
<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 SCHEDULE 14A
                   PROXY STATEMENT PURSUANT TO SECTION 14(A)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

     Filed by the Registrant                     [X]

     Filed by a Party other than the Registrant  [ ]


     Check the appropriate box:

     [ ] Confidential, for Use of the Commission Only (as permitted by Rule
         14a-6(e)(2))

     [ ] Preliminary Proxy Statement

     [X] Definitive Proxy Statement

     [ ] Definitive Additional Materials

     [ ] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12


                       NANOPHASE TECHNOLOGIES CORPORATION

--------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)


--------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

               Payment of filing fee (Check the appropriate box):

     [X]  No fee required

     [ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
          0-11.

     1)  Title of each class of securities to which transaction applies:


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

     2)  Aggregate number of securities to which transaction applies:


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

     3)  Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):


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     4)  Proposed maximum aggregate value of transaction:


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     5)  Total fee paid:


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     [  ]  Fee paid previously with preliminary materials.


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

     [  ]  Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously.  Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

     1)  Amount Previously Paid:


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     2)  Form, Schedule or Registration Statement No.:


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     3)  Filing Party:


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     4)  Date Filed:


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<PAGE>

                            [GRAPHIC OF NANOPHASE]

1319 Marquette Drive
Romeoville, Illinois 60446

                                  May 4, 2001

Dear Stockholder:

   On behalf of the Board of Directors, I cordially invite you to attend the
2001 Annual Meeting of Stockholders of Nanophase Technologies Corporation to
be held at Nanophase Technologies Corporation, 1319 Marquette Drive,
Romeoville, Illinois, on Tuesday, June 5, 2001 at 9:00 a.m., local time. The
formal notice of the Annual Meeting appears on the following page.

   The attached Notice of Annual Meeting and Proxy Statement describe the
matters that we expect to be acted upon at the Annual Meeting. Immediately
after the Annual Meeting, stockholders will be able to view a presentation by
the Company and have the opportunity to ask questions.

   Whether or not you plan to attend the Annual Meeting, it is important that
your shares be represented. Regardless of the number of shares you own, please
sign and date the enclosed proxy card and promptly return it to us in the
enclosed postage paid envelope. If you sign and return your proxy card without
specifying your choices, your shares will be voted in accordance with the
recommendations of the Board of Directors contained in the Proxy Statement.

   We look forward to seeing you on June 5, 2001 and urge you to return your
proxy card as soon as possible.

                                        Sincerely,

                                        /s/ Joseph E. Cross,
                                        Joseph E. Cross,
                                        President and Chief Executive Officer
<PAGE>


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

                   NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

                          TO BE HELD ON JUNE 5, 2001

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

To the Stockholders of
Nanophase Technologies Corporation:

   The Annual Meeting of Stockholders of Nanophase Technologies Corporation
(the "Company") will be held at 9:00 a.m., Chicago time, on Tuesday, June 5,
2001, at Nanophase Technologies Corporation, 1319 Marquette Drive, Romeoville,
Illinois, for the following purposes:

     (1) To elect one Class I director to the Company's Board of Directors;

     (2) Approve the Nanophase Technologies Corporation 2001 Equity
  Compensation Plan;

     (3) To ratify the appointment by the Board of Directors of Ernst & Young
  LLP as the independent auditors of the Company's financial statements for
  the year ended December 31, 2001; and

     (4) To transact such other business as may properly come before the
  meeting or any adjournments thereof.

   The foregoing items of business are more fully described in the
accompanying Proxy Statement.

   The Board of Directors has fixed the close of business on April 9, 2001 as
the record date for determining stockholders entitled to notice of, and to
vote at, the Annual Meeting.

                                          By order of the Board of Directors,

                                          /s/ Jess Jankowski
                                          Jess Jankowski,
                                          Secretary

Romeoville, Illinois
May 4, 2001

   ALL STOCKHOLDERS ARE URGED TO ATTEND THE MEETING IN PERSON OR BY PROXY.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE FURNISHED FOR THAT PURPOSE.
<PAGE>

                      NANOPHASE TECHNOLOGIES CORPORATION

                             1319 Marquette Drive
                          Romeoville, Illinois 60446
                                (630) 771-6708

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

                                PROXY STATEMENT

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

   The accompanying proxy is solicited by the Board of Directors (the "Board
of Directors") of Nanophase Technologies Corporation, a Delaware corporation
(the "Company"), for use at the Annual Meeting of Stockholders (the "Annual
Meeting") to be held at 9:00 a.m., Chicago time, Tuesday, June 5, 2001, at
Nanophase Technologies Corporation, 1319 Marquette Drive, Romeoville,
Illinois, and any adjournments thereof. This Proxy Statement and accompanying
form of proxy are first being mailed to stockholders on or about May 4, 2001.

   Record Date and Outstanding Shares--The Board of Directors has fixed the
close of business on April 9, 2001, as the record date (the "Record Date") for
the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments thereof. As of the Record Date, the Company
had outstanding 13,621,549 shares of Common Stock, par value $.01 per share
(the "Common Stock"). Each outstanding share of Common Stock is entitled to
one vote on all matters to come before the Annual Meeting.

   Voting of Proxies--Joseph E. Cross and Jess Jankowski, the persons named as
proxies on the proxy card accompanying this Proxy Statement, were selected by
the Board of Directors to serve in such capacity. Messrs. Cross and Jankowski
are executive officers of the Company and Mr. Cross is also a director of the
Company. The shares represented by each executed and returned proxy will be
voted in accordance with the directions indicated thereon, or, if no direction
is indicated, such proxy will be voted in accordance with the recommendations
of the Board of Directors contained in this Proxy Statement. Each stockholder
giving a proxy has the power to revoke it at any time before the shares it
represents are voted. Revocation of a proxy is effective upon receipt by the
Secretary of the Company of either (1) an instrument revoking the proxy or (2)
a duly executed proxy bearing a later date. Additionally, a stockholder may
change or revoke a previously executed proxy by voting in person at the Annual
Meeting (attendance at the Annual Meeting will not, by itself, revoke a
proxy).

   Required Vote--The vote of a plurality of the shares of Common Stock voted
in person or by proxy is required to elect the nominee for Class I director.
The affirmative vote of a majority of the shares of Common Stock represented
in person or by proxy is required to approve the Nanophase Technologies
Corporation 2001 Equity Compensation Plan and to ratify the appointment of
Ernst & Young LLP as the independent auditors of the Company's financial
statements for the year ended December 31, 2001. Stockholders will not be
allowed to cumulate their votes in the election of directors.

   Quorum; Abstentions and Broker Non-Votes--The required quorum for
transaction of business at the Annual Meeting will be a majority of the shares
of Common Stock issued and outstanding as of the Record Date. Votes cast by
proxy or in person at the Annual Meeting will be tabulated by the election
inspectors appointed for the meeting and will determine whether or not a
quorum is present. Abstentions and broker non-votes will be included in
determining the presence of a quorum. Abstentions and broker non-votes will
have no effect on the vote for directors. Abstentions will be considered
present and entitled to vote with respect to approving the Nanophase
Technologies Corporation 2001 Equity Compensation Plan and to ratifying the
appointment of the Company's independent auditors and will have the same
effect as votes "against" such proposals. Broker non-votes will not be
considered present and entitled to vote with respect approving the Nanophase
Technologies Corporation 2001 Equity Compensation Plan and to ratifying the
appointment of the Company's independent auditors and will have no effect on
such proposals.

   Annual Report to Stockholders--The Company's Annual Report to Stockholders
for the year ended December 31, 2000, containing financial and other
information pertaining to the Company, is being furnished to stockholders
simultaneously with this Proxy Statement.
<PAGE>

                                  PROPOSAL 1

                             ELECTION OF DIRECTOR

   The Company's Board of Directors currently consists of six directors.
Article VI of the Company's Certificate of Incorporation provides that the
Board of Directors shall be classified with respect to the terms for which its
members shall hold office by dividing the members into three classes. At the
Annual Meeting, one director of Class I will be elected for a term of three
years expiring at the Company's 2004 Annual Meeting of Stockholders. The
nominee is presently serving as a director of the Company. See "Nominee"
below.

   Edward E. Hagenlocker, Ph.D., a current Class I director, has elected not
to stand for reelection at the end of his term which expires at the June 5,
2001 annual meeting. The Board of Directors would like to extend its thanks to
Dr. Hagenlocker for all of his past contributions and dedication to the
Company. The Board of Directors has been engaged in the ongoing process of
considering potential nominees for the remaining Class I director position.
When the Board of Directors has located qualified candidates, it expects to
either fill the remaining Class I position or nominate appropriate candidates
for election at a subsequent meeting of stockholders.

   The four directors whose terms of office do not expire in 2001 will
continue to serve after the Annual Meeting until such time as their respective
terms of office expire or their successors are duly elected and qualified. See
"Other Directors" below.

   If at the time of the Annual Meeting the nominee should be unable or
decline to serve, the persons named in the proxy will vote for such substitute
nominee as the Board of Directors recommends, or vote to allow the vacancy
created thereby to remain open until filled by the Board of Directors, as the
Board of Directors recommends. The Board of Directors has no reason to believe
that the nominee will be unable or decline to serve as a director if elected.

   THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEE NAMED BELOW.

                                    NOMINEE

   The name of the nominee for the office of director, together with certain
information concerning such nominee, is set forth below:

<TABLE>
<CAPTION>
                                                  Served as        Position with
      Name                                      Director Since Age    Company
      ----                                      -------------- --- -------------
      <S>                                       <C>            <C> <C>
      James A. McClung, Ph.D...................      2000       63   Director
</TABLE>

   Mr. McClung has served as a director of the Company since February 2000. He
is a Senior Vice President and a corporate officer for FMC Corporation, a
leading producer of chemicals and machinery for industry and agriculture. He
has over 25 years of international business development in over 75 countries,
having managed diversified global businesses, including specialized chemicals
and machinery, while living in the United States, Europe, and Africa. Mr.
McClung currently serves as Director of Alticor (Amway) and Turtle Wax. He
also serves as a board member of: Thunderbird, The American Graduate School of
International Management (Glendale, Arizona); College of Wooster (Ohio); U.S.-
Russia Business Council (Washington, D.C.); U.S.-China Business Council
(Washington, D.C.); Japan American Society; and a member of The Economic Club
and The Executive's Club of Chicago. Mr. McClung earned a B.S. degree from the
College of Wooster, an M.A. from the University of Kansas, and a Ph.D. from
Michigan State University.

   THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE NOMINEE
FOR ELECTION AS A CLASS I DIRECTOR.

                                       2
<PAGE>

                                OTHER DIRECTORS

   The following persons will continue to serve as directors of the Company
after the Annual Meeting until their terms of office expire (as indicated
below) or until their successors are duly elected and qualified.

<TABLE>
<CAPTION>
                                                               Served as
                                                               Director   Term
Name                               Age  Position with Company    Since   Expires
----                               ---  ---------------------  --------- -------
<S>                                <C> <C>                     <C>       <C>
Joseph E. Cross...................  53  Director, President,     1998     2002
                                       Chief Executive Officer

Jerry K. Pearlman.................  62        Director           1999     2003

Donald S. Perkins.................  74     Chairman of the       1998     2003
                                         Board of Directors

Richard W. Siegel, Ph.D...........  63        Director           1989     2002
</TABLE>

   Mr. Cross has served as Chief Executive Officer of the Company since
December 1998 and President and a director of the Company since joining the
Company in November 1998. From November 1998 to December 1998, Mr. Cross
served as the Company's Chief Operating Officer. Prior to joining the Company
in November 1998, Mr. Cross served as President and Chief Executive Officer of
Aptech, a manufacturer of measurement, metering and control devices for the
utility industry, from August 1996 to October 1998. From December 1993 to July
1996, Mr. Cross served as President of Aegis Technologies, an interactive
telecommunications company. He holds a B.S. degree from Southwest Missouri
University and attended the M.B.A. program at Southwest Missouri University.

   Mr. Pearlman has served as a director of the Company since April 1999. Mr.
Pearlman retired as chairman of Zenith Electronics Corporation in November
1995. He joined Zenith as controller in 1971 and served as chief executive
officer from 1983 through April 1995. Mr. Pearlman is a director of Smurfit
Stone Container Corporation, Ryerson-Tull, Inc., and Parson Group LLC. He is a
trustee of Northwestern University where he is vice chairman of the capital
campaign, director and past chairman of the board of Evanston Northwestern
Healthcare. Mr. Pearlman graduated from Princeton with honors from the Woodrow
Wilson School and from Harvard Business School with highest honors.

   Mr. Perkins has served as a director of the Company since February 1998.
Mr. Perkins retired from Jewel Companies, Inc., the retail supermarket and
drug chain, in 1983. He had been with Jewel since 1953, serving as President
from 1965 to 1970, as Chairman of the Board of Directors from 1970 to 1980,
and as Chairman of the Executive Committee until his retirement. He has served
on a number of corporate boards and is currently a director of Aon
Corporation, LaSalle Hotel Properties and Luminant Worldwide. For more than 30
years, he has served on corporate boards including AT&T, Cummins Engine
Company, Kmart Corporation, Lucent Technologies, Inc., and Time-Warner, Inc.
Mr. Perkins is a trustee and Vice Chairman of the Board of Trustees of
Northwestern University. Mr. Perkins holds a B.A. degree from Yale University
and an M.B.A. degree from the Harvard Graduate School of Business
Administration.

