**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      DC 20549**

**FORM      10-Q**

**COMMISSION      FILE NO. 1-11602**

**NANO-PROPRIETARY,      INC.**

| **TEXAS**                                      | **76-0273345**                                      |
|------------------------------------------------|-----------------------------------------------------|
| (State                or other jurisdiction of | (I.R.S.                Employer Identification No.) |
| incorporation                or organization)  |                                                |
|                                           |                                                |

| **3006                Longhorn Blvd., Suite 107**       |                      |
|---------------------------------------------------------|---------------------------|
| **Austin,                Texas**                        | **78758**                 |
| (Address                of principal executive offices) | (Zip                Code) |

| **(512)                339-5020**                                                  |
|------------------------------------------------------------------------------------|
| (Registrant's                telephone number, including area                code) |

|   | [X] |                  Yes |   | [                  ] |                  No |
|--------|-----|---------------------------|--------|--------------------------------|--------------------------|

|   | [                 ] |                  Yes |   | [X] |                  No |
|--------|--------------------------|---------------------------|--------|-----|--------------------------|

----

**NANO-PROPRIETARY,      INC.**

**INDEX**

| Part                I.  Financial Information | **Page**                                                                                                                                                                                                                                                                                       |
|----------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                1.  Financial                Statements                                                                                                                                                                                                                               |   |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               |                                                                                                                                                                                                                                                                                           | Consolidated                Balance Sheets--March                31, 2006 and December 31, 2005 | 3 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               |                                                                                                                                                                                                                                                                                           | Consolidated                Statements of Operations--Three                Months Ended          March                31, 2006 and 2005 |  4 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               |                                                                                                                                                                                                                                                                                           | Consolidated                Statements of Cash Flows--Three                Months Ended          March                31, 2006 and 2005 |  5 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               |                                                                                                                                                                                                                                                                                           | Notes                to                Consolidated Financial Statements | 6 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                2.  Management’s                Discussion and Analysis of Financial Condition                      and                Results of Operations |  9 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                3.  Quantitative and Qualitative Disclosures about Market                Risk                                                                                                                                                                                    | 13 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                4.                                                                                                                                                                                                                                                                         | Controls                and Procedures | 13 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
| Part                II.  Other Information    |                                                                                                                                                                                                                                                                                           |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                1. Legal                Proceedings                                                                                                                                                                                                                                        | 14 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
|                                               | Item                2. Unregistered Sales of Equity Securities and Use of                Proceeds                                                                                                                                                                                              | 14 |
|                                               |                                                                                                                                                                                                                                                                                           |   |
|                                               | Item                6.  Exhibits                                                                                                                                                                                                                                                          | 14 |
|                                               |                                                                                                                                                                                                                                                                                           |   |   |
| Signatures                                         | 15                                                                                                                                                                                                                                                                                             |

----

**PART      I.  FINANCIAL INFORMATION**

**ITEM      1.  FINANCIAL STATEMENTS**

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      **
**BALANCE      SHEETS**

| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                            |   | **(Unaudited)****March                31,****2006** |        |  **December                31,****2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-------------|-----------------------------------------------|--------|
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                        |   |                                                |        |                                          |   |
| Cash                and cash equivalents                                                                                                                                                                                                                                                                                                                                                              |   | $                                                   | 1,304,835   |                                          | $      | 897,247 |   |
| Accounts                receivable, trade - net of allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                    |   |                                                | 101,717     |                                          |   | 94,103 |   |
| Prepaid                expenses and other current assets                                                                                                                                                                                                                                                                                                                                              |   |                                                | 48,542      |                                          |   | 85,306 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
|                                Total current assets                                                                                                                                                                                                                                                                        |   |                                                | 1,455,094   |                                          |   | 1,076,656 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
| Property                and equipment, net                                                                                                                                                                                                                                                                                                                                                            |   |                                                | 94,170      |                                          |   | 101,785 |   |
| Other                assets                                                                                                                                                                                                                                                                                                                                                                           |   |                                                | 9,540       |                                          |   | 9,540 |   |
|                                Total assets                                                                                                                                                                                                                                                                                |   | $                                                   | 1,558,804   |                                          | $      | 1,187,981 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                         |   |                                                |             |                                          |   |  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                   |   |                                                |             |                                          |   |  |   |
| Accounts                payable                                                                                                                                                                                                                                                                                                                                                                       |   | $                                                   | 357,368     |                                          | $      | 231,131 |   |
| Obligations                under capital lease                                                                                                                                                                                                                                                                                                                                                        |   |                                                | 299         |                                          |   | 4,348 |   |
| Accrued                liabilities                                                                                                                                                                                                                                                                                                                                                                    |   |                                                | 89,816      |                                          |   | 93,163 |   |
| Deposits                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                | 100,000     |                                          |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
|                                Total current liabilities                                                                                                                                                                                                                                                                   |   |                                                | 547,483     |                                          |   | 328,642 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
| Commitments                and contingencies                                                                                                                                                                                                                                                                                                                                                          |   |                                                | -           |                                          |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
|  Total                Liabilities                                                                                                                                                                                                                                                                                                                                                                |   |                                                | 547,483     |                                          |   | 328,642 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
| Stockholders'                (deficit):                                                                                                                                                                                                                                                                                                                                                               |   |                                                |             |                                          |   |  |   |
|      Convertible                preferred stock, $1.00 par value, 2,000,000 shares                authorized;            No                shares issued and outstanding                                                                                                                                         |   |                                                | -           |                                          |   | - |   |
|      Common                stock, $.00l par value, 120,000,000 shares authorized,            100,496,440                and 99,746,440 shares issued and outstanding at            March                31, 2006 and December 31, 2005, respectively |   |                                                | 100,496     |                                          |   | 99,746 |   |
| Additional                paid-in capital                                                                                                                                                                                                                                                                                                                                                             |   |                                                | 97,713,045  |                                          |   | 95,767,647 |   |
| Accumulated                deficit                                                                                                                                                                                                                                                                                                                                                                    |   |                                                | (96,802,220 | )                                             |   | (95,008,054 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
|                                Total stockholders' equity                                                                                                                                                                                                                                                                  |   |                                                | 1,011,321   |                                          |   | 859,339 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |             |                                          |   |  |   |
|                                Total liabilities and stockholders' equity                                                                                                                                                                                                                                                  |   | $                                                   | 1,558,804   |                                          | $      | 1,187,981 |   |

----

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                                                      |   | **For                the Three Months Ended****March                31,**  |        |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|-------------|
|                                                                                      |   | **2006**                                                                        |        | **2005** |   |
| Revenues                                                                                  |   |                                                                            |        |   |   |
| Government                contracts                                                       |   | $                                                                               | 63,582      |   | $ | 18,367 |   |
| Royalties                                                                                 |   |                                                                            | -           |   |   | 3,897 |   |
| Other                                                                                     |   |                                                                            | 98,602      |   |   | 46,551 |   |
|           Total                Revenues |   |                                                                            | 162,184     |   |   | 68,815 |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Research                and Development                                                   |   |                                                                            | 782,054     |   |   | 710,473 |   |
| Selling,                general and administrative expenses                               |   |                                                                            | 1,177,323   |   |   | 727,137 |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Operating                costs and expenses                                               |   |                                                                            | 1,959,377   |   |   | 1,437,610 |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Loss                from operations                                                       |   |                                                                            | (1,797,193  | ) |   | (1,368,795 | ) |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Other                income (expense), net                                                |   |                                                                            |             |   |   |  |   |
| Interest                Expense                                                           |   |                                                                            | (113        | ) |   | (1,026 | ) |
| Interest                Income                                                            |   |                                                                            | 3,140       |   |   | 4,627 |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
|  Loss                from continuing operations before taxes                         |   |                                                                            | (1,794,166  | ) |   | (1,365,194 | ) |
|                                                                                      |   |                                                                            |             |   |   |  |   |
|  Provision                for taxes                                                  |   |                                                                            | -           |   |   | - |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Net                loss                                                                   |   | $                                                                               | (1,794,166  | ) | $ | (1,365,194 | ) |
| Loss                per share                                                             |   |                                                                            |             |   |   |  |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Basic                and Diluted                                                          |   | $                                                                               | (0.02       | ) | $ | (0.01 | ) |
| Weighted                average shares outstanding                                        |   |                                                                            |             |   |   |  |   |
|                                                                                      |   |                                                                            |             |   |   |  |   |
| Basic                and Diluted                                                          |   |                                                                            | 100,017,273 |   |   | 97,914,179 |   |

