
costs, in pursuing any such contest whether or not Landlord is successful in
such contest. There shall be deducted from Taxes the amount of any Taxes
refunded in any Lease Year, provided said refund relates to an assessment year
included within the Term of the Lease.

     SECTION 6.10. TENANT'S CONTEST OF TAXES. Upon the written request of Tenant
during each calendar year of the Term, Landlord shall acknowledge that it will
be contesting taxes or shall waive its right to do so for such calendar year
within ten (10) days after receipt of Tenant's request. In the event Landlord
waives its right to contest Taxes with respect to any calendar year during the
Term, Tenant shall have the right, at Tenant's sole expense, to contest such
Taxes. At Tenant's request, Landlord shall provide copies of current tax bills
and notices of assessment, if any, to Tenant. For purposes of contesting Taxes,
any valuation by Tenant of the personal


<PAGE>   8


properly in the Premises shall be subject to Landlord's approval, which shall
not be unreasonably withheld.

     Upon written request by Tenant no more often than two (2) times in any
calendar year, Landlord shall deliver to Tenant copies of any assessment notices
or real estate tax bills with respect to the Property then in the possession of
Landlord.

                                  ARTICLE VII
                                       USE

     SECTION 7.1. USE. The Premises shall be used for the Use only, and for no
other purpose.

     SECTION 7.2. PROHIBITED USES. Tenant shall not permit the Premises, or any
portion thereof, to be used in such manner which impairs Landlord's right, title
or interest in the Premises or any portion thereof, or in such manner which
gives rise to a claim or claims of adverse possession or of a dedication of the
Premises, or any portion thereof, for public use. Tenant shall not use or occupy
the Premises or permit the Premises to be used or occupied contrary to any
statute, rule, order, ordinance, requirement, regulation or restrictive covenant
applicable thereto or in any manner which would violate any certificate of
occupancy affecting the same or which would render the insurance thereon void or
the insurance risk more hazardous, or which would cause structural injury to the
Improvements or cause the value or usefulness of the Premises or any part
thereof to diminish or which would constitute a public or private nuisance or
waste, and Tenant agrees that it will, promptly upon discovery of any such use,
immediately notify Landlord and take all necessary steps to compel the
discontinuance of such use. Landlord acknowledges that the Use set forth in
Section 1.1 shall not render Landlord's insurance on the Premises void or the
insurance risk more hazardous.

                                  ARTICLE VIII
                MAINTENANCE, REPAIR AND REPLACEMENTS OF PREMISES

     SECTION 8.1. TENANT'S OBLIGATIONS. Subject to Landlord's obligations as set
forth in Section 8.5 below, Tenant agrees, at Tenant's sole cost and expense, to
take good care of the Premises, including the Improvements, and keep same and
all parts thereof, including without limitation, the entire exterior and
interior, the roof, foundations, parking areas, sidewalks, railroad tracks,
water, sewer, gas and electricity connections, pipes, mains and all other
fixtures, machinery, apparatus, equipment, overhead cranes, and appurtenances
thereto together with any and all alterations and additions thereto, in good
order, condition and repair, suffering no waste or injury. Tenant shall, at its
sole cost and expense, promptly make all necessary repairs and replacements,
structural or otherwise, ordinary as well as extraordinary, foreseen as well as
unforeseen, in and to any Improvements or equipment now or hereafter located
upon the Land, including, without limitation, the entire interior and exterior
of the Improvements, the roof, the foundations, sidewalks, parking areas,
railroad tracks, water, sewer, gas and electricity connections, pipes, mains and
all other fixtures, machinery, apparatus, equipment and appurtenances now or
hereafter belonging to, connected with or used in conjunction with the Premises.
All such repairs and replacements shall be of first-class quality and sufficient
for the proper maintenance and operation of the Premises. Tenant shall keep and
maintain the Premises, including the Improvements and all sidewalks, vault
space, parking areas and areas adjacent





<PAGE>   9



thereto, safe, secure and clean, specifically including, but not by way of
limitation, snow and ice clearance, landscaping and removal of waste and refuse
matter. Tenant shall not permit anything to be done upon the Premises (and shall
perform all maintenance and repairs thereto so as not) to invalidate, in whole
or in part, or prevent the procurement of any insurance policies which may, at
any time, be required under the provisions of this Lease. Tenant shall not
obstruct or permit the obstruction of any parking area, adjoining street or
sidewalk.

     No less than one (1) time in any calendar year, Tenant shall cause a roof
inspection to be performed by a contractor reasonably acceptable to Landlord.
Tenant shall deliver a copy of the report with respect to such inspection to
Landlord and shall comply with the recommendations contained therein.

     No more often than one (1) time in any calendar year, Landlord shall pay to
Tenant an amount equal to the lesser of (i) actual expenses incurred by Tenant
in connection with Tenant's maintenance, repair or replacement of the roof
(including the costs of any roof inspection) except to the extent required by
any alteration Tenant has made to the roof, or (ii) $369.00 ("Landlord's Roof
Contribution"). Landlord shall pay Landlord's Roof Contribution to Tenant within
fifteen (15) days after receipt of a request from Tenant, which request shall be
accompanied by invoices for work performed and other evidence of the amount
expended by Tenant as reasonably requested by Landlord.

     SECTION 8.2. GOVERNMENTAL REQUIREMENTS. Subject to Landlord's requirements
as set forth in Section 8.5 below, Tenant, at its own cost and expense, shall
promptly comply with any and all governmental requirement to or affecting the
Premises or any part thereof, irrespective of the nature of the work required to
be done, extraordinary as well as ordinary, whether or not the same involve or
require any structural changes or additions in or to the improvements and
irrespective of whether or not such changes or additions be required on account
of any particular use to which the Premises or any part thereof are being put.
Included in the obligations set forth above, but not in limitation thereof,
Tenant, at its own cost and expense shall promptly comply with OSHA regulations
relating to overhead cranes, CFR 1910-179(j)(2) and 184(d), CFR 1910-179(j)(3),
CFR 1910-179(e)(1) through (4) and CFR 1910-179(b)(5).

     SECTION 8.3. TENANT'S RESPONSIBILITIES. Landlord shall not be required to
furnish any services or facilities whatsoever to the Premises. Tenant hereby
assumes full and sole responsibility for condition, operation, repair,
alteration, improvement, replacement, maintenance and management of the
Premises. Landlord shall not be responsible for any loss or damage to the person
or property of Tenant, any guests or invitees, any persons using or working on
the Premises, or any persons claiming by, through or under, or any agents,
employees, heirs, legal representatives, successors or assigns of, any of the
foregoing.

     SECTION 8.4. MAINTENANCE CONTRACT. At Landlord's option, Tenant shall enter
into a maintenance contract, in form and substance and with a firm reasonably
satisfactory to Landlord, for the maintenance of the HVAC systems in the
Premises.

     SECTION 8.5. LANDLORD'S MAINTENANCE OBLIGATIONS. Landlord shall keep,
maintain (except for ordinary daily maintenance, which shall be the
responsibility of Tenant), repair and replace the structural members of the
Building. For purposes of this Lease, the phrase "structural



<PAGE>   10



members" shall mean the exterior face of the exterior walls (excluding windows,
window frames, doors and door frames), load bearing portions of load bearing
walls and foundation of the Premises. Landlord shall make any required
replacements to the parking areas, except to the extent such replacement is as a
result of any use of the parking area which is not customary for similar
buildings in the Chicago metropolitan area or reasonably deemed excessive for
the parking area.

     To the extent that any component of the roof requires replacement and if
such replacement constitutes a capital expenditure under generally accepted
accounting principals, then Landlord shall replace the roof or the applicable
component thereof. Landlord shall pay all expenses of such replacement except to
the extent such replacement is required as a result of alterations to the roof
made by Tenant, Tenant's negligence or by Tenant's failure to maintain the roof
in the same manner a reasonably prudent property owner would ("Tenant's Roof
Share"). All expenses incurred by Landlord in replacing the roof, after
deducting Tenant's Roof Share, are hereinafter referred to as "Landlord's Roof
Share." Landlord shall be responsible for the payment of Landlord's Roof Share.
Tenant shall pay Tenant's Roof Share to Landlord within fifteen (15) days after
demand by Landlord.

     In addition to the foregoing, to the extent that any component of the
Building (other than structural components) requires replacement and if such
replacement constitutes a capital expenditure under generally accepted
accounting principals, then Landlord shall, at its cost, replace the item in
question. In such event, the cost thereof shall be amortized over the useful
life of such item with interest at the rate of eleven and one half percent
(11.5%) per annum, and the portion thereof allocable to such cost during the
Term of this Lease (and any Renewal Term) shall be considered Additional Rent
and shall be due and payable from Tenant to Landlord within thirty (30) days
after Landlord bills Tenant from time to time. Such amounts shall be prorated
for any partial year remaining during the Term or Renewal Term.

                                   ARTICLE IX
                               TENANT'S INSURANCE

     SECTION 9.1. COVERAGE REQUIRED. Tenant shall procure and maintain, or cause
to be maintained, at all times during the term of this Lease, at Tenant's sole
cost and expense, and until each and every obligation of Tenant contained in the
Lease has been fully performed, the types of insurance specified below, with
insurance companies authorized to do business in the State of Illinois covering
all operations under this Lease, whether performed by Tenant or by Contractors.
For purposes of this Article IX, "Contractors" shall mean Tenant and contractors
and subcontractors and materialmen or any tier providing services, material,
labor, operation or maintenance on, about or adjacent to the Premises, whether
or not in privity with Tenant.

          A. IN GENERAL. Upon execution of the Lease, Tenant shall procure and
     maintain the following kinds and amounts of insurance:

               (i)   WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE.
          Worker's Compensation and Occupational Disease Insurance, in statutory
          amounts, covering all employees who provide a service under this



<PAGE>   11



          Lease. Employer's liability coverage with limits of not less than
          $100,000 each accident or illness shall be included.

               (ii)  COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA).
          Commercial Liability Insurance or equivalent with limits of not less
          than $5,000,000 per occurrence, combined single limit, for bodily
          injury, personal injury, and property damage liability.
          Products/completed operation, independent contractors, broad form
          property damage and contractual liability (with no limitation)
          coverages are to be included. Landlord is to be named as additional
          insureds, on a primary, non-contributory basis for any liability,
          arising directly or indirectly from this Lease.

               (iii) AUTOMOBILE LIABILITY INSURANCE. When any motor vehicles are
          used in connection with this Lease, Tenant shall provide Automobile
          Liability Insurance with limits of not less than $2,000,000 per
          occurrence combined single limit, for bodily and property damage.

               (iv)  CONTENTS INSURANCE. Insurance against fire, sprinkler
          leakage, vandalism, and the extended coverage perils for the full
          insurable value of all contents of Tenant within the Premises, and of
          all office furniture, trade fixtures, office equipment, merchandise
          and all other items of Tenant's property on the Premises and business
          interruption insurance.

          B. CONSTRUCTION. During any construction (other than with respect to
     the construction of the Initial Improvements by Landlord, but including
     improvements, betterments or repairs), Tenant shall procure and maintain,
     or cause to be maintained, the following kinds and amounts of insurance:

               (i)   WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE.
          Worker's Compensation and Occupational Disease Insurance, in statutory
          amounts, covering all employees who are to provide a service under
          this construction. Employer's liability coverage with limits of not
          less than $500,000 for each accident or illness shall be included.

               (ii)  COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA).
          Commercial Liability Insurance or equivalent with limits of not less
          than $5,000,000 per occurrence, combined single limit, for bodily
          injury, personal injury, and property liability. Products/completed
          operations, explosion, collapse, underground, independent contractors,
          broad form property damage and contractual liability coverages are to
          be included. Landlord is to be named as additional insureds on a
          primary non-contributory basis for any liability arising directly or
          indirectly from the Lease.

               (iii) AUTOMOBILE LIABILITY INSURANCE (PRIMARY AND UMBRELLA). When
          any motor vehicles are used in connection with work to be performed,
          Tenant or contractor shall provide Automobile Liability Insurance with
          limits of not less than $5,000,000 per occurrence combined single
          limit, for


<PAGE>   12



          bodily injury and property damage. Landlord is to be named as an
          additional insured on a primary non-contributory basis.

               (iv)  ALL RISK BUILDERS RISK INSURANCE. Tenant or Contractor
          shall provide All Risk Blanket Builder's Risk Insurance to cover the
          materials, supplies, equipment, machinery and fixtures that are or
          will be part of the Project. Coverage extensions shall include the
          following: right to partial occupancy, material stored off-site and
          in-transit, boiler and machinery, earthquake, flood (including surface
          water backup), collapse, water damage, debris removal, faulty
          workmanship or materials, testing, mechanical-electrical breakdown and
          failure, deletion of freezing and temperature exclusions, business
          interruption, extra expense, loss of revenue, loss of rents and loss
          of use of property, as applicable, Landlord shall be named as loss
          payee.

               (v)   PROFESSIONAL LIABILITY. When any architects, engineers, or
          consulting firms perform work in connection with this Lease,
          Professional Liability Insurance shall be maintained with limits of
          $1,000,000. The policy shall have an extended reporting period of two
          (2) years. When policies are renewed or replaced, the policy
          retroactive date must coincide with, or precede, start of work.

     SECTION 9.2. POLICIES. All insurance policies shall be written with
insurance companies and shall be in form satisfactory to Landlord. Landlord
hereby approves The Chubb Insurance Group as Tenant's insurance carrier. All
insurance policies shall name Landlord as an additional insured and loss payee
as their respective interests may appear and shall provide that they may not be
terminated or modified without thirty (30) days' advance written notice to
Landlord. The minimum limits of insurance specified in this Section shall in no
way limit or diminish Tenant's liability under this Lease. Tenant shall furnish
to Landlord, not less than fifteen (15) days prior to the date such insurance is
first required to be carried by Tenant, and thereafter at least fifteen (15)
days prior to the expiration of each such policy, certificates of insurance, and
such other evidence of coverages as Landlord may reasonably request, and
evidence of payment of all premiums and other expenses owed in connection
therewith. Upon Tenant's default in obtaining or delivering the policy for any
such insurance or Tenant's failure to pay the charges therefor, Landlord may, at
its option, on or after the tenth (10th) day after written notice thereof is
given to Tenant, procure or pay the charges for any such policy or policies and
the total cost and expense (including attorneys' fees) thereof shall be
immediately paid by Tenant to Landlord as Additional Rent upon receipt of a bill
therefor. Within thirty (30) days after demand by Landlord that the minimum
amount of any coverage be so increased, Tenant shall furnish Landlord with
evidence of Tenant's compliance with such demand.

     SECTION 9.3. SUBROGATION. Landlord and Tenant agree to have all fire and
extended coverage and material damage insurance which may be carried by either
of them endorsed with a clause providing that any release from liability of or
waiver of claim for recovery from the other party or any of the parties named in
Section 9.2 above entered into in writing by the insured thereunder prior to any
loss or damage shall not affect the validity of said policy or the right of the
insured to recover thereunder, and providing further that the insurer waives all
rights of subrogation which such insurer might have against the other party or
any of the parties named in




<PAGE>   13


Section 9.2 above. Without limiting any release or waiver of liability or
recovery contained in any other Section of this Lease but rather in confirmation
and furtherance thereof, Landlord and any beneficiaries of Landlord waive all
claims for recovery from Tenant, and Tenant waives all claims for recovery from
Landlord, any beneficiaries of Landlord and the managing agent for the Project
and their respective agents, partners and employees, for any loss or damage to
any of its property insured under valid and collectible insurance policies to
the extent of any recovery collectible under such insurance policies.
Notwithstanding the foregoing or anything contained in this Lease to the
contrary, any release or any waiver of claims shall not be operative, nor shall
the foregoing endorsements be required, in any case where the effect of such
release or waiver is to invalidate insurance coverage or invalidate the right of
the insured to recover thereunder or increase the cost thereof (provided that in
the case of increased cost the other party shall have the right, within ten (10)
days following written notice, to pay such increased cost, thereby keeping such
release or waiver in full force and effect).

     SECTION 9.4. MISCELLANEOUS INSURANCE PROVISIONS. Landlord and Tenant
further agree as follows:

          A. Tenant and Contractors expressly understand and agree that any
     insurance coverages and limits furnished by the Tenant and Contractors
     shall in no way limit the Tenant's and Contractor's liabilities and
     responsibilities specified under the Lease, or contracts executed relating
     to the Project, or by law.

          B. The failure of Landlord to obtain such evidence from Tenant or
     Contractors before permitting Tenant or Contractors to commence work shall
     not be deemed to be a waiver by Landlord, and Tenant or contractors shall
     remain under continuing obligation to maintain the insurance coverage.

          C. Any and all deductibles on referenced insurance coverages shall be
     borne by Tenant and Contractors.

          D. Tenant expressly understands and agrees that any insurance
     maintained by Landlord shall apply in excess of and not contribute with
     insurance provided by the Tenant or Contractor under the Lease.

          E. If Tenant or any Contractors desire additional coverage, higher
     limits of liability, or other modifications for their own protection,
     Tenant and such Contractors shall be responsible for the acquisition and
     cost of such additional protection.

          F. Tenant agrees, and shall cause each Contractor in connection with
     the Project to agree, that all insurers shall waive their rights of
     subrogation against Landlord.

          G. Tenant and Contractors shall not violate or permit to be violated
     any of the conditions or provisions of any of the insurance policies, and
     Tenant and Contractors shall so perform and satisfy or cause to be
     performed and satisfied the requirements of the companies writing such
     policies so that at all times companies of good standing, satisfactory to
     Landlord shall be willing to write and continue such insurance.




<PAGE>   14


          H. Landlord shall not be limited in the proof of any damages which
     Landlord may claim against Tenant and Contractors arising out of or by
     reason of Tenant's and Contractor's failure to provide and keep in force
     insurance, as aforesaid, to the amount of the insurance premium or premiums
     not paid or incurred by Tenant and Contractors and which would have been
     payable under such insurance, but Landlord shall also be entitled to
     recover as damages for such breach the uninsured amount of any loss, to the
     extent of any deficiency in the insurance required by the provisions of
     this Lease, and damages, costs and expenses of suit suffered or incurred by
     reason of damage to, or destruction of, the Project or the Premises
     occurring during any period when Tenant or Contractors shall have failed or
     neglected to provide insurance as aforesaid.

          I. The insurance required by this Lease, at the option of Tenant or
     Contractors, may be effected by blanket or umbrella policies issued to
     Tenant or Contractors covering the Premises and other properties owned or
     leased by Tenant or Contractors, provided that the policies otherwise
     comply with the provisions of this Lease and allocate to the Premises the
     specified coverage, without possibility of reduction or coinsurance by
     reason of, or damage to, any other premises covered therein.

          J. All insurance companies shall have a Best rating of not less than
     A/VII, or an equivalent rating in the event Best ceases to exist or provide
     a rating.

          K. Tenant and Contractors shall provide and keep in force such other
     insurance in such amounts as may from time to time be reasonably required
     by Landlord or a holder of a Mortgage (defined in Section 23.1 hereof)
     against such other insurable hazards as at the time are commonly insured
     against in the case of prudent owners of properties similar to the Project
     and the Premises, and in that connection Landlord may require changes in
     the forms, types and amounts of insurance required pursuant to this Section
     or add to, modify or delete other requirements; and in any event, if under
     applicable law, rule, regulation or ordinance of any governmental
     authority, state or federal, having jurisdiction in the Premises, liability
     may be imposed upon Landlord on account of the use or operation of the
     Premises or the Project or other improvements, insurance within limits
     reasonably satisfactory to Landlord shall be maintained by Tenant and
     Contractors against any such liability.

          L. The required insurance to be carried shall not be limited by any
     limitations expressed in the indemnification language herein or any
     limitation placed on the indemnity therein given as a matter of law.

                                   ARTICLE X
                               PROPERTY INSURANCE

     SECTION 10.1. KINDS AND AMOUNTS. Landlord shall at all times during the
Term of this Lease keep in effect insurance on all Improvements against loss by
fire and lightning, the risks covered by what is commonly known as extended
coverage, malicious mischief and vandalism, and all other risks of direct
physical loss in an amount equal to the full replacement value on the
replacement form basis, of such Improvements. The policy or policies evidencing
such insurance shall be written by a company or companies reasonably
satisfactory to Landlord and to



<PAGE>   15



Landlord's mortgagee, if any, and authorized to do business in the state where
the Premises are located, shall name Landlord as insured thereunder, and shall
provide that losses shall be paid to Landlord or its mortgagee, if applicable.
At the request of Landlord, a mortgage clause may be included in said policies
covering Landlord's mortgagee, if any. Tenant further agrees that if and when
obtainable, Landlord will procure and maintain so-called war risk and war damage
insurance, earthquake and flood insurance on the Improvements for not less than
one hundred percent (100%) of the full insurance value above foundation. Such
insurance shall provide for payment of loss thereunder to Landlord and shall, at
Landlord's request, contain a mortgage clause in favor of Landlord's mortgagee,
if any. Landlord shall also obtain (i) boiler and machinery insurance in an
amount equal to the full replacement value of the Improvements, (ii) insurance
against loss of Rents due to the occurrence of any casualty or hazard in the
amount of all Base Rent payments, taxes, assessments and insurance premiums
required hereunder for a twelve (12) month period, (iii) liability insurance,
(iv) insurance against breakage of all plate glass in the Improvements and (v)
such other insurance reasonably required by Landlord, all in amounts and under
terms customarily carried by Landlord for similar buildings owned by it. Tenant
shall be named as an additional insured on Landlord's liability insurance
policy.