   Dr. Siegel is a co-founder of the Company and has served as a director of
the Company since 1989. Dr. Siegel also has served as a consultant to the
Company since 1990 with regard to the application and commercialization of
nanocrystalline materials. Dr. Siegel is an internationally recognized
scientist in the field of nanocrystalline materials. During his tenure on the
research staff at Argonne National Laboratory from July 1974 to May 1995, he
was the principal scientist engaged in research with the laboratory-scale
synthesis process that was the progenitor of the Company's physical-vapor-
synthesis production system. Dr. Siegel has been the Robert W. Hunt Professor
in Materials Science and Engineering at Rensselaer Polytechnic Institute since
June 1995, and served as Department Head from 1995 to 2000. In April 2001, Dr.
Siegel became the founding Director of the newly created Rensselaer
Nanotechnology Center at the Institute. During 1995-1998, he was also a
visiting professor at the Max Planck Institute for Microstructure Physics in
Germany on an Alexander von

                                       3
<PAGE>

Humboldt Research Prize received in 1994. He chaired the World Technology
Evaluation Center worldwide study of nanostructure science and technology for
the U.S. government, has served on the Council of the Materials Research
Society and as Chairman of the International Committee on Nanostructured
Materials. He also served on the Committee on Materials with Sub-Micron Sized
Microstructures of the National Materials Advisory Board and was the co-
chairman of the Study Panel on Clusters and Cluster-Assembled Materials for
the U.S. Department of Energy. Dr. Siegel holds an A.B. degree in physics from
Williams College and an M.S. degree and Ph.D. from the University of Illinois
at Urbana-Champaign.

   Director Compensation--Upon first being elected to the Board of Directors,
each director of the Company who is not an employee or consultant of the
Company (an "Outside Director") is granted, pursuant to the Company's Amended
and Restated 1992 Stock Option Plan, as amended (the "1992 Plan"), stock
options to purchase 10,000 shares of Common Stock at the fair market value of
the Common Stock, as determined by a committee appointed by the Board of
Directors, as of the date of issuance of such stock options. On the date of
each annual meeting of the stockholders of the Company, each Outside Director
who is re-elected or continues to serve as a director because his or her term
has not expired is granted stock options to purchase 2,000 shares of Common
Stock pursuant to the 1992 Plan; provided that no such automatic grant is made
to an Outside Director who was first elected to the Board of Directors within
three months prior to such annual meeting. The options granted to Outside
Directors under the 1992 Plan vest in three equal annual installments
beginning on the first anniversary of the date of grant. All options granted
under the 1992 Plan to Outside Directors expire ten years from the date of
grant. Effective January 2, 2001, the Company granted 1,361 shares of Common
Stock to each of Donald Perkins, Richard Siegel, Jerry Pearlman, James
McClung, and Edward Hagenlocker. The Company also agreed to issue a cash
payment of $10,000 to reimburse these Directors for personal income tax
liabilities relating to this grant of Common Stock. In addition, the Company
entered into a consulting agreement in March 2001 with Richard Siegel, Ph.D.
pursuant to which the Company pays Dr. Siegel $2,000 per month for consulting
services over a twelve-month term. This agreement is renewable for successive
twelve-month terms or may be terminated by either party under conditions
defined in the agreement.

   All Outside Directors are reimbursed for their reasonable out-of-pocket
expenses incurred in attending board and committee meetings.

   Meetings--During the year ended December 31, 2000, the Board of Directors
held twelve formal meetings. Each of the Company's current directors attended
at least 75% of the aggregate of the number of board meetings held (during the
period in which he was a director) and the total number of committee meetings
on which he served that were held (during the period in which he was a member
of such committee) during 2000.

   Committees of the Board of Directors--The Board of Directors has
established an Audit and Finance Committee and a Compensation and Governance
Committee, each comprised entirely of directors who are not officers or
employees of the Company. The members of the Audit and Finance Committee are
Dr. Hagenlocker (Chairman), Mr. Pearlman and Mr. Perkins. The members of the
Compensation and Governance Committee are Mr. Pearlman (Chairman), Dr.
Hagenlocker and Mr. Perkins. The Company does not have a standing nominating
committee.

   The Audit and Finance Committee generally has responsibility for
recommending independent public auditors to the Board of Directors for
selection, reviewing the plan and scope of the accountants' annual audit,
reviewing the Company's internal control functions and financial management
policies, and reporting to the Board of Directors regarding all of the
foregoing. The Audit and Finance Committee held six formal meetings in 2000.
See "Report of the Audit and Finance Committee of the Board of Directors."

   The Compensation and Governance Committee generally has responsibility for
recommending to the Board of Directors guidelines and standards relating to
the determination of executive and key employee compensation, reviewing the
Company's executive compensation policies and reporting to the Board of
Directors regarding the foregoing. The Compensation and Governance Committee
also has responsibility for administering the 1992 Plan, determining the
number of options, if any, to be granted to the Company's employees and
consultants

                                       4
<PAGE>

pursuant to the 1992 Plan and reporting to the Board of Directors regarding
the foregoing. The Compensation and Governance Committee held one formal
meeting in 2000. See "Report of the Compensation and Governance Committee of
the Board of Directors."

                              EXECUTIVE OFFICERS

   The table below identifies executive officers of the Company who are not
identified in the tables entitled "Election of Directors--Nominees" or "--
Other Directors."

<TABLE>
<CAPTION>
     Name                    Age                            Position
     ----                    ---                            --------
<S>                          <C> <C>
Jess Jankowski.............   35 Acting Chief Financial Officer, Corporate Controller, Secretary
                                  and Treasurer

Gina R. Kritchevsky, Ph.D..   47 Vice President--Technology and Engineering

Daniel S. Bilicki..........   57 Vice President--Sales and Marketing

Richard W. Brotzman, Ph.D..   47 Vice President--Research and Development

Donald J. Freed, Ph.D......   59 Vice President--Business Development
</TABLE>

   Mr. Jankowski has served as Controller of the Company since joining in
1995. He was elected Secretary and Treasurer in November 1999, and Acting
Chief Financial Officer in January 2000. From 1990-1995 he served as
Controller for two building contractors in the Chicago area. Mr. Jankowski
holds a B.S. in accountancy from Northern Illinois University, an M.B.A. from
Loyola University, and received his certified public accountant certificate
from the State of Illinois.

   Dr. Kritchevsky has served as Vice President--Technology and Engineering of
the Company since joining the Company in February 1999. From June 1998 to
February 1999, Dr. Kritchevsky provided consulting services to companies in a
variety of markets, including electronics packaging and liquid crystal display
technology. From January 1997 to May 1998, Dr. Kritchevsky was Vice President
of Strategic Initiatives for Donnelly Optics Corporation, an optics company.
From 1989 to January 1997, Dr. Kritchevsky served in various positions with
Donnelly Corporation, an automotive supplier, including Director of Corporate
New Business Development. She holds a B.S. degree in chemistry and a Ph.D. in
material sciences and engineering from MIT.

   Mr. Bilicki has served as Vice President--Sales and Marketing of the
Company since joining the Company in March 1999. From January 1996 until March
1999, Mr. Bilicki served as President/Director of PT Crosfield Indonesia in
Jakarta, Indonesia, a subsidiary of Crosfield Company, which is a global
chemical company. From January 1994 to December 1995, Mr. Bilicki held the
position of President/Director North America of Crosfield Company. He holds a
B.S. degree from Indiana Institute of Technology and an M.B.A. degree from
Winthrop University.

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

   Dr. Freed joined the Company in April 1995 as Vice President--Marketing and
has served as Vice President--Business Development of the Company since June
1998. He has extensive experience in the

                                       5
<PAGE>

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

   The Board of Directors elects executive officers annually and such
executive officers, subject to the terms of certain employment agreements,
serve at the discretion of the Board of Directors. Messrs. Cross, Jankowski,
Bilicki and Drs. Freed and Kritchevsky each have employment agreements with
the Company. See "Executive Compensation--Employment and Consulting
Agreements." There are no family relationships among any of the directors or
officers of the Company.

                                       6
<PAGE>

                            EXECUTIVE COMPENSATION

   The following table provides information concerning the annual and long-
term compensation for services in all capacities to the Company for the years
ended December 31, 2000, 1999, and 1998 of those persons who were (i) during
2000, the chief executive officer of the Company and (ii) at December 31,
2000, the four other most highly compensated (based upon combined salary and
bonus) executive officers of the Company whose total salary and bonus exceeded
$100,000 during 2000.

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                           Long-Term
                                                                          Compensation
                                             Annual Compensation             Awards
                                      ----------------------------------   Securities
                                                          Other Annual     Underlying     All Other
  Name and Principal Position    Year Salary($) Bonus($) Compensation($)    Options    Compensation($)
  ---------------------------    ---- --------- -------- ---------------  ------------ ---------------
<S>                              <C>  <C>       <C>      <C>              <C>          <C>
Joseph E. Cross (1)............  2000 $244,905  $50,000     $ 40,083(2)     100,000        $84,925(3)
 President and Chief Executive   1999  216,538        0      120,188(4)     100,000         71,157(5)
 Officer                         1998   29,487        0       14,111(6)     100,000         36,450(7)

Gina R. Kritchevsky, Ph.D. (8).  2000 $170,769  $35,000     $      0         50,000        $ 9,363(9)
 Vice President Technology and   1999  142,789        0       51,370(10)    100,000              0
 Engineering

Daniel S. Bilicki (11).........  2000 $183,288  $     0     $      0         50,000        $     0
 Vice President Sales and        1999  130,096        0            0        100,000              0
 Marketing

Donald J. Freed, Ph.D..........  2000 $139,039  $     0     $      0         16,875        $     0
 Vice President Business         1999  126,154        0            0         10,000              0
 Development                     1998  120,753                               27,572

Richard Brotzman, Ph.D.........  2000 $139,039  $     0     $      0         22,500        $     0
 Vice President Research and     1999  126,154    6,000            0         15,000              0
 Development                     1998  119,721        0                      40,600
</TABLE>
--------
(1) Joseph E. Cross commenced employment as the President and Chief Operating
    Officer of the Company in November 1998 and became its Chief Executive
    Officer in December 1998.
(2) Includes $17,605 paid for lodging in Burr Ridge, Illinois, $12,992 paid
    for airfare to and from Chicago, Illinois, and $9,486 in payments related
    to use of a car. These expenses were incurred through 2000. All amounts
    have been "grossed-up" significantly to compensate Mr. Cross for personal
    income tax liabilities associated with the reimbursement of these
    expenses.
(3) Represents relocation expenses incurred by Mr. Cross for moving to the
    greater Chicago metropolitan area.
(4) Includes $50,571 paid for lodging in Burr Ridge, Illinois, $35,085 paid
    for airfare to and from Chicago, Illinois, and $26,820 in payments related
    to use of a car. These expenses were incurred evenly throughout 1999. All
    amounts have been "grossed-up" significantly to compensate Mr. Cross for
    personal income tax liabilities associated with the reimbursement of these
    expenses.
(5) Represents compensation relating to the grant of 24,500 shares of
    unregistered Common Stock to Mr. Cross in August of 1999. This amount has
    been "grossed-up" significantly to compensate Mr. Cross for personal
    income tax liabilities associated with the grant of these shares.
(6) Includes $8,602 paid for airfare to and from Chicago, Illinois.
(7) Represents a one-time payment to Mr. Cross for the preparation of his
    residence for sale in connection with his intended move to the greater
    Chicago metropolitan area.
(8) Dr. Kritchevsky's employment with the Company commenced on February 15,
    1999.

                                       7
<PAGE>

(9) Represents a reimbursement for tax liabilities incurred by Dr. Kritchevsky
    in relation to amounts previously paid to her for relocating to the
    greater Chicago metropolitan area.
(10) Includes $25,000 paid at signing of her employment agreement and $13,082
     paid for lodging in Burr Ridge, Illinois. All amounts other than the
     $25,000 paid at the signing of her employment agreement have been
     "grossed-up" significantly to compensate Dr. Kritchevsky for personal
     income tax liabilities associated with the reimbursement of these
     expenses.
(11) Mr. Bilicki's employment commenced with the Company on March 15, 1999.

   OPTION GRANTS IN 2000--The following table provides information on grants
of stock options to the Named Officers during 2000. No stock appreciation
rights were granted to the Named Officers during 2000.

