**Exhibit 4.2**

**FORM OF REGISTRATION RIGHTS AGREEMENT**

            This REGISTRATIONRIGHTS AGREEMENT (“Agreement”) is made as of October __, 2003 by and among Nano-Proprietary, Inc., a Texas corporation(the “Company”), and the persons listed as the Investors on the signature pages hereto (the “Investors”),and each person or entity that subsequently becomes a party to this Agreement pursuant to, and in accordance with, the provisionsof Section 11 hereof (collectively, the “Permitted Transferees” and each individually a “PermittedTransferee”).

            WHEREAS, pursuant to aSecurities Purchase Agreement (the “Securities Purchase Agreement”), dated as of the date hereof, the Company hasagreed to issue and sell to the Investors, and each Investor has agreed to purchase from the Company, up to $2,000,000 of theCompany’s authorized but unissued common stock (the “Shares”), $0.001 par value per share (the “CommonStock”); and

            WHEREAS, the terms ofthe Securities Purchase Agreement provide that it shall be a condition precedent to the closing of the transactions thereunder forthe Company and the Investors to execute and deliver this Agreement.

            NOW, THEREFORE, inconsideration of the premises and mutual covenants contained herein, the parties hereto hereby agree as follows:

            1.          DEFINITIONS.  As used in this Agreement, the following terms shall have the following respective meanings:

            “Board”shall mean the board of directors of the Company.

            “Closing”shall mean the last Closing under the Securities Purchase Agreement.

            “ExchangeAct” shall mean the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgatedthereunder.

            “Holders”shall mean, collectively, the Investors and the Permitted Transferees; *provided*, *however*, that the term“Holders” shall not include any of the foregoing that ceases to own or hold any Registrable Securities.

            “QualifyingHolder” shall have the meaning ascribed thereto in Section 11 hereof.

            “RegistrableSecurities” shall mean the Shares issued to the Investors pursuant to the Securities Purchase Agreement, and shall includeany shares of the Company’s Common Stock issued with respect to the Registrable Securities as a result of any stock split,stock dividend, recapitalization, exchange or similar event; *provided*, *however*, that all Registrable Securities shallcease to be Registrable Securities once they have been sold pursuant to a registration statement or may be sold pursuant to Rule144.

----

            “Rule 144”shall mean Rule 144 promulgated under the Securities Act and any successor or substitute rule, law or provision.

            “SEC” shallmean the Securities and Exchange Commission.

            “SecuritiesAct” shall mean the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder.

            2.          EFFECTIVENESS.  This Agreement shall become effective and legally binding upon the Closing.

           3.          MANDATORY REGISTRATION.

                        (a)          By the later to occur of (i) thirty (30) days after the Closing (or, if the date that is thirty (30) days after the Closing isnot a business day, the next business day immediately following such date) or (ii) November 15, 2003, the Company will prepare andfile with the SEC a registration statement on Form S-2 for the purpose of registering under the Securities Act all of theRegistrable Securities for resale by, and for the account of, the Holders as selling stockholders thereunder (the“Registration Statement”).  The Registration Statement shall permit the Holders to offer and sell, on a delayed orcontinuous basis pursuant to Rule 415 under the Securities Act, any or all of the Registrable Securities.  The Company agreesto use commercially reasonable efforts to cause the Registration Statement to become effective as soon as reasonably practicable(which shall include using commercially reasonable efforts to respond to any comments of the SEC in respect of the RegistrationStatement within ten (10) business days following receipt thereof.  The Company shall use its commercially reasonable effortsto keep the Registration Statement effective until such date that is the earlier of (i) the date when all of the RegistrableSecurities registered thereunder shall have been sold or (ii) two (2) years after the Closing, subject to extension as set forthbelow (such date is referred to herein as the “Mandatory Registration Termination Date”).  Thereafter, the Companyshall be entitled to withdraw the Registration Statement and the Holders shall have no further right to offer or sell any of theRegistrable Securities pursuant to the Registration Statement (or any prospectus relating thereto).  In the event the right ofthe selling Holders to use the Registration Statement (and the prospectus relating thereto) is delayed or suspended pursuant toSections 4(c) or 10 hereof, if the events described in clause (i) or (ii) above of this subsection (a) have not yet occurred, theCompany shall be required to extend the Mandatory Registration Termination Date by the same number of days as such delay orSuspension Period (as defined in Section 10 hereof), provided that such delay is not the result of the Holders’ failure ordelay to furnish information required under Section 5 hereof.