     SECTION 10.2. INSURANCE APPRAISALS. From time to time during the Term
hereof upon the request of Landlord, or Landlord's mortgagee, if any, Tenant
shall furnish to Landlord, at Tenant's expense, insurance appraisals,
satisfactory to Landlord, as such are regularly and ordinarily made by or for
the benefit of insurance companies, in order to determine the then replacement
value of the Improvements. Such insurance appraisals shall not be required more
frequently than once in each Lease Year during the Term hereof.

     SECTION 10.3. TENANT PAYMENTS. All such insurance described in this Article
X shall be kept in full force throughout the Term of this Lease, and any amounts
paid therefor by Landlord (hereinafter referred to as the "Insurance Premiums")
shall be payable by Tenant as Additional Rent in accordance with Sections 6.4.
and 6.6. hereof.

     SECTION 10.4. WAIVER OF RECOVERY. Landlord and Tenant hereby waive all
claims for recovery from the other party for any loss or damage (whether or not
such loss or damage is caused by negligence of the other party and,
notwithstanding any provision or provisions obtained in the Lease to the
contrary) to any person or property insured under valid and collectible property
insurance policies to the extent of any recovery collectible under such
insurance.

                                   ARTICLE XI
                              DAMAGE OR DESTRUCTION

     SECTION 11.1. DAMAGE OR DESTRUCTION BY FIRE OR CASUALTY. In the event the
Premises are damaged by fire, explosion or other casualty, Landlord shall
diligently proceed with respect to the proposed restoration promptly after
receipt of the insurance proceeds. Landlord shall commence the repair,
restoration or rebuilding thereof and shall complete such restoration, repair or
rebuilding within six (6) months after the receipt of such proceeds, subject to
extension due to delay because of changes, deletions, or additions in
construction requested by Tenant, acts of Tenant, strikes, lockouts, casualties,
acts of God, war, fuel or energy shortages, material or labor shortages,
governmental regulation or control, severe weather conditions or other causes
beyond



<PAGE>   16



the control of Landlord ("Extension Events"). In the event of any such casualty
all insurance proceeds shall be payable to Landlord. In no event shall Landlord
be required to repair or replace any alterations or improvements made by Tenant
which are not related to the Building, Tenant's Equipment or any other fixtures,
furnishing and personal property of Tenant. Tenant agrees that Tenant shall
deposit with Landlord prior to the commencement of such restoration any sums in
the amount of the deductible amounts carried by Landlord under its insurance
policies. Landlord's obligation to repair, restore or rebuild the Premises shall
be limited to restoring the Premises to substantially the condition in which the
same existed prior to the casualty. Rent and all other charges payable by Tenant
hereunder shall abate during the period of such repair, restoration or
rebuilding to the extent that the Improvements are not tenantable because of any
damage or destruction. In the event the casualty causes fifty percent (50%) or
more of the Premises to be untenantable during the last twenty-four (24) months
of the Term and provided Tenant and Landlord have not agreed to extend the Term
on terms acceptable to both parties or Tenant has not exercised its option to
renew within fifteen (15) days after the date of such casualty. Landlord or
Tenant may terminate this Lease as of the date of such casualty by providing
notice to Tenant within thirty (30) days after occurrence of the fire or other
casualty causing the damage, in which event, all insurance proceeds shall be
paid to the Landlord and in addition Tenant shall pay to Landlord the amount of
any deductible carried by Tenant under its insurance policies.

                                  ARTICLE XII
                                      LIENS

     SECTION 12.1. LIEN CLAIMS. Tenant shall not do any act which shall in any
way encumber the title of Landlord in and to the Premises, nor shall any
interest or estate of Landlord in the Premises be in any way subject to any
claim by way of lien or encumbrance, whether by operation of law or by virtue of
any express or implied contract by Tenant, and any claim to or lien upon the
Premises arising from any act or omission of Tenant shall accrue only against
the leasehold estate of Tenant and shall in all respects be subject and
subordinate to the paramount title and rights of Landlord in and to the
Premises. Tenant will not permit the Premises to become subject to any
mechanics', laborers' or materialmen's lien on account of labor or material
furnished to Tenant or claimed to have been furnished to Tenant in connection
with work of any character performed or claimed to have been performed on the
Premises by or at the direction of sufferance of Tenant; provided, however that
Tenant shall have the right to contest in good faith and with reasonable
diligence, the validity of any such lien or claimed lien if Tenant shall first
give to Chicago Title Insurance Company ("Title Company") an amount equal to one
hundred twenty percent (120%) of the amount of the lien or claimed lien which,
together with interest earned thereon, shall be held by Title Company for the
benefit of Landlord as security to insure payment thereof and to prevent any
sale, foreclosure or forfeiture of the Premises by reason of non-payment
thereof. The amount so deposited with the Title Company shall be held in an
account established at a federally insured banking institution until
satisfactory removal of said lien or claim of lien. On any final determination
of the lien or claim for lien, Tenant will immediately pay any judgment
rendered, with all proper costs and charges, and will, at its own expense, have
the lien released and any judgment satisfied. Should Tenant fail to diligently
contest and pursue such lien contest, Landlord may, at its option, direct the
Title Company to use the sums so deposited to discharge any such lien and upon
the satisfaction of such lien or



<PAGE>   17



encumbrance Landlord shall direct the Title Company to pay all such sums
remaining on deposit to Tenant.

     SECTION 12.2. LANDLORD'S RIGHT TO CURE. If Tenant shall fail to contest the
validity of any lien or claimed lien or fail to give security to Landlord to
insure payment thereof, or shall fail to prosecute such contest with diligence,
or shall fail to have the same released and satisfy any judgment rendered
thereon, then Landlord may, at its election (but shall not be so required) and
upon ten (10) days' written notice to Tenant, remove or discharge such lien or
claim for lien (with the right, in its discretion, to settle or compromise the
same), and any amounts advanced by Landlord, including reasonable attorneys'
fees, for such purposes shall be so much additional rent due from Tenant to
Landlord at the next rent date after any such payment, with interest thereon at
the Lease Interest Rate from the date so advanced.

                                  ARTICLE XIII
                          ALTERATIONS AND IMPROVEMENTS

     SECTION 13.1. ALTERATIONS. Subject to Tenant's rights to make Improvements
as set forth in Article XXXVI, Tenant shall not at any time during the Term of
this Lease make any openings in the roof or exterior walls of the Building or
make any Tenant alteration, addition or improvement to the Premises or any
portion thereof (collectively, "Alterations") without in each instance, the
prior written consent of Landlord; provided, however, upon notice to, but
without the consent of Landlord, Tenant shall have the right to make any
Alterations where same are non-structural, do not require openings on the roof
or exterior walls of the Improvements, do not affect any Building system, and do
not exceed TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00) in the aggregate
in any twelve (12)-month period. Tenant may submit a plan for proposed
Alterations over an extended period ("Alteration Plan") to Landlord for
Landlord's approval. Tenant shall not be required to seek Landlord's consent for
any subsequent Alterations made in accordance with the Alteration Plan, as the
same has been approved by Landlord. Landlord shall have a period of ten (10)
business days from receipt of the Alteration Plan, which shall be accompanied by
cost estimates and other information set forth below, in which to notify Tenant
of Landlord's approval or disapproval of the Alteration Plan or any portion
thereof. In the event Landlord fails to notify Tenant of Landlord's disapproval
of the Alteration Plan or any portion thereof within said ten (10) business day
period, the Alteration Plan as submitted to Landlord shall be deemed approved;
provided, however, all such Alterations so deemed approved shall be removed by
Tenant at the expiration or termination of this Lease.

     No Alteration to the Premises for which Landlord's consent is required
shall be commenced by Tenant until Tenant has furnished Landlord with a
satisfactory certificate or certificates from an insurance company acceptable to
Landlord, evidencing workmen's compensation coverage, and insurance coverage in
amounts satisfactory to Landlord and protecting Landlord against public
liability and property damage to any person or property, on or off the Premises,
arising out of and during the making of such alterations, additions or
improvements.

     Any Alteration by Tenant hereunder shall be done in a good and workmanlike
manner in compliance with any applicable governmental law, statute, ordinance or
regulation. Upon completion of any Alteration by Tenant hereunder, Tenant shall
furnish Landlord with a copy of



<PAGE>   18




the "as built" plans covering such construction, if the same are available
without additional cost to Tenant. Tenant, at its sole cost and expense, will
make all Alterations on the Premises which may be necessary by the act or
neglect of any other person or corporation (public or private), except Landlord,
its agents, employees or contractors provided, nothing contained herein shall be
deemed to be a waiver by Tenant of any right of Tenant to contest the necessity
of such Alteration. Before commencing any Alterations involving an estimated
cost of more than TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00) or upon
submittal of the Alteration Plan: (a) plans and specifications therefor,
prepared by a licensed architect, shall be submitted to and approved by Landlord
(such approval shall not be unreasonably withheld or delayed); (b) Tenant shall
furnish to Landlord an estimate of the cost of the proposed work, certified by
the architect who prepared such plans and specifications; (c) all contracts for
any proposed work shall be submitted to and approved by Landlord; and (d) Tenant
shall either furnish to Landlord a bond in form and substance satisfactory to
Landlord, or such other security reasonably satisfactory to Landlord to insure
payment for the completion of all work free and clear of liens. Before
commencing any Alteration, Tenant shall provide Landlord with a written
certification that the Alteration does not have any environmental impact on the
Premises. Prior to the commencement of any construction activity for which
Landlord's consent shall be required, certificates of such insurance coverages
shall be provided to Landlord.

     SECTION 13.2. OWNERSHIP OF ALTERATIONS. All Alterations (except Tenant's
Equipment, as defined in Section 21.2 hereof), put in at the expense of Tenant
shall become the property of Landlord and shall, unless the Landlord request
their removal (provided, in the event Tenant has requested Landlord's consent
for any Alteration, Landlord's request for removal shall be included at the time
Landlord's consent is delivered to Tenant) remain upon and be surrendered with
the Premises as a part thereof at the termination of this Lease, without
compensation or allowance to Tenant. Landlord may, at its sole option, request
that Tenant, at Tenant's sole cost, remove any such Alterations and if Tenant
shall fail to do so, Landlord may remove the same and Tenant shall pay the cost
of such removal to Landlord upon demand. Notwithstanding the foregoing, upon
Tenant's request prior to such time as Tenant intends to make any Alteration,
Landlord shall indicate to Tenant whether or not such Alterations must be
removed upon surrender of the Premises.

     SECTION 13.3. SIGNS. Tenant shall not place any signs on any part of the
Premises without the prior written consent of Landlord, which consent shall not
be unreasonably withheld provided that: (i) the installation and dimensions of
said sign is in strict accordance with applicable law, ordinances and
restrictions; (ii) Tenant continually maintains said sign in a first-class
manner; and (iii) Tenant, at Tenant's sole cost and expense, removes said sign
at the expiration of the Term and restores the area in which said sign is placed
to its condition prior to the installation of said sign.

     SECTION 13.4. TENANT INDEMNITY. Tenant hereby agrees to indemnify, defend
and hold the Landlord, its beneficiaries, shareholders, partners or members and
their respective agents and employees harmless from any and all liabilities of
every kind and description which may arise out of or be connected in any way
with said Alterations. Upon completing any Alterations, Tenant shall furnish
Landlord with contractors' affidavits and full and final waivers of lien and
receipted bills covering all labor and materials expended and used. All
Alterations shall comply with all insurance requirements and with all ordinances
and regulations of any pertinent


<PAGE>   19



governmental authority. All alterations and additions shall be constructed in a
good and workmanlike manner and only good grades of materials shall be used.

                                  ARTICLE XIV
                                  CONDEMNATION

     SECTION 14.1. TAKING: LEASE TO TERMINATE. In the event the whole of the
Premises shall be taken as a result of the exercise of the power of eminent
domain or condemned for a public or quasi-public use or purpose by any competent
authority or sold to the condemning authority under threat of condemnation, or
in the event a portion of the Premises shall be taken or sold as a result of
such event, and as a result thereof the balance of the Premises cannot be used
for the same purpose as before such taking, sale or condemnation, then and in
either of such events, the Term of this Lease shall terminate as of the date of
vesting of title pursuant to such proceeding or sale. The total award,
compensation or damages received from such proceeding or sale (collectively, the
"Award"), shall be paid to and be the property of Landlord, whether the Award
shall be made as compensation for diminution of the value of the leasehold or
the fee of the Premises or otherwise, and Tenant hereby assigns to Landlord, all
of Tenant's right, title and interest in and to the Award, subject to the
provisions of Section 4.3 below. Tenant shall execute, immediately upon demand
of Landlord, such documents as may be necessary to facilitate collection by
Landlord of any such Award.

     SECTION 14.2. TAKING: LEASE TO CONTINUE. In the event only a part of the
Premises shall be taken as a result of the exercise of the power of eminent
domain or condemned for a public or quasi-public use or purpose by any competent
authority or sold to the condemning authority under threat of condemnation, and
as a result thereof the balance of the Premises can be used for the same purpose
as before such taking, sale or condemnation, this Lease shall not terminate and
Landlord, at its sole cost and expense, shall, to the extent practical, promptly
repair and restore the Premises, subject to any Extension Events. Any Award paid
as a consequence of such taking, sale, or condemnation, shall be paid to
Landlord. Any sums not so disbursed shall be retained by Landlord. In the event
of a taking of land only, this Lease shall not terminate and Landlord shall not
be obligated to repair or restore the Premises. In the event such taking results
in a decrease in the useable area of the Premises, Rent shall be equitably
reduced based on the size and location of the area taken.

     SECTION 14.3. TENANT'S AWARD. To the extent permitted by law and subject to
the rights of any lender with respect to the Premises, Tenant shall be allowed
to pursue a claim against the condemning authority (hereinafter referred to as
the "Tenant's Claim") that shall be independent of and wholly separate from any
action, suit or proceeding relating to any award to Landlord for reimbursement
of relocation expenses or for Tenant's Equipment, leasehold improvements paid
for by Tenant and personal property, provided: (i) Tenant's Claim shall in no
way limit, affect, alter or diminish in any kind or way whatsoever Landlord's
award as a result of such taking, sale or condemnation so that the award payable
to Landlord shall be less than Landlord's basis in the Building, as determined
by generally accepted accounting principles, and (ii) Tenant's Claim shall in no
event include any claim for any interest in real property, it being expressly
understood and agreed that all sums paid with respect to the real property
interests taken, sold or condemned shall be the sole property of Landlord.



<PAGE>   20


                                   ARTICLE XV
                                  RENT ABSOLUTE

     SECTION 15.1. RENT ABSOLUTE. Except for Landlord's obligations set forth in
Section 8.5 of this Lease, this Lease shall be deemed and construed to be a "net
lease" and Tenant agrees to pay all costs and expenses of every kind and nature
whatsoever, ordinary and extraordinary, arising out of or in connection with the
ownership, maintenance, repair, replacement, use and occupancy of the Premises
during the Term of this Lease, which, except for the execution and delivery
hereof, would otherwise have been payable by Landlord.

                                  ARTICLE XVI
                       ASSIGNMENT -- SUBLETTING BY TENANT

     SECTION 16.1. NO ASSIGNMENT, SUBLETTING OR OTHER TRANSFER. Tenant shall not
assign this Lease or any interest hereunder, nor shall Tenant sublet or permit
the use or occupancy of the Premises or any part thereof by anyone other than
Tenant, without the express prior written consent of Landlord which consent
shall not be unreasonably withheld or delayed. No assignment or subletting shall
relieve Tenant of its obligations hereunder, and Tenant shall continue to be
liable as a principal and not as a guarantor or surety, to the same extent as
though no assignment or sublease had been made, unless specifically provided to
the contrary in Landlord's consent. Consent by Landlord pursuant to this Article
shall not be deemed, construed or held to be consent to any additional
assignment or subletting, but each successive act shall require similar consent
of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses
incurred pursuant to any request by Tenant for consent to any such assignment or
subletting. In the consideration of the granting or denying of consent, Landlord
may, at its option, take into consideration: (i) the business reputation and
creditworthiness of the proposed subtenant or assignee; (ii) any required
alteration of the Premises; (iii) the intended use of the Premises by the
proposed subtenant or assignee; and (iv) any other factors which Landlord shall
deem relevant.

     SECTION 16.2. OPERATION OF LAW. Tenant shall not allow or permit any
transfer of this Lease, or any interest hereunder, by operation of law, or
convey, mortgage, pledge or encumber this Lease or any interest hereunder.

     SECTION 16.3. EXCESS RENTAL. If Tenant shall, with Landlord's prior consent
as herein required, sublet the Premises other than under a Permitted Sublease
(as defined in Section 16.6), an amount equal to (i) fifty percent (50%) of the
rental in excess of the base rent and any additional rent herein provided to be
paid, and (ii) fifty percent (50%) of any other consideration payable to Tenant
in connection with such sublease shall be for benefit of Landlord and shall be
paid to Landlord promptly when due under any such subletting as additional rent
due hereunder.

     SECTION 16.4. MERGER OR CONSOLIDATION. If Tenant is a corporation whose
stock is not publicly traded, any transaction or series of transactions
(including, without limitation, any dissolution, merger, consolidation or other
reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of
any capital stock of Tenant, whether voluntary, involuntary or by operation of
law, or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, other than by reason of death, shall be deemed to
be a voluntary



<PAGE>   21




assignment of this Lease by Tenant subject to the provisions of this Section 16.
If Tenant is a partnership, any transaction or series of transactions (including
without limitation any withdrawal or admittance of a partner or a change in any
partner's interest in Tenant, whether voluntary, involuntary or by operation of
law, or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, other than by reason of death, shall be deemed to
be a voluntary assignment of this Lease by Tenant subject to the provisions of
this assignment of this Lease by Tenant subject to the provisions of this
Section 16. If Tenant is a corporation, a change or series of changes in
ownership of stock which would result in direct or indirect change in ownership
by the stockholders or an affiliated group of stockholders of less than fifty
percent (50%) of the outstanding stock as of the date of the execution and
delivery of this Lease shall not be considered a change of control.
Notwithstanding the immediately foregoing, Tenant may, upon notice to, but
without Landlord's consent, assign (either voluntarily or by operation of law)
this Lease to any entity resulting from a merger or consolidation of Tenant,
provided that the total assets and the total net worth of such assignee after
such consolidation or merger shall be in excess of the greater of (i) the net
worth of Tenant immediately prior to such consolidation or merger, or (ii) the
net worth of Tenant as of the date hereof, determined by generally accepted
accounting principles and provided that Tenant is not at such time in default
hereunder, and provided further that, in the event of an assignment, such
successor shall execute an instrument in writing, acceptable to Landlord in its
reasonable discretion, fully assuming all of the obligations and liabilities
imposed upon Tenant hereunder and deliver the same to Landlord. Tenant shall
provide in its notice to Landlord such information as may be reasonably required
by Landlord to determine that the requirements of this Section 16.4 have been
satisfied. As used in this Section 16.4, the term "control" means possession of
the power to vote not less than a majority interest of any class of voting
securities and partnership or limited liability company interests or to direct
or cause the direction (directly or indirectly) of the management or policies of
a corporation, or partnership or limited liability company through the ownership
of voting securities, partnership interests or limited liability company
interests, respectively.

     SECTION 16.5. UNPERMITTED TRANSACTION. Any assignment, subletting, use,
occupancy, transfer or encumbrance of this Lease or the Premises without
Landlord's prior written consent shall be of no effect and shall, at the option
of Landlord, constitute a default under this Lease.

     SECTION 16.6. PERMITTED SUBLEASE. Notwithstanding anything contained herein
to the contrary, provided Tenant is not in default under the terms of this
Lease, Tenant may sublease not more than thirty percent (30%) of the Premises
without Landlord's consent ("Permitted Sublease(s)"), provided (i) no such
sublease shall relieve Tenant of its liability hereunder, and (ii) Tenant
provides Landlord with not less than three (3) business days' written notice of
such sublease.

                                  ARTICLE XVII
                                ANNUAL STATEMENTS

     SECTION 17.1. ANNUAL STATEMENTS. Tenant agrees to furnish Landlord annually
upon Landlord's request, within ninety (90) days of the end of such fiscal year
with a copy of its quarterly 10Q and 10K ("Financial Information") and agrees
that Landlord may deliver such



<PAGE>   22



Financial Information to any mortgagee, prospective mortgagee or prospective
purchaser of the Premises.

                                 ARTICLE XVIII
                            INDEMNITY FOR LITIGATION

     SECTION 18.1. TENANT'S INDEMNITY FOR LITIGATION. Tenant agrees to pay, and
to indemnify and defend Landlord against, all costs and expenses (including
reasonable attorneys' fees) incurred by or imposed upon Landlord by or in
connection with any litigation to which Landlord becomes or is made a party
without fault on its part, whether commenced by or against Tenant, or any other
person or entity or that may be incurred by Landlord in enforcing any of the
covenants and agreements of this Lease with or without the institution of any
action or proceeding relating to the Premises or this Lease, or in obtaining
possession of the Premises after an Event of Default hereunder or upon
expiration or earlier termination of this Lease. The foregoing notwithstanding,
Tenant's responsibility under this Section 18.1 to pay Landlord's costs and
expenses (including reasonable attorneys' fees) shall not extend to such costs
and expenses incurred in defending an action brought by Tenant to enforce the
terms of this Lease in which there is a court determination that Landlord failed
to perform its obligations under this Lease. The provisions of this Section 18.1
shall survive the expiration or earlier termination of this Lease.