                             Option Grants in 2000
<TABLE>
<CAPTION>
                                                                          Potential
                                                                     Realizable Value at
                                                                       Assumed Annual
                                                                       Rates of Stock
                                                                     Price Appreciation
                                      Individual Grants              For Option Term (2)
                                    ---------------------            -------------------
                                     Percent of
                         Number of     Total
                         Securities   Options
                         Underlying   Granted    Exercise
                          Options   to Employees or Base
                          Granted        in       Price   Expiration
Name                      (#) (1)   Fiscal Year   ($/SH)     Date     5%($)     10%($)
----                     ---------- ------------ -------- ---------- -------- ----------
<S>                      <C>        <C>          <C>      <C>        <C>      <C>
Joseph E. Cross.........  100,000      32.82%    $7.6875   5/24/10   $483,463 $1,225,190
Gina R. Kritchevsky,
 Ph.D...................   50,000      16.41%     7.6875   5/24/10    241,731    612,595
Daniel S. Bilicki.......   50,000      16.41%     7.6875   5/24/10    241,731    612,595
Donald J. Freed, Ph.D...   16,875       5.54%     7.6875   5/24/10     81,584    206,751
Richard W. Brotzman,
 Ph.D...................   22,500       7.38%     7.6875   5/24/10    108,779    275,668
</TABLE>
--------
(1) These options are all non-qualified stock options. Subject to certain
    restrictions, these options become exercisable in three equal annual
    installments, beginning on the first anniversary of the date of grant.
    These options were granted ten years prior to their expiration dates.
(2) Potential realizable value is presented net of the option exercise price
    but before any federal or state income taxes associated with exercise.
    These amounts represent certain assumed rates of appreciation only. Actual
    gains will be dependent on the future performance of the Common Stock and
    the option holder's continued employment through the vesting period. The
    amounts reflected in the table may not necessarily be achieved.

   AGGREGATED OPTION EXERCISES IN 2000 AND YEAR-END 2000 OPTION VALUES--The
following table provides information regarding each of the Named Officers'
option exercises in 2000 and unexercised options at December 31, 2000.

                          Year-End 2000 Option Values

<TABLE>
<CAPTION>
                                                 Number of Securities
                                                Underlying Unexercised     Value of Unexercised
                           Shares                     Options at          In-The-Money Options at
                          Acquired     Value       Year-End 2000 (#)       Year-End 2000 ($) (1)
                         On Exercise Realized  ------------------------- -------------------------
Name                         (#)        ($)    Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- --------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>       <C>         <C>           <C>         <C>
Joseph E. Cross.........        0    $       0    66,667      233,333     $ 564,795   $1,475,830
Gina R. Kritchevsky,
 Ph.D...................        0            0    23,333      126,667       199,893      811,045
Daniel S. Bilicki.......        0            0    26,666      123,334       240,411      818,965
Donald J. Freed, Ph.D...   68,113    1,024,728    17,628       72,926       132,930      490,103
Richard W. Brotzman,
 Ph.D...................        0            0   130,750       94,995     1,127,027      634,662
</TABLE>
--------
(1) The value per option is calculated by subtracting the exercise price per
    option from the closing price of the Common Stock on the Nasdaq National
    Market on December 29, 2000, which was $11.00.

                                       8
<PAGE>

Employment and Consulting Agreements

   The Company entered into an employment agreement with Joseph E. Cross dated
November 9, 1999 which provides for an annual base salary of not less than
$220,000. In addition, Mr. Cross received a lump sum payment of $50,000 on the
first anniversary of the commencement of this agreement. The Company also
granted to Mr. Cross options to purchase up to 100,000 shares of Common Stock
at an exercise price of $2.9375 per share and options to purchase up to 50,000
shares of Common Stock at an exercise price of $2.1875, with options for one-
fifth of such shares becoming exercisable on each of the first five
anniversaries of the dates of grant. No term has been assigned to Mr. Cross'
employment agreement. If Mr. Cross is terminated other than for "cause" (as
such term is defined in Mr. Cross' employment agreement), Mr. Cross will
receive severance benefits in an amount equal to Mr. Cross' base salary for 52
weeks.

   Effective as of February 15, 1999, the Company also entered into an
employment agreement with Dr. Gina R. Kritchevsky providing for an annual base
salary of not less than $165,000. In addition, Dr. Kritchevsky was granted a
signing bonus of $25,000 and a further bonus of $35,000 on the first
anniversary of the commencement of this agreement. The Company also granted to
Dr. Kritchevsky options to purchase up to 75,000 shares of Common Stock at an
exercise price of $2.8125. No term has been assigned to Dr. Kritchevsky's
employment agreement. If Dr. Kritchevsky is terminated other than for "cause"
(as such term is defined in Dr. Kritchevsky's employment agreement), Dr.
Kritchevsky will receive severance benefits in an amount equal to Dr.
Kritchevsky's base salary for 52 weeks.

   Effective as of March 15, 1999, the Company also entered into an employment
agreement with Daniel Bilicki providing for an annual base salary of not less
than $165,000. In addition, Mr. Bilicki was granted options to purchase up to
50,000 shares of Common Stock at an exercise price of $2.375. No term has been
assigned to Mr. Bilicki's employment agreement. If Mr. Bilicki is terminated
other than for "cause" (as such term is defined in Mr. Bilicki's employment
agreement), Mr. Bilicki will receive severance benefits in an amount equal to
Mr. Bilicki's base salary for 26 weeks.

   Effective as of June 1, 1999, the Company also entered into an employment
agreement with Dr. Donald Freed providing for an annual base salary of not
less than $125,000. No term has been assigned to Dr. Freed's employment
agreement. If Dr. Freed is terminated other than for "cause" (as such term is
defined in Dr. Freed's employment agreement), Dr. Freed will receive severance
benefits in an amount equal to Dr. Freed's base salary for 26 weeks.

                        REPORT OF THE COMPENSATION AND
                             GOVERNANCE COMMITTEE
                           OF THE BOARD OF DIRECTORS

   The current Compensation and Governance Committee members are Jerry K.
Pearlman (chairman), Edward E. Hagenlocker, Ph.D., and Donald S. Perkins. The
objectives of the Compensation and Governance Committee in determining the
levels and components of executive compensation are to (1) attract, motivate
and retain talented and dedicated executive officers, (2) provide executive
officers with both cash and equity incentives to further the interests of the
Company and its stockholders, and (3) compensate executive officers at levels
comparable to those of executive officers at other comparable high technology
companies. In setting compensation, the Compensation and Governance Committee
reviews the achievement of corporate goals and individual contributions of
particular executives. Generally, the compensation of the Company's executive
officers is composed of base annual compensation, in the form of salary and
other benefits, incentives in the form of fiscal year-end bonuses, and long-
term compensation consisting of stock options awarded under the Company's
stock option plan.

Base Salaries

   In determining the base salaries of the executive officers in 2000, the
Compensation and Governance Committee considered the performance of each
executive, the nature of the executive's responsibilities, the salary levels
of executives at comparable high technology companies, including other
publicly-held advanced materials and advanced technologies companies, and the
Company's general compensation practices.

                                       9
<PAGE>

Cash Bonuses

   Discretionary cash bonuses for executive officers are directly tied to
achievement of specified goals of the Company and are a function of the
criteria which the Compensation and Governance Committee believes
appropriately take into account the specific areas of responsibility of the
particular officer.

Stock Option

   Periodically, the Compensation and Governance Committee also grants stock
options to executive officers in order to provide a long-term incentive which
is directly tied to the performance of the Company's stock. These options
provide an incentive to maximize stockholder value because they reward option
holders only if stockholders also benefit. The exercise price of these stock
options is the fair market of the Common Stock on the date of grant. In
general, the options vest in equal annual installments over a three-year
period beginning one year after the date of grant, in certain instances the
Board of Directors (or the Compensation and Governance Committee) can adjust
the vesting period for performance-based options. Vesting periods are used to
retain key employees and to emphasize the long-term aspect of contribution and
performance. In making stock option grants to executives, including Mr. Cross,
in 2000, the Compensation and Governance Committee considered a number of
factors, including the performance of such persons, the Company's performance
in 1999, achievement of specific delineated goals, the responsibilities and
the relative position of such persons within the Company, the compensation of
executives in comparable high technology companies and the number of stock
options each such person currently possesses.

Compliance with Section 162(m)

   The Compensation and Governance Committee currently intends for all
compensation paid to the Named Officers to be tax deductible to the Company
pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended
("Section 162(m)"). Section 162(m) provides that compensation paid to the
Named Officers in excess of $1,000,000 cannot be deducted by the Company for
Federal income tax purposes unless, in general, (1) such compensation is
performance-based, established by a committee of outside directors and
objective, and (2) the plan or agreement providing for such performance-based
compensation has been approved in advance by stockholders. The Compensation
and Governance Committee believes that the requirements of Section 162(m) are
uncertain at this time and may arbitrarily impact the Company. In the future,
the Compensation and Governance Committee may determine to adopt a
compensation program that does not satisfy the conditions of Section 162(m) if
in its judgment, after considering the additional costs of not satisfying
Section 162(m), such program is appropriate.

Compensation and Governance Committee Interlocks and Insider Participation

   Pursuant to a consulting agreement effective as of October 29, 1998, and
prior to his appointment as Chairman of the Board of Directors, Donald S.
Perkins, who is Chairman of the Compensation and Governance Committee, was
engaged by the Company to provide additional services in connection with the
Company's organizational restructuring and refocusing. In consideration for
such services, Mr. Perkins was granted options to purchase 25,000 shares of
Common Stock at an exercise price of $3.50 per share. Such options vest in
five equal annual installments beginning on October 29, 1999; provided,
however, that unvested options will expire upon Mr. Perkins no longer
providing such services to the Company.

                                 REPORT OF THE
                          AUDIT AND FINANCE COMMITTEE
                           OF THE BOARD OF DIRECTORS

   All members of the Audit and Finance Committee are independent, as that
term is defined in the applicable National Association of Securities Dealers'
listing standards. Each member of the Audit and Finance Committee

                                      10
<PAGE>

is also financially literate, as that qualification is interpreted by the
Company's Board of Directors in its business judgment. The Audit and Finance
Committee currently consists of Edward E. Hagenlocker, Ph.D. (chairman), Jerry
K. Pearlman and Donald S. Perkins.

   Policies and Mission. The Audit and Finance Committee recommends the
independent certified public accountants for Board of Director approval,
engages in a discussion with the independent accountants regarding the
objectivity and independence of the accountants, reviews the adequacy of the
Audit and Finance Committee Charter, reviews certain of the Company's
Securities and Exchange Commission filings, reviews significant financial
reporting issues with the Company's chief financial officer, reviews risk
management and internal audit procedures with the Company's chief financial
officer, and engages in any necessary private sessions with the Company's
chief financial officer and independent accountants.

   Audit and Finance Committee Statement. The Audit and Finance Committee,
consistent with its policies and mission, has adopted a charter, which is
included as Exhibit A to this proxy statement. The Audit and Finance Committee
has reviewed and discussed the audited financial statements with Company
management; discussed with the independent auditors the matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards), as
modified or supplemented; received a written disclosure letter from the
Company's independent certified public accountants as required by Independence
Standards Board Standard No. 1 (Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees), as modified and supplemented,
and has discussed with the independent certified public accountants the
independent accountant's independence; and based on the preceding review and
discussions contained in this paragraph, recommended to the Board of Directors
that the audited financial statements be included in the Company's Annual
Report on Form 10-K for the 2000 fiscal year for filing with the Securities
and Exchange Commission.

                                      11
<PAGE>

                               PERFORMANCE GRAPH

   The following graph shows a comparison of cumulative total returns for the
Company, the Nasdaq Market Composite Index and an index of peer companies
selected by the Company during the period commencing on November 26, 1997, the
date of the Company's initial public offering, and ending on December 31,
2000. The comparison assumes $100 was invested on November 26, 1997 in the
Common Stock, the Nasdaq Market Composite Index and the peer companies
selected by the Company and assumes the reinvestment of all dividends, if any.
The performance graph must begin with the closing price of the Common Stock on
the date of the initial public offering, which was $8.00 (this was also the
price at which the Common Stock was offered in the initial public offering.)

                    COMPARISON OF CUMULATIVE TOTAL RETURNS

                                 [LINE GRAPH]

<TABLE>
<CAPTION>
                                                    Nanophase
 Measurement                                       Technologies  Peer
     Date                                          Corporation   Group  NASDAQ
 -----------                                       ------------ ------- -------
<S>                                                <C>          <C>     <C>
November 26, 1997.................................   $100.00    $100.00 $100.00
December 31, 1997.................................    158.59      93.52   98.49
December 31, 1998.................................     28.13     131.60  137.52
December 31, 1999.................................     60.94     138.04  255.21
December 31, 2000.................................    137.50      98.15  154.94
</TABLE>

   The companies in the peer group, both of which are advanced materials or
advanced technologies companies, are: Delta & Pine Land Company and Landec
Corporation. The peer group in the Company's proxy statement for the 2000
annual meeting included Alyn Corporation. On July 31, 2000, Alyn Corporation
filed a petition for bankruptcy and accordingly has been removed from the
calculations of the graph above for all periods presented.

   The above graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act or under the Exchange Act, except to the
extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.

                                      12
<PAGE>

                       SECURITY OWNERSHIP OF MANAGEMENT
                          AND PRINCIPAL STOCKHOLDERS

   The following table sets forth, as of March 31, 2001 certain information
with respect to the beneficial ownership of the Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Company director, (iii) each of
the Named Officers and (iv) all Company executive officers and directors as a
group.