                        (b)          In the event that the Registration Statement is not filed with the SEC by the later of (i) thirty (30) days after the Closing(or, if the date that is thirty (30) days after the Closing is not a business day, the next business day immediately following suchdate) or (ii) November 15, 2003, or the Company fails to use its commercially reasonable efforts to respond to any comments of theSEC in respect of the Registration Statement within ten (10) business days following receipt thereof, the Company shall pay, at itssole option, either in (ii) cash, check or by wire transfer, or (ii) in common stock of the Company at the then current five-daytrading average of such common stock to each Investor, one percent (1.0%) of the aggregate Purchase Price (as defined in theSecurities Purchase Agreement) paid by the Investor for all Shares sold to each such Investor pursuant to the Securities PurchaseAgreement.  For every additional thirty (30) days that the Company continues to be delayed from filing the RegistrationStatement with the SEC or continues to fail to use its commercially reasonable efforts to respond to any comments of the SEC inrespect of the Registration Statement, the Company will issue to each Investor, an additional one percent (1.0%) of the Shares soldto each such Investor pursuant to the Securities Purchase Agreement in accordance with the terms in this Section 3(b). 

----

                        (c)          Within three (3) business days after a Registration Statement that covers applicable Registrable Securities is declaredeffective by the SEC, the Company shall deliver, or shall cause legal counsel to deliver, to the transfer agent for suchRegistrable Securities (with copies to the Holders whose Registrable Securities are included in such Registration Statement)confirmation that such Registration Statement has been declared effective by the SEC in such form as agreed to by counsel to theCompany and counsel to the Holders at such time.

                        (d)          Subject to review and comment by the SEC, the Plan of Distribution set forth in the Registration Statement shall besubstantially as set forth in Exhibit B attached hereto.

          4.          OBLIGATIONS OF THE COMPANY.  In connection with the Company’s obligation under Section 3 hereof to file theRegistration Statement with the SEC and to use commercially reasonable efforts to cause the Registration Statement to becomeeffective, the Company shall:

                        (a)          Prepare and file with the SEC, as expeditiously as reasonably practicable, such amendments and supplements to the RegistrationStatement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Actwith respect to the disposition of all Registrable Securities covered by the Registration Statement;

                        (b)          Promptly furnish to the selling Holders such number of copies of a prospectus, including a preliminary prospectus, in conformitywith the requirements of the Securities Act, and such other documents (including, without limitation, prospectus amendments andsupplements as are prepared by the Company in accordance with Section 4(a) above) as the selling Holders may reasonably request inorder to facilitate the disposition of such selling Holder’s Registrable Securities;

                        (c)          Promptly notify the selling Holders, at any time when a prospectus relating to the Registration Statement is required to bedelivered under the Securities Act, of the occurrence of any event as a result of which the prospectus included in or relating tothe Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statementstherein not misleading in light of the circumstances in which they are made; and, thereafter, the Company will promptly prepare(and, when completed, give notice to each selling Holder) a supplement or amendment to such prospectus so that, as thereafterdelivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material factor omit to state any fact necessary to make the statements therein not misleading in light of the circumstances in which they aremade; provided that upon such notification by the Company, the selling Holders will not offer or sell Registrable Securities untilthe Company has notified the selling Holders that it has prepared a supplement or amendment to such prospectus and delivered copiesof such supplement or amendment to the selling Holders (it being understood and agreed by the Company that the foregoing provisoshall in no way diminish or otherwise impair the Company’s obligation to promptly prepare a prospectus amendment orsupplement as above provided in this Section 4(c) and deliver copies of same as above provided in Section 4(b) hereof);

----

                        (d)          Use commercially reasonable efforts to register and qualify the Registrable Securities covered by the Registration Statementunder such other securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate in the opinion of theCompany,  provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to dobusiness, to file a general consent to service of process or to become subject to any material tax in any such states orjurisdictions, and provided further that (notwithstanding anything in this Agreement to the contrary with respect to the bearing ofexpenses) if any jurisdiction in which any of such Registrable Securities shall be qualified shall require that expenses incurredin connection with the qualification therein of any such Registrable Securities be borne by the selling Holder, then the sellingHolders shall, to the extent required by such jurisdiction, pay their pro rata share of such qualification expenses; and

                        (e)          Promptly after a sale of Registrable Securities pursuant to the Registration Statement (assuming that no stop order is in effectwith respect to the Registration Statement at the time of such sale), the Company shall cooperate with the selling Holder andprovide the transfer agent for the Common Stock with such instructions and legal opinions as may be required in order to facilitatethe issuance to the purchaser (or the selling Holder’s broker) of new unlegended certificates for such RegistrableSecurities.