     SECTION 18.2. LANDLORD'S INDEMNITY FOR LITIGATION. Landlord agrees to pay,
and to indemnify and defend Tenant against all costs and expenses (including
reasonable attorneys' fees) incurred by or imposed upon Tenant by or in
connection with any litigation to which Tenant becomes or is made a party
without fault on its part and commenced by or against Landlord and arising out
of Tenant's use or occupancy of the Premises or that may be incurred by Tenant
in enforcing any of the covenants and agreements of this Lease. The foregoing
notwithstanding, Landlord's responsibility under this Section 18.2 to pay
Tenant's costs and expenses (including reasonable attorneys' fees) shall not
extend to such costs and expenses incurred in defending an action brought by
Landlord to enforce the terms of this Lease in which there is a court
determination that Tenant failed to perform its obligations under this Lease.
The provisions of this Section 18.2 shall survive the expiration or earlier
termination of this Lease.

                                  ARTICLE XIX
                              ESTOPPEL CERTIFICATES

     SECTION 19.1. ESTOPPEL CERTIFICATE. Tenant agrees that on the Commencement
Date and at any time and from time to time thereafter, upon not less than ten
(10) days' prior written request by Landlord, it will execute, acknowledge and
deliver to Landlord, or Landlord's mortgagee to the extent factually accurate, a
statement in writing in the form of Exhibit "B" attached hereto and by this
reference incorporated herein; provided, however, Tenant agrees to certify to
any prospective purchaser or mortgagee any other reasonable information
specifically requested by such prospective purchaser or mortgagee.

     SECTION 19.2. LANDLORD'S ESTOPPEL CERTIFICATE. Landlord agrees that at any
time and from time to time, upon not less than ten (10) days' prior written
request by Tenant, Landlord will execute, acknowledge and deliver to Tenant, or
Tenant's lender, to the extent factually


<PAGE>   23



accurate, a statement in writing stating that this Lease is in full force and
effect and setting forth the lease term, the amount of Rent then payable by
Tenant, the amount of the Security Deposit then held by Landlord and stating
that this Lease is free from default to Landlord's actual knowledge.

                                   ARTICLE XX
                             INSPECTION OF PREMISES

     SECTION 20.1. INSPECTIONS. Tenant agrees to permit Landlord and any
authorized representatives of Landlord, to enter the Premises at all reasonable
times on reasonable advance notice, except in the case of emergency, for the
purpose of inspecting the same. Any such inspections shall be solely for
Landlord's purposes and may not be relied upon by Tenant or any other person.
Landlord shall use reasonable efforts to minimize any interference with the
operation of Tenant's business during the pendency of such inspections.

     SECTION 20.2. SIGNS. Tenant agrees to permit Landlord and any authorized
representative of Landlord to enter the Premises at all reasonable times during
business hours on reasonable advance notice to exhibit the same for the purpose
of sale, mortgage or lease, and during the final year of the Term hereof or any
extension thereof, Landlord may display on the Premises customary "For Sale" or
"For Rent" signs.

                                  ARTICLE XXI
                                    FIXTURES

     SECTION 21.1. BUILDING FIXTURES. All improvements and all plumbing,
heating, lighting, electrical and air-conditioning fixtures and equipment, and
other articles of personal property used in the operation of the Premises (as
distinguished from operations incident to the business of Tenant), whether or
not attached or affixed to the Premises ("Building Fixtures"), shall be and
remain a part of the Premises and shall constitute the properly of Landlord.

     SECTION 21.2. TENANT'S EQUIPMENT. All of Tenant's trade fixtures, trade
equipment and all personal property, fixtures, apparatus, machinery and
equipment now or hereafter located upon the Premises, other than Building
Fixtures, as shall be and remain the personal property of Tenant, and the same
are herein referred to as "Tenant's Equipment."

     SECTION 21.3. REMOVAL OF TENANT'S EQUIPMENT. Tenant's Equipment may be
removed from time to time by Tenant; provided, however, that if such removal
shall injure or damage the Premises, Tenant shall repair the damage and place
the Premises in the same condition as it would have been if such Tenant's
Equipment had not been installed.

                                  ARTICLE XXII
                                     DEFAULT

     SECTION 22.1. EVENTS OF DEFAULT. Tenant agrees that any one or more of the
following events shall be considered "Events of Default" as said term is used
herein:

               (a) If an order, judgment or decree shall be entered by any court
          adjudicating Tenant a bankrupt or insolvent, or approving a petition
          seeking



<PAGE>   24



          reorganization of Tenant or appointing a receiver, trustee or
          liquidator of Tenant, or of all or a substantial part of its assets,
          and such order, judgment or decree shall continue unstayed and in
          effect for any period of sixty (60) days; or

               (b) Tenant shall file an answer admitting the material
          allegations of a petition filed against Tenant in any bankruptcy,
          reorganization or insolvency proceeding or under any laws relating to
          the relief of debtors, readjustment or indebtedness, reorganization,
          arrangements, composition or extension; or

               (c) Tenant shall make any assignment for the benefit of creditors
          or shall apply for or consent to the appointment of a receiver,
          trustee or liquidator of Tenant, or any of the assets of Tenant; or

               (d) Tenant shall file a voluntary petition in bankruptcy, or
          shall admit in writing its inability to pay its debts as they come
          due, or shall file a petition or an answer seeking reorganization or
          arrangement with creditors or take advantage of any insolvency law; or

               (e) A decree or order appointing a receiver of the property of
          Tenant shall be made and such decree or order shall not have been
          vacated within sixty (60) days from the date of entry or granting
          thereof; or

               (f) Tenant shall abandon the Premises and cease the payment of
          Rent or the performance of Tenant's other obligations under this Lease
          during the Term hereof; or

               (g) Tenant shall default in making any payment of Rent or other
          payment required to be made by Tenant hereunder when due as herein
          provided, and such default continues for five (5) days after written
          notice from Landlord; or

               (h) Tenant shall be in default in the performance of or
          compliance with any of the agreements, terms, covenants or conditions
          in this Lease other than those referred to in the foregoing
          subparagraphs (a) through (g) of this Section for a period of thirty
          (30) days after notice from Landlord to Tenant specifying the items in
          default, or in the case of a default which cannot, with due diligence,
          be cured within said thirty (30) day period, Tenant fails to proceed
          within said thirty (30) day period to cure the same and thereafter to
          prosecute the curing of such default with due diligence (it being
          intended in connection with a default not susceptible of being cured
          with due diligence within said thirty (30) day period that the time of
          Tenant within which to cure the same shall be extended for such period
          as may be necessary to complete the same with all due diligence).

     Upon the occurrence of any one or more of such Events of Default, Landlord
may at its election terminate this Lease or terminate Tenant's right to
possession only, without terminating this Lease. Upon termination of this Lease
or of Tenant's right to possession, Tenant shall immediately surrender
possession and vacate the Premises, and deliver possession thereof to Landlord,
and Landlord or Landlord's agents may immediately or any time thereafter without


<PAGE>   25




notice, re-enter the Premises and remove all persons and all or any property
therefrom, either by any suitable action or proceeding at law or equity or by
force or otherwise, without being liable in indictment, prosecution or damages,
therefor, and repossess and enjoy the Premises, together with the right to
receive all income of, and from, the Premises.

     In the event Tenant is in default (after any applicable grace or cure
periods) under the terms and conditions of this Lease during the Abatement
Period, then any amounts due to Landlord under this Lease whether Landlord
terminates this Lease or Tenant's right to possession only shall include the
monthly installment of Base Rent which would have been due and owing hereunder
but for the abatement.

     In the event of the termination of this Lease by Landlord as provided for
above, Landlord shall be entitled to recover from Tenant all damages and other
sums which Landlord is entitled to recover under any provision of this Lease or
at law or equity, including, but not limited to, all Rent accrued and unpaid for
the period up to and including such termination date, as well as all other
additional sums payable by Tenant, or for which Tenant is liable or in respect
of which Tenant has agreed to indemnify Landlord under any of the provisions of
this lease, which may be then owing and unpaid, and all costs and expenses,
including, without limitation, court costs and reasonable attorneys' fees
incurred by Landlord in the enforcement of its rights and remedies hereunder
and, in addition, any damages provable by Landlord as a matter of law including,
without limitation, an amount equal to the excess of the Rent provided to be
paid for the remainder of the Term over the fair market rental value of the
Premises (determined at the date of termination of this Lease) after deduction
of all anticipated expenses of reletting and taking into consideration the time
necessary to relet the Premises. In the alternative, Landlord shall have the
right, from time to time, to recover from Tenant, and Tenant shall remain liable
for, all Rent and other amounts due and owing under this Lease not paid pursuant
to the provisions of this Lease plus (x) damages equal to all other sums which
would have accrued under this Lease after the date of termination had it not
been terminated, such damages to be due and payable as such sums would have
become due, less (y) such amounts as Landlord may receive from reletting after
first paying all costs of such reletting, including, without limitation,
brokerage commissions and the costs of repairs, alterations, additions and
redecorations, and the expenses of re-entry, and the net amounts of rent
collected remaining after such expenses shall operate only as an off-setting
credit against the amount due hereunder with any excess or residue belonging to
Landlord solely. Should the fair market rental value of the Premises after and
taking into consideration the time necessary to relet the Premises after
deduction of all anticipated expenses of reletting exceed the Rent provided to
be paid by Tenant for the remainder of the Term, Landlord shall not be obligated
to pay to Tenant any part of such excess or to credit any part of such excess
against any other sums or damages for which Tenant may be liable to Landlord.

     SECTION 22.2. WAIVERS. Tenant hereby expressly waives, so far as permitted
by law, the service of any notice of intention to re-enter provided for in any
statute, except as is herein otherwise provided. Tenant for and on behalf of
itself and all persons claiming through or under Tenant, also waives any and all
rights of redemption or re-entry or repossession in case Tenant shall be
dispossessed by a judgment or by warrant of any court or judge or in case of
re-entry or repossession by Landlord or in case of any expiration or termination
of this Lease. The terms



<PAGE>   26



"enter," "re-enter," "entry" or "re-entry" as used in this Lease are not
restricted to their technical legal meanings.

     SECTION 22.3. BANKRUPTCY. If Landlord shall not be permitted to terminate
this Lease, as provided in this Article XXII because of the provisions of the
United States Code relating to Bankruptcy, as amended (the "Bankruptcy Code"),
then Tenant as a debtor-in-possession or any trustee for Tenant agrees promptly,
within no more than sixty (60) days after the filing of the bankruptcy petition,
to assume or reject this Lease. In such event, Tenant or any trustee for Tenant
may only assume this Lease if: (a) it cures or provides adequate assurances that
the trustee will promptly cure any default hereunder; (b) compensates or
provides adequate assurance that Tenant will promptly compensate Landlord of any
actual pecuniary loss to Landlord resulting from Tenant's default; and (c)
provides adequate assurance of performance during the fully stated term hereof
of all of the terms, covenants, and provisions of this Lease to be performed by
Tenant. In no event after the assumption of this Lease shall any then-existing
default remain uncured for a period in excess of the earlier of ten (10) days or
the time period set forth herein. Adequate assurance of performance of this
Lease, as set forth hereinabove, shall include, without limitation, adequate
assurance: (i) of the source of rent reserved hereunder; and (ii) that the
assumption of this Lease will not breach any provision hereunder.

     If Tenant assumes this Lease and proposes to assign the same pursuant to
the provisions of the Bankruptcy Code to any person or entity who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to Tenant, then notice of such proposed assignment, setting forth: (i) the name
and address of such person; (ii) all of the terms and conditions of such offer,
and (iii) the adequate assurance to be provided Landlord to assure such person's
future performance under the Lease, including, without limitation, the assurance
referred to in Section 365(b)(3 ) of the Bankruptcy Code, shall be given to
Landlord by the Tenant no later than twenty (20) days after receipt by the
Tenant but in any event no later than ten (10) days prior to the date that the
Tenant shall make application to a court of competent jurisdiction for authority
and approval to enter into such assignment and assumption, and Landlord shall
thereupon have the prior right and option, to be exercised by notice to the
Tenant given at any time prior to the effective date of such proposed
assignment, to accept an assignment of this Lease upon the same terms and
conditions and for the same consideration, if any, as the bona fide offer made
by such person, less any brokerage commissions which may be payable out of the
consideration to be paid by such person for the assignment of this Lease.

     If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code any and all monies or other considerations
payable or otherwise to be delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or of
the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting the Landlord's properly under the
preceding sentence not paid or delivered to the Landlord shall be held in trust
for the benefit of Landlord and shall be promptly paid to the Landlord.

     Any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be conclusively deemed without further
act or deed to have assumed all of the obligations arising under this Lease on
and after the date of such assignment. Any such



<PAGE>   27



assignee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption. Any such assignee shall be permitted to use the
Leased Premises only for the Use.

     Nothing contained in this Section shall, in any way, constitute a waiver of
the provisions of Article XVI of this Lease relating to alienation. Tenant shall
not, by virtue of this section, have any further rights relaxing to assignment
other than those granted in the Bankruptcy Code. Notwithstanding anything in
this Lease to the contrary, all amounts payable by Tenant to or on behalf of
Landlord under this Lease, whether or not expressly denominated as rent, shall
constitute rent for the purpose of Section 501(b)(6) or any successive section
of the Bankruptcy Code.

                                 ARTICLE XXIII
                            PERFORMANCE OF COVENANTS

     SECTION 23.1. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. In the
event Tenant shall fail to maintain any insurance required to be paid by it
under the terms hereof, or in an Emergency Situation or upon occurrence of an
Event of Default, Landlord may (but shall not be obligated so to do), and
without waiving or releasing Tenant from any obligation of Tenant hereunder,
make any payment or perform any other act which Tenant is obligated to make or
perform under this Lease in such manner and to such extent as Landlord may deem
desirable; and in so doing Landlord shall also have the right to enter upon the
Premises for any purpose reasonably necessary in connection therewith and to pay
or incur any other necessary and incidental costs and expenses, including
reasonable attorneys' fees. All sums so paid and all liabilities so incurred by
Landlord, together with interest thereon at the Lease Interest Rate and shall be
payable to Landlord upon demand as Additional Rent. Landlord shall use
reasonable efforts to give prior notice (which may be oral) of its performance,
if reasonably feasible under the circumstances. The performance of any such
obligation by Landlord shall not constitute a waiver of Tenant's default in
failing to perform the same. Inaction of Landlord shall never be considered as a
waiver of any right accruing to it pursuant to this Lease. Landlord, in making
any payment hereby authorized: (a) relating to Taxes, may do so according to any
bill, statement or estimate, without inquiry into the validity of any tax,
assessment, sale, forfeiture, tax lien or title or claim thereof; (b) for the
discharge, compromise or settlement of any lien, may do so without inquiry as to
the validity or amount of any claim for lien which may be asserted; or (c) in
connection with the completion of construction of improvements to the Premises
or the repair, maintenance or the payment of operating costs thereof, may do so
in such amounts and to such persons as Landlord reasonably may deem appropriate.
Nothing contained herein shall be construed to require Landlord to advance
monies for any purpose. Landlord shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business or other damage of
Tenant or any other occupant of the Premises or any part thereof, by reason of
making repairs or the performance of any work on the Premises or on account of
bringing materials, supplies and equipment into or through the Premises during
the course thereof and the obligations of Tenant under this Lease shall not
thereby be affected in any manner. In doing so, however, Landlord shall use
reasonable efforts not to interfere with the normal operation of the Premises.
The term "EMERGENCY SITUATION" shall mean a situation which has caused or is
likely to cause bodily injury to persons, contamination of or physical damage to
the Premises or adjoining property or economic liability or criminal jeopardy to
Landlord.




<PAGE>   28


     SECTION 23.2. TENANT'S RIGHT TO PERFORM LANDLORD'S OBLIGATIONS. If Landlord
shall be in default in the performance of or compliance with any of the
agreements, terms, covenants or conditions in this Lease for a period of thirty
(30) days after notice from Tenant to Landlord specifying the items in default,
or in the case of a default which cannot, with due diligence, be cured within
said thirty (30)-day period, Landlord fails to proceed within said thirty
(30)-day period to cure the same and thereafter to prosecute the curing of such
default with due diligence (it being intended in connection with a default not
susceptible of being cured with due diligence within said thirty (30)-day period
that the time of Landlord within which to cure the same shall be extended for
such period as may be necessary to complete the same with all due diligence),
then Tenant may, at its option (but shall not be required to) do the same or
cause the same to be done, the amounts paid and expenses incurred by tenant in
connection therewith shall accrue interest at the Lease Interest Rate and shall
be due and payable by Landlord to Tenant within thirty (30) days after demand
therefor from Tenant. Tenant, in making any payment hereby authorized in
connection with the completion of construction of improvements to or repair or
maintenance of the Premises may do so in such amounts and to such persons as
Tenant reasonably may deem appropriate. Nothing contained herein shall be
construed to require Tenant to advance monies for any purpose.

                                  ARTICLE XXIV
                              EXERCISE OF REMEDIES

     SECTION 24.1. CUMULATIVE REMEDIES. No remedy contained herein or otherwise
conferred upon or reserved to either party shall be considered exclusive of any
other remedy, but the same shall be cumulative and shall be in addition to every
other remedy given herein, now or hereafter existing at law or in equity or by
statute, and every power and remedy given by this Lease to either party may be
exercised from time to time and as often as occasion may arise or as may be
deemed expedient. No delay or omission of either party to exercise any right or
power arising from any default shall impair any such right or power or shall be
construed to be a waiver of any such default or an acquiescence therein.

     SECTION 24.2. NO WAIVER. No waiver of any breach of any of the covenants of
this Lease shall be construed, taken or held to be a waiver of any other breach,
or a waiver, acquiescence in or consent to any further or succeeding breach of
the same covenant. The acceptance by Landlord of any payment of Rent or other
sums payable hereunder after the termination by Landlord of this Lease or of
Tenant's right to possession hereunder shall not, in the absence of agreement in
writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's
right to possession hereunder, as the case may be, but shall be construed as a
payment on account and not in satisfaction of damages due from Tenant to
Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this
Lease by Tenant or of any default by Tenant in the observance or performance of
any of the conditions or covenants of this Lease, shall not be deemed to be a
waiver of any provision of this Lease.

     SECTION 24.3. EQUITABLE RELIEF. In the event of any breach or threatened
breach by either party of any of the agreements, terms, covenants or conditions
contained in this Lease, the other party shall be entitled to enjoin such breach
or threatened breach and shall have the right to invoke any right and remedy
allowed at law or in equity or by statute or otherwise as though re-entry,
summary proceedings, and other remedies were not provided for in this Lease.



<PAGE>   29


                                  ARTICLE XXV
                           SUBORDINATION TO MORTGAGES

     SECTION 25.1. SUBORDINATION. Landlord may execute and deliver a mortgage or
trust deed in the nature of a mortgage (both sometimes hereinafter referred to
as "Mortgage") against the Premises or any portion thereof. This Lease and the
rights of Tenant hereunder, shall automatically, and without the requirement of
the execution of any further documents, be and are hereby made expressly subject
and subordinate at all times to the lien of any Mortgage now or hereafter
encumbering any portion of the Improvements, and to all advances made or
hereafter to be made upon the security thereof; provided, however, the holder of
said Mortgage agrees in writing not to disturb the rights of Tenant under this
Lease so long as Tenant is not in default hereunder beyond any applicable grace
or cure period. Notwithstanding the foregoing, Tenant agrees to execute and
deliver a Subordination, Nondisturbance and Attornment Agreement in the form
attached hereto as EXHIBIT "C" ("SNDA") or such other instruments subordinating
this Lease to the lien of any such Mortgage in form reasonably acceptable to
Tenant as may be requested in writing by Landlord from time to time. In the
event Tenant does not execute and deliver the SNDA or such other instruments
subordinating this Lease to the lien of any such Mortgage as may be requested in
writing by Landlord, Landlord may execute such document on Tenant's behalf and
deliver the same to the holder of the aforesaid Mortgage. Notwithstanding
anything to the contrary contained herein, any mortgagee under a Mortgage may,
by notice in writing to the Tenant, subordinate its Mortgage to this Lease.

     Landlord and Tenant acknowledge that, as of the Commencement Date, the
Project is encumbered by a Mortgage, Assignment of Rents and Leases and Security
Agreement dated November 1,1995 and recorded December 5, 1995 as Document Number
R95-94469 ("Mortgage"). Landlord agrees that, until such time as Landlord either
(i) receives a release of the Mortgage, or (ii) obtains an Subordination,
Nondisturbance and Attornment Agreement in substantially the same form as the
SNDA executed by the holder of the Mortgage, Landlord shall indemnify and hold
harmless Tenant from and against all losses incurred by Tenant in connection
with the actual unreimbursed expenditures (as amortized over the balance of the
Term) for improvements to the Premises made and not removed or removable by
Tenant in the event the holder of the Mortgage terminates this Lease and
Tenant's right to possession of the Premises as part of a foreclosure of the
lien of the Mortgage. In the event Tenant continues to occupy the Premises
subsequent to a judgment of foreclosure pursuant to the terms of an agreement
between Tenant and the holder of the Mortgage, the indemnity granted hereunder
shall be null and void.