<TABLE>
<CAPTION>
                                                      Number of       Percent of
                                                        Shares          Shares
                                                     Beneficially    Beneficially
Name and Address                                       Owned(1)         Owned
----------------                                     ------------    ------------
<S>                                                  <C>             <C>
Spurgeon Corporation...............................   2,035,443(2)       14.9%
Bradford T. Whitmore...............................   2,035,443(3)       14.9%
Grace Investments, Ltd.............................   1,069,750(4)        7.9%
Grace Brothers, Ltd................................     965,693(5)        7.1%
Joseph E. Cross....................................     110,000(6)          *
Edward E. Hagenlocker, Ph.D........................      11,870(7)          *
Richard W. Siegel, Ph.D............................     260,173(8)        1.9%
James McClung......................................      25,360(9)          *
Jerry Pearlman.....................................      21,870(10)         *
Donald S. Perkins..................................      43,068(11)         *
Gina R. Kritchevsky, Ph.D..........................      57,999(12)         *
Daniel S. Bilicki..................................      73,332(13)         *
Donald J. Freed, Ph.D..............................      32,517(14)         *
Richard W. Brotzman, Ph.D..........................     148,093(15)       1.1%
All executive officers and directors as a group (11
 persons)..........................................     808,735(16)       5.9%
</TABLE>
--------
*   Denotes beneficial ownership of less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission (the "Commission"). Unless otherwise
    indicated below, the persons in the above table have sole voting and
    investment power with respect to all shares of Common Stock shown as
    beneficially owned by them.
(2) Includes 965,693 shares of Common Stock held by Grace Brothers, Ltd. and
    1,069,750 shares of Common Stock held by Grace Investments, Ltd. Spurgeon
    Corporation is a general partner of both Grace entities and shares voting
    and investment power with respect to the shares of Common Stock held by
    such Grace entities. This information is based on information reported on
    Form 4 filed on March 5, 2001 with the Commission by Spurgeon Corporation.
    The address of the stockholder is 1560 Sherman Avenue, Suite 900,
    Evanston, Illinois 60201.
(3) Includes 965,693 shares of Common Stock held by Grace Brothers, Ltd. and
    1,069,750 shares of Common Stock held by Grace Investments, Ltd. Mr.
    Whitmore is a general partner of Grace Brothers, Ltd. and is the sole
    owner of an entity which is a general partner of Grace Investments, Ltd.
    In such capacities, Mr. Whitmore shares voting and investment power with
    respect to the shares of Common Stock held by the Grace entities. This
    information is based on information reported on Form 4 filed on March 5,
    2001 with the Commission by Mr. Whitmore. The address of the stockholder
    is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201.
(4) This information is based on information reported on Form 4's filed on
    March 5, 2001 with the Commission by Spurgeon Corporation and Bradford T.
    Whitmore. The address of the stockholder is 1560 Sherman Avenue, Suite
    900, Evanston, Illinois 60201.
(5) This information is based on information reported on Form 4's filed on
    March 5, 2001 with the Commission by Spurgeon Corporation and Bradford T.
    Whitmore. The address of the stockholder is 1560 Sherman Avenue, Suite
    900, Evanston, Illinois 60201.

                                      13
<PAGE>

(6) Consists of 110,000 shares of Common Stock issuable upon exercise of
    options exercisable currently or within 60 days of March 31, 2001.
(7) Includes 7,332 shares of Common Stock issuable upon exercise of options
    exercisable currently or within 60 days of March 31, 2001.
(8) Includes 28,950 shares of Common Stock issuable upon exercise of warrants
    presently exercisable and 69,951 shares of Common Stock issuable upon
    exercise of options exercisable currently or within 60 days of March 31,
    2001.
(9) Includes 3,999 shares of Common Stock issuable upon exercise of options
    exercisable currently or within 60 days of March 31, 2001.
(10) Includes 7,332 shares of Common Stock issuable upon exercise of options
     exercisable currently or within 60 days of March 31, 2001.
(11) Includes 8,334 shares of Common Stock issuable upon exercise of options
     exercisable currently or within 60 days of March 31, 2001.
(12) Includes 54,999 shares of Common Stock issuable upon exercise of options
     exercisable currently or within 60 days of March 31, 2001.
(13) Includes 53,332 shares of Common Stock issuable upon exercise of options
     exercisable currently or within 60 days of March 31, 2001.
(14) Consists of 32,517 shares of Common Stock issuable upon exercise of
     options exercisable currently or within 60 days of March 31, 2001.
(15) Consists of 148,093 shares of Common Stock issuable upon exercise of
     options exercisable currently or within 60 days of March 31, 2001.
(16) Includes 28,950 shares of Common Stock issuable upon exercise of warrants
     presently exercisable and 520,042 shares of Common Stock issuable upon
     exercise of options exercisable currently or within 60 days of March 31,
     2001.

                                      14
<PAGE>

                                  PROPOSAL 2

                    APPROVAL OF THE NANOPHASE TECHNOLOGIES
                   CORPORATION 2001 EQUITY COMPENSATION PLAN

   The Board of Directors proposes that the Company replace its existing
equity compensation plan, the 1992 Amended and Restated Stock Option Plan (the
"1992 Plan") (effective January 12, 1993, amended and restated April 6, 1997)
with the 2001 Equity Compensation Plan described below. Over the last four
years, Nanophase has recruited many new executives, other key employees, and
new members of the Board of Directors. Part of this recruitment effort, and
related efforts to retain new and existing employees and Directors, resulted
in the granting of stock options as a form of equity-based compensation. As a
result of these efforts, the shares available for grant under the 1992 Plan
have been effectively depleted. As of March 31, 2001, only 54,934 shares are
available for grant under the 1992 Plan. Additionally, the existing plan
limits the flexibility of the Board of Directors in determining the nature of
equity-based compensation. The Board of Directors believes that in order to
attract and retain key personnel the Company must have shares available to
grant as part of the Company's compensation scheme as well as greater
flexibility with respect to the form of the grants. The proposed new plan will
effectively allow the Board of Directors to grant up to an additional 900,000
shares, with limitations on the size of individual and aggregate annual grants
discussed below. Added to the Company's existing outstanding but unexercised
stock options under the 1992 Plan, this plan will create a pool of currently
outstanding options and shares available for future grant of approximately 21%
of the outstanding shares of Company stock at March 31, 2001.

   Accordingly, on April 10, 2001, the Board of Directors adopted the
Nanophase Technologies Corporation 2001 Equity Compensation Plan (the "2001
Plan") and is seeking approval of this plan by the shareholders of the
Company. Pursuant to the terms of the 2001 Plan, upon approval of the 2001
Plan by the Company's stockholders, no further grants may be made under the
1992 Plan.

   The following is a general summary of the 2001 Plan and is qualified in its
entirety by the full text of the 2001 Plan which is attached to this Proxy
Statement as Exhibit B. Capitalized terms not defined herein shall have the
same meanings ascribed to such terms in the plan document.

Purpose

   The purpose of the 2001 Plan is to provide plan participants with the
opportunity to receive grants of incentive stock options, nonqualified
options, share appreciation rights, dividend equivalent rights and cash
awards. The Company believes that the plan will encourage the participants to
contribute materially to the growth of the Company, thereby benefiting the
Company's shareholders, and will align the economic interests of the
participants with those of the shareholders.

Administration

   The 2001 Plan will be administered by the Compensation and Governance
Committee of the Board of Directors (the "Committee"). The Committee consists
of three or more persons appointed by the Board of Directors, all of whom
shall be "outside directors" as defined under Section 162(m) of the Internal
Revenue Code of 1986, as amended, and related Treasury regulations (the
"Internal Revenue Code") and shall be "non-employee directors" as defined
under Rule 16b-3 promulgated under the Exchange Act. The Committee has full
authority to construe and interpret the 2001 Plan and to establish, amend, and
rescind rules and regulations relating to the 2001 Plan, and take any other
action necessary for the administration of the 2001 Plan.

Participants

   The Committee will designate certain (i) employees of the Company and its
subsidiaries, (ii) advisors who perform services for the Company or its
subsidiaries and (iii) non-employee members of the board of directors of the
Company who will participate in the 2001 Plan. As of March 31, 2001,
approximately 56 employees were eligible to participate in the 2001 Plan.

                                      15
<PAGE>

Shares Available for the 2001 Plan

   Subject to adjustment as provided in the 2001 Plan (for example, in the
event of recapitalization, stock split, stock dividend, merger, reorganization
or similar event), the maximum number of shares of Common Stock that may be
issued under the 2001 Plan is 900,000 shares and the maximum number of shares
of Common Stock that may be issued under the 2001 Plan in any single calendar
year is 400,000 shares, which may be shares of original issuance, treasury
shares or a combination thereof. The maximum number of shares of Common Stock
that may be granted to any eligible participant in any single calendar year
may not exceed one percent (1.0%) of the sum of the total amount of the
Company's outstanding Common Stock on December 31 of the prior year plus the
total number of outstanding but unexercised options to purchase Common Stock
under both the 2001 Plan and 1992 Plan on December 31 of the prior year.

Awards

   Awards under the 2001 Plan may be in the form of (i) incentive stock
options to purchase the Company's Common Stock ("Incentive Stock Options"),
(ii) nonqualified options to purchase the Company's Common Stock
("Nonqualified Options"), (iii) stock appreciation rights ("SARs"), (iv)
dividend equivalent rights ("Dividend Equivalent Rights") and (v) cash awards
("Cash Awards") (hereinafter collectively referred to as "Grants"). The terms
and features of the various forms of Grants are set forth below and described
more fully in the 2001 Plan itself, attached as Exhibit B.

   Incentive and Nonqualified Stock Options. A stock option is a right to
purchase a specific number of shares of Common Stock under specific terms,
conditions and price. The Committee determines the price of the shares of
Common Stock covered by each stock option (the "Stock Option Price"), except
that the Stock Option Price may not be less than 100% of the fair market value
of the shares of Common Stock on the date such stock options are granted. The
Committee also sets the term of each stock option. The term of a stock option
may not exceed 10 years from the date of the grant. Stock options granted
under the 2001 Plan may be either Incentive Stock Options which qualify under
the meaning of Section 422 of the Internal Revenue Code or Nonqualified Stock
Options which are not designed to qualify under Section 422. With respect to
each stock option granted under the 2001 Plan, the Committee may determine the
nature and extent of any restrictions to be imposed on the shares of Common
Stock which may be purchased thereunder, including, but not limited to
restrictions on the transferability of shares acquired upon exercise. Stock
options granted under the 2001 Plan cannot be repriced (except in the event of
a recapitalization, stock split, stock dividend, merger, reorganization or
similar event as described above). For purposes of the 2001 Plan, the term
"reprice" means the lowering of the Stock Option Price of previously granted
nonqualified stock options within the meaning of Item 402(i) under Securities
and Exchange Commission Regulation S-K. The actual purchase of shares of
Common Stock pursuant to a stock option is called the "exercise" of that stock
option. Stock options granted under the 2001 Plan are exercisable at such time
or times and subject to such terms and conditions as determined by the
Committee at the time of grant. The Committee may waive such restrictions on
the exercisability at any time on or after the date of the grant in whole or
in part, as the Committee determines in its sole discretion. Generally, a
portion of a stock option may be exercised after completing one year of
continuous employment with the Company or any of its subsidiaries or
affiliates, from the date the stock option is granted with additional portions
being exercisable each year thereafter. The Committee will determine the form
of payment of the exercise price, which may include cash, shares of Common
Stock already owned by the participant for a sufficient time (generally six
months) to not result in an accounting charge to Company, or any combination
of cash and shares of Common Stock, with the fair market value of such Common
Stock valued as of the day prior to delivery. The Committee may also designate
additional forms of payment that will be permitted, including the payment of
all or a portion of the exercise price from the shares of Common Stock
issuable to a participant upon such exercise. A participant will not have any
of the rights of a stockholder until the shares of Common Stock are issued to
the participant.

   Stock Appreciation Rights. A Stock Appreciation Right ("SAR") is a right to
receive, in cash or shares of Common Stock, the appreciation in value of a
share of Common Stock between the date the SAR, or related stock option, is
granted and the date it is exercised. SARs under the 2001 Plan may be granted
separately from

                                      16
<PAGE>

or in tandem with all or part of any stock options granted under the 2001
Plan. Upon exercise, each SAR entitles a participant to an amount in cash or
shares of Common Stock or combination thereof (as chosen by the Committee)
equal in value to the difference between (i) the fair market value of the
Common Stock covered by such SAR as of the date such SAR is surrendered, and
(ii) fair market value of the Common Stock covered by such SAR as of the date
such SAR was granted. If SARs are granted in tandem with stock options, upon
exercise of the SAR, the participant must surrender to the Company that
portion of the stock option equal to the number of shares underlying the SAR
being exercised. SARs granted independent of stock options may only be
exercised and expire in accordance with the terms of the SARs grant
instrument. SARs granted in tandem with stock options expire at the same time
the associated stock options expire and may be exercised only at such times
and to the extent that stock options to which they relate are exercisable. The
Committee may provide that SARs will become exercisable subject to certain
limitations similar to those restrictions applied to stock options.
Participants may exercise SARs by surrendering the applicable stock options if
granted in tandem with a stock option and specifying the number of SARs to be
exercised. Shares of Common Stock that may be issued pursuant to the exercise
of SARs will be subject to the same restrictions that apply to the acquisition
of shares of Common Stock acquired pursuant to the exercise of stock options.

