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**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 |   | o | No |
|--------|---|-----|--------|---|----|

|   | x | Yes |   | o | No |
|--------|---|-----|--------|---|----|

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Table          of Contents

**NANO-PROPRIETARY,      INC.**

**INDEX**

| Part                I.  Financial Information | **Page**                                                                                                                                                                                                                                                                                      |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                                                                                                                                                                                                          |   |   |
|                                               | Item                1.  Financial Statements                                                                                                                                                                                                                                             |   |
|                                               |                                                                                                                                                                                                                                                                                          |   |   |
|                                               |                                                                                                                                                                                                                                                                                          | Consolidated                Balance Sheets--June 30, 2005 and December                31, 2004 | 3 |
|                                               |                                                                                                                                                                                                                                                                                          |   |   |
|                                               |                                                                                                                                                                                                                                                                                          | Consolidated                Statements of Operations --Three Months and Six                Months Ended                         June 30, 2005 and 2004 |  4 |
|                                               |                                                                                                                                                                                                                                                                                          |   |   |
|                                               |                                                                                                                                                                                                                                                                                          | Consolidated                Statements of Cash Flows --Six Months                Ended                         June 30, 2005 and 2004 |  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                6.  Exhibits                                                                                                                                                                                                                                                         | 15 |
|                                               |                                                                                                                                                                                                                                                                                          |   |   |
| Signatures                                         | 16                                                                                                                                                                                                                                                                                            |

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Table          of Contents

**PART      I.  FINANCIAL INFORMATION**

**ITEM      1.  FINANCIAL STATEMENTS**

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

**CONSOLIDATED      **
**BALANCE      SHEETS**

| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                | **(Unaudited)****June                30,****2005** |            |  **December                31,****2004** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|-----------------|-----------------------------------------------|
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                |                                               |            |                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                | Cash                and cash equivalents                                                                                            |  $                                            | 1,877,768  | $                                             | 901,585  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Accounts                receivable, trade - net of allowance for doubtful accounts                                                  |                                               | 61,631     |                                          | 6,735  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Prepaid                expenses and other current assets                                                                            |                                               | 218,032    |                                          | 85,135  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                Total current assets      |                                               | 2,157,431  |                                          | 993,455  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                | Property                and equipment, net                                                                                          |                                               | 119,282    |                                          | 141,373  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Other                assets                                                                                                         |                                               | 9,540      |                                          | 9,540  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                Total assets              | $                                                  | 2,286,253  | $                                             | 1,144,368  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                | **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                       |                                               |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                |                                               |            |                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                | Accounts                payable                                                                                                     | $                                                  | 206,723    | $                                             | 140,597  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Obligations                under capital lease                                                                                      |                                               | 16,946     |                                          | 21,430  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Accrued                liabilities                                                                                                  |                                               | 73,414     |                                          | 74,956  |
|                                                                                                                                                                                                                                                                                                                                                                                                | Deferred                Revenue                                                                                                     |                                               | 54,985     |                                          | 54,985  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                Total current liabilities |                                               | 352,068    |                                          | 291,968  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
| Obligations                under capital lease                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                |  -                                       |            | 5,944                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
|  Total                Liabilities                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                |  352,068                                 |            | 297,912                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |   |
| Commitments                and contingencies                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                | -                                             |            | -                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |
| Stockholders'                (deficit):                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                |                                               |            |                                          |
|      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,            99,164,047                and 97,246,422 shares issued and outstanding at            June                30, 2005 and December 31, 2004, respectively |                                                                                                                                | 99,164                                        |            | 97,246                                   |
| Additional                paid-in capital                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                | 84,351,809                                    |            | 80,822,625                               |
| Accumulated                deficit                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                | (82,516,788)                                       |            | (80,073,415)                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |
|                                Total stockholders equity                                                                                                                                                                                                                                                                 |                                                                                                                                | 1,934,185                                     |            | 846,456                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                               |            |                                          |
|                                Total liabilities and stockholders equity                                                                                                                                                                                                                                                 | $                                                                                                                                   | 2,286,253                                     | $               | 1,144,368                                |