     SECTION 25.2. MORTGAGE PROTECTION. Tenant agrees to give the holder of any
Mortgage, by registered or certified mail, a copy of any notice of default
served upon the Landlord by Tenant, provided that prior to such notice Tenant
has received notice (by way of service on Tenant of a copy of an assignment of
rents and leases, or otherwise) of the address of such mortgagee and containing
a request therefor. Tenant further agrees that mortgagee shall have the right to
cure such default. Until the time allowed as aforesaid for said mortgagee to
cure such defaults has expired without cure, Tenant shall have no right to, and
shall not, terminate this Lease on account of default. This Lease may not be
modified or amended so as to reduce the Rent or shorten the Term, or so as to
adversely affect in any other respect to any material extent



<PAGE>   30



the rights of the Landlord, nor shall this Lease be cancelled or surrendered,
without the prior written consent, in each instance, of the mortgagee.

                                  ARTICLE XXVI
                              INDEMNITY AND WAIVER

     SECTION 26.1. TENANT'S INDEMNITY. Tenant shall not do or permit any act or
thing to be done or omit to do any act or thing upon the Premises which may
subject Landlord to any liability or responsibility for injury, damage to
persons or property, or to any liability by reason of any violation of
applicable laws and shall exercise such control over the Premises so as to fully
protect Landlord against any such liability. Tenant shall defend, indemnify and
save Landlord, and any official, agent, beneficiary, contractor, director,
employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee
of Landlord (each an "Indemnified Party") representatives, successors and
assigns harmless from and against any and all liabilities, suits, judgments,
settlements, obligations, fines, damages, penalties, claims, costs, charges and
expenses, including, without limitation, engineers', architects' and attorneys'
fees, court costs and disbursements, which may be imposed upon or incurred by or
asserted against any Indemnified Party by reason of any of the following
occurring during or after (but attributable to a period of time falling within)
the Term:

               A.   any demolition or razing or construction of any improvements
                    or any other work or thing done in, on or about the Premises
                    or any part thereof by Tenant or any member of the Tenant
                    Group (defined below), including any claim that such work
                    constitutes "public works";

               B.   any use, nonuse, possession, occupation, alteration, repair,
                    condition, operation, maintenance or management of the
                    Premises or any part thereof or of any tunnel, creek, ditch,
                    detention area, sidewalk, curb or vault adjacent thereto by
                    Tenant or any member of the Tenant Group;

               C.   any act or failure to act on the part of Tenant or any
                    member of the Tenant Group;

               D.   any accident, injury (including death) or damage to any
                    person or property occurring in, on or about the Premises or
                    any part thereof or in, on or about any tunnel, creek,
                    ditch, detention area, sidewalk, curb or vault adjacent
                    thereto as a result of the act or neglect of Tenant or any
                    member of the Tenant Group;

               E.   any failure to perform or comply with any of the covenants,
                    agreements, terms or conditions in this Lease on Tenant's
                    part to be performed or complied with (other than the
                    payment of money);


               F.   any lien or claim which may be alleged to have arisen
                    against or on the Premises, or any lien or claim which may
                    be alleged to have arisen out of this Lease and created or
                    permitted to be created by Tenant or any member of the
                    Tenant Group against any assets of Landlord, or any
                    liability which may be asserted against Landlord with
                    respect thereto;



<PAGE>   31


               G.   any failure on the part of Tenant to keep, observe and
                    perform any of the terms, covenants, agreements, provisions,
                    conditions or limitations contained in the contracts and
                    agreements affecting the Premises on Tenant's part to be
                    kept, observed or performed; and

               H.   any contest permitted pursuant to the provisions of this
                    Lease.

     No agreement or covenant of Tenant in this Section 26.1 shall be deemed to
exempt Landlord from, and Tenant's obligations under this Section 26.1 shall not
include liability or damages for injury to persons or damage to property caused
by or resulting from the negligence of Landlord, its agents or employees, in the
operation or maintenance of the Project.

     The obligations of Tenant under this Section 26.1 shall not be affected in
any way by the absence in any case of covering insurance or by the failure or
refusal of any insurance earner to perform any obligation on its part under
insurance policies affecting the Premises or any part thereof.

     SECTION 26.2. LANDLORD'S INDEMNITY. Landlord will protect, indemnify and
save Tenant, its partners, shareholders, employees, officers, directors, agents
and their respective successors and assigns harmless from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including without limitation, reasonable attorneys' fees and
expenses) imposed upon, incurred by or asserted against Tenant by reason of any
accident, injury to or death of persons or loss of or damage to property
occurring on or about the Premises or any part thereof or the adjoining
properties, sidewalks, curbs, streets or ways resulting from the negligent act
or omission of Landlord or anyone claiming by, through or under Landlord.

     SECTION 26.3. WAIVER OF CLAIMS. Tenant waives all claims it may have
against Landlord and Landlord's agents for damage or injury to person or
property sustained by Tenant or any persons claiming through Tenant or by any
occupant of the Premises, or by any other person, resulting from any part of the
Premises becoming out of repair, or resulting from any accident on or about the
Premises or resulting directly or indirectly from any act or neglect of any
person, excluding Landlord. This Section 26.3. shall include, but not by way of
limitation, damage caused by water, snow, frost, steam, excessive heat or cold,
sewage, gas, odors, or noise, or caused by bursting or leaking pipes or plumbing
fixtures, and shall apply equally whether any such damage results from the act
or neglect of Tenant or of any other person, excluding Landlord, and whether
such damage be caused or result from anything or circumstance above mentioned or
referred to, or to any other thing or circumstance whether of a like nature or
of a wholly different nature. All Tenant's Equipment and other personal property
belonging to Tenant or any occupant of the Premises that is in or on any part of
the Premises shall be there at the risk of Tenant or of such other person only,
and Landlord shall not be liable for any damage thereto or for the theft or
misappropriation thereof.



<PAGE>   32


                                 ARTICLE XXVII
                                    SURRENDER

     SECTION 27.1. CONDITION. Upon the termination of this Lease whether by
forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises to Landlord, broom clean, in good order, condition and repair,
reasonable wear and tear and casualty damage excepted. "Broom clean" means free
from all debris, dirt, rubbish, personal property of Tenant, oil, grease, tire
tracks or other substances, inside and outside of the Improvements and on the
grounds comprising the Premises. Any damage caused by removal of Tenant from the
Premises, including any damages caused by removal of Tenant's Equipment as
defined above, shall be repaired and paid for by Tenant prior to the expiration
of the Term.

     SECTION 27.2. REMOVAL OF TENANT'S EQUIPMENT. Upon the termination of this
Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment
provided, however, that Tenant shall repair any injury or damage to the Premises
which may result from such removal. If Tenant does not remove Tenant's Equipment
from the Premises prior to the end of the Term, however ended, Landlord may, at
its option, remove the same and deliver the same to any other place of business
of Tenant or warehouse the same, and Tenant shall pay the cost of such removal
(including the repair of any injury or damage to the Premises resulting from
such removal), delivery and warehousing to Landlord on demand, or Landlord may
treat tenant's equipment as having been conveyed to Landlord with this Lease as
a Bill of Sale, without further payment or credit by Landlord to Tenant.

     SECTION 27.3. HOLDOVER. If Tenant retains possession of the Premises or any
part thereof after the termination of the Term, by lapse of time and otherwise,
then Tenant shall pay to Landlord monthly rent equal to the sum of (i) one and
one half times the monthly Base Rent rate, plus (ii) any deposits for Taxes,
Insurance Premiums or Expenses payable for the month immediately preceding said
holding over (including increases for additional rent which Landlord may
reasonably estimate), computed on a per-month basis, for each month or part
thereof (without reduction for any such partial month) that Tenant thus remains
in possession, and in addition thereto, in the event such holdover continues for
a period in excess of thirty (30) days, Tenant shall pay Landlord all damages,
consequential as well as direct, sustained by reason of Tenant's retention of
possession. Alternatively, at the election of Landlord expressed in a written
notice to Tenant and not otherwise, such retention of possession shall
constitute a renewal of this Lease for one (1) year, at a rental equal to one
hundred twenty percent (120%) of the Rent during the previous year. The
provisions of this paragraph do not exclude the Landlord's rights of re-entry or
any other right hereunder. Any such extension or renewal shall be subject to all
other terms and conditions herein contained.

                                 ARTICLE XXVIII
                           COVENANT OF QUIET ENJOYMENT

     SECTION 28.1. COVENANT OF QUIET ENJOYMENT. Landlord covenants that Tenant,
on paying the Rent and all other charges payable by Tenant hereunder, and on
keeping, observing and performing all the other terms, covenants, conditions,
provisions and agreements herein contained on the part of Tenant to be kept,
observed and performed, all of which obligations of



<PAGE>   33


Tenant are independent of Landlord's obligations hereunder, shall, during the
Term, peaceably and quietly have, hold and enjoy the Premises subject to the
terms, covenants, conditions, provisions and agreement hereof free from
hindrance by Landlord or any person claiming by, through or under Landlord.

                                  ARTICLE XXIX
                                  NO RECORDING

     SECTION 29.1. MEMORANDUM OF LEASE. A Memorandum of Lease in form and
content acceptable to Landlord and Tenant may be recorded by Tenant at Tenant's
cost.

                                  ARTICLE XXX
                                     NOTICES

     SECTION 30.1. NOTICES. All notices, consents, approvals to or demands upon
or by Landlord or Tenant desired or required to be given under the provisions
hereof, shall be in writing. Any notices or demands from Landlord to Tenant
shall be deemed to have been duly and sufficiently given if a copy thereof has
been personally served, forwarded by messenger or recognized overnight courier
service with evidence of delivery or mailed by United States registered or
certified mail in an envelope properly stamped and addressed to Tenant at
Tenant's Mailing Address, or at such other address as Tenant may theretofore
have furnished by written notice to Landlord. Any notices or demands from Tenant
to Landlord shall be deemed to have been duly and sufficiently given if
forwarded by expedited messenger or recognized overnight courier service with
evidence of delivery or mailed by United States registered or certified mail in
an envelope properly stamped and addressed to Landlord at Landlord's Mailing
Address, with a copy to Mark S. Richmond, Katz Randall & Weinberg, 333 West
Wacker Drive, Suite 1800, Chicago, Illinois 60606, or at such other address as
Landlord may theretofore have furnished by written notice to Tenant. The
effective date of such notice shall be the date of actual delivery, except that
if delivery is refused, the effective date of notice shall be the date delivery
is refused.

                                  ARTICLE XXXI
                             COVENANTS RUN WITH LAND

     SECTION 31.1. COVENANTS. All of the covenants, agreements, conditions and
undertakings in this Lease contained shall extend and inure to and be binding
upon the heirs, executors, administrators, successors and assigns of the
respective parties hereto, the same as if they were in every case specifically
named, and shall be construed as covenants running with the Land, and wherever
in this Lease reference is made to either of the parties hereto, it shall be
held to include and apply to, wherever applicable, the heirs, executors,
administrators, successors and assigns of such party. Nothing herein contained
shall be construed to grant or confer upon any person or persons, firm,
corporation or governmental authority, other than the parties hereto, their
heirs, executors, administrators, successors and assigns, any right, claim or
privilege by virtue of any covenant, agreement, condition or undertaking in this
Lease contained.

     SECTION 31.2. RELEASE OF LANDLORD. The term "Landlord" as used in this
Lease, so far as covenants or obligations on the part of Landlord are concerned,
shall be limited to mean and include only the owner or owners at the time in
question of title to the Premises, and in the event



<PAGE>   34



of any transfer or transfers of the title, Landlord herein named (and in the
case of any subsequent transfers or conveyances, the then grantor) shall be
automatically freed and relieved, from and after the date of such transfer or
conveyance, of all personal liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed; provided that any funds in the hands of such
Landlord or the then grantor at the time of such transfer, in which Tenant has
an interest, shall be turned over to the grantee and such grantee assumes the
obligations of Landlord hereunder.

                                 ARTICLE XXXII
                              ENVIRONMENTAL MATTERS

     SECTION 32.1. DEFINED TERMS.

          A. "Hazardous Material" shall include but shall not be limited to any
     substance, material, or waste that is regulated by any federal, state, or
     local governmental authority because of toxic, flammable, explosive,
     corrosive, reactive, radioactive or other properties that may be hazardous
     to human health or the environment, including without limitation asbestos
     and asbestos-containing materials, radon, petroleum and petroleum products,
     urea formaldehyde foam insulation, methane, lead based paint,
     polychlorinated biphenyl compounds, hydrocarbons or like substances and
     their additives or constituents, pesticides, agricultural chemicals, and
     any other special, toxic, or hazardous substances, materials, or wastes of
     any kind, including without limitation those now or hereafter defined,
     determined, or identified as "hazardous substances," "hazardous materials,"
     "toxic substances," or "hazardous wastes" in any Environmental Law.

          B. "Environmental Law" shall mean any federal, state, or local law,
     statute, ordinance, code, rule, regulation, policy, common law, license,
     authorization, decision, order, or injunction which pertains to health,
     safety, any Hazardous Material, or the environment (including but not
     limited to ground, air, water, or noise pollution or contamination, and
     underground or aboveground tanks) and shall include, without limitation,
     the Resource Conservation and Recovery Act, 42 U.S.C. 86901 et seq., as
     amended by the Hazardous and Solid Waste Amendments of 1984; the
     Comprehensive Environmental Response, Compensation and Liability Act of
     1980, 42 U.S.C. 89601 et seq., as amended by the Superfund Amendments and
     Reauthorization Act of 1986; the Hazardous Materials Transportation Act, 49
     U.S.C. 81801 et seq.; the Federal Water Pollution Control Act, 33 U.S.C.
     81251 et seq.; the Clean Air Act, 42 U.S.C. 87401 et seq.; the Toxic
     Substances Control Act, 15 U.S.C. 82601 et seq.; the Safe Drinking Water
     Act, 42 U.S.C.ss. 300f et seq.; the Illinois Environmental Protection Act,
     415 ILCS 4/1 et seq.; the Emergency Planning and Community Right-to-Know
     Act of 1986, 42 U.S.C. 11001 et seq. ("EPCRA"), the Federal Insecticide,
     Fungicide and Rodenticide Act, 7 U.S.C. 136 to 136y; the Oil Pollution Act
     of 1990, 33 U.S.C. 2701 et seq.; and the Occupational Safety and Health
     Act, 29 U.S.C. 651 et seq.; and any other federal, state, or local
     environmental requirements, together with all rules, regulations, orders,
     and decrees now or hereafter promulgated under any of the foregoing, as any
     of the foregoing now exist or may be changed or amended or come into effect
     in the future.



<PAGE>   35


          C. "Environmental Claim" shall mean and include any demand, notice of
     violation, inquiry, cause of action, proceeding, or suit for damages
     (including reasonable attorneys', consultants', and experts' fees, costs or
     expenses), losses, injuries to person or property, damages to natural
     resources, fines, penalties, interest, cost recovery, compensation, or
     contribution resulting from or in any way arising in connection with any
     Hazardous Material or any Environmental Law.

          D. "Pre-Existing Condition" shall mean the presence of any Hazardous
     Material on the Premises, to the extent such Hazardous Material was not
     introduced on to the Premises after the Commencement Date.

          E. "Environmental Condition" shall mean (i) the presence on the
     Premises of one or more underground storage tanks or (ii) the existence of
     any Hazardous Material on the Premises, other than a Pre-Existing
     Condition,

               (a) in violation of or requiring cleanup under any Environmental
          Law or the provisions of this Article XXXII, or

               (b) in concentrations or at levels exceeding applicable federal,
          state, or local standards for soil, groundwater, or waste on
          residential properties,

either of which subjects Landlord to liability for any Environmental Claim or
which must be remediated to prevent Landlord from incurring loss of any kind.

          F. "Environmental Remediation" shall mean any investigation, cleanup,
     removal, containment, remediation, or other action relating to an
     Environmental Condition (i) required pursuant to any Environmental Law, or
     (ii) necessary to prevent Landlord from incurring, or relieve Landlord
     from, loss of any kind as a result of an Environmental Claim.

          G. "Remediating Party" shall mean the party which has elected (or is
     deemed to have elected) to perform any Environmental Remediation.

          H. "Tenant Group" shall mean any or all of Tenant's agents, employees,
     representatives, contractors, workmen, mechanics, suppliers, customers,
     guests, licensees, invitees, sublessees, assignees and all of their
     respective successors and assigns or any party claiming by, through or
     under any of them. I. "Permitted Materials" shall mean Hazardous Materials
     in quantities customarily used, stored, generated or disposed of by Tenant
     in the ordinary course of Tenant's business.

     SECTION 32.2. TENANT'S COVENANTS WITH RESPECT TO ENVIRONMENTAL MATTERS.
During the Term, Tenant, at its sole cost and expense, shall:

          A. comply with all Environmental Laws relating to the use and
     operation of the Premises;


<PAGE>   36


          B. keep the Premises free of any Hazardous Material except for the
     Permitted Materials and any Pre-Existing Condition;

          C. not exacerbate a Pre-Existing Condition known to Tenant;

          D. upon the discovery of an Environmental Condition:

               (i) promptly, but not later than three (3) business days after
          the discovery of the Environmental Condition, notify Landlord of the
          Environmental Condition;

               (ii) furnish a letter of credit, personal guaranty, escrow of
          funds, or other security reasonably acceptable to Landlord to secure
          performance of Environmental Remediation and to assure Landlord that
          all necessary funds are readily available to Landlord to pay the costs
          and expenses of Environmental Remediation;

               (iii) prior to commencement of any Environmental Remediation
          except where immediate action is required or necessary to minimize
          impact submit a proposed scope of work for the Environmental
          Remediation, together with a timetable and a cost estimate, to
          Landlord for review and approval;

               (iv) after obtaining Landlord's approval, diligently perform the
          approved Environmental Remediation;

               (v) submit to Landlord in a timely manner for Landlord's review
          and comment the documentation and information required by Sections
          32.6 and 32.7 of this Lease relating to each phase of the
          Environmental Remediation;

               (vi) comply with applicable release reporting requirements and
          provide Landlord with any information necessary for Landlord to comply
          with Environmental Law; and

               (vii) obtain a so-called "no further action letter" or other
          acknowledgment from the federal, state, or local governmental agency
          with jurisdiction over the Environmental Condition that the Premises
          have been fully remediated without reliance on institutional controls
          (including but not limited to deed restrictions) or engineered
          barriers;

          E. not install or operate any above or below ground tank, sump, pit,
     pond, lagoon, or other storage or treatment vessel or device on the
     Premises without first obtaining Landlord's prior written consent, which in
     the case of above ground tanks, sumps, storage or treatment vessels which
     do not result in structural alterations to the Premises may not be
     unreasonably delayed or withheld.

          F. not handle, use, generate, treat, dispose of, or permit the use,
     handling, generation, treatment, storage, or disposal of any Hazardous
     Material except for the


<PAGE>   37



     Permitted Materials in, on, under, around, or above the Premises at any
     time during the Term;

          G. not use any above-ground or below-ground tank (including barrels
     and drums), of any size within or without the Premises, except (i) in
     compliance with all Environmental Laws and any and all applicable laws,
     ordinances, regulations and codes including, without limitation any
     municipal requirements to maintain such tank in accordance with National
     Fire Protection Association standards, and (ii) if secondary containment
     approved by Landlord is provided. Empty tanks, barrels and drums shall be
     presumed to have one (1) inch of product remaining when declared empty.

     SECTION 32.3. CONDUCT OF TENANT. If Tenant generates, uses, transports,
stores, treats, or disposes of any Hazardous Material:

          A. Tenant shall, at its own cost and expense, comply with all
     Environmental Laws relating to any Hazardous Material;

          B. Tenant shall (i) not dispose of any Hazardous Material in dumpsters
     or trash containers or at any other location at the Premises, except in
     compliance with applicable Environmental Law or a permit issued to Tenant
     and approved by Landlord; (ii) not discharge any Hazardous Material into
     drains or sewers except in compliance with applicable Environmental Law or
     a permit issued to Tenant and approved by Landlord; (iii) not cause or
     allow the release, discharge, emission, or run-off of any Hazardous
     Material to air, surface waters, the land, or ground water, whether
     directly or indirectly except in compliance with applicable Environmental
     Law or a permit issued to Tenant and approved by Landlord; (iv) at Tenant's
     own cost and expense, arrange for the lawful transportation and off-site
     disposal of all Hazardous Materials generated by Tenant; (v) provide
     secondary containment around all Hazardous Material storage containers,
     storage facilities, and above-ground storage tanks; (vi) conduct all
     necessary environmental inspections, including but not limited to asbestos
     inspections prior to any renovation or demolition as required by 40 CFR
     Part 61, and provide copies of all reports associated with such inspections
     to Landlord; (vii) comply with all reporting requirements under any
     federal, state, or local ordinance, statute, or regulation, including but
     not limited to toxics inventory reporting under EPCRA, the provisions of 40
     CFR Part 61, or various regulations controlling the emissions of volatile
     organic compounds, and Tenant shall provide copies of all such reports and
     notifications to Landlord; and (viii) use only highly skilled people
     reasonably acceptable to Landlord to address all environmental issues
     associated with the Premises, and ensure that such people and all employees
     of the Tenant shall receive all training or certification required under
     any federal, state, or local legal requirement specifically mentioned or
     alluded to in Section 30.1 of this Lease;

          C. Tenant shall promptly provide Landlord with copies of all
     communications, permits, or agreements with any governmental authority or
     agency (federal, state, or local) or any private entity relating in any way
     to the violation or alleged violation of any Environmental Laws or to any
     violation of Tenant's obligations under subparagraph (B) above;



<PAGE>   38


          D. Landlord and Landlord's agents and employees shall have the right
     to enter the Premises and/or conduct appropriate tests for the propose of
     ascertaining that Tenant complies with all applicable laws, rules or
     permits relating in any way to the presence of any Hazardous Materials on
     the Premises; and

          E. In the event that Landlord has reason to believe an environmental
     problem exists at the Premises, Tenant shall provide Landlord the results
     of appropriate tests of air, water, and soil to demonstrate (i) that Tenant
     is in compliance with all applicable laws, rules or permits relating in any
     way to the presence of any Hazardous Material on the Premises and (ii) the
     lack of any unpermitted releases, discharges, or emissions.