   Other Incentives. Dividend Equivalent Rights and Cash Awards may be granted
in numbers or amounts and subject to any conditions and restrictions as
determined by the Committee.

Reorganization or Change in Control

   Under the 2001 Plan, a reorganization shall be deemed to occur the
shareholders of the Company approve (or, if shareholder approval is not
required, the Board of Directors approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or consolidation,
shares of the Company's stock entitling such shareholders to more than 50% of
all votes to which all shareholders of the surviving corporation would be
entitled in the election of directors (without consideration of the rights of
any class of stock to elect directors by a separate class vote), (ii) the sale
or other disposition of all or substantially all of the assets of the Company,
or (iii) a liquidation or dissolution of the Company. A change in control
shall be deemed to have occurred if any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) or any of its subsidiaries or
affiliates becomes a "beneficial owner" (as defined in Rule 13d-3 under the
such act), directly or indirectly, of securities of the Company representing a
majority of the voting power of the then outstanding securities of the Company
except where the acquisition is approved by the Board of Directors.

   Upon a Reorganization where the Company is not the surviving corporation
(or survives only as a subsidiary of another corporation), all outstanding
Incentive Stock Options, Nonqualified Stock Options and SARs that are not
exercised shall be assumed by, or replaced with comparable options or rights
by, the surviving corporation. In addition, upon any Reorganization or a
Change of Control, (i) the Company shall provide each participant with
outstanding grants written notice of such event and (ii) all outstanding
Incentive Stock Options, Nonqualified Stock Options and SARs shall
automatically accelerate and become fully exercisable.

Transferability

   Awards under the 2001 Plan may not be transferred, assigned, pledged, or
hypothecated in any manner except in the case of death of a participant;
provided, however, Nonqualified Stock Options may be transferred to certain
immediate family members and other persons or entities according to such terms
as the Committee may determine provided such transferability does not result
in accelerated federal income taxation and further provided the participant
receives no consideration for the transfer of a stock option. Any
appropriately transferred grant shall remain subject to all terms and
conditions applicable to the applicant transferring such grant.

Termination and Amendment

   The Board of Directors, may at any time terminate or from time to time
amend the 2001 Plan; provided that the Board of Directors may not make any
amendment to the 2001 Plan without the approval of the shareholders, if such
shareholder approval is required by any requirement of applicable law or
regulation. The 2001 Plan shall

                                      17
<PAGE>

terminate on the day immediately preceding the tenth anniversary of the
effective date of the plan, unless the plan is terminated earlier by the Board
of Directors or is extended by the Board of Directors with the approval of the
shareholders. A termination or amendment of the 2001 Plan that occurs after a
grant is made shall not materially impair the rights of the participant
receiving such grant unless the participant consents or unless the amendment
is required in order to comply with applicable law. The termination of the
2001 Plan shall not impair the power and authority of the Committee with
respect to an outstanding grant.

Outstanding Grants and Effect on Prior Plan

   Based on the closing price of $6.50 per share on March 31, 2001, the
aggregate market value of the 900,000 shares of Common Stock reserved for
issuance under the 2001 Plan is $5,850,000. As of March 31, 2001, only 54,934
shares are available for grant under the 1992 Plan. Pursuant to the terms of
the 2001 Plan, upon the effective date of the 2001 Plan, no further grants may
be made under the 1992 Plan.

United States Federal Income Tax Consequences

   The following discussion briefly summarizes the material federal income tax
consequences of participation in the 2001 Plan. This discussion is general in
nature and does not address issues related to the tax circumstances of any
particular participant. The discussion is limited to the impact of the
Internal Revenue Code as is currently in effect upon United States citizens
residing in the United States.

   Stock Options. Under the Internal Revenue Code, a participant granted a
Nonqualified Stock Option or Incentive Stock Option generally realizes no
taxable income upon receipt of the stock option, but in the case of a
Nonqualified Stock Option a participant is deemed to have realized ordinary
taxable income upon the exercise of the stock option equal to the excess of
the fair market value of the shares of Common Stock acquired at the time of
the exercise of the stock option over the exercise price of such stock option.
The Company will be entitled to a deduction equal to the same amount to the
extent such amount is treated as reasonable compensation under the Internal
Revenue Code. The deduction will be allowed in the Company's taxable year
which includes the last day of the participant's taxable year in which the
stock option is exercised. A participant's tax basis in shares of Common Stock
acquired upon the exercise of a stock option will be the fair market value of
such Common Stock shares on the date the stock option is exercised. Upon any
sale of shares of Common Stock acquired under the 2001 Plan, the participant's
gain or loss will therefore equal the difference between the sale price and
such tax basis. (Notwithstanding the foregoing, in the event of a "cashless"
exercise of stock options, the fair market value shall equal the actual sales
price of the underlying shares of Common Stock.) Upon disposition by a
participant of Incentive Stock Option shares received under the 2001 Plan, any
gain or loss realized by the participant will generally be taxed as a capital
gain or loss. There will be no federal income tax consequences to the Company
upon the disposition of shares acquired upon exercise of an Incentive Stock
Option received under the 2001 Plan, provided the necessary holding periods
have been met.

   SARs. The grant of a SAR to a participant will have no taxable consequences
for the participant or the Company. The exercise of an SAR results in taxable
income to the participant equal to the difference between the price of the SAR
and the fair market value of the shares of Common Stock on the date of
exercise, and a corresponding tax deduction to the Company.

   Other Incentives. A participant will not recognize income and will not be
taxed upon the grant of Dividend Equivalent Rights and Cash Awards. Generally,
at the time a participant receives payment under Dividend Equivalent Rights
and Cash Awards, the participant will recognize compensation taxable as
ordinary income in an amount equal to the cash or fair market value of the
shares received, and the Company will then be entitled to a corresponding
deduction.

   Withholding Taxes. A participant may be liable for federal, state, or local
tax withholding obligations as a result of the grant, exercise or settlement
of any grant under the 2001 Plan. The tax withholding obligation may be
satisfied by payment in the form of cash, certified check, previously-owned
shares of Common Stock or, if a participant elects with the permission of the
Committee, by a reduction in the number of shares to be received by the
participant under the award.

                                      18
<PAGE>

Reasons for Obtaining Stockholder Approval

   The Board of Directors has approved the 2001 Plan subject to stockholder
approval at the annual meeting. The Company is submitting the 2001 Plan for
stockholder approval at the annual meeting because stockholder approval is
required to (a) qualify the 2001 Plan under Section 422 of the Internal
Revenue Code relating to the grant of Incentive Stock Options and (b) obtain a
federal income tax deduction under Section 162(m) of the Internal Revenue Code
for compensation recognized by participants in connection with the Grants
under the 2001 Plan.

Recommendation

   The Board of Directors believes that approval of the 2001 Plan is in the
best interest of the Company and its stockholders because the 2001 Plan will
enable the Company to attract and retain officers and key management employees
and provide those employees with competitive incentives which also align their
interests with those of the stockholders.

   THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE NANOPHASE TECHNOLOGIES CORPORATION 2001 EQUITY COMPENSATION
PLAN.

                                      19
<PAGE>

                                  PROPOSAL 3

                    RATIFICATION OF APPOINTMENT OF AUDITORS

   The Board of Directors, upon the recommendation of the Audit and Finance
Committee, has appointed Ernst & Young LLP, independent certified public
accountants, as auditors of the Company's financial statements for the year
ended December 31, 2001. Ernst & Young LLP has acted as auditors for the
Company since 1993. The Board of Directors has determined to afford
stockholders the opportunity to express their opinions on the matter of
auditors and, accordingly, is submitting to the stockholders at the Annual
Meeting a proposal to ratify the Board of Directors' appointment of Ernst &
Young LLP. If a majority of the shares voted at the Annual Meeting, in person
or by proxy, are not voted in favor of the ratification of the appointment of
Ernst & Young LLP, the Board of Directors will interpret this as an
instruction to seek other auditors. In addition to audit services, Ernst &
Young LLP also provided certain non-audit services to Nanophase Technologies
Corporation in relation to the 2000 fiscal year. The Audit and Finance
Committee has considered whether the provision of these additional services is
compatible with maintaining the independence of Ernst & Young LLP. The
following table sets forth fees incurred by Nanophase Technologies Corporation
for the services of Ernst & Young LLP in relation to the 2000 fiscal year.

<TABLE>
<CAPTION>
             Audit
             Fees     All Other Fees
             -----    --------------
             <S>      <C>
             $46,000     $11,800*
</TABLE>
--------
   * Consists primarily of fees in connection with tax and compliance matters.

   It is expected that representatives of Ernst & Young will be present at the
meeting and will be available to respond to questions. They will be given an
opportunity to make a statement if they desire to do so.

   THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
AUDITORS OF THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
2001.

                        MISCELLANEOUS AND OTHER MATTERS

   Solicitation--The cost of this proxy solicitation will be borne by the
Company. The Company may request banks, brokers, fiduciaries, custodians,
nominees and certain other record holders to send proxies, proxy statements
and other materials to their principals at the Company's expense. Such banks,
brokers, fiduciaries, custodians, nominees and other record holders will be
reimbursed by the Company for their reasonable out-of-pocket expenses of
solicitation. The Company does not anticipate that costs and expenses incurred
in connection with this proxy solicitation will exceed an amount normally
expended for a proxy solicitation for an election of directors in the absence
of a contest.

   Proposals of Stockholders--Proposals of stockholders (1) intended to be
considered at the Company's 2002 Annual Meeting of Stockholders (the "2002
Annual Meeting") and (2) to be considered for inclusion in the Company's proxy
statement and proxy for the 2002 Annual Meeting, must be received by the
Secretary of the Company on or before January 4, 2002.

   Other Business--The Board of Directors is not aware of any other matters to
be presented at the Annual Meeting other than those mentioned in this Proxy
Statement and the Company's Notice of Annual Meeting of Stockholders enclosed
herewith. If any other matters are properly brought before the Annual Meeting,
however, it is intended that the persons named in the proxies will vote such
proxies as the Board of Directors directs.

   Section 16(a) Beneficial Ownership Reporting Compliance--Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the
Company's officers (as defined under Section 16), directors and persons who
beneficially own greater than 10% of a registered class of the Company's
equity

                                      20
<PAGE>

securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely on a review of the forms it
has received and on written representations from certain reporting persons
that no such forms were required for them, the Company believes that during
2000 all Section 16 filing requirements applicable to its officers, directors
and 10% beneficial owners were complied with by such persons, except that Mr.
McClung inadvertently filed his Form 3 (Initial Statement of Beneficial
Ownership) late.

   Additional Information--The Company will furnish without charge a copy of
its Annual Report on Form 10-K for its year ended December 31, 2000, as filed
with the Commission, upon the written request of any person who is a
stockholder as of the Record Date, and will provide copies of the exhibits to
such Form 10-K upon payment of a reasonable fee which shall not exceed the
Company's reasonable expenses in connection therewith. Requests for such
materials should be directed to Nanophase Technologies Corporation, 1319
Marquette Drive, Romeoville, Illinois 60446, Attention: Nancy Baldwin, Manager
of Investor Relations

                                          By order of the Board of Directors

                                          /s/ Jess Jankowski
                                          -------------------------------------
                                          JESS JANKOWSKI,
                                          Secretary

Romeoville, Illinois
May 4, 2001

                  ALL STOCKHOLDERS ARE REQUESTED TO COMPLETE,
              DATE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY.

                                      21
<PAGE>

                                                                      EXHIBIT A

                      NANOPHASE TECHNOLOGIES CORPORATION

                      AUDIT AND FINANCE COMMITTEE CHARTER

Composition

   There shall be a committee of the board of directors (the "Board") to be
known as the audit and finance committee which shall have at least three (3)
members, comprised solely of independent directors, as such term is defined in
Rule 4200(a)(14) of the National Association of Securities Dealers' ("NASD")
listing standards, subject to the exception in Rule 4310(c)(26)(B)(ii) of the
NASD listing standards.

   Each member of the audit and finance committee shall be able to read and
understand fundamental financial statements, including the company's balance
sheet, income statement and cash flow statement or will become able to do so
within a reasonable period of time after his or her appointment to the audit
and finance committee. In addition, at least one member of the audit and
finance committee shall have past employment experience in finance or
accounting, requisite professional certification in accounting or any other
comparable experience or background which results in the individual's
financial sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with financial
oversight responsibilities.

   The Board shall elect or appoint a chair of the audit and finance committee
who will have authority to act on behalf of the audit and finance committee
between meetings.