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Table          of Contents

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

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                        |                                                                                      | **For the                Three Months****Ended                June 30,** |            |   | **For                 the Six Months****Ended                June 30,** |
|-------------------------------------------------------------|-------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-----------------|--------|------------------------------------------------------------------------------|
|                                                        |                                                                                      | **2005**                                                                      |            |   | **2004**                                                                     |   |   | **2005** |   |   | **2004** |
| Revenues                                                    |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
|                                                        | Government                contracts                                                       | $                                                                             | 69,243     |   | $                                                                            | 65,798  |   | $ | 87,610  |   | $ | 131,678  |
|                                                        | Royalties                                                                                 |                                                                          | -          |   |                                                                         | -  |   |   | 3,897  |   |   | -  |
|                                                        | Other                                                                                     |                                                                          | 19,301     |   |                                                                         | 34,920  |   |   | 65,852  |   |   | 46,698  |
|                                                        |           Total                Revenues |                                                                          | 88,544     |   |                                                                         | 100,718  |   |   | 157,359  |   |   | 178,376  |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |
| Research                and development                     |                                                                                      | 574,586                                                                  |            |   | 529,812                                                                 |   |   | 1,255,292  |   |   | 1,281,407  |
| Selling,                general and administrative expenses |                                                                                      | 498,181                                                                  |            |   | 340,107                                                                 |   |   | 1,359,083  |   |   | 784,032  |
| Royalty                expense                              |                                                                                      | -                                                                        |            |   | 500,000                                                                 |   |   | -  |   |   | 500,000  |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
|                                                        | Operating                costs and expenses                                               |                                                                          | 1,072,767  |   |                                                                         | 1,369,919  |   |   | 2,614,375  |   |   | 2,565,439  |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |
| Loss                from operations                         |                                                                                      | (984,223)                                                                     |            |   | (1,269,201)                                                                  |   |   | (2,457,016) |   |   | (2,387,063) |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |
| Other                income (expense), net                  |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
|                                                        | Interest                Expense                                                           |                                                                          | (880)           |   |                                                                         | (1,097) |   |   | (1,906) |   |   | (2,269) |
|                                                        | Interest                Income                                                            |                                                                          | 10,922     |   |                                                                         | 6,769  |   |   | 15,549  |   |   | 14,037  |
|                                                        | Other                                                                                     |                                                                          | -          |   |                                                                         | -  |   |   | -  |   |   | 125  |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |
| Loss                from continuing operations before taxes |                                                                                      | (974,181)                                                                     |            |   | (1,263,529)                                                                  |   |   | (2,443,373) |   |   | (2,375,170) |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |
| Provision                for taxes                          |                                                                                      |  -                                                                  |            |   |  -                                                                 |   |   |  -  |   |   |  -  |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |   |   |
| Net                loss                                     | $                                                                                         | (974,181)                                                                     |            | $      | (1,263,529)                                                                  |   | $ | (2,443,373) |   | $ | (2,375,170) |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
| Loss                per share                               |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |   |   |
|                                                        | Basic                and Diluted                                                          |                                                                          |            | $      | (0.01)                                                                       |   | $ | (0.01) |   | $ | (0.02) |   | $ | (0.02) |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
| Weighted                average shares outstanding          |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |
|                                                        |                                                                                      |                                                                          |            |   |                                                                         |   |   |   |   |   |   |   |   |   |
|                                                        | Basic                and Diluted                                                          |                                                                          |            |   | 99,081,410                                                              |   |   | 96,536,111  |   |   | 98,501,019  |   |   | 96,273,901  |

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

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                | **For                 the Six Months Ended****June                30,** |
|---------------------------------------------------------------------|------------------------------------------------------------------------------|
|                                                                | **2005**                                                                     |   |   | **2004** |
| Cash                flows from operating activities:                |                                                                         |   |   |   |   |
|                                                                |  Net                loss                                                |   |   | $ | (2,443,373) | $ | (2,375,170) |
|                                                                |                                                                         | Adjustments                to reconcile net loss to net |   |   |   |   |
|                                                                |                                                                         |   | cash                used in operating activities: |   |   |   |   |
|                                                                |                                                                         |   | Depreciation                and amortization expense |   | 28,605  |   | 25,739  |
|                                                                |                                                                         |   | Gain                on sale of fixed assets |   | -  |   | (125) |
|                                                                |                                                                         |   | Options                issued for services |   | 19,339  |   | 116,600  |
|                                                                |                                                                         |   | Non-cash                variable option pricing expense |   | 33,825  |   | (341,250) |
|                                                                |                                                                         |   | Changes                in assets and liabilities: |   |   |   |   |
|                                                                |                                                                         |   |   | Accounts                receivable, trade |   | (54,896) |   | (12,333) |
|                                                                |                                                                         |   |   | Prepaid                expenses and other current assets |   |  (132,897) |   |  (124,425) |
|                                                                |                                                                         |   |   | Accounts                payable and accrued liabilities |   | 64,584  |   | 66,582  |
|                                                                |                                                                         |   |   |   |   |   |   |   |
|                                                                |                                                                         |   |   | Total                adjustments |   | (41,440) |   | (269,212)  |
|                                                                |                                                                         |   |   |   |   |   |   |   |
|                                                                |                                                                         |   | Net                cash used in operating activities |   | (2,484,813) |   | (2,644,382) |
|                                                                |                                                                         |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                |                                                                         |   |   |   |
|                                                                |                                                                         | Capital                expenditures |   |   | (6,514) |   | (87,647)  |
|                                                                |                                                                         | Proceeds                from sale of fixed assets |   |  -   |   | 125  |
|                                                                |                                                                         |        Net                cash used in investing activities |   | (6,514) |   | (87,522) |
|                                                                |                                                                         |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                |                                                                         |   |   |   |
|                                                                |                                                                         | Repayment                of notes payable |   | (10,428) |   | (9,439) |
|                                                                |                                                                         | Proceeds                of stock issuance, net of costs |   | 3,477,938  |   | 1,564,209  |
|                                                                |                                                                         |   |   |   |   |   |   |   |
|                                                                |                                                                         |        Net                cash provided by financing activities |   | 3,467,510  |   | 1,554,770  |
|                                                                |                                                                         |   |   |   |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents |                                                                         | 976,183  |   | (1,177,134) |
|                                                                |                                                                         |   |   |   |   |   |   |   |
| Cash                and cash equivalents, beginning of period       |                                                                         | 901,585  |   | 3,564,570  |
|                                                                |                                                                         |   |   |   |   |   |   |   |
| Cash                and cash equivalents, end of period             | $                                                                            | 1,877,768  |   | $ | 2,387,436  |