     If the presence, release, threat of release, or placement of any hazardous
Material on or in the Premises occurs or is caused in whole or in part during
the Term of this Lease, or the generation, transportation, storage, treatment,
or disposal of any Hazardous Material at the Premises occurs or is caused in
whole or in part during the Term of this Lease, and such gives rise to liability
(including, but not limited to, a response action, remedial action, or removal
action) under any Environmental Law or common law theory, including but not
limited to nuisance, strict liability, negligence and trespass, Tenant shall
promptly take any and all action necessary to clean up the Premises and mitigate
exposure to liability arising from the Hazardous Material, whether or not
required by law.

     SECTION 32.4. EXACERBATION. If Tenant exacerbates a known Pre-Existing
Condition (as a result of Tenant's investigative or remedial activities or
otherwise) during the Lease Term, the provisions of this Article XXXII shall
apply to such exacerbation of the Pre-Existing Condition as if it were an
Environmental Condition, and Tenant shall perform Environmental Remediation as
to such exacerbation. Tenant shall be responsible for all fines and penalties
caused by Tenant or to the extent exacerbated by Tenant at any time during the
Lease Term.

     SECTION 32.5. RIGHTS OF INSPECTION. Landlord and their respective agents
and representatives shall have a right of entry and access to the Premises at
any time in Landlord's discretion for the purposes of (i) inspecting the
documentation relating to Hazardous Materials or environmental matters
maintained by Tenant or occupant of the Premises; (ii) ascertaining the nature
of the activities being conducted on the Premises and investigating whether
Tenant is in compliance with its obligations under Article XXXII of this Lease;
and (iii) determining the type, kind, and quantity of all products, materials,
and substances brought onto the Premises, or made or produced thereon. Landlord
and its agents and representatives shall have the right to take samples in
quantities sufficient for analysis of all products, materials, and substances
present on the Premises including, but not limited to, samples, products,
materials, or substances brought onto or made or produced on the Premises by
Tenant or occupant of the Premises or their respective agents, employees,
contractors or invitees and shall also have the right to conduct other tests and
studies as may be reasonably determined by Landlord to be appropriate in order
to investigate whether Tenant is in compliance with its obligations under
Article XXXII. All information disclosed to Landlord subsequent to the date
hereof may be disclosed to Landlord's consultants, mortgagees, prospective
mortgagees or prospective purchasers for the Premises but otherwise shall be
maintained on a confidential basis. Notwithstanding the foregoing, Landlord may
disclose such information to any party as may be required by Environmental Laws,
court order, on the Illinois Responsible Property Transfer Act, or any similar
statute.



<PAGE>   39


     SECTION 32.6. CONIES OF NOTICES. During the term of this Lease, Tenant and
Landlord shall each provide the other promptly with copies of all summons,
citations, directives, information inquiries or requests, notices of potential
responsibility, notices of violation or deficiency, orders or decrees,
Environmental Claims, complaints, investigations, judgments, letters, notices of
environmental liens or response actions in progress, and other communications,
written or oral, actual or threatened, received in the case of Tenant, by Tenant
or occupant of the Premises, or in the case of Landlord, by Landlord, from the
United States Environmental Protection Agency, Occupational Safety and Health
Administration, Illinois Environmental Protection Agency, Illinois Office of the
State Fire Marshall, Chicago Department of the Environment, or other federal,
state, or local agency or authority, or any other entity or individual
(including both governmental and non-governmental entities and individuals),
concerning (a) any actual or alleged release of any Hazardous Material on, to,
or from the Premises; (b) the imposition of any lien on the Premises relating to
any Hazardous Material; (c) any actual or alleged violation of or responsibility
under Environmental Laws; or (d) any actual or alleged liability under any
theory of common law tort or toxic tort, including without limitation,
negligence, trespass, nuisance, strict liability, or ultrahazardous activity.

     SECTION 32.7. TESTS AND REPORTS.

          A. Upon written request by Landlord, Tenant shall provide Landlord, at
     Tenant's expense, with (i) copies of all environmental reports and tests
     prepared or obtained by or for Tenant or occupant of the Premises; (ii)
     copies of transportation and disposal contracts (and related manifests,
     schedules, reports, and other information) entered into or obtained by
     Tenant with respect to any Hazardous Material; (iii) copies of any permits
     issued to Tenant under Environmental Laws with respect to the Premises;
     (iv) prior to filing, copies of any and all reports, notifications, and
     other filings to be made by Tenant or occupant of the Premises to any
     federal, state, or local environmental authorities or agencies, and after
     filing, copies of such filings; and (v) any other relevant documents and
     information with respect to environmental matters relating to the Premises.
     Tenant shall be obligated to provide such documentation only to the extent
     that the documentation is within Tenant's possession or control.

          B. In addition, if Landlord ever reasonably believes that Tenant has
     breached the terms of this Article XXXII, or if any Environmental Claim is
     made or threatened, or if a default shall have occurred under the Lease, or
     at Landlord's discretion, one (1) time per Lease Year. Landlord shall have
     the right, but not the duty, to enter upon the Premises and conduct an
     environmental assessment of the Premises, including but not limited to a
     visual site inspection, review of records pertaining to the site, and
     interviews of Tenant's representatives or others concerning the site use
     and history and other matters. The investigation may also include
     reasonable subsurface or other invasive investigation of the Premises,
     including but not limited to soil borings and sampling of site soil and
     ground or surface water for laboratory analysis, as may be recommended by
     the Landlord's consultant (discussed below) as part of its inspection of
     the Premises or based upon such other reasonable evidence of Environmental
     Conditions warranting such subsurface or other invasive investigation.
     Landlord shall have the right, but not the duty, to retain any independent
     professional consultant to conduct any such environmental assessment;
     provided, however, that Landlord agrees to limit, in the



<PAGE>   40


     absence of an Environmental Claim or default under this Article XXXII, the
     number of such environmental assessments to one (1) per Lease Year for the
     Lease Term. Tenant will cooperate with the Landlord's consultant and will
     supply to the consultant, promptly upon request, any information reasonably
     requested by Landlord to facilitate the completion of the environmental
     assessment. Landlord and its designees are hereby granted access to the
     Premises at any time or times, upon reasonable notice (which may be written
     or oral) to perform such environmental assessment. In exercising its right,
     Landlord shall use its reasonable efforts to minimize disruption of
     operations at the Premises. Any costs associated with performance of the
     environmental assessment, including but not limited to the consultant fees
     and restoration of any property damaged by such environmental assessment,
     shall be paid by Landlord unless such investigation discloses an
     Environmental Condition, in which case Tenant shall pay such costs.

          C. Tenant shall pay reasonable costs incurred by Landlord (including
     consultants' fees, costs and expenses) to review and comment on all reports
     and other documentation and information required by Sections 32.5 and 32.6,
     and to monitor the performance of any Environmental Remediation performed
     by Tenant.

     SECTION 32.8. INDEMNIFICATION. Tenant shall reimburse, defend with counsel
chosen by Landlord, indemnify, and hold Landlord and any other Indemnified Party
free and harmless from and against any and all Environmental Claims, response
costs, losses, liabilities, damages, costs, and expenses, including without
limitation loss of rental income, loss due to business interruption, and
reasonable attorneys' and consultants' fees, costs and expenses arising out of
or in any way connected with any or all of the following:

          A. any Hazardous Material (other than a Pre-Existing Condition) which,
     at any time during the Term, is or was actually or allegedly generated,
     stored, treated, released, disposed of, or otherwise located on or at the
     Premises as a result of the act or omission of Tenant or any member of the
     Tenant Group (regardless of the location at which such Hazardous Material
     is now or may in the future be located or disposed of), including, but not
     limited to any and all (i) liabilities under any common law theory of tort,
     nuisance, strict liability, ultrahazardous activity, negligence, or
     otherwise based upon, resulting from or in connection with any Hazardous
     Material; (ii) obligations to take response, cleanup, or corrective action
     pursuant to any Environmental Laws; and (iii) the costs and expenses of
     investigation or remediation in connection with the decontamination,
     removal, transportation, incineration, or disposal of any of the foregoing;
     and

          B. any actual or alleged illness, disability, injury, or death of any
     person, in any manner arising out of or allegedly arising out of exposure
     to any Hazardous Material or other substances or conditions present at the
     Premises as a result of the act or omission of Tenant or any member of the
     Tenant Group (including, but not limited to, ownership, operation, and
     disposal of any equipment which generates, creates, or uses electromagnetic
     files, x-rays, other forms of radiation and radioactive materials),
     regardless of when any such illness, disability, injury, or death shall
     have occurred or been incurred or manifested itself; and


<PAGE>   41


          C. any actual or alleged failure of Tenant or any member of the Tenant
     Group at any time and from time to time to comply with all applicable
     Environmental Laws or any permit issued thereunder;

          D. any failure by Tenant to comply with any obligation under this
     Article XXXII relating to an Environmental Condition for which Tenant is
     Remediating Party;

          E. Tenant's failure to provide any information, make any submission,
     and take any step required by any relevant governmental authorities;

          F. the imposition of any lien for damages caused by, or the recovery
     of any costs for, the remediation or cleanup of any Hazardous Material as a
     result of events that took place during the Term of this Lease as a result
     of the act or omission of Tenant or any member of the Tenant Group;

          G. costs of removal of any and all Hazardous Materials from all or any
     portion of the Premises, which Hazardous Materials came to be present at
     the Premises during the Term of this Lease as a result of the act or
     omission of Tenant or any member of the Tenant Group;

          H. costs incurred to comply, in connection with all or any portion of
     the Premises, with all governmental requirements with respect to any
     Hazardous Material on, in, under or affecting the Premises, which Hazardous
     Material came to be present at the Premises during the Term of this Lease
     as a result of the act or omission of Tenant or any member of the Tenant
     Group;

          I. any spills, charges, leaks, escapes, releases, dumping,
     transportation, storage, treatment, or disposal of any Hazardous Material
     which occur during the Term of this Lease, but only to the extent that such
     Hazardous Material originated from or were or are located on the Premises.

     In the event Environmental Claims or other assertion of liability shall be
made against any Indemnified Party for which the Indemnified Party is entitled
to indemnity hereunder, the procedure set forth in Section 24.1 shall apply. The
obligations of Tenant under this Section 32.8 shall survive any termination or
expiration of this Lease.

     SECTION 32.9. TENANT ACKNOWLEDGMENTS WITH RESPECT TO ENVIRONMENTAL MATTERS.
Tenant acknowledges that the Premises are being leased in their present "as is"
condition. Tenant further acknowledges that Landlord has made no representation
whatsoever regarding any Hazardous Material on or about the Premises.

     SECTION 32.10. NO LIABILITY OF LANDLORD.

          A. Landlord shall not have any liability to Tenant or any of its
     employees, agents, shareholders, officers or directors, or any other
     persons as a result of any Hazardous Material now or hereafter located on
     the Premises.



<PAGE>   42


          B. Tenant hereby waives and releases Landlord from all Environmental
     Claims arising from or relating to Pre-Existing Conditions.

                                 ARTICLE XXXIII
                                SECURITY DEPOSIT

     SECTION 33.1. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord,
upon the execution of this Lease, the Security Deposit as security for the full
and faithful performance by Tenant of each and every term, provision, covenant
and condition of this Lease. If Tenant defaults in respect to any of the terms,
provisions, covenants and conditions of this Lease including, but not limited
to, payment of all rental and other sums required to be paid by Tenant
hereunder, Landlord may use, apply or retain the whole or any part of the
security so deposited for the payment of such rent in default, for any sum which
Landlord may expend or be required to expend by reason of Tenant's default
including, without limitation, any damages or deficiency in the reletting of the
Premises, whether such damages or deficiency shall have accrued before or after
re-entry by Landlord. If any of the security deposit shall be so used, applied
or retained by Landlord at any time or from time to time, Tenant shall promptly,
in each such instance, on written demand therefor by Landlord, pay to Landlord
such additional sums as may be necessary to restore the security deposit to the
original amount set forth in the first sentence of this section. If Tenant shall
fully and faithfully comply with all the terms, provisions, covenants and
conditions of this Lease, the security deposit, or the balance thereof, shall be
returned to Tenant after the following: (a) the time fixed as the expiration of
the Term of this Lease; (b) the removal of Tenant from the Premises; (c) the
surrender of the Premises by Tenant to Landlord in accordance with this Lease;
and (d) final determination of all amounts payable by Tenant hereunder and
payment of same. Except as otherwise required by law, Tenant shall not be
entitled to any interest on the aforesaid security deposit. In the absence of
evidence satisfactory to Landlord of an assignment of the right to receive the
security deposit or the remaining balance thereof, Landlord may return the
security deposit to the original Tenant, regardless of one or more assignments
of this Lease.

     SECTION 33.2. FIXTURE REMOVAL DEPOSIT. Tenant agrees to deposit with
Landlord, no later than fifteen (15) days after Landlord's approval has been
granted for any Alterations or Improvements to be made by Tenant, an amount
equal to the sum of:

          A. with respect to Alterations or Improvements made to the Building in
     excess of the first $150,000.00 of Improvements or Alterations, the lesser
     of (i) Landlord's reasonable determination of the cost to remove Tenant's
     Equipment and any Alterations or Improvements, or (ii) an amount equal to
     25% of the actual cost of any Alterations or Improvements made by Tenant in
     excess of the first $150,000.00 ("Removal Deposit"); plus

          B. With respect to Alterations or Improvements made to the land
     surrounding the Building, Landlord's reasonable determination of the cost
     to remove Tenant's Equipment and any Alterations or Improvements.

     If Tenant fails to remove Tenant's Equipment and surrender the Premises to
Landlord at the expiration or termination of the Term in the manner and the
condition set forth in this Lease,




<PAGE>   43



Landlord may use, apply or retain the whole or any part of the Removal Deposit
for the payment of any sum which Landlord may expend or be required to expend by
reason of Tenant's failure to remove Tenant's Equipment and any Alterations or
Improvements and surrender the Premises to Landlord at the expiration or
termination of the Term in the manner and the condition set forth in this Lease.
If Tenant shall fully and faithfully comply with all the terms, provisions,
covenants and conditions of this Lease with respect to the removal of Tenant's
Equipment and any Alterations or Improvements made by Tenant and surrender of
the Premises, then the Removal Deposit, or the balance thereof, shall be
returned to Tenant after the following: (a) the time fixed as the expiration of
the Term of this Lease; (b) the removal of Tenant, Tenant's Equipment and any
Alterations or Improvements made by Tenant from the Premises; and (c) the
surrender of the Premises by Tenant to Landlord in accordance with this Lease.
Except as otherwise required by law, Tenant shall not be entitled to any
interest on the aforesaid Removal Deposit. In the absence of evidence
satisfactory to Landlord of an assignment of the right to receive the Removal
Deposit or the remaining balance thereof, Landlord may return the Removal
Deposit to the original Tenant, regardless of one or more assignments of this
Lease.

     SECTION 33.3. LETTER OF CREDIT. At Tenant's election, in lieu of paying the
Security Deposit or the Removal Deposit in cash, Tenant may, on or before the
date on which the Security Deposit or Removal Deposit is due, deliver to
Landlord an irrevocable, unconditional letter of credit running in favor of
Landlord's beneficiary issued by a bank satisfactory to Landlord in the amount
of the Security Deposit or Removal Deposit, as applicable. The letter of credit
shall be irrevocable for one (1) year and shall provide that it is automatically
renewable for one (1) year periods ending not earlier than sixty (60) days after
the expiration of the Term without any action whatsoever on the part of
Landlord; provided that the issuing bank shall have the right not to renew said
letter of credit on written notice to Landlord not less than sixty (60) days
prior to the expiration of the then current term thereof (it being understood,
however, that the privilege of the issuing bank not to renew said letter of
credit shall not, in any event, diminish the obligation of Tenant to maintain
such irrevocable letter of credit with Landlord through the date which is sixty
(60) days after the date of such notice). In the event the issuing bank elects
not to renew the letter of credit, Tenant shall either provide Landlord with a
substitute letter of credit which meets all of the criteria contained herein or
deposit the amount of the Security Deposit with Landlord in cash.

     The form and terms of the letter of credit shall be acceptable to Landlord
in all respects and shall provide, among other things, in effect that:

               (a) Landlord, its beneficiary, or its then managing agent shall
          have the right to draw down an amount up to the face amount of the
          letter of credit upon the presentation to the issuing bank of a sight
          draft only.

               (b) The letter of credit will be honored by the issuing bank
          without inquiry as to the accuracy thereof and regardless of whether
          the Tenant disputes the content of such statement.

               (c) In the event of a transfer of Landlord's interest in the
          Premises, Landlord shall have the right to transfer the letter of
          credit to the transferee and thereupon the Landlord shall, without any
          further agreement between the parties,


<PAGE>   44
          be released by Tenant from all liability therefor, and it is agreed
          that the provisions hereof shall apply to every transfer or assignment
          of said letter of credit to a new Landlord.

     If, as a result of any draw on the letter of credit the Security Deposit
evidenced by the letter of credit shall be reduced, Tenant shall, within ten
(10) days thereafter, provide Landlord with additional letter(s) of credit in
the form required hereunder in an amount equal to the deficiency so that the
letter(s) of credit shall be in the aggregate amount of the Security Deposit.

     Without limiting the generality of the foregoing, if the letter of credit
expires earlier than sixty (60) days after the expiration of the Term of this
Lease, or the issuing bank notifies Landlord that it shall not renew the letter
of credit, Landlord will accept a renewal thereof or substitute letter of credit
(such renewal or substitute letter of credit to be in effect not later than
thirty (30) days prior to the expiration of the original letter of credit),
irrevocable and automatically renewable as above provided to sixty (60) days
after the end of the Term of this Lease upon the same terms as the expiring
letter of credit or such other terms as may be acceptable to Landlord. However,
(i) if the letter of credit is not timely renewed or a substitute letter of
credit is not timely received, (ii) or if Tenant fails to maintain the letter of
credit in the amount and terms set forth in this Article XXXIII, Tenant, at
least thirty (30) days prior to the expiration of the letter of credit, or
immediately upon its failure to comply with each and every term of this Article
XXXIII must deposit with Landlord cash or a substitute letter of credit from a
bank as financial institution acceptable to Landlord in the amount of the
Security Deposit or Removal Deposit, as applicable, required by this Lease. The
cash or letter of credit shall to be held subject to and in accordance with, all
of the terms and conditions set forth in Section 33.1 and 33.2 hereof, as
applicable, or this Section 33.3. In the event Tenant does not deposit with
Landlord cash or the substitute letter of credit, the Landlord, its beneficiary
or managing agent may present such letter of credit to the issuing bank, in
accordance with the terms of this Article XXXIII and the entire sum secured
thereby shall be paid to Landlord, to be held by Landlord as provided in Section
33.1 or 33.2, as applicable.

                                 ARTICLE XXXIV
                                 MISCELLANEOUS

     SECTION 34.1. CAPTIONS. The captions of this Lease are for convenience only
and are not to be construed as part of this Lease and shall not be construed as
defining or limiting in any way the scope or intent of the provisions hereof.

     SECTION 34.2. SEVERABILITY. If any covenant, agreement or condition of this
Lease or the application thereof to any person, firm or corporation or to any
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such covenant, agreement or condition to
persons, firms or corporations or to circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby. Each covenant,
agreement or condition of this Lease shall be valid and enforceable to the
fullest extent permitted by law.

     SECTION 34.3. APPLICABLE LAW. This Lease shall be construed and enforced in
accordance with the laws of the state where the Premises are located.



<PAGE>   45


     SECTION 34.4. AMENDMENTS IN WRITING. None of the covenants, terms or
conditions of this Lease, to be kept and performed by either party, shall in any
manner be altered, waived, modified, changed or abandoned, except by a written
instrument, duly signed, acknowledged and delivered by the other party.

     SECTION 34.5. RELATIONSHIP OF PARTIES. Nothing contained herein shall be
deemed or construed by the parties hereto, nor by any third party, as creating
the relationship of principal and agent or of partnership, or of joint venture
by the parties hereto, it being understood and agreed that no provision
contained in this Lease nor any acts of the parties hereto shall be deemed to
create any relationship other than the relationship of Landlord and Tenant.

     SECTION 34.6. BROKERAGE. Tenant warrants that it has no dealings with any
real estate broker or agent in connection with this lease other than Landlord's
Broker and Tenant's Broker, and Tenant covenants to pay, hold harmless and
indemnify Landlord from and against any and all cost, expense or liability for
any compensation, commissions and charges claimed by any other broker or other
agent with respect to this Lease or the negotiation thereof arising out of any
acts of Tenant.

     SECTION 34.7. NO ACCORD AND SATISFACTION. No payment by Tenant or receipt
by Landlord of a lesser amount than the monthly rent herein stipulated and
additional rent shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.