Responsibilities

   The responsibilities of the audit and finance committee are as follows:

  . Ensure its receipt from the outside auditor of a formal written
    statement, delineating all relationships between the outside auditor and
    the company consistent with the Independence Standards Board Standard No.
    1.

  . Actively engage in a dialogue with the outside auditor with respect to
    any disclosed relationships or services that may impact the objectivity
    and independence of the outside auditor and be responsible for taking, or
    recommending that the board of directors take, appropriate action to
    oversee the independence of the outside auditor.

  . In view of the outside auditor's ultimate accountability to the Board and
    the audit and finance committee, as representatives of the shareholders,
    the audit and finance committee, acting together with the Board, has the
    ultimate authority and responsibility to select, evaluate, and, where
    appropriate, replace the outside auditor (or nominate an outside auditor
    for shareholder approval in any proxy statement).

  . Review with the outside auditor and financial and accounting personnel,
    the adequacy and effectiveness of the accounting and financial controls
    of the company, and elicit any recommendations for the improvement of
    such internal control procedures or particular areas where new or more
    detailed controls or procedures are desirable.

  . Consider, in consultation with the outside auditor and management of the
    company, the audit scope and procedures.

  . Review the financial statements contained in the annual report to
    shareholders with management and the outside auditor.

  . Where such prior review is practicable, review (either as an entire
    committee or the chairman of the audit and finance committee alone) the
    financial statements contained in the quarterly report to shareholders
    with management and the outside auditor.

  . Meet with the outside auditor or management privately to discuss any
    matters that the audit and finance committee, the outside auditor or the
    management believe should be discussed privately with the audit and
    finance committee, which discussions may include the matters set forth in
    Statement of Auditing Standards No. 61.

                                      A-1
<PAGE>

  . Review and assess with the Company's counsel, any legal matters that
    could have a significant impact on the organization's financial
    statements, the Company's compliance with applicable laws and
    regulations, and material inquiries received from regulators or
    governmental agencies.

  . Review and reassess the adequacy of the committee's charter annually.

  . Make such other recommendations to the Board on such matters, within the
    scope of its functions, as may come to its attention and which in its
    discretion warrant consideration by the Board.

Limitations

   The audit and finance committee is responsible for the duties set forth in
this charter but is not responsible for either the preparation of the
financial statements or the auditing of the financial statements. Management
has the responsibility for preparing the financial statements and implementing
internal controls and the independent accountants have the responsibility for
auditing the financial statements and monitoring the effectiveness of the
internal controls. The review of the financial statements by the audit and
finance committee is not of the same quality as the audit performed by the
independent accountants. In carrying out its responsibilities, the audit and
finance committee believes its policies and procedures should remain flexible
in order to best react to a changing environment.

                                      A-2
<PAGE>

                                                                      EXHIBIT B

                      NANOPHASE TECHNOLOGIES CORPORATION

                           EQUITY COMPENSATION PLAN

   The purpose of the Nanophase Technologies Corporation Equity Compensation
Plan (the "Plan") is to provide (i) designated employees of Nanophase
Technologies Corporation (the "Company") and its subsidiaries, (ii) certain
advisors who perform services for the Company or its subsidiaries and (iii)
non-employee members of the Board of Directors of the Company (the "Board")
with the opportunity to receive grants of incentive stock options,
nonqualified options, share appreciation rights, dividend equivalent rights
and cash awards. The Company believes that the Plan will encourage the
participants to contribute materially to the growth of the Company, thereby
benefiting the Company's shareholders, and will align the economic interests
of the participants with those of the shareholders.

                                   ARTICLE I

                          ADMINISTRATION OF THE PLAN

   Section 1.1 Administration.

   (a) Committee. The Plan shall be administered and interpreted by a
committee appointed by the Board (the "Committee"). The Committee shall
consist of three or more persons appointed by the Board, all of whom shall be
"outside directors" as defined under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), and related Treasury regulations and
shall be "non-employee directors" as defined under Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

   (b) Committee Authority. The Committee shall have the sole authority to (i)
determine the individuals to whom grants shall be made under the Plan, (ii)
determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability, and (iv)
make all determinations with respect to any other matters arising under the
Plan. The Committee may delegate the authority to make grants in the ordinary
course during the periods between regularly scheduled meetings of the
Committee; provided, however, grants in excess of 5,000 shares or grants with
non-standard terms shall be made subject to Committee approval.

   (c) Committee Determinations. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual
determinations, and to adopt or amend such rules, regulations, agreements and
instruments for implementing the Plan and for the conduct of its business as
it deems necessary or advisable, in its sole discretion. The Committee's
interpretations of the Plan and all determinations made by the Committee
pursuant to the powers vested in it hereunder shall be conclusive and binding
on all persons having any interest in the Plan or in any awards granted
hereunder. All powers of the Committee shall be executed in its sole
discretion, in the best interest of the Company, not as a fiduciary, and in
keeping with the objectives of the Plan. Determinations made by the Committee
under the Plan need not be uniform as to similarly situated individuals.

   Section 1.2 Grants. Awards under the Plan may consist of grants of (i)
incentive stock options as described in Section 2.1 ("Incentive Stock
Options"), (ii) nonqualified options as described in Section 2.1
("Nonqualified Options") (Incentive Stock Options and Nonqualified Options are
collectively referred to as "Options"), (iii) stock appreciation rights as
described in Section 2.2 ("SARs"), (iv) dividend equivalent rights as
described in Section 2.3 ("Dividend Equivalent Rights") and (v) cash awards as
described in Section 2.4 ("Cash Awards") (hereinafter collectively referred to
as "Grants"). All Grants shall be subject to the terms and conditions set
forth herein and to such other terms and conditions consistent with the Plan
as the Committee deems appropriate and as are specified in writing by the
Committee to the individual in a grant instrument (the

                                      B-1
<PAGE>

"Grant Instrument") or an amendment to the Grant Instrument. The Committee
shall approve the form and provisions of each Grant Instrument. Grants under a
particular Section of the Plan need not be uniform as among the grant
recipients (the "Grantees").

   Section 1.3 Shares Subject to the Plan.

   (a) Shares Authorized. For purposes of the Plan, a "Share" means one share
of common stock of the Company, par value $0.01 per share. Subject to
adjustments as provided in Section 1.3(b) below, the aggregate number of
Shares available for Grants under the Plan shall be 900,000 Shares.

   Subject to adjustments as provided in Section 1.3(b) below, the maximum
aggregate number of Shares that shall be subject to Grants made under the Plan
during any calendar year shall be 400,000 Shares.

   The maximum aggregate number of Shares that shall be subject to Grants made
under the Plan to any individual during any calendar year shall be equal to
one percent (1.0%) of the sum of the total amount of the Company's outstanding
Shares on December 31 of the prior year plus the total number of outstanding
options to purchase Shares granted under the Plan and under the Prior Plan
outstanding on December 31 of the prior year.

   The Shares may be authorized but unissued Shares or reacquired Shares,
including Shares purchased by the Company on the open market for purposes of
the Plan. If and to the extent Options or SARs granted under the Plan
terminate, expire, or are canceled, forfeited, exchanged or surrendered
without having been exercised, or if any Dividend Equivalent Rights are
forfeited, the Shares subject to such Grants shall again be available for
purposes of the Plan.

   (b) Adjustments for Significant Events. If there is any change in the
number or kind of outstanding Shares (i) by reason of a dividend, spin-off,
recapitalization, split or combination or exchange of Shares, (ii) by reason
of a merger, reorganization or consolidation in which the Company is the
surviving corporation, (iii) by reason of a reclassification or change in par
value, or (iv) by reason of any other extraordinary or unusual event affecting
the outstanding Shares of the Company as a class without the Company's receipt
of consideration, or if the value of outstanding Shares is substantially
reduced as a result of a spin-off or the Company's payment of an extraordinary
dividend or distribution, the maximum number of Shares available for Grants,
the maximum number of Shares that any individual participating in the Plan may
be granted in any year, the number of Shares covered by outstanding Grants,
the kind of Shares issued under the Plan, and the price per Share or the
applicable market value of such Grants may be appropriately adjusted by the
Committee to reflect any increase or decrease in the number of, or change in
the kind or value of, issued Shares to preclude, to the extent practicable,
the enlargement or dilution of rights and benefits under such Grants;
provided, however, that any fractional Shares resulting from such adjustment
shall be eliminated. Any adjustments determined by the Committee shall be
final, binding and conclusive.

   Section 1.4 Eligibility for Participation.

   (a) Eligible Persons. All employees of the Company, its parents and its
subsidiaries ("Employees"), including Employees who are officers or members of
the Board, and members of the Board who are not Employees ("Non-Employee
Directors") shall be eligible to participate in the Plan. Advisors who perform
services to the Company or any of its parents or its subsidiaries ("Key
Advisors") shall be eligible to participate in the Plan if the Key Advisors
render bona fide services and such services are not in connection with the
offer or sale of securities in a capital-raising transaction.

   (b) Selection of Grantees. The Committee shall select the Employees, Non-
Employee Directors and Key Advisors to receive Grants and shall determine the
number of Shares subject to a particular Grant in such manner as the Committee
determines.

   Section 1.5 Limitation on Grants Prior to January 1, 2002. Notwithstanding
anything in the Plan to the contrary, the Committee shall not make any Grants
to Employees or Key Advisors prior to January 1, 2002.

                                      B-2
<PAGE>

                                  ARTICLE II

                            EQUITY INCENTIVE GRANTS

   Section 2.1 Options.

   (a) Number of Shares. The Committee shall determine the number of Shares
that will be subject to each Grant of Options to Employees, Non-Employee
Directors and Key Advisors.

   (b) Type of Option and Price.

     (i) The Committee may grant Incentive Stock Options that are intended to
  qualify as "incentive stock options" within the meaning of Section 422 of
  the Code or Nonqualified Options that are not intended so to qualify or any
  combination of Incentive Stock Options and Nonqualified Options, all in
  accordance with the terms and conditions set forth herein. Incentive Stock
  Options may be granted only to Employees. Nonqualified Options may be
  granted to Employees, Non-Employee Directors and Key Advisors.

     (ii) The purchase price (the "Exercise Price") of Shares subject to an
  Option shall be determined by the Committee and may be equal to, or greater
  than, the Fair Market Value (as defined below) of a Share on the date the
  Option is granted; provided, however, that (x) the Exercise Price of an
  Incentive Stock Option shall be equal to, or greater than, the Fair Market
  Value of a Share on the date the Incentive Stock Option is granted and (y)
  an Incentive Stock Option may not be granted to an Employee who, at the
  time of grant, owns Shares possessing more than 10 percent of the total
  combined voting power of all Shares and other classes of stock of the
  Company or any parent or subsidiary of the Company, unless the Exercise
  Price per Share is not less than 110% of the Fair Market Value of a Share
  on the date of grant.

     (iii) If the Shares are publicly traded, then the Fair Market Value per
  Share shall be determined as follows: (x) if the principal trading market
  for the Shares is a national securities exchange or the Nasdaq National
  Market, the last reported sale price thereof on the preceding date or, if
  there were no trades on that date, the latest preceding date upon which a
  sale was reported, or (y) if the Shares are not principally traded on such
  exchange or market, the mean between the last reported "bid" and "asked"
  prices of a Share on the preceding date, as reported on Nasdaq or, if not
  so reported, as reported by the National Daily Quotation Bureau, Inc. or as
  reported in a customary financial reporting service, as applicable and as
  the Committee determines. If the Shares are not publicly traded or, if
  publicly traded, are not subject to reported transactions or "bid" or
  "asked" quotations as set forth above, the Fair Market Value per Share
  shall be as determined in good faith by the Committee; provided that, if
  the Shares are publicly traded, the Committee may make such discretionary
  determinations where the Shares have not been traded for 10 trading days.

   (c) Option Term. The Committee shall determine the term of each Option. The
term of any Option shall not exceed ten years from the date of grant. However,
an Incentive Stock Option that is granted to an Employee who, at the time of
grant, owns Shares possessing more than 10 percent of the total combined
voting power of all Shares and other classes of stock of the Company, or any
parent or subsidiary of the Company, may not have a term that exceeds five
years from the date of grant.

   (d) Vesting and Exercisability of Options.

     (i) Vesting. Options shall vest in accordance with such terms and
  conditions as may be determined by the Committee and specified in the Grant
  Instrument or an amendment to the Grant Instrument. The Committee may
  accelerate the vesting of any or all outstanding Options at any time for
  any reason.

     (ii) Exercisability. Notwithstanding the foregoing, the Option may, but
  need not, include a provision whereby the Grantee may elect at any time
  while an Employee, Non-Employee Director or Key Advisor to exercise the
  Option as to any part or all of the Shares subject to the Option prior to
  the full vesting of the Option. Any unvested Shares so purchased shall be
  subject to a repurchase right in favor of the Company, with the repurchase
  price to be equal to the lesser of (x) the original purchase price or (y)
  the Fair Market Value of the Shares on the date of such repurchase, or to
  any other restriction the Committee determines to be appropriate.

                                      B-3
<PAGE>

   (e) Termination of Employment, Disability or Death.