----

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                                                 |   |  **For                  the Three Months                  Ended****March                  31,** |       |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|------------|
|                                                                                                 |   |  **2006**                                                                                       |       |   | **2005** |   |
| Cash                  flows from operating activities:                                               |   |                                                                                                 |       |   |   |   |   |
| Net                  loss                                                                            |   | $                                                                                                    | (1,794,166 | ) | $ | (1,365,194 | ) |
| Adjustments                  to reconcile net loss to net                                            |   |                                                                                                 |            |   |   |  |   |
| cash                  used in operating activities:                                                  |   |                                                                                                 |            |   |   |  |   |
| Depreciation                  and amortization expense                                               |   |                                                                                                 | 13,307     |   |   | 15,026 |   |
| Stock                  based compensation expense                                                    |   |                                                                                                 | 446,148    |   |   | 129,666 |   |
| Changes                  in assets and liabilities:                                                  |   |                                                                                                 |            |   |   |  |   |
| Accounts                  receivable, trade                                                          |   |                                                                                                 | (7,614     | ) |   | (4,438 | ) |
| Prepaid                  expenses and other assets                                                   |   |                                                                                                 | 36,764     |   |   | (15,292 | ) |
| Accounts                  payable and accrued liabilities                                            |   |                                                                                                 | 122,890    |   |   | 133,213 |   |
|  Deposits                                                                                       |   |                                                                                                 | 100,000    |   |   | - |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Total                  adjustments                                                                   |   |                                                                                                 | 711,495    |   |   | 258,175 |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Net                  cash used in operating activities                                               |   |                                                                                                 | (1,082,671 | ) |   | (1,107,019 | ) |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Cash                  flows from investing activities:                                               |   |                                                                                                 |            |   |   |  |   |
| Capital                  expenditures                                                                |   |                                                                                                 | (5,692     | ) |   | (3.703 | ) |
|        Net                  cash used in investing activities     |   |                                                                                                 | (5,692     | ) |   | (3,703 | ) |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Cash                  flows from financing activities:                                               |   |                                                                                                 |            |   |   |  |   |
| Repayment                  of notes payable and capital lease obligations                            |   |                                                                                                 | (4,049     | ) |   | (5,149 | ) |
| Proceeds                  of stock issuance, net of costs                                            |   |                                                                                                 | 1,500,000  |   |   | 3,157,563 |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
|        Net                  cash provided by financing activities |   |                                                                                                 | 1,495,951  |   |   | 3,152,414 |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Net                  increase (decrease) in cash and cash equivalents                                |   |                                                                                                 | 407,588    |   |   | 2,041,692 |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Cash                  and cash equivalents, beginning of period                                      |   |                                                                                                 | 897,247    |   |   | 901,585 |   |
|                                                                                                 |   |                                                                                                 |            |   |   |  |   |
| Cash                  and cash equivalents, end of period                                            |   | $                                                                                                    | 1,304,835  |   | $ | 2,943,277 |   |