     SECTION 34.8. JOINT EFFORT. The preparation of this Lease has been a joint
effort of the parties hereto and the resulting documents shall not, solely as a
matter of judicial construction, be construed more severely against one of the
parties than the other.

     SECTION 34.9. WAIVER OF JURY TRIAL. Tenant hereby waives a jury trial in
action brought by Landlord with respect to the nonpayment of any sums due
hereunder. If Landlord commences any proceeding for nonpayment of rent or any
other sum due to be paid by Tenant under this Lease, Tenant hereby agrees that
Tenant will not impose any noncompulsory counterclaim of any nature or
description in any such proceeding, provided however, such agreement of Tenant
shall not be construed as a waiver of the right of Tenant to assert such claim
in a separate action or actions brought by Tenant.

     SECTION 34.10. TIME. Time is of the essence of this Lease, and all
provisions herein relating thereto shall be strictly construed.

     SECTION 34.11. CONSENT. The granting of any consent under this Lease by
Landlord or Tenant, or either party's failure to object to any action taken by
the other party without the consent required under this Lease, shall not be
deemed a waiver by either party of its rights to require such consent for any
further similar act by the other party. No waiver by either party of any other
breach of the covenants of this Lease shall be construed, taken or held to be a
waiver of any other breach or to be a waiver, acquiescence in or consent to any
further or succeeding



<PAGE>   46



breach of the same covenant. Neither party's covenants under this Lease, and no
breach thereof, shall be waived, altered or modified except by a written
instrument executed by both parties.

     SECTION 34.12. NO PARTNERSHIP. Landlord is not, and shall not be deemed to
be, in any way or for any purpose, the partner, employer, principal, master or
agent of or with Tenant.

     SECTION 34.13. LANDLORD'S LIABILITY. Notwithstanding anything to the
contrary herein contained, there shall be absolutely no personal liability
asserted or enforceable against Landlord or on any persons, firms or entities
who constitute Landlord with respect to any of the terms, covenants, conditions
and provisions of this Lease, and Tenant shall, subject to the rights of any
mortgagee, look solely to the interest of Landlord, its successors and assigns
in the Premises for the satisfaction of each and every remedy of Tenant in the
event of default by Landlord hereunder, such exculpation of personal liability
is absolute and without any exception whatsoever. If the entity constituting
Landlord is a partnership, Tenant agrees that the deficit capital account of any
such partner shall not be deemed an asset or property of said partnership.
Notwithstanding anything in this Lease to the contrary, with respect to any
provision of this Lease which requires Landlord's consent or approval, Tenant
shall not be entitled to make, nor shall Tenant make, any claim for (and Tenant
hereby waives any claim for) money damages as a result of any claim by Tenant
that Landlord has unreasonably withheld or unreasonably delayed any consent or
approval, but Tenant's sole remedy shall be an action or proceeding to enforce
such provision, or for specific performance, injunction or declaratory judgment.

     SECTION 34.14. LANDLORD RIGHTS. This Lease does not grant any rights to
light or air over or about the Premises. Landlord specifically excepts and
reserves to itself the use of any roofs, the exterior and structural components
of the Building, all rights to the land and improvements below the improved
floor level of the Building, to the improvements and air rights above the
Building and to the improvements and air rights located outside the demising
walls of the building and to such areas within the Building required for
installation of utility lines and other installations and to such portions of
the Premises necessary to access, maintain and repair same, and no rights with
respect thereto are conferred upon Tenant.

     SECTION 34.15. ENTIRE AGREEMENT. It is understood and agreed that all
understandings and agreements heretofore had between the parties hereto are
merged in this Lease, the exhibits annexed hereto and the instruments and
documents referred to herein, which alone fully and completely express their
agreements, and that no party hereto is relying upon any statement or
representation, not embodied in this Agreement, made by the other. Each party
expressly acknowledges that, except as expressly provided in this Agreement, the
other party and the agents and representatives of the other party have not made,
and the other party is not liable for or bound in any manner by, any express or
implied warranties, guaranties, promises, statements, inducements,
representations or information pertaining to the transactions contemplated
hereby.

     SECTION 34.16. TENANT AUTHORITY. Simultaneously with the execution and
delivery of this Lease by Tenant, Tenant shall deliver to Landlord:

          A. Certified resolutions of its board of directors of Tenant executing
     this Lease on behalf of Tenant authorizing the execution and delivery of
     this Lease.



<PAGE>   47


          B. A certificate of incumbency executed by the secretary of any
     corporate partner of Tenant executing this Lease on behalf of Tenant
     identifying by name, office and facsimile signature the officers of Tenant.

          C. A current certificate of good standing issued by the Secretary of
     State of the state of incorporation of Tenant and the State of Illinois.

                                  ARTICLE XXXV
                                 RENEWAL OPTIONS

     SECTION 35.1. RENEWAL OPTION(S). Tenant shall have the option ("Renewal
Option") to renew the Initial Term for all of the Premises as of the expiration
date of the Initial Term, for two (2) additional periods of five (5) years each
(each of said renewals is a "Renewal Term") upon the following terms and
conditions:

          A. Tenant gives Landlord written notice of its exercise of the Renewal
     Option at least twelve (12) months prior to the expiration of the Initial
     Term or the expiration of the first Renewal Term, as applicable.

          B. Tenant is not in default under this Lease either on the date Tenant
     delivers the notice required under subparagraph A. above or at any time
     thereafter prior to the commencement of the Renewal Term so exercised.

          C. All of the terms and provisions of this Lease (except this Article
     XXXV) shall be applicable to the Renewal Term, except that Base Rent for
     the Renewal Terms shall be determined in accordance with the following
     schedule:

        ----------------------------------------------------------------------
                            PERIOD             Annual           Monthly
                                             Base Rent         Base Rent
         ----------------------------------------------------------------------
        FIRST RENEWAL TERM
        ----------------------------------------------------------------------
        August 1, 2006-July 31, 2007          $325,503.43         $27,125.29
         ----------------------------------------------------------------------
        August 1, 2007-July 31, 2008          $335,268.53         $27,939.04
        ----------------------------------------------------------------------
        August 1, 2008-July 31, 2009          $345,326.59         $28,777.22
        ----------------------------------------------------------------------
        August 1, 2009-July 31, 2010          $355,686.39         $29,640.53
        ----------------------------------------------------------------------
        August 1, 2010-July 31, 2011          $366,356.98         $30,529.75
        ----------------------------------------------------------------------
        SECOND RENEWAL TERM
        ----------------------------------------------------------------------
        August 1, 2011-July 31, 2012          $377,347.69         $31,445.64
        ----------------------------------------------------------------------
        August 1, 2012-July 31, 2013          $388,668.12         $32,389.01
        ----------------------------------------------------------------------



<PAGE>   48


        August 1, 2013-July 31, 2014          $400,328.16         $33,360.68
        ----------------------------------------------------------------------
        August 1, 2014-July 31, 2015          $412,338.01         $34,361.50
        ----------------------------------------------------------------------
        August 1, 2015-July 31, 2106          $424,708.15         $35,392.35
        ----------------------------------------------------------------------

     SECTION 35.2. "AS IS" CONDITION. Tenant agrees to accept the Premises to be
covered by this Lease during each Renewal Term in an "as is" physical condition
and Tenant shall not be entitled to receive any allowance, credit, concession or
payment from Landlord for the improvement thereof.

     SECTION 35.3. AMENDMENT. In the event that Tenant exercises either Renewal
Option, then Landlord and Tenant shall mutually execute and deliver an amendment
to this Lease reflecting the renewal of the Term on the terms herein provided,
which amendment shall be executed and delivered promptly after the determination
of Rent to be applicable to the Renewal Term as hereinabove provided.

     SECTION 35.4. TERMINATION. The Renewal Options herein granted shall
automatically terminate upon the earliest to occur of (i) the expiration or
termination of this Lease, (ii) the termination of Tenant's right to possession
of the Premises, or (iii) the failure of Tenant to timely or properly exercise
the Renewal Option pursuant to the terms of Section 35.1. The second Renewal
Option for the period consisting of July 1, 2011 through June 30, 2106 shall
automatically terminate upon any assignment or subletting by Tenant other than a
Permitted Sublease.

     SECTION 35.5. NO COMMISSIONS. Landlord and Tenant acknowledge and agree
that no real estate brokerage commission or finder's fee shall be payable by
Landlord in connection with any exercise by Tenant of the Renewal Option herein
contained.

                                 ARTICLE XXXVI
                              TENANT IMPROVEMENTS

     SECTION 36.1. TENANT IMPROVEMENTS. Landlord acknowledges that Tenant
desires to make certain improvements and alterations to the Premises
("Improvements"). The Improvements shall (i) be of the same character as the
existing improvements in the Premises; (i) be non-structural in nature except
for vents in the roof necessary for the operation of Tenant's business provided
the same do not materially impair the structural integrity of the roof; (iii)
not require openings on the roof (except as set forth in (i) above)or exterior
walls of the Building; (iv) not affect any building system; (v) be completed
within six (6) months after the date hereof; (vi) be capital in nature, and
(vii) be otherwise acceptable to Landlord in its reasonable discretion. The
Improvements shall be constructed in a good and workmanlike manner and only new
and good grades of material shall be used. All work performed by or on behalf of
Tenant with respect to the Improvements shall comply with all applicable
insurance requirements, all laws, statutes, ordinances and regulations of the
City of Romeoville, the State of Illinois and the United States of America.
Tenant, at its sole cost and expense, shall file all necessary plans with



<PAGE>   49



the appropriate governmental authorities having jurisdiction over the
construction of the Improvements.

     SECTION 36.2. APPROVAL. Tenant shall, at Tenant's sole cost and expense
(subject to Landlord's Contribution), cause to be prepared and submitted to
Landlord plans and specifications for the Improvements ("Tenant's Plans").
Tenant shall not commence actual construction of the Improvements until Tenant
has obtained Landlord's prior approval to Tenant's Plans and Tenant has obtained
and appropriate building permits and construction contracts. Landlord agrees to
review and either approve or disapprove (and noting with such disapproval the
specific items not approved and the reasons therefor) Tenant's Plans within ten
(10) business days of Landlord's receipt of a complete set of Tenant's Plans. In
the event Tenant's Plans are disapproved, Tenant shall revise and resubmit
Tenant's Plans and Landlord shall review the same and notify Tenant of its
approval or disapproval within ten (10) business days thereafter in the same
manner as required for the initial submittal. In the event Landlord fails to
approve or disapprove such Plans within such ten (10) day period, the Plans
shall be deemed approved. Landlord's approval of the Plans shall not be
unreasonably withheld.

     SECTION 36.3. TENANT CONTRACTORS. Tenant is hereby granted the right to
utilize contractors of Tenant's own choice ("Tenant's Contractors") for the
construction of the Improvements subject to Landlord's reasonable approval,
which approval shall not be unreasonably withheld or delayed. Tenant shall
permit Landlord to observe all construction operations performed by Tenant's
Contractors. No silence or statement by Landlord's supervisor shall be deemed or
construed as an assumption by said supervisor or Landlord of any responsibility
for or in relation to the construction of the Improvements or any guarantee that
the Improvements comply with laws or with Tenant's Plans, or are suitable or
acceptable to Tenant for Tenant's intended purposes.

     Tenant shall at all times keep the demised premises and adjacent areas free
from accumulations of waste materials or rubbish caused by its suppliers,
contractors or workmen. Landlord reserves the right to do clean-up at the
expense of Tenant if Tenant fails to comply with Landlord's reasonable cleanup
requirements. At the completion of construction of the Improvements, Tenant's
Contractors shall forthwith remove all rubbish and all tools, equipment and
surplus materials from and about the demised premises and Building. Any damage
caused by Tenant's Contractors to any portion of the Building or to any property
of Landlord shall be repaired forthwith by Tenant at its expense to its
condition prior to such damage.

     Tenant and Tenant's Contractors shall assume responsibility for the
prevention of accidents and shall take all reasonable safety precautions with
respect to the construction of the Improvements and shall comply with all
reasonable and customary safety measures initiated by Landlord and with all
applicable laws, ordinances, rules, regulations and orders including those of
any public authority for the safety of persons or property to the extent
applicable to Tenant's Work. Tenant shall advise Tenant's Contractors to report
to Landlord any injury to any of its agents or employees and shall furnish
Landlord a copy of the accident report filed with its insurance earner within
three (3) days of its occurrence.

     SECTION 36.4. LANDLORD'S CONTRIBUTION. Provided no default exists under the
Lease, Landlord shall pay as Landlord's contribution for the costs of
construction of the Improvements


<PAGE>   50



(including hard and soft costs) a sum equal to the lesser of (i) the actual cost
of the Improvements (including hard and soft costs), or (ii) ONE HUNDRED FIFTY
THOUSAND AND NO/100 ($150,000.00) DOLLARS ("Landlord's Contribution"). The cost
of all work necessary to construct the Improvements (including, but not limited
to, all labor, material, permits) and to pay architectural fees, permit fees and
engineering fees) in excess of Landlord's Contribution shall be the
responsibility of Tenant. Landlord's Contribution shall be paid in monthly
installments by the Landlord to Tenant's Contractors as the work progresses
within ten (10) days of Tenant's presentation of reasonable documentation
evidencing (i) the amounts due to Tenant's Contractors, including presentation
of a contractor's statement and partial and final lien waivers, as the case may
be, covering all work for which the Tenant is requesting payment; (ii) the
percentage of the work completed; (iii) a sworn statement from Tenant setting
forth in detail all contractors and material suppliers with whom Tenant has
contracted, their addresses, work or materials to be furnished, amounts of
contracts, amounts paid to date, amounts of current payments and balances due;
and (iv) a certification by the architect who prepared Tenant's Plans that the
Improvements for which payment is requested have been completed and materials
are in place as indicated by the request for payment and that all work which has
progressed to date conforms to Tenant's Plans.

     Tenant shall be responsible for obtaining and submitting to Landlord all
documentation reasonably required by the Landlord in relation to draw requests
made by Tenant. Tenant's draw amounts shall never exceed, in the aggregate, the
lesser of: (i) the remaining unpaid amount of Landlord's Contribution, or (ii)
that amount equal to ninety percent (90%) of the cost of the Improvements then
completed. The ten percent (10%) of the cost of Improvements not disbursed shall
be disbursed to Tenant with the final payment for the Improvements. Landlord
reserves the right to disburse any fiends pursuant to an escrow with Chicago
Title Insurance Company and Tenant shall pay all costs associated therewith. .

     The final payment of Landlord's Contribution shall not be made until the
architect or contractor who prepared the Tenant's Plans shall have certified to
Landlord and Tenant that the Improvements are substantially complete in
accordance with the Tenant's Plans, any applicable certificate of occupancy or
other governmental license or permit has been issued, all final waivers of lien
have been deposited with Landlord and there are no liens of public record
resulting from the Improvements.

     SECTION 36.5. CEILING TILE ALLOWANCE. Provided no default exists under the
Lease, Landlord shall pay as Landlord's contribution for the costs of repair or
replacement of damaged ceiling tiles in the Premises a sum equal to the lesser
of (i) the actual cost of the repair or replacement of damaged ceiling tiles, or
(ii) $5,000.00 ("Ceiling Tile Contribution"). The Ceiling Tile Contribution
shall be paid in a single installment by Landlord to Tenant within ten (10) days
of Tenant's request for payment and presentation of reasonable documentation
evidencing the amounts paid by Tenant to repair or replace damaged ceiling tiles
provided Tenant has requested payment of the Ceiling Tile Contribution prior to
December 31, 2000.



<PAGE>   51


                                 ARTICLE XXXVII
                        RIGHT OF FIRST OFFER TO PURCHASE

     SECTION 37.1. RIGHT OF FIRST OFFER TO PURCHASE. Landlord agrees that if, at
any time during the Initial Term of this Lease, Landlord decides to offer the
Premises for sale and provided no Event of Default exists under the terms of
this Lease, Landlord shall first offer the Premises to Tenant on the following
terms and conditions:

          (a) The right granted to Tenant hereunder shall not be effective if
     Landlord determines to create a joint venture or partnership and to which
     joint venture or partnership Landlord sells or contributes the Premises.
     Furthermore, Tenant shall have no rights hereunder if Landlord obtains a
     bona fide first mortgage from an institutional lender not related to or
     affiliated with Landlord which mortgage is a so-called "Participating
     Mortgage" under which the lender has a right to participate in the profits
     or cash flow or both of the Premises of if the Premises is sold in a
     transaction involving the simultaneous lease back of the Premises by
     Landlord or if the Premises are sold in connection with a foreclosure of
     any mortgage.

          (b) If Landlord decides to offer the Premises for sale, Landlord shall
     submit such offer to Tenant and Tenant shall have the right, within fifteen
     (15) days after receipt of the offer, to elect to purchase the Premises on
     the same terms and conditions as set forth in the offer and the terms and
     conditions of Sections 38.4 through 38.13 below shall be deemed to apply to
     such purchase, and except that any due diligence period or similar
     contingency shall not be a condition of any agreement between Landlord and
     Tenant. If Tenant does not give Landlord notice in writing within said
     fifteen (15) day period that Tenant intends to exercise its rights
     hereunder, then Landlord shall be free to sell the Premises on the terms
     and conditions set forth in the offer submitted to Tenant and in such event
     (i) Tenant's rights hereunder shall terminate, and (ii) within fifteen (15)
     days after the request of Landlord, Tenant shall acknowledge in writing
     that it has not exercised its right of first offer; provided, however, that
     in the event such sale to a third party on the terms and conditions set
     forth in the offer submitted to Tenant shall not close, then Tenant's
     rights hereunder shall be reinstated as to subsequent bona fide offers.

                                ARTICLE XXXVIII
                               OPTION TO PURCHASE

     SECTION 38.1. OPTION. Provided that (a) Tenant has not either assigned this
Lease or sublet the Premises other than for a Permitted Sublease, and (b) no
Event of Default under the terms of this Lease then exists, then Tenant is
granted an option (hereinafter referred to as the "Purchase Option") to purchase
the Premises on and after the Commencement Date and on or before July 1, 2002.

     SECTION 38.2. CONDITIONS. The Purchase Option shall be exercisable only
prior to July 1, 2002. If the Purchase Option is not duly exercised within the
period allowed hereunder or does not include the earnest money deposit referred
to below, the Purchase Option shall automatically terminate and be of no further
force and effect. The Purchase Option shall be exercised by Tenant by written
notice signed by Tenant and received by Landlord on or before



<PAGE>   52



July 1, 2002. The date of Tenant's election shall be the date that Landlord
receives the notice of election. The closing date for the purchase and sale of
the Premises shall be on the date which is either (i) ninety (90) days after the
date of Tenant's election provided the date of Tenant's election is no later
than July 1, 2002, or (ii) on a date selected by Landlord provided the same is
no later than nine (9) months after the date of Tenant's election. The notice of
exercise to be effective shall be accompanied by a cashier's or certified check
in the sum of ONE HUNDRED THOUSAND AND NO/00 DOLLARS ($100,000.00), which sum
shall be earnest money and shall be applied toward the Purchase Price at the
Closing, as such terms are hereinafter defined; such sum shall be placed in an
interest bearing account with interest accruing until Closing for Tenant's
benefit. In the event that after exercising the Purchase Option Tenant fails to
consummate the purchase of the Premises on the date of the Closing for any
reason other than as a result of Landlord's failure to deliver title to the
Premises as required hereunder, the earnest money deposit plus accrued interest
shall be forfeited to Landlord as liquidated damages for the breach of this
provision of the Lease. At all times after the exercise of the Purchase Option
and prior to the actual Closing or if the Closing does not occur due to a
default by Tenant, this Lease shall remain in full force and effect and all of
the obligations of Tenant, including, but not limited to, the obligation to pay
Rent shall continue.

     SECTION 38.3. PURCHASE PRICE. The total Purchase Price for the Premises
shall be an amount equal $3,870,000.00 provided Landlord has not made any
additional improvements to or expansion of the Premises. In the event Landlord
has made any additional improvements or expansion of the Premises, Landlord
shall within fifteen (15) days after receipt of Tenant's notice exercising its
option to purchase, provide Tenant with a revised purchase price for the
Premises. Tenant shall have a period of fifteen (15) days after receipt of
Landlord's notice in which to accept or reject Landlord's revised purchase price
and Tenant's failure to respond within said fifteen (15) day period shall be
deemed to be Tenant's acceptance of the revised purchase price. In the event
Tenant rejects the revised purchase price, Tenant's exercise of its option to
purchase shall be deemed withdrawn and this Lease shall continue in full force
and effect.

     The balance of the Purchase Price, plus or minus prorations, shall be paid
by wire transfer at Closing.

     SECTION 38.4. PERMITTED EXCEPTIONS. Landlord agrees to convey, or cause to
be conveyed, to Tenant, or Tenant's nominee, title to the Premises by a
recordable, stamped special warranty deed, subject only to: (a) general real
estate taxes and special assessments; (b) acts of Tenant and those parties
acting through or for Tenant; (c) the matters set forth on Exhibit "D" attached
hereto and by this reference made a part hereof; and (d) this Lease.

Section 38.5. Closing. The consummation of the transaction herein described
(herein referred to as the "Closing") shall be at 10:00 a.m. on the date set
forth above at the offices of Chicago Title and Trust Company in Chicago,
Illinois in accordance with standard Deed and Money Escrow. If the date for
Closing or performance of an obligation under this Article XXXVIII falls on a
Saturday, Sunday or holiday, then the date shall be deferred until the first
(1st) business day prior thereto.