     (i) Except as provided below and subject to the provisions of the Grant
  Instrument, an Option may only be exercised while the Grantee is an
  Employee, Key Advisor or member of the Board. In the event that a Grantee
  has a Termination of Service (as defined below) for any reason other than
  Disability (as defined below), death or Cause (as defined below), any
  Option which is otherwise exercisable by the Grantee shall terminate unless
  exercised within 90 days after the date of such termination (or within such
  other period of time as may be specified by the Committee), but in any
  event no later than the date of expiration of the Option term. Any of the
  Grantee's Options that are not otherwise exercisable as of the date on
  which the Grantee has such a Termination of Service shall terminate as of
  such date.

     (ii) In the event the Grantee has a Termination of Service on account of
  a termination for Cause by the Company, unless otherwise determined by the
  Committee (x) any Option held by the Grantee shall terminate as of the date
  of such Termination of Service and (y) the Grantee shall automatically
  forfeit all Shares underlying any exercised portion of an Option for which
  the Company has not yet delivered the certificates, upon refund by the
  Company of the Exercise Price paid by the Grantee for such Shares.

     (iii) In the event the Grantee has a Termination of Service on account
  of Disability, any Option which is otherwise exercisable by the Grantee
  shall terminate unless exercised within one year after the date of such
  Termination of Service (or within such other period of time as may be
  specified by the Committee), but in any event no later than the date of
  expiration of the Option term. Unless provided otherwise in the applicable
  Grant Instrument, any of the Grantee's Options which are not otherwise
  exercisable as of the date of such Termination of Service shall terminate
  as of such date.

     (iv) If the Grantee dies while an Employee, Key Advisor or member of the
  Board or within 90 days after the date on which the Grantee has a
  Termination of Service specified in Section 2.1(e)(i) above (or within such
  other period of time as may be specified by the Committee), any Option that
  is otherwise exercisable by the Grantee shall terminate unless exercised
  within one year after the date of such death or Termination of Service (or
  within such other period of time as may be specified by the Committee), but
  in any event no later than the date of expiration of the Option term.
  Unless provided otherwise in the applicable Grant Instrument, any of the
  Grantee's Options that are not otherwise exercisable as of the date shall
  terminate as of such date.

     (v) For purposes of the Plan:

       (A) "Cause" shall mean, except to the extent specified otherwise by
    the Committee, a finding by the Committee that (1) the Grantee has
    breached his or her employment, service, noncompetition,
    nonsolicitation or other similar contract with the Company or its
    parent and subsidiary corporations, (2) has been engaged in disloyalty
    to the Company or its parent and subsidiary corporations, including,
    without limitation, fraud, embezzlement, theft, commission of a felony
    or dishonesty in the course of his or her employment or service, (3)
    has disclosed trade secrets or confidential information of the Company
    or its parents and subsidiary corporations to persons not entitled to
    receive such information or (4) has entered into competition with the
    Company or its parent or Subsidiary Corporations. Notwithstanding the
    foregoing, if the Grantee has an employment agreement with the Company
    defining "Cause," then such definition shall supersede the foregoing
    definition.

       (B) "Disability" shall mean a Grantee's becoming disabled within the
    meaning of Section 22(e)(3) of the Code. Notwithstanding the foregoing,
    if the Grantee has an employment agreement with the Company defining
    "Disability," then such definition shall supersede the foregoing
    definition.

       (C) "Termination of Service" shall mean a Grantee's termination of
    employment or service as an Employee, Key Advisor or member of the
    Board (so that, for purposes of the Plan, cessation of service as an
    Employee, Key Advisor and member of the Board shall not be treated as a
    Termination of Service if the Grantee continues without interruption to
    serve thereafter in another one (or more) of such other capacities)
    unless the Committee determines other wise.

                                      B-4
<PAGE>

   (f) Exercise of Options. A Grantee may exercise an Option that has become
exercisable, in whole or in part, by delivering a notice of exercise to the
Company with payment of the Exercise Price. The Grantee shall pay the Exercise
Price for an Option as specified by the Committee (x) in cash, (y) by
delivering Shares owned by the Grantee for the period necessary to avoid a
charge to the Company's earnings for financial reporting purposes and to avoid
adverse accounting consequences to the Company (including Shares acquired in
connection with the exercise of an Option, subject to such restrictions as the
Committee deems appropriate) and having a Fair Market Value on the date of
exercise equal to the Exercise Price, or (z) by such other method as the
Committee may approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board; provided,
that, for purposes of assisting a Grantee to exercise an Option, the Company
may make loans to the Grantee or guarantee loans made by third parties to the
Grantee, on such terms and conditions as the Committee may authorize. The
Grantee shall pay the Exercise Price at the time of exercise and shall satisfy
the withholding tax requirements of Section 3.1.

   (g) Limits on Incentive Stock Options. Each Incentive Stock Option shall
provide that, if the aggregate Fair Market Value of the Shares on the date of
the grant with respect to which Incentive Stock Options are exercisable for
the first time by a Grantee during any calendar year, under the Plan and any
other equity compensation plan of the Company or a parent or subsidiary,
exceeds $100,000, then the option, as to the excess, shall be treated as a
Nonqualified Option. No Incentive Stock Option shall be granted to any person
who is not an Employee of the Company or a parent or subsidiary of the Company
(within the meaning of Section 424(f) of the Code).

   Section 2.2 Stock Appreciation Rights.

   (a) General Requirements. The Committee may grant SARs to an Employee, Non-
Employee Director or Key Advisor separately from or in tandem with any Option
(for all or a portion of the applicable Option). Tandem SARs may be granted
either at the time the Option is granted or at any time thereafter while the
Option remains outstanding; provided, however, that, in the case of an
Incentive Stock Option, SARs may be granted only at the time of the grant of
the Incentive Stock Option. The Committee shall establish the base amount of
the SAR at the time the SAR is granted. Unless the Committee determines
otherwise, the base amount of each SAR shall be equal to the per Share
Exercise Price of the related Option or, if there is no related Option, the
Fair Market Value of a Share as of the date of grant of the SAR.

   (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to
a Grantee that shall be exercisable during a specified period shall not exceed
the number of Shares that the Grantee may purchase upon the exercise of the
related Option during such period. Upon the exercise of an Option, the SARs
relating to the Shares covered by such Option shall terminate. Upon the
exercise of SARs, the related Option shall terminate to the extent of an equal
number of Shares.

   (c) Exercisability. A SAR shall be exercisable during the period specified
by the Committee in the Grant Instrument and shall be subject to such vesting
and other restrictions as may be specified in the Grant Instrument. The
Committee may accelerate the exercisability of any or all outstanding SARs at
any time for any reason. SARs may only be exercised while the Grantee is as an
Employee, Key Advisor or member of the Board or during the applicable period
after Termination of Service as described in Section 2.1(e). A tandem SAR
shall be exercisable only during the period when the Option to which it is
related is also exercisable. No SAR may be exercised for cash by an executive
officer or director of the Company or any of its subsidiaries who is subject
to Section 16 of the Exchange Act, except in accordance with Rule 16b-3 under
the Exchange Act.

   (d) Value of SARs. When a Grantee exercises an SAR, the Grantee shall
receive in settlement of such SAR an amount, payable in cash, Shares or a
combination thereof equal to the amount by which the Fair Market Value of a
Share on the date of exercise of the SAR exceeds the base amount of the SAR as
described in Section 2.2(a).

   (e) Form of Payment. The Committee shall determine whether the appreciation
in an SAR shall be paid in the form of cash, Shares, or a combination of the
two, in such proportion as the Committee deems appropriate.

                                      B-5
<PAGE>

For purposes of calculating the number of Shares to be received, Shares shall
be valued at their Fair Market Value on the date of exercise of the SAR. If
Shares are to be received upon exercise of a SAR, cash shall be delivered in
lieu of any fractional Share.

   Section 2.3 Dividend Equivalent Rights.

   (a) General Requirements. The Committee may grant Dividend Equivalent
Rights to Employees, Non-Employee Directors and Key Advisors. Each Dividend
Equivalent Right shall represent the right to receive, either credits for or
payments of, amounts based on the dividends declared on Shares, to be credited
or paid as of the dividend payment dates, during the term of the Dividend
Equivalent Right as determined by the Committee. With respect to Dividend
Equivalent Rights granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section 162(m) of the Code,
such Dividend Equivalent Rights shall be payable regardless of whether such
Option is exercised.

   (b) Certain Terms. Unless otherwise determined by the Committee, a Dividend
Equivalent Right is exercisable or payable only while the Grantee is an
Employee, member of the Board or Key Advisor. Payment of the amount determined
in accordance with Section 2.3(a) shall be in cash, in Shares or a combination
of the two, as determined by the Committee. The Committee may impose such
other terms conditions on the grant of a Dividend Equivalent Right as it deems
appropriate in its discretion as reflected by the terms of the Grant
Instrument.

   (c) Dividend Equivalent Right with Other Grants. The Committee may
establish a program under which Dividend Equivalent Rights may be granted in
conjunction with other Grants. For example, and without limitation, the
Committee may grant a Dividend Equivalent Right in respect of each Share
subject to an Option which right would consist of the right to receive a cash
payment in an amount equal to the dividend distributions paid on a Share from
time to time.

   (d) Deferral. The Committee may establish a program under which the
payments with respect to Dividend Equivalent Rights may be deferred. Such
program may include, without limitation, provisions for the crediting of
earnings and losses on unpaid amounts, and, if permitted by the Committee,
provisions under which Grantees may select from among hypothetical investment
alternatives for such deferred amounts in accordance with procedures
established by the Committee.

   Section 2.4 Cash Awards. The Committee may grant Cash Awards to Employees,
Non-Employee Directors and Key Advisors. The cash payment due upon settlement
of a Cash Award shall be based on the attainment of performance goals and
shall be subject to such other conditions, restrictions and contingencies as
the Committee shall determine as reflected by the terms of the Grant
Instrument. If Cash Awards are granted pursuant to this Section 2.4, the
maximum amount that may be paid to an Employee, Non-Employee Director or Key
Advisor under such Cash Awards during any calendar year shall not exceed the
amounts allowable under applicable law.

   Section 2.5 Qualified Performance-Based Compensation.

   (a) Designation as Qualified Performance-Based Compensation. The Committee
may determine that Cash Awards granted to an Employee shall be considered
"qualified performance-based compensation" under Section 162(m) of the Code.
The provisions of this Section 2.5 shall apply to Grants of Cash Awards that
are intended to be "qualified performance-based compensation" under Section
162(m) of the Code.

   (b) Performance Period and Performance Goals. When Cash Awards are granted
as "qualified performance-based compensation," the Committee shall establish
the performance period during which performance shall be measured (the
"Performance Period"), performance goals applicable to such Cash
Award("Performance Goals"), if any, and such other conditions of the Grant as
the Committee deems appropriate. Performance Goals may relate to the financial
performance of the Company or its operating units, the performance of Shares,
individual performance, or such other criteria as the Committee deems
appropriate.

                                      B-6
<PAGE>

   (c) Performance Goals. When Cash Awards that are intended to be "qualified
performance-based compensation" are granted, the Committee shall establish in
writing (i) the objective performance goals that must be met in order for
amounts to be paid under the Cash Awards, (ii) the Performance Period during
which the performance goals must be met, (iii) the threshold, target and
maximum amounts that may be paid if the performance goals are met, and (iv)
any other conditions, including without limitation provisions relating to
death, Disability, other Termination of Service or Reorganization, that the
Committee deems appropriate and consistent with the Plan and Section 162(m) of
the Code and the Treasury regulations thereunder. The performance goals may
relate to the Employee's individual performance or the performance of the
Company and its subsidiaries as a whole, or any combination of the foregoing.
The Committee shall use objectively determinable performance goals based on
one or more of the following criteria: Share price, earnings per Share, net
earnings, operating earnings, return on assets, shareholder return, return on
equity, growth in assets, share volume, sales, market share, or strategic
business criteria consisting of one or more objectives based on meeting
specific revenue goals, market penetration goals, geographic business
expansion goals, cost targets or goals relating to acquisitions or
divestitures.

   (d) Establishment of Goals. The Committee shall establish the performance
goals in accordance with Section 2.5(b) in writing either before the beginning
of the Performance Period or during a period ending no later than the earlier
of (i) 90 days after the beginning of the Performance Period or (ii) the date
on which 25% of the Performance Period has been completed, or such other date
as may be required or permitted under applicable regulations under Section
162(m) of the Code. The Performance Goals shall satisfy the requirements for
"qualified performance-based compensation," including the requirement that the
achievement of the goals be substantially uncertain at the time they are
established and that the goals be established in such a way that a third party
with knowledge of the relevant facts could determine whether and to what
extent the performance goals had been met. The Committee shall not have
discretion to increase the amount of compensation that is payable upon
achievement of the designated performance goals.

   (e) Performance Certification. The Committee shall certify and announce the
results for each Performance Period to all Grantees immediately following the
announcement of the Company's financial results for the Performance Period. If
and to the extent that the Committee does not certify that the performance
goals have been met, the grants of Cash Awards made pursuant to this Section
2.5 for the Performance Period shall be forfeited.