----

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

----

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Litigation*

** **

----

**NANO-PROPRIETARY,      INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

|                                                             |   | ANI    |       | EBT    |   | All                  Other |   | Total  |     |
|------------------------------------------------------------------|--------|--------|------------|--------|--------|----------------------------|--------|--------|----------|
| 2006                                                             |   |   |       |   |   |                       |   |   |     |
|                                                             |   |   |       |   |   |                       |   |   |     |
| Revenue                                                          |   | $      | 162,184    |   | $      | -                          |   | $      | -        |   | $ | 162,184 |   |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| Profit                  (Loss)                                   |   |   | (1,229,535 | )      |   | (7,199                     | )      |   | (557,432 | ) |   | (1,794,166 | ) |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| Expenditures                  for                                |   |   |            |   |   |                            |   |   |          |   |   |  |   |
|      long-lived                  assets |   |   | 5,692      |   |   | -                          |   |   | -        |   |   | 5,692 |   |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| 2005                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| Revenue                                                          |   | $      | 68,815     |   | $      | -                          |   | $      | -        |   | $ | 68,815 |   |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| Profit                  (Loss)                                   |   |   | (1,100,002 | )      |   | -                          |   |   | (265,192 | ) |   | (1,365,194 | ) |
|                                                             |   |   |            |   |   |                            |   |   |          |   |   |  |   |
| Expenditures                  for                                |   |   |            |   |   |                            |   |   |          |   |   |  |   |
|      long-lived                  assets |   |   | 3,703      |   |   | -                          |   |   | -        |   |   | 3,703 |   |

----

| **ITEM              2:** | **MANAGEMENT'S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF                OPERATIONS** |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------|

**FORWARD-LOOKING      STATEMENTS **

**Three      months ended March 31, 2006 and 2005**

**OVERVIEW**

**OUTLOOK**

----

| **ITEM              2:** | **MANAGEMENT'S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF                OPERATIONS (cont.)** |
|--------------------------|------------------------------------------------------------------------------------------------------------------------------------|

**RECENT      DEVELOPMENTS**

**RECENT      ACCOUNTING PRONOUNCEMENTS**

----

| **ITEM              2:** | **MANAGEMENT'S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF                OPERATIONS (cont.)** |
|--------------------------|------------------------------------------------------------------------------------------------------------------------------------|

**FINANCIAL      CONDITION AND LIQUIDITY**

----

| **ITEM              2:** | **MANAGEMENT'S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF                OPERATIONS (cont.)** |
|--------------------------|------------------------------------------------------------------------------------------------------------------------------------|

**RESULTS      OF OPERATIONS**

----

**ITEM      3.       **
**QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**ITEM      4.       **
**CONTROLS      AND PROCEDURES**

----

**PART      II. OTHER INFORMATION**

**ITEM      1.  LEGAL PROCEEDINGS**

**ITEM      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF      PROCEEDS**

|   |                               |                     | Common                shares |
|--------|------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------------------------|
|   | Shareholder                        |                                                                                                               | issued                       |
|   |                               |                                                                                                               |                         |
|   | Karrison                Nichols    |                                                                                                               | 375,000                      |
|   | Pinnacle                Fund, L.P. |                                                                                                               | 375,000                      |

**ITEM      6**
**.     EXHIBITS      **

----

**SIGNATURES**

|                                                                | NANO-PROPRIETARY,                INC.(Registrant)                                                                                                                                                                            |
|---------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                |                                                                                                                                                                                                                         |
| Date:     May                1, 2006  | /s/                Marc W. Eller      Marc                W. EllerChairman                and Chief ExecutiveOfficer                (Principal Executive Officer)                                   |
|                                                                |                                                                                                                                                                                                                         |
| Date:     May                1, 2006  | /s/                Douglas P. Baker     Douglas                P. BakerChief                Financial Officer(Principal                Financial Officer and PrincipalAccounting                Officer) |

----

**INDEX      TO EXHIBITS**

| Exhibit |                                                                       |
|---------|----------------------------------------------------------------------------|
|    |                                                                       |
| 11      | Computation                of (Loss) Per Common Share                      |
|    |                                                                       |
| 31.1    | Rule                13a-14(a)/15d-14(a) Certificate of Marc W. Eller       |
|    |                                                                       |
| 31.2    | Rule                13a-14(a)/15d-14(a) Certificate of Douglas P. Baker    |
|    |                                                                       |
| 32.1    | Section                1350 Certificate of Marc W. Eller                   |
|    |                                                                       |
| 32.2    | Section                1350 Certificate of Douglas P.                Baker |