     SECTION 38.6. POSSESSION. Landlord shall deliver and Tenant agrees to
accept possession of the Premises on the day of the Closing.




<PAGE>   53


     SECTION 38.7. TITLE. Landlord shall deliver, or cause to be delivered, to
Tenant or Tenant's nominee, within thirty (30) days after Landlord's receipt of
the exercise notice, a current title commitment from Chicago Title Insurance
Company or such other title company chosen by Landlord for an ALTA (1992) Form
Owner's Title Insurance Policy in the amount of the Purchase Price. At the
Closing, Landlord shall cause to be issued to Tenant or Tenant's nominee an ALTA
(1992) Form Owner's Title Insurance Policy with extended coverage in the amount
of the applicable Purchase Price hereof covering title to the Premises on the
date thereof. The aforesaid commitment and policy shall be subject only to the
title exceptions set forth in Section 38.4 hereof. The commitment may also be
subject to title exceptions pertaining to liens or encumbrances of a definite or
ascertainable amount which may be removed by the payment of money at the Closing
and which Landlord will so remove at that time by using the funds to be paid to
Landlord hereunder (all of which are herein referred to as the "Permitted
Exceptions"). The title policy shall be conclusive evidence of good title as
therein shown as to all matters insured by the policy subject to the exceptions
therein stated.

     SECTION 38.8. TITLE CLEARANCE. If the title commitment discloses
unpermitted exceptions, Landlord shall have thirty (30) days from the date of
delivery thereof to have the exceptions removed from the commitment or to have
the title insurer commit to insure against loss or damage that may be occasioned
by such exceptions provided such alternative insurance is acceptable to Tenant's
Lender. If Landlord fails to have the exceptions removed, or in the alternative,
to obtain the commitment for title insurance specified above as to such
exceptions within the specified time, Tenant may terminate the Purchase Option
or may elect, upon notice to Landlord within ten (10) days after the expiration
of the thirty (30)-day period, to take title as it then is with the right to
deduct from the Purchase Price liens or encumbrances of a definite or
ascertainable amount. If Tenant does not so elect, the Purchase Option shall
become null and void without further actions or liability of the parties and the
earnest money deposited by Tenant pursuant to the terms hereof shall be returned
to Tenant, together with all interest earned thereon, but this Lease shall
remain in full force and effect and all of the covenants, agreements and
obligations of Tenant hereunder shall continue.

     SECTION 38.9. TRANSFER TAXES. Landlord shall pay the amount of any stamp or
transfer tax imposed by law by the State of Illinois and the County of Will on
the transfer of title, and shall furnish completed Real Estate Transfer
Declarations signed by Landlord or Landlord's agent in the forms required
pursuant to the Real Estate Transfer Tax Acts of the State of Illinois and the
County of Will. The Tenant shall pay the amount of the local transfer taxes, if
any. All tax and other deposits held by Landlord hereunder shall be returned to
Tenant at closing.

     SECTION 38.10. UNIFORM VENDOR RISK ACT. The provisions of the Uniform
Vendor and Tenant Risk Act of the State of Illinois shall not be applicable to
the Purchase Option.

     SECTION 38.11. TIME. Time is of the essence with respect to the Purchase
Option.

     SECTION 38.12. TERMINATION. The Purchase Option herein granted shall
automatically terminate upon the earliest to occur of (i) July 1, 2002 if the
Purchase Option has not been exercised; (ii) the termination of Tenant's right
to possession of the Premises; (iii) the termination of the Term; (iv) the
assignment of this Lease or the subletting of the Premises other


<PAGE>   54



than for a Permitted Sublease; or (v) the failure of Tenant to timely or
properly exercise the Purchase Option.

     SECTION 38.13. LIKE-KIND EXCHANGE. Tenant agrees to cooperate with Landlord
if Landlord notifies Tenant that it desires to complete a like-kind exchange
under Section 1031 of the Internal Revenue Code. Tenant agrees to execute any
documents requested by Landlord, provided Tenant incurs no additional
liabilities in connection therewith. In the event that Landlord elects to engage
in such like-kind exchange, the rights of Landlord and the obligations of Tenant
under this Article may, at Landlord's option, be assigned to a qualified
intermediary and one or more exchange trusts in order to consummate same.

                                 ARTICLE XXXIX
                            EXPANSION OF IMPROVEMENTS

     SECTION 39.1. OPTION TO EXPAND. Upon written request from Tenant, and upon
satisfaction of the conditions hereinafter set forth, Landlord agrees, subject
to and to the extent permitted under applicable laws and ordinances, to
construct an addition to the Improvements ("Addition"), which Addition shall, in
Landlord's determination, be architecturally compatible with the existing
improvements on the Premises and which Addition shall be constructed so that all
of the Improvements, including the Addition, will not constitute a single
purpose building. Landlord's obligation to construct the Addition shall be
subject to satisfaction of the following conditions:

          (a) No Event of Default shall exist at the time of Tenant's request
     for the Addition and thereafter and no event shall have occurred during
     such time which would, with the passage of time or the giving of notice, or
     both, constitute such an Event of Default; and

          (b) this Lease shall not have been terminated; and

          (c) the Tenant has not sublet any portion of the Premises (other than
     the Permitted Subleases) and has not assigned any rights hereunder other
     than an Approved Transfer; and

          (d) Tenant's written request shall be received by Landlord on or
     before July 1, 2004; and

          (e) Tenant, at its sole cost and expense, shall furnish to Landlord
     full and complete plans and specifications for the Addition (hereinafter
     referred to as the "Plans") prepared by an architect licensed in Illinois
     who is reasonably acceptable to Landlord, which Plans shall be sufficiently
     detailed so as to enable Landlord to obtain all necessary building permits
     and otherwise satisfactory to Landlord; and

          (f) all trade fixtures of Tenant and other equipment necessary for the
     operation of Tenant's business shall not be included in the Plans and shall
     be paid for by Tenant; and




<PAGE>   55


          (g) this Lease shall be amended to incorporate the increase in rent
     hereinafter provided and other terms herein contained.

         The option to expand granted hereunder shall terminate upon any sale of
the Premises by Landlord.

     SECTION 39.2. CONSTRUCTION COSTS. Within ninety (90) days after receipt by
Landlord of the written request and the Plans, Landlord shall obtain and deliver
to Tenant (i) a bid from a general contractor for the construction of the
Addition, based on the approved plans and specifications; (ii) the amount of the
fee payable to Landlord in an amount equal to the usual and customary Landlord
sponsored development fee as determined by Landlord not to exceed five percent
(5%) of the total costs to be incurred in connection with the Addition,
including, without limitation, reasonable costs of Landlord allocated to
staffing of the construction of the Addition ("Landlord's Fee"); and (iii) a
factor of return determined by Landlord ("Multiplier"). If the general
contractor bid is not acceptable to Tenant, Tenant may, subject to the approval
of Landlord, make revisions to the Plans, and thereupon, Landlord will obtain a
further bid based on the revised Plans. If the final bid, development fee and
Multiplier are not acceptable to Tenant, Tenant shall be deemed to have
withdrawn its request for the expansion.

     SECTION 39.3. CHANGES. Provided the bid for construction of the Addition is
accepted by Tenant, Landlord shall cause the Addition to be constructed in
accordance with the Plans. Changes to the plans and specifications after
commencement of construction must be approved by Landlord and, if any such
change results in an increase in the cost of construction, Tenant shall be
responsible for the payment of such increased cost upon demand from Landlord.

     SECTION 39.4. INCREASED RENT. On the earlier to occur of the date of
substantial completion of the Addition and the date of occupancy thereof by
Tenant (such earlier date is hereinafter referred to as the "Addition Date"),
the monthly Base Rent due under this Lease as set forth in Section 5.1 hereof
shall be increased by one twelfth (1/12) of an amount equal to the product of
the "Cost of Tenant's Work" (as hereinafter defined) multiplied by the
Multiplier. As used herein, the date of substantial completion shall be the date
on which the Village of Romeoville issues a permanent, temporary or conditional
certificate of occupancy or otherwise acknowledges that Tenant may occupy the
Addition; provided, however, that in the event that the Addition cannot be
occupied due to work required to be performed, but which is not the obligation
of Landlord to perform in accordance with the Plans, the Addition shall be
deemed substantially complete. The increase in the monthly Base Rent ("Increased
Rent") shall be payable monthly in the manner provided in Section 5.1 hereof.
The Increased Rent shall increase on each July 1 during the Term following the
Addition Date by an amount equal to one hundred and three percent (103 %) of the
then Increased Rent.

     SECTION 39.5. COST OF WORK. As used herein, "Cost of Tenant's Work" shall
mean one hundred percent (100%) of the aggregate of all hard and soft costs and
expenses of any nature whatsoever, including Landlord's Fee, required directly
or indirectly to design and construct the Addition in accordance with the Plans.




<PAGE>   56




     SECTION 39.6. AMENDMENT. Landlord and Tenant agree to enter into an
amendment to this Lease to document the expansion of the Improvements, the
Addition Date, the Increased Rent and the extension of the Term.

         IN WITNESS WHEREOF, the parties have executed this Lease as of the date
set forth above.

LANDLORD:

                                    CP FINANCING TRUST,
                                    a Maryland real estate financing trust

                                    By:  CENTERPOINT PROPERTIES TRUST, a
                                         Maryland real estate investment trust

                                    Its: Beneficiary

                                    By:            /s/ illegible
                                         -------------------------------------
                                         Its:      illegible
                                             ---------------------------------

                                    By:            /s/ Michael A. Totoriei
                                         -------------------------------------
                                         Its:      Vice President, Controller
                                             ---------------------------------

TENANT:

                                    NANOPHASE TECHNOLOGIES, INC., a Delaware
                                    corporation

                                    By:            /s/ Jess Jankowski
                                         -------------------------------------
                                         Its:      Secretary and Treasurer
                                             ---------------------------------



<PAGE>   57


                                   EXHIBIT "A"

                                LEGAL DESCRIPTION

     Lots 33, 34, 41 and 42 in Marquette Center Business and Industrial Park
Resubdivision No. 3, being a Subdivision of part of Sections 22 and 27, Township
37 North, Range 10 East of the Third Principal Meridian in Will County,
Illinois.



<PAGE>   58



                                    EXHIBIT C

             SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT

THIS DOCUMENT PREPARED
BY AND AFTER RECORDING
RETURN TO:



                         SUBORDINATION, NON-DISTURBANCE
                            AND ATTORNMENT AGREEMENT

     NOTICE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT RESULTS IN YOUR
LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN
THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER OR LATER INSTRUMENT.

     THIS AGREEMENT (this "Agreement") is made as of the ___ day of
______________ among _______________________________ ("Lender"), NANOPHASE
TECHNOLOGIES, INC., a Delaware corporation ("Tenant"), and ____________________
("Landlord").

WITNESSETH:

     WHEREAS, the Property (as hereinafter defined) is to be encumbered by a
certain Mortgage (hereinafter called the "Mortgage") covering the real property
described in Exhibit "A" attached hereto and made a part hereof for all
purposes, and the buildings and improvements thereon (collectively, the
"Property") securing the payment of a promissory note payable to the order of
Lender (the "Note"); and

     WHEREAS, by that certain Industrial Building Lease entered into as of
_________, 2000 between Landlord and Tenant (collectively, the "Lease"),
Landlord has leased all or portion of the Property (the "Premises") to Tenant;
and

     WHEREAS, Lender will not make the loan secured by the Mortgage unless
Tenant subordinates the Lease and Tenant's rights thereunder to the lien and
provisions of the Mortgage; and

     WHEREAS, Tenant and Lender desire to confirm their understanding with
respect to the Lease and the Mortgage.


<PAGE>   59



     NOW, THEREFORE, in consideration of the premises, the covenants,
conditions, provisions and agreement set forth herein, and other good and
valuable consideration, receipt and sufficiency of which whereof is hereby
acknowledged, Lender, Tenant and Landlord do hereby mutually represent,
acknowledge, covenant and agree as follows:

     1. THE LEASE. The Lease is in good standing and full force and effect
without any modification or amendment as of the date hereof. The Lease shall not
be amended without the written approval of Lender and shall not be terminated or
canceled except as expressly provided in the Lease.

     2. SUBORDINATION. Tenant hereby subordinates in all respects and at all
times its interests in the Lease and to the Premises under and pursuant to the
Lease to all of the terms, conditions and provisions of the Mortgage insofar as
it affects the Property of which the Premises form a part, to all advances made
or to be made thereunder, to the full extent of the principal sum and interest
thereon from time to time secured thereby, and to any renewals, modifications
and extensions or modifications thereof including any increase in the
indebtedness secured thereby or supplements thereto, subject to the terms and
conditions set forth in this Agreement. Notwithstanding the foregoing or
anything else contained herein to the contrary, the Lender shall be subject to
the terms of the Lease with respect to the availability of insurance proceeds
for repair or restoration in the event of a casualty.

     3. NON-DISTURBANCE. So long as Tenant is not in default (beyond any
periods) given under the Lease to Tenant to cure such default) in (i) the
payment of any monetary obligation under the Lease, or (ii) the performance of
any of the other terms, covenants or conditions with which Tenant is obligated
to comply pursuant to the Lease, then:

        (a) The right of possession of Tenant to the Premises shall not be
affected or disturbed by Lender in the exercise of any of its rights under the
Mortgage or the Note; nor shall Tenant be named as a party defendant to any
foreclosure of the lien of the Mortgage, nor in any other way be deprived of its
rights under the Lease except in accordance with the terms of the Lease.

        (b) In the event Lender succeeds to the interest of Landlord under the
Lease, the Lease shall not be terminated or affected thereby, and any sale of
the Premises by Lender or pursuant to the judgment of any court in an action to
enforce the remedies provided for in the Mortgage, shall be made subject to the
Lease and the rights of Tenant thereunder.

     4. RECOGNITION AND ATTORNMENT. If Lender succeeds to the interest of
Landlord under the Lease and all terms therein, and the rights of Tenant
thereunder, the Lease shall continue in effect, shall not be altered,
terminated, or disturbed, and Tenant shall be bound to Lender under all of the
terms, covenants and conditions of the Lease for the balance of the term of the
Lease as specified in the Lease (the "Term"), with the same force and effect as
if Lender were the landlord under the Lease except that, notwithstanding
anything to the contrary herein or in the Lease, the provisions of the Mortgage
will govern with respect to the disposition of proceeds of insurance policies or
condemnation or eminent domain awards. In such event, Tenant shall attorn to
Lender as its landlord, such attornment to be effective and self-operative
without the execution of any other instruments on the part of Lender or Tenant,
immediately


<PAGE>   60



upon Lender succeeding to the interest of Landlord under the Lease. Provided,
however, Tenant shall be under no obligation to pay any monetary obligation set
forth in the Lease to Lender until Tenant receives written notice from Lender
that Lender has succeeded to the interest of Landlord under the Lease. Upon
receipt by Tenant of such notice from Lender, Tenant shall make all payments due
by Tenant under the Lease to Lender or as Lender may in writing direct. The
respective rights and obligations of Tenant and Lender upon such attornment, to
the extent of the then remaining balance of the Term, shall be and are the same
as are then in existence, as set forth in the Lease.

     5. RIGHTS UNDER THE LEASE. If Lender shall succeed to the interests of
Landlord in and to the Premises or under the Lease, Lender shall not be:

        (a) liable for any acts or omissions of any prior landlord (including,
but not limited to, Landlord); or

        (b) subject to any offsets, deductions or defenses which Tenant might
have arising out of acts or omissions of any prior landlord (including, but not
limited to, Landlord); or

        (c) liable to Tenant for any security deposit under the Lease not
actually transferred and paid over to Lender; or

        (d) obligated to give Tenant a credit for and/or acknowledge any rent
or additional rent which Tenant has paid to Landlord or any prior landlord which
is in excess of the rent or additional rent due under the Lease preceding the
effective date of the notice wherein Lender gave Tenant notice of Lenders
succeeding to the Landlord's interest under the Lease, unless such payment is
provided for in the Lease as presently existing or as amended in accordance with
this Agreement; or

        (e) bound by any agreement or modification of the Lease made after the
date hereof without Lenders consent, except as permitted by the Mortgage.

     The foregoing provisions shall be self-operative and effective without the
execution of any further instruments on the part of either party hereto.
However, Tenant agrees to execute and deliver to Lender or to any person to whom
Tenant herein agrees to attorn such other instruments as either shall request in
order to effectuate said provisions.

     Any option to purchase or right of first offer with respect to the Property
in favor of Tenant shall not be deemed to (i) include a transfer to Lender or
Lender's nominee in the event of a foreclosure or deed in lieu of foreclosure;
(ii) be a waiver of any rights of Lender with respect to any prohibition on
prepayment or transfer as contained in the Mortgage or any other document
evidencing or securing the Loan; or (iii) include a transfer by Lender to an
affiliate of Lender.

     6. COLLECTION OF RENTS AND/OR POSSESSION OF THE PREMISES BY LENDER. Upon
receipt of written notice from Lender, Landlord and Tenant agree that Tenant
shall pay all rent and other amounts owing under the Lease to a bank account or
accounts designated by Lender. Any such payment by Tenant made in the manner
directed by Lender shall be credited against the rental obligations of Tenant
under the Lease in the direct order of maturity of the rental and other
installments due thereunder, and Landlord hereby releases Tenant from all claims
and



<PAGE>   61


liabilities as to the payment of rent or any other amount due under the
Lease if such payment is made pursuant to the written direction of Lender.

     7. NOTICE AND OPPORTUNITY TO CARE LANDLORD DEFAULT. Tenant shall furnish to
Lender copies of all notices which Landlord is entitled to receive under the
Lease, and upon request by Lender, Tenant agrees to certify in writing to Lender
whether or not any default on the part of Landlord exists under the Lease and
the nature of any such default. Furthermore, Tenant shall notify Lender in
writing of the occurrence of any default by Landlord and shall permit Lender a
period of thirty (30) days from the date of such notice (the "Cure Period") in
which to cure such default prior to proceeding to exercise any of the rights or
remedies of Tenant under the Lease, including termination of the Lease,
abatement of rental payments due thereunder, or performance of Landlord's
covenants or obligations which Tenant asserts to be in default; provided,
however, that the Care Period granted to bender herein (i) shall be extended by
any period of time during which Lender is diligently pursuing the cure of a
default which can not reasonably be expected to be cured within the initial
thirty (30) day Care Period, and (ii) shall not be deemed to commence until
after any period of time during which Lender is pursuing acquisition of title to
the Premises through foreclosure or otherwise, such period to include, without
limitation, any period of time (a) during which Lenders acquisition of title to
the Premises is stayed by any proceeding in bankruptcy, any injunction or other
judicial process, and (b) after acquisition of title by Lender during which
Landlord or any other party is contesting the validity of the acquisition of
Lenders title to the Premises. With respect to defaults which are personal to
Landlord, such as bankruptcy, and thus not capable of being cured by Lender, or
with respect to defaults which are not capable of being cured without possession
of the Premises, then Lender shall be deemed to be diligently pursuing a cure of
such default if, within the above described thirty (30) day Cure Period, Lender
commences and thereafter pursues (subject to any judicial stays, injunctions or
other delays) foreclosure proceedings for the Premises. Furthermore, in the case
of defaults personal to Landlord, Lender shall be deemed to have cured such
defaults upon final foreclosure of the Premises.

     8. LIMITATION OF LENDER LIABILITY. Notwithstanding anything to the contrary
contained in this Agreement or the Lease, in the event of any default or breach
by Lender with respect to any of the terms, covenants and conditions of the
Lease to be observed, honored or performed by Lender as Landlord, Tenant shall
look solely to the estate and property of Lender in the Premises fob the
recovery of any judgment (or any other judicial procedures requiring the payment
of money by Lender) from Lender, it being agreed that Lender shall never be
personally liable for any such judgment and that no property or assets of Lender
other than Lenders interest in the Premises shall be subject to levy, execution
or other procedures for satisfaction of Tenant's remedies. Lender shall not be
required to respond in monetary damages from any of its properties or assets
other than Lenders interests in the Premises.

     9. SUCCESSION IN INTEREST. For purposes of this Agreement, Lender will be
deemed to have succeeded to the interest of Landlord under the Lease upon (i)
the transfer of title to the Premises to Lender, whether by virtue of
foreclosure, sale or transfer in lieu of foreclosure, or pursuant to the
exercise of any rights and remedies under the Mortgage or otherwise, or (ii) the
occurrence of any other event as a result of which Lender may acquire the right,
title and interest of Landlord in and to the Lease or the Premises.



<PAGE>   62


     10. NOTICES. All notices, requests and communications ("Notice") hereunder
shall be given in writing or by telegram confirmed in writing, and shall be
delivered or mailed by first class registered or certified mail, postage
prepaid, return receipt requested to Lender, Landlord or Tenant, as the case may
be, at the addresses listed next to the signature of each of the foregoing
parties. Any Notice provided for herein shall become effective only upon and at
the time of receipt by the party to whom it is given, unless such Notice is
mailed by registered or certified mail, in which case it shall be deemed to be
received on the earlier of (i) the second business day observed by Lender
following the mailing thereof, or (ii) the day of its receipt if such day is a
business day of Lender (or if not a business day, the first business day
thereafter). Any party may, by proper written notice hereunder to the other
parties, change the individual address to which such Notice shall thereafter be
sent to such party.