                                  ARTICLE III

                                GENERAL MATTERS

   Section 3.1 Withholding of Taxes. The Company shall be entitled to withhold
from any payments or deemed payments any amount of tax withholding (including
all federal, state and local taxes) determined by the Committee to be required
by law. Without limiting the generality of the foregoing, the Committee may,
in its discretion, require the Grantee to pay to the Company at such time as
the Committee determines the amount that the Committee deems necessary to
satisfy the Company's obligation to withhold federal, state or local income or
other taxes incurred by reason of (i) the exercise of any Option or SAR, (ii)
the receipt of a payment in respect of Dividend Equivalent Rights or Cash
Awards or (iii) any other applicable income recognition event (for example, an
election under Section 83(b) of the Code). Notwithstanding anything contained
in the Plan to the contrary, the Grantee's satisfaction of any tax-withholding
requirements imposed by the Committee shall be a condition precedent to the
Company's obligation as may otherwise be provided hereunder to provide Shares
to the Grantee and to the release of any restrictions as may otherwise be
provided hereunder, as applicable; and the applicable options, SARs or
Dividend Equivalent Rights shall be forfeited upon the failure of the Grantee
to satisfy such requirements with respect to, as applicable, (i) the exercise
of the option or SARor (ii) payments in respect of any Dividend Equivalent
Right.

                                      B-7
<PAGE>

   Section 3.2 Transferability of Grants.

   (a) In General. Except as provided in Section 3.2(b), only the Grantee may
exercise rights under a Grant during the Grantee's lifetime. A Grantee may not
transfer those rights except by will or by the laws of descent and
distribution. When a Grantee dies, the personal representative or other person
entitled to succeed to the rights of the Grantee ("Successor Grantee") may
exercise such rights in accordance with the terms of the Plan. A Successor
Grantee must furnish proof satisfactory to the Company of his or her right to
receive the Grant under the Grantee's will or under the applicable laws of
descent and distribution.

   (b) Transfer of Nonqualified Options. Notwithstanding the foregoing, the
Committee may provide in a Grant Instrument that a Grantee may transfer
Nonqualified Options to family members or other persons or entities according
to such terms as the Committee may determine where the Committee determines
that such transferability does not result in accelerated federal income
taxation; provided that the Grantee receives no consideration for the transfer
of an Option and the transferred Option shall continue to be subject to the
same terms and conditions as were applicable to the Option immediately before
the transfer.

   Section 3.3 Reorganization or Change in Control of the Company.

   (a) Definitions.

     (i) As used herein, a "Reorganization" shall be deemed to have occurred
  if the shareholders of the Company approve (or, if shareholder approval is
  not required, the Board approves) an agreement providing for (i) the merger
  or consolidation of the Company with another corporation where the
  shareholders of the Company, immediately prior to the merger or
  consolidation, will not beneficially own, immediately after the merger or
  consolidation, Shares entitling such shareholders to more than 50% of all
  votes to which all shareholders of the surviving corporation would be
  entitled in the election of directors (without consideration of the rights
  of any class of stock to elect directors by a separate class vote), (ii)
  the sale or other disposition of all or substantially all of the assets of
  the Company, or (iii) a liquidation or dissolution of the Company.

     (ii) As used herein, a "Change of Control" shall be deemed to have
  occurred if any "person" (as such term is used in Sections 13(d) and 14(d)
  of the Exchange Act) or any of its subsidiaries or affiliates becomes a
  "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
  directly or indirectly, of securities of the Company representing a
  majority of the voting power of the then outstanding securities of the
  Company except where the acquisition is approved by the Board.

   (b) Assumption of Grants. Upon a Reorganization where the Company is not
the surviving corporation (or survives only as a subsidiary of another
corporation), all outstanding Options and SARs that are not exercised shall be
assumed by, or replaced with comparable options or rights by, the surviving
corporation.

   (c) Notice and Acceleration. Upon a Reorganization or a Change of Control,
(i) the Company shall provide each Grantee with outstanding Grants written
notice of such event and (ii) all outstanding Options and SARs shall
automatically accelerate and become fully exercisable.

   Section 3.4 Requirements for Issuance or Transfer of Shares.

   (a) Shareholder's Agreement. The Committee may require that a Grantee
execute a shareholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Shares distributed pursuant to the Plan.

   (b) Limitations on Issuance or Transfer of Shares. No Shares shall be
issued or transferred in connection with any Grant hereunder unless and until
all legal requirements applicable to the issuance or transfer of such Shares
have been complied with to the satisfaction of the Committee. The Committee
shall have the right to condition any Grant made to any Grantee hereunder on
such Grantee's undertaking in writing to comply with

                                      B-8
<PAGE>

such restrictions on his or her subsequent disposition of such Shares as the
Committee shall deem necessary or advisable as a result of any applicable law,
regulation or official interpretation thereof, and certificates representing
such Shares may be legended to reflect any such restrictions. Certificates
representing Shares issued or transferred under the Plan will be subject to
such stop-transfer orders, registration and other restrictions as may be
required by applicable laws, regulations and interpretations, including any
requirement that a legend be placed thereon.

   Section 3.5 Amendment and Termination of the Plan.

   (a) Amendment. The Board may amend or terminate the Plan at any time;
provided that the Board may not make any amendment to the Plan without the
approval of the shareholders, if such shareholder approval is required by any
requirement of applicable law or regulation.

   (b) Termination of Plan. The Plan shall terminate on the day immediately
preceding the tenth anniversary of the Effective Date (as defined below),
unless the Plan is terminated earlier by the Board or is extended by the Board
with the approval of the shareholders.

   (c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
amendment is required in order to comply with applicable law. The termination
of the Plan shall not impair the power and authority of the Committee with
respect to an outstanding Grant. Whether or not the Plan has terminated, an
outstanding Grant may be terminated or amended in accordance with the Plan or
may be amended by agreement of the Company and the Grantee consistent with the
Plan.

   (d) Governing Document. The Plan shall be the controlling document. No
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.

   Section 3.6 Miscellaneous.

   (a) Programs. The Committee may adopt one or more programs not inconsistent
with this Plan pursuant to which Grants may be made under this Plan. Such
programs shall be deemed merely programs of implementation of this Plan and
shall not be deemed new plans.

   (b) Funding of the Plan. The Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Grants under the Plan.
Except as provided in Section 2.3(d) above, in no event shall interest be paid
or accrued on any Grant, including unpaid installments of Grants.

   (c) Rights of Participants. Nothing in the Plan shall entitle any Employee,
Non-Employee Director, Key Advisor or other person to any claim or right to be
granted a Grant under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any individual any rights to be
retained by or in the employ of the Company or any other employment rights.

   (d) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional Shares or whether such fractional Shares or any rights thereto
shall be forfeited or otherwise eliminated.

   (e) Section Headings. Section headings are for reference only. In the event
of a conflict between a title and the content of a Section, the content of the
Section shall control.

   (f) Effective Date of the Plan. Provided the Plan has been approved by the
Company's Board of Directors, the Plan shall be effective on the first
business day immediately following the Plan's approval by the Shareholders of
the Company (the "Effective Date").

                                      B-9
<PAGE>

   (g) Reporting Company. The provisions of the Plan that refer to the Company
becoming a Reporting Company, or that refer to, or are applicable to persons
subject to, Section 16 of the Exchange Act or Section 162(m) of the Code,
shall be effective, if at all, upon the initial registration of the Shares
under Section 12(g) of the Exchange Act, and shall remain effective thereafter
for so long as such Shares are so registered.

   (h) Grants in Connection with Corporate Transactions and Otherwise. Nothing
contained in the Plan shall be construed to (i) limit the right of the
Committee to make Grants under the Plan in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including Grants to employees thereof
who become Employees or for other proper corporate purposes, or (ii) limit the
right of the Company to grant stock options or make other awards outside of
the Plan. Without limiting the foregoing, the Committee may make a Grant to an
employee of another corporation who becomes an Employee by reason of a
corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option grant made to such employee by such
corporation. The terms and conditions of the substitute grants may vary from
the terms and conditions required by the Plan and from those of the
substituted stock incentives. The Committee shall prescribe the provisions of
the substitute grants.

   (i) Compliance with Law. The Plan, the exercise of Options and SARs and the
obligations of the Company to issue or transfer Shares under Grants shall be
subject to all applicable laws and to approvals by any governmental or
regulatory agency as may be required. With respect to persons subject to
Section 16 of the Exchange Act, it is the intent of the Company that the Plan
and all transactions under the Plan comply with all applicable provisions of
Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke
any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Committee
may, in its sole discretion, agree to limit its authority under this Section.

   (j) Successors. All obligations of the Company under the Plan with respect
to awards granted hereunder shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or substantially all of
the business or assets of the Company.

   (k) Governing Law. The validity, construction, interpretation and effect of
the Plan and Grant Instruments issued under the Plan shall exclusively be
governed by and determined in accordance with the law of the State of
Delaware.

   (l) Transition Provisions Relating to the Prior Plan. Upon the
effectiveness of the Plan, the Company's Amended and Restated 1992 Stock
Option Plan (the "Prior Plan") shall be deemed terminated subject to the
provisions of Section 12(b) of the Prior Plan relating to the post termination
effectiveness of grants under the Prior Plan. The Plan shall not be deemed an
amendment or restatement of the Prior Plan. Nothing in the Plan shall be
deemed to impair the rights of any person receiving grants under the Prior
Plan nor shall any provision in the Plan shall be deemed to give any new or
additional rights to any person receiving grants under the Prior Plan.

                                     B-10
<PAGE>

PROXY                                                                      PROXY
                      NANOPHASE TECHNOLOGIES CORPORATION

                             1319 MARQUETTE DRIVE

                          ROMEOVILLE, ILLINOIS 60446

                 PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS

                          TO BE HELD ON JUNE 5, 2001

          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder(s) hereby appoints Joseph E. Cross and Jess
Jankowski and each of them, with full power of substitution, as attorneys and
proxies for, and in the name and place of, the undersigned, and hereby
authorizes each of them to represent and to vote all of the shares which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of
Nanophase Technologies Corporation to be held at Nanophase Technologies
Corporation, 1319 Marquette Drive, Romeoville, Illinois, on Tuesday, June 5,
2001, at 9:00 a.m., local time, and at any adjournments thereof, upon the
matters as set forth in the Notice of Annual Meeting of Stockholders and Proxy
Statement, receipt of which is hereby acknowledged.

THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED IN A TIMELY MANNER, WILL BE
VOTED AT THE ANNUAL MEETING AND AT ANY ADJOURNMENTS THEREOF IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO CONTRARY INDICATION IS
MADE, THE PROXY WILL BE VOTED FOR NOMINEE LISTED IN PROPOSAL 1, FOR PROPOSALS 2
AND 3, AND IN ACCORDANCE WITH THE JUDGMENT OF THE PERSONS NAMED AS PROXIES
HEREIN ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.

           (continued, and to be signed and dated, on reverse side)


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

                         /\  FOLD AND DETACH HERE  /\


                                              NANOPHASE TECHNOLOGIES CORPORATION


PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.  [X]

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR NOMINEE LISTED
IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3.
<PAGE>

1.  ELECTION OF CLASS I DIRECTOR.

For nominee listed below                  [  ]

Withhold authority to vote                [  ]

(except as marked to the contrary below)  [  ]

for nominee listed below                  [  ]

(INSTRUCTION:  TO WITHHOLD AUTHORITY TO VOTE FOR THE INDIVIDUAL NOMINEE, STRIKE
                    A LINE THROUGH THE NOMINEE'S NAME BELOW)



                            James A. McClung, Ph.D.

2.   PROPOSAL TO APPROVE THE NANOPHASE TECHNOLOGIES CORPORATION 2001 EQUITY
     COMPENSATION PLAN.

                          FOR      [  ]

                          AGAINST  [  ]

                          ABSTAIN  [  ]

3.   PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
     AUDITORS OF THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
     DECEMBER 31, 2001.

                          FOR      [  ]

                          AGAINST  [  ]

                          ABSTAIN  [  ]

4.   EACH OF THE PERSONS NAMED AS PROXIES HEREIN ARE AUTHORIZED, IN SUCH
     PERSON'S DISCRETION, TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
     BEFORE THE ANNUAL MEETING, OR ANY ADJOURNMENTS THEREOF.

Date:  _______________________, 2001


                              __________________________________________________
                              Signature

                              __________________________________________________
                              Signature (if held jointly)
<PAGE>

Please date this Proxy and sign it exactly as your name(s) appears hereon.

When shares are held by joint tenants, both should sign. When signing as an
attorney, executor, administrator, trustee, guardian or other fiduciary, please
indicate your capacity. If you sign for a corporation, please print full
corporate name and indicate capacity of duly authorized officer executing on
behalf of the corporation.

If you sign for a partnership, please print full partnership name and indicate
capacity of duly authorized person executing on behalf of the partnership.

PLEASE VOTE, SIGN EXACTLY AS NAME APPEARS ABOVE, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.

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

/\  FOLD AND DETACH HERE  /\