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Table          of Contents

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

**NOTESTO      CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

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Table          of Contents

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Litigation*

|                                                           |   | ANI                |          | EBT           |    | All                Other |   | Total        |
|----------------------------------------------------------------|--------|--------------------|---------------|---------------|---------|--------------------------|--------|--------------|
| 2005                                                           |   |               |          |          |    |                     |   |         |
| Revenue                                                        |   | $             | 157,359  |          | $  |  -             |   | $            |  -  |   | $  | 157,359  |
|                                                           |   |               |          |          |    |                     |   |         |
| Profit                (Loss)                                   |   | (2,003,622)        |          |  -  |    | (439,751)                |   | (2,443,373)  |
|                                                           |   |               |          |          |    |                     |   |         |
| Expenditures                for                                |   |               |          |          |    |                     |   |         |
|      long-lived                assets |   | 5,232    |          | -        |    | 1,282               |   | 6,514   |
|                                                           |   |               |          |          |    |                     |   |         |
| 2004                                                           |   |               |          |          |    |                     |   |         |
| Revenue                                                        |   | $             | 178,376  |          | $  |  -             |   | $            |  -  |   | $  | 178,376  |
|                                                           |   |               |          |          |    |                     |   |         |
| Profit                (Loss)                                   |   | (2,290,539)        |          | 121,497       |    | (206,128)                |   | (2,375,170)  |
|                                                           |   |               |          |          |    |                     |   |         |
| Expenditures                for                                |   |               |          |          |    |                     |   |         |
|      long-lived                assets |   | 85,274   |          | -        |    | 2,373               |   | 87,647  |

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Table          of Contents

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

**FORWARD-LOOKING      STATEMENTS **

**Six      months ended June 30, 2005 and 2004**

**OVERVIEW**

**OUTLOOK**

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Table          of Contents

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

**RECENT      DEVELOPMENTS**

**RECENT      ACCOUNTING PRONOUNCEMENTS**

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Table          of Contents

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

**FINANCIAL      CONDITION AND LIQUIDITY**

**RESULTS      OF OPERATIONS**

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Table          of Contents

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

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Table          of Contents

**ITEM      3.       **
**QUANTITATIVEAND      QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

**ITEM      4.       **
**CONTROLSAND      PROCEDURES**

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Table          of Contents

**PART      II. OTHER INFORMATION**

**ITEM      1.  **
**LEGAL**
**PROCEEDINGS**

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Table          of Contents

**ITEM      6.     EXHIBITS**

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Table          of Contents

**SIGNATURES**

|                                                            | NANO-PROPRIETARY,                INC.(Registrant)                                                                                                                                                                                        |
|-----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |                                                                                                                                                                                                                                     |
| Date:     July                26, 2005 |      /s/                Marc W. Eller                 Marc W. EllerChairman                and Chief ExecutiveOfficer                (Principal Executive Officer)                                         |
|                                                            |                                                                                                                                                                                                                                     |
| Date:     July                26, 2005 |      /s/                Douglas P. Baker                 Douglas P. BakerChief                Financial Officer(Principal                Financial Officer and PrincipalAccounting                Officer) |

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**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 |