     11. BINDING AGREEMENT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns where permitted by
the Agreement. For purposes of this Agreement, all references herein to "Lender"
shall be deemed to include also any subsequent holder of the Mortgage who has
given notice to Tenant of its ownership of the Mortgage and who has furnished to
Tenant its mailing address and/or any other person succeeding to title to the
Premises and/or the Lease encumbered by the Mortgage or any part thereof and who
claims by, through or under Lender, whether by virtue of foreclosure, or sale or
transfer in lieu of foreclosure, or pursuant to the exercise of any rights and
remedies under the Mortgage or otherwise.

     12. ATTORNEY'S FEES. In the event any legal action or proceeding is
commenced to interpret or enforce, the terms of, or obligations arising out of
this Agreement, or to recover damages for the breach thereof; the party
prevailing in any such action or proceeding shall be entitled to recover from
the nonprevailing party all reasonable attorney's fees, costs and expenses
incurred by the prevailing party as shall be plead and proven by such party and
awarded by a court of competent jurisdiction.

     13. SEVERABILITY. In case anyone or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.

     14. HEADINGS. The headings of this Agreement are for convenience of
reference only.

     15. MODIFICATION. This Agreement may not be modified other than by an
agreement in writing signed by the parties hereto or their respective
successors.

     16. COUNTERPARTS. This Agreement may be signed in counterparts.


     17. TERMINATION. From and after payment in full of the loan secured by the
Mortgage and the recordation of a release or satisfaction thereof, without the
transfer of the



<PAGE>   63



Properly to Lender as a purchaser, this Agreement shall become void and of no
further force or effect.

     18. GOVERNING LAW. THE INTERPRETATION, VALIDITY AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF
ILLINOIS.

     IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed effective as of the day and year first above written although
actually executed on the dates) set forth in the acknowledgments below:

LENDER ADDRESS:                     LENDER:
--------------                      ------



                                    BY:
                                       ---------------------------------------


LANDLORD ADDRESS:                   LANDLORD:
----------------                    --------



                                    BY:
                                       ---------------------------------------


TENANT ADDRESS:                     TENANT:
--------------                      ------



                                    BY:
                                       ---------------------------------------


<PAGE>   64


                                    EXHIBIT B

                              PERMITTED EXCEPTIONS

(1)  ACTS OF TENANT OR ANY PARTY ACTING BY, THROUGH OR UNDER TENANT.

(2)  REAL ESTATE TAXES NOT THE DUE OR PAYABLE.

(3)  DECLARATION OF PROTECTIVE COVENANTS DATED SEPTEMBER 11, 1981 AND RECORDED
     SEPTEMBER 21, 1981 AS DOCUMENT NO. R81-23291 MADE BY FORD MOTOR CREDIT
     COMPANY, WHICH PROVIDE AMONG OTHER THINGS FOR DEFINITIONS OF TERMS, PURPOSE
     OF RESTRICTIONS, PERMITTED USES AND PERFORMANCE STANDARDS, REGULATION OF
     IMPROVEMENTS, ARCHITECTURAL CONTROL COMMITTEE, ENFORCEMENT OF RESTRICTIONS,
     AND TERM, TERMINATION, MODIFICATION AND ASSIGNMENTS.

(4)  DECLARATION OF PROTECTIVE COVENANTS DATED SEPTEMBER 11, 1981 AND RECORDED
     SEPTEMBER 21, 1981 AS DOCUMENT NO. R81-23291 MADE BY FORD MOTOR CREDIT
     COMPANY, WHICH PROVIDE AMONG OTHER THINGS FOR DEFINITIONS OF TERMS, PURPOSE
     OF RESTRICTIONS, PERMITTED USES AND PERFORMANCE STANDARDS, REGULATION OF
     IMPROVEMENTS, ARCHITECTURAL CONTROL COMMITTEE, ENFORCEMENT OF RESTRICTIONS,
     AND TERM, TERMINATION, MODIFICATION AND ASSIGNMENTS.

     (FOR FURTHER PARTICULARS SEE RECORDED DOCUMENT).

(5)  10 FOOT PUBLIC UTILITY AND DRAINAGE EASEMENTS AS SHOWN ON THE PLAT OF
     MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 3 RECORDED
     JANUARY 17, 1989, AS DOCUMENT NO. R89-02594

(6)  EASEMENT IN FAVOR OF NORTHERN ILLINOIS GAS COMPANY, THE ILLINOIS BELL
     TELEPHONE COMPANY, THE COMMONWEALTH EDISON COMPANY, FRANCHISED CABLE
     TELEVISION AND ITS/THEIR RESPECTIVE SUCCESSORS AND ASSIGNS, AND OTHER
     PUBLIC OR QUASI PUBLIC UTILITIES TO INSTALL, OPERATE AND MAINTAIN ALL
     EQUIPMENT NECESSARY FOR THE PURPOSE OF SERVING THE LAND AND OTHER PROPERTY,
     TOGETHER WITH THE RIGHT OF ACCESS TO SAID EQUIPMENT, AND THE PROVISIONS
     RELATING THERETO CONTAINED IN THE PLAT OF MARQUETTE CENTER BUSINESS AND
     INDUSTRIAL PARK UNIT TWO RECORDED JANUARY 27, 1975 AS DOCUMENT NO.
     R75-2230, THE PLAT OF MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK
     RESUBDIVISION NO. 2 RECORDED SEPTEMBER 9, 1976 AS DOCUMENT NO. R76-29157
     AND PLAT OF MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO.
     3 RECORDED JANUARY 17, 1989 AS DOCUMENT NO. R89-02594.


<PAGE>   65




     (AFFECTS THE NORTH 10 OF UNDERLYING OUTLOTS C AND D IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO.
     R76-21957; AFFECTS THE NORTH 10 FEET OF LOT 42 AND THE NORTHERLY 10 FEET OF
     LOT 33 IN MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK RESUBDIVISION UNIT
     NO. 3 RECORDED AS DOCUMENT NO. 889-02594)

     (AFFECTS THE WESTERLY 10 FEET OF UNDERLYING OUTLOT C IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO.
     R76-21957; AFFECTS THE WESTERLY 10 FEET OF LOT 33 IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION UNIT NO. 3 RECORDED AS DOCUMENT
     NO. R89-02594)

     (AFFECTS THE WEST 10 FEET OF UNDERLYING LOT 66 IN MARQUETTE CENTER BUSINESS
     AND INDUSTRIAL PARK UNIT NO. 2 RECORDED AS DOCUMENT NO. R75-2230; AFFECTS
     THE WEST 10 FEET OF LOT 34 IN MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK
     RESUBDIVISION UNIT 3 RECORDED AS DOCUMENT NO. R89-02594)

(7)  10 FOOT PUBLIC UTILITY EASEMENT AS SHOWN ON PLAT OF SUBDIVISIONS.

     (AFFECTS THE NORTH 10 OF UNDERLYING OUTLOTS C AND D IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO.
     R76-21957; AFFECTS THE NORTH 10 FEET OF LOT 42 AND THE NORTHERLY 10 FEET OF
     LOT 33 IN MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK RESUBDIVISION UNIT
     NO. 3 RECORDED AS DOCUMENT NO. R89-02594)

     (AFFECTS THE WESTERLY 10 FEET OF UNDERLYING OUTLOT C IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO.
     R76-21957; AFFECTS THE WESTERLY 10 FEET OF LOT 33 IN MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION UNIT 3 RECORDED AS DOCUMENT NO.
     R89-02594)

     (AFFECTS THE WEST 10 FEET OF UNDERLYING LOT 66 IN MARQUETTE CENTER BUSINESS
     AND INDUSTRIAL PARK UNIT NO. 2 RECORDED AS DOCUMENT NO. R75-2230; AFFECTS
     THE WEST 10 FEET OF LOT 34 IN MARQUETTE CENTER BUSINESS AND INDUSTRIAL PARK
     RESUBDIVISION UNIT 3 RECORDED AS DOCUMENT NO. R89-02594)

(8)  25 FOOT RAILROAD EASEMENT AS SHOWN ON PLAT OF SUBDIVISIONS.

     AFFECTS 25 FEET ALONG THE WEST LINE OF UNDERLYING OUTLOT D MARQUETTE CENTER
     BUSINESS AND INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO.
     R76-21975; 25 FEET ALONG THE EAST LINE OF UNDERLYING OUTLOT C MARQUETTE
     CENTER BUSINESS AND



<PAGE>   66



     INDUSTRIAL PARK RESUBDIVISION NO. 2 RECORDED AS DOCUMENT NO. R76-21975; 25
     FEET ALONG THE EAST LINE OF UNDERLYING LOT 66 AND 25 FEET ALONG THE WEST
     LINES OF UNDERLYING LOTS 64 AND 65 MARQUETTE CENTER BUSINESS AND INDUSTRIAL
     PARK UNIT NO. 2 RECORDED AS DOCUMENT NO. R75-2230 (APPROXIMATE LOCATION:
     AFFECTING THE EAST 50 FEET OF LOTS 41 AND 42 IN MARQUETTE CENTER BUSINESS
     AND INDUSTRIAL PARK RESUBDIVISION 3 RECORDED AS DOCUMENT NQ R89-2594)

     NOTE: THE FOLLOWING IS PROVIDED FOR YOUR INFORMATION AND IS NOT A PART OF
     THIS COMMITMENT/POLICY.



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>4
<FILENAME>c60965ex10-24.txt
<DESCRIPTION>AMENDMENT #1 TO ZINC OXIDE SUPPLY AGREEMENT
<TEXT>

<PAGE>   1
                                                                   EXHIBIT 10.24

                             AMENDMENT NO. 1 TO ZINC
                             OXIDE SUPPLY AGREEMENT

         THIS AMENDMENT, dated as of January __, 2001, entered into by and
between BASF CORPORATION, a Delaware corporation ("BASF") and NANOPHASE
TECHNOLOGIES CORPORATION, a Delaware corporation ("Nanophase").

                                    RECITALS

          A. Nanophase and Sun Smart, Inc. ("SSI") entered into that certain
Zinc Oxide Supply Agreement, dated as of September 16, 1999 (as amended, the
"Agreement"), pursuant to which Nanophase manufactured zinc oxide and supplied
it to SSI.

          B. BASF and Nanophase desire that Nanophase manufacture and supply to
BASF coated as well as non-coated zinc oxide.

          C. To facilitate Nanophase's purchase and installation of the
equipment necessary to coat zinc oxide for BASF (the "New Equipment"), BASF has
provided a loan to Nanophase in the amount of $1,293,895, payable over three
years, in accordance with that certain Letter Agreement dated as of September
14, 2000, and Nanophase has delivered a Promissory Note dated September 14, 2000
for said amount (the "Note").

          D. BASF and Nanophase desire to amend the Agreement as set forth
herein.

         THEREFORE, the parties hereto agree as follows:

          Section 1.  BASF and Nanophase acknowledge and agree that effective
November 30, 1999, SSI assigned the Agreement to BASF.

          Section 2.  Reference in the Agreement to SSI shall be deemed to be
reference to BASF.

          Section 3. Section 1.01 of the Agreement is hereby deleted in its
entirety and replaced with the following:

                   "1.01. Agreement to Purchase and Sell. On the terms and
          subject to the conditions of this Agreement, Nanophase agrees to sell
          to BASF, and BASF agrees to purchase from Nanophase, coated and
          non-coated zinc oxide meeting the specifications set forth in Exhibit
          A to this Agreement and manufactured in accordance with Exhibit A
          (such coated and non-coated zinc oxide being referred to as the
          "Product") provided, however, that Nanophase shall not be obligated to
          accept purchase orders for coated zinc oxide from the New Equipment
          until June 1, 2001. The terms of this Agreement apply only to the sale
          and use of the Product for skin care products, hair care products, sun
          care products, oral care products, baby care products, toiletries,
          color cosmetics and topical human sunscreen products (the "Field")."


<PAGE>   2

          Section 4. A new Section 1.04(g) is hereby added as follows:

                   "(g) BASF will rebate Nanophase the difference between (i) [
          * * * ] and (ii) BASF's 2001 purchase price per kilogram for
          non-coated zinc oxide (determined in accordance with Exhibit B) for
          non-coated zinc oxide volumes sold to Schering Plough during the 2001
          calendar year for the application field Foot Care. BASF will pay
          Nanophase the rebate on a semiannual basis on June 30 and December 31,
          2001."

          Section 5. Section 1.07 of the Agreement is hereby deleted in its
entirety and replaced with the following:

                   "Payment of the initial purchase price for Product ordered
          under this Agreement shall be due 30 days from date of invoice with
          payment due on the 30th day. Product will be invoiced on or after
          shipment. Nanophase shall retain title to Product until payment in
          full of the initial purchase price. If for any reason this retention
          of title is ineffective, BASF grants to Nanophase a purchase money
          security interest in ordered Product for payment in full of the
          initial purchase price. Invoices for coated zinc oxide manufactured by
          Nanophase shall be credited per the terms and conditions of the Note."

          Section 6. Section 4.01(b) of the Agreement is hereby deleted in its
entirety and replaced with the following:

                   "(b) Any time after July 1, 2002, either party may terminate
          this Agreement for any reason by delivering two years' advance notice
          of termination to the other party."

          Section 7. Section 7.12 of the Agreement is hereby amended by deleting
the address for notices to SSI and inserting the following address for notices
to BASF.

                  "to BASF:

                            BASF Corporation
                            3000 Continental Drive - North
                            Mount Olive, NJ 07828-1234
                            Facsimile: 973-426-5369
                            Attention: Marketing Manager, Cosmetic Chemicals"

          Section 8. Exhibit A to the Agreement is hereby deleted in its
entirety and replaced with Exhibit A hereto.

          Section 9. Exhibit B to the Agreement is hereby deleted in its
entirety and replaced with Exhibit B hereto.

* * *  CONFIDENTIAL TREATMENT REQUESTED


<PAGE>   3

          Section 10. The parties represent and warrant that the representations
contained in the Agreement are true and correct as of the date hereof.

          Section 11. All other terms and conditions of the Agreement shall
remain in full effect in accordance with their terms.

          IN WITNESS WHEREOF, the parties have executed this Amendment as of the
first date set forth above.

                                            NANOPHASE TECHNOLOGIES CORPORATION


                                            By:/S/ Joseph Cross
                                               ---------------------------------
                                            Its:   President and CEO
                                                --------------------------------


                                            BASF CORPORATION


                                            By:/S/ illegible
                                               ---------------------------------
                                            Its:
                                                --------------------------------


<PAGE>   4


                                    EXHIBIT A

             "The Product" is defined as uncoated ZnO and coated ZnO

                            MANUFACTURING CONDITIONS

          The Product will be manufactured under GNP standards (as defined in 21
code of Federal Regulations Parts 210 and 211) and ISO 9000 standards as
applicable and such other standards as the parties may mutually agree from time
to time.

                             PURITY (UNCOATED ONLY)

          The Product will meet USP, BP purity requirements. At least 50% of the
Product made will meet the JSCI standard for zinc oxide purity. The Product will
be free of foreign bodies.

                          PARTICLE SIZE (UNCOATED ONLY)

          It is the present intention of the parties that the specifications for
particle size applicable under this Agreement will be those set forth below. The
parties will conduct additional tests to validate such specifications. If the
results of validation testing are inconsistent with the specifications set forth
below, the parties will in good faith agree on changes to such specifications.

          To be determined using a Brook Haven XDC or other instrument mutually
agreed upon.

          The Product will have an average particle size (on a number basis) of
less than 0.2 microns but greater than .05 microns. The Product will have an
average particle size (on a mass basis) of less than 0.250 microns.

          The Product will have at least 95% of its mass accounted for by
particles with diameters of less than 1.0 microns with no detectable particles
greater than 1.5 microns.

          From samples produced by Nanophase, a Reference Standard for the
Product will be established and inventoried for comparison and instrument
calibration.

                              COATING (COATED ONLY)

          It is the present intention of the parties that the specifications for
the Coated Product applicable under this agreement will be those set forth
below. The parties will conduct additional tests to validate such
specifications. If the results of validation testing are inconsistent with the
specifications set forth below, the parties will in good faith agree on changes
to such specifications.

          [ * * * ]

          * * * CONFIDENTIAL TREATMENT REQUESTED


<PAGE>   5

                                    PACKAGING

          Packaging will be specified by BASF. The uncoated Product will be
packaged in 10 kg corrugated boxes with plastic liners. The coated Product will
be packaged in 25 kg corrugated boxes with plastic liners.

          Labeling will be specified by BASF.


<PAGE>   6


                                    EXHIBIT B

I. Indicated below is the pricing schedule for uncoated Product F.O.B.
   Nanophase's Plant.



                                    [ * * * ]





II. Indicated below is the pricing schedule for coating the uncoated Products
    (these prices are in addition to the prices for the uncoated Product listed
    above)



                                    [ * * * ]
















* * *  CONFIDENTIAL TREATMENT REQUESTED
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>5
<FILENAME>c60965ex10-25.txt
<DESCRIPTION>PROMISSORY NOTE DATED AS OF 9/14/00
<TEXT>

<PAGE>   1

                                                                  EXHIBIT 10.25

                                 PROMISSORY NOTE
                                 ---------------

     FOR VALUE RECEIVED, the undersigned, Nanophase Technology Corporation,
("Debtor"), a Delaware corporation, with an office and place of business at 1319
Marquette Drive, Romeoville, Illinois 60446, hereby promises to pay to the order
of BASF Corporation, a Delaware corporation ("BASF"), at its offices at 3000
Continental Drive-North, Mount Olive, New Jersey 07828-1234, or at such other
place as the holder may otherwise hereafter specify in writing from time to
time, in lawful legal tender money of the United States of America, the
principal sum of ONE MILLION TWO HUNDRED NINETY THREE THOUSAND, EIGHT HUNDRED
NINETY FIVE AND 00/100 DOLLARS ($1,293,895.00) plus interest in the amount of
8.45% per annum commencing upon the earlier to occur of the First Delivery Date
(as defined below) or June 1, 2001. Monies will be provided to Debtor by BASF in
accordance with the payment schedule which is attached to this Promissory Note
as Exhibit "A".

     Effective November 30, 1999 Debtor and BASF became parties to an Agreement
dated September 16, 1999 whereby Debtor supplies zinc oxide to BASF. In
consideration of certain undertakings, Debtor has agreed to provide the
additional service of coating the BASF form of particulate zinc oxide
("Z-Cote"). Commencing with the first delivery of Z-Cote coated by Debtor (the
"First Delivery Date"), the principal and interest due under this note shall be
repaid through the issuance by Debtor of a credit on all invoices for coating at
the rate of $1.37 per/kg., until such time as all principal and interest due
under this note has been paid; provided further that all principal and interest
which remains outstanding three years after the earlier of the First Delivery
Date or June 1, 2001 shall become immediately payable upon demand by BASF.

     IN WITNESS WHEREOF, Debtor has signed this Promissory Note as of the 6th
day of October, 2000.

                                      NANOPHASE TECHNOLOGY CORPORATION


                                      By: /s/ Joseph Cross
                                          ------------------------------------
                                          Title: President and CEO
                                                 -----------------------------


<PAGE>   2

                                   EXHIBIT "A"
                                   -----------

                              Construction Schedule
                              ---------------------

PHASE 1

         Purchase of Patterson-Kelly blenders

         Infrastructure expenditures:

                  a.       Engineering
                  b.       Foundations
                  c.       Electrical
                  d.       Building modifications

         Monies to be transferred to NTC upon signing - $650,000

PHASE II

         Purchase and installation of:

                  a.       Powder conveyance system
                  b.       Control systems
                  c.       Heating and cooling systems for the blenders
                  d.       Vacuum system

         Monies to be transferred to NTC on 1/3/01....................$390,000

PHASE III

         Completion of mechanical work

         Commissioning and start up

         Monies to be transferred to NTC on 4/3/01....................$253,895

         Total expenditure..........................................$1,293,895



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>6
<FILENAME>c60965ex11.txt
<DESCRIPTION>STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
<TEXT>

<PAGE>   1
                                                                      EXHIBIT 11

                       NANOPHASE TECHNOLOGIES CORPORATION

               STATEMENTS REGARDING COMPUTATION OF LOSS PER SHARE

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                          ------------------------------------------------------------
                                                                 2000                1999                 1998
                                                          -----------------   ----------------     -------------------
<S>                                                       <C>                 <C>                  <C>
Weighted average common shares outstanding                       13,390,741         12,690,483           12,416,305
                                                          =================   ================     ================
Net loss                                                  $     (4,518,327)   $    (5,117,067)     $    (5,633,880)
                                                          =================   ================     ================
Net loss per common share-basic and diluted               $          (0.34)   $         (0.40)     $         (0.45)
                                                          =================   ================     ================
</TABLE>



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>c60965ex23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>

<PAGE>   1


                                                                      EXHIBIT 23

                         CONSENT OF INDEPENDENT AUDITORS

     We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-53445) pertaining to the Nanophase Technologies Corporation
Amended and Restated 1992 Stock Option Plan of our report dated February 2,
2001, with respect to the financial statements and schedule of Nanophase
Technologies Corporation included in this Annual Report (Form 10-K) for the year
ended December 31, 2000.

                                             /S/ ERNST & YOUNG LLP
                                             -----------------------------------
                                             Ernst & Young LLP

Chicago, Illinois
March 26, 2001

</TEXT>
</DOCUMENT>
</SUBMISSION>
