The analysis below first appeared in Motley Fool CAPS in January. Click here for more CAPS coverage from this contributor on all 15 stocks in the nanotechnology sector, including NVE (NASDAQ:NVEC) and Harris & Harris (NASDAQ:TINY).

Nanophase Technologies (NASDAQ:NANX) likes to say it is "transforming the boundaries of performance ... today," and that phrase seems to fit this interesting small cap.

The company is a leading developer and commercial manufacturer of nanomaterials. It produces these products for a variety of diverse markets: personal care, sunscreen, abrasion-resistant applications, environmental catalysts, antimicrobial products, and a variety of ultra-fine polishing applications, including semiconductor wafers, hard disk drives, and optics.

Nanophase has two distinct and patented processes for the preparation and commercial manufacturing of nanopowder metal oxides. It has developed a process, Discrete Particle Encapsulation, to coat the surface of its nanoparticles with a thin polymeric shell that enables compatibility of the particles with a wide variety of fluids, resins, and polymers. Its products are available as nanoparticles, surface-treated nanoparticles, and stable nanoparticle dispersions in aqueous or organic media, providing customers with nanomaterials in readily usable forms.

The company recently reported all-time high revenues in the fiscal third quarter of 2006, with significant growth in gross margins primarily due to a favorable product mix. Additionally, efficient cost controls on the SG&A expense line helped the business report its smallest operating loss ever. This shows management is heading in the right direction, with revenue growth and cost cutting that will ultimately increase cash flow and meet the break-even point very soon.

The business model revolves around strategic partnerships with companies like BASF (NYSE:BF) and Rohm and Haas (NYSE:ROH) Electronic Materials. A current strong order book bodes well for future business. The company also has research and development and manufacturing facilities, allowing it to develop and supply nanomaterials ranging from grams to metric tons. Additionally, because of its modular processes and state-of-art infrastructure, there is ample room for expansion, and management is eyeing 100% revenue growth with minimal additional cost.

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