          5.          FURNISH INFORMATION.  It shall be a condition precedent to the obligations of the Company to take any action pursuant tothis Agreement that the selling Holders shall furnish to the Company such information regarding them and the securities held bythem as the Company shall reasonably request and as shall be required in order to effect any registration by the Company pursuantto this Agreement.

          6.          EXPENSES OF REGISTRATION.  All expenses incurred in connection with the registration of the Registrable Securities pursuantto this Agreement (excluding underwriting, brokerage and other selling commissions and discounts), including without limitation allregistration and qualification and filing fees, printing, and fees and disbursements of counsel for the Company, shall be borne bythe Company.

          7.          DELAY OF REGISTRATION.  The Holders shall not take any action to restrain, enjoin or otherwise delay any registration asthe result of any controversy which might arise with respect to the interpretation or implementation of this Agreement.

----

          8.          INDEMNIFICATION AND CONTRIBUTION.

                        (a)          To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, any investment banking firmacting as an underwriter for the selling Holder, any broker/dealer acting on behalf of any selling Holder and each officer anddirector of such selling Holder, such underwriter, such broker/dealer and each person, if any, who controls such selling Holder,underwriter or broker/dealer within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint orseveral, to which they may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages orliabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any materialfact contained in the Registration Statement, in any preliminary prospectus or final prospectus relating thereto or in anyamendments or supplements to the Registration Statement or any such preliminary prospectus or final prospectus, or arise out of orare based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary tomake the statements therein not misleading in light of the circumstances in which they are made, and which were not corrected by asubsequently filed amendment or supplement thereto; and will reimburse such selling Holder, such underwriter, broker/dealer or suchofficer, director or controlling person for any legal or other expenses reasonably incurred by them in connection withinvestigating or defending any such loss, claim, damage, liability or action; *provided*, *however*, that the indemnityagreement contained in this Section 8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liabilityor action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), norshall the Company be liable in any such case for any such loss, damage, liability or action to the extent that it: (i) arises outof or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in connection with theRegistration Statement, any preliminary prospectus or final prospectus relating thereto or any amendments or supplements to theRegistration Statement or any such preliminary prospectus or final prospectus, in reliance upon and in conformity with writteninformation furnished expressly for use in connection with the Registration Statement or any such preliminary prospectus or finalprospectus by the selling Holder, any underwriter for them or controlling person with respect to them; or (ii) is in excess of thegross proceeds received by the Company under the Securities Purchase Agreement.  This Section 8(a) shall not inure to thebenefit of any selling Holder with respect to any person asserting loss, damage, liability or action as a result of a sellingHolder selling Registrable Securities during a Suspension Period (as defined in Section 10 hereof) or selling in violation ofSection 5(c) of the Securities Act.

                        (b)          To the extent permitted by law, each selling Holder will severally and not jointly indemnify and hold harmless the Company, eachof its officers and directors, each person, if any, who controls the Company within the meaning of the Securities Act, anyinvestment banking firm acting as underwriter for the Company or the selling Holder, or any broker/dealer acting on behalf of theCompany or any other selling Holder, and all other selling Holders against any losses, claims, damages or liabilities to which theCompany or any such director, officer, controlling person, underwriter, or broker/dealer or other selling Holder may become subjectto, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto)arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statementor any preliminary prospectus or final prospectus, relating thereto or in any amendments or supplements to the RegistrationStatement or any such preliminary prospectus or final prospectus, or arise out of or are based upon the omission or allegedomission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleadingin light of the circumstances in which they are made, in each case to the extent and only to the extent that such untrue statementor alleged untrue statement or omission or alleged omission was made in the Registration Statement, in any preliminary prospectusor final prospectus relating thereto or in any amendments or supplements to the Registration Statement or any such preliminaryprospectus or final prospectus, in reliance upon and in conformity with written information furnished by such selling Holderexpressly for use in connection with the Registration Statement or any preliminary prospectus or final prospectus related thereto;and such selling Holders will reimburse any legal or other expenses reasonably incurred by the Company or any such director,officer, controlling person, underwriter, broker/dealer or other selling Holder in connection with investigating or defending anysuch loss, claim, damage, liability or action; *provided*, *however*, that the liability of each selling Holder hereundershall be limited to the gross proceeds (net of underwriting discounts and commissions, if any) received by such selling Holder fromthe sale of Registrable Securities covered by the Registration Statement; and *provided*, *further*, *however*, thatthe indemnity agreement contained in this Section 8(b) shall not apply to amounts paid in settlement of any such loss, claim,damage, liability or action if such settlement is effected without the consent of those selling Holder(s) against which the requestfor indemnity is being made (which consent shall not be unreasonably withheld).

----

                        (c)          Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, suchindemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify theindemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in and, tothe extent the indemnifying party desires, jointly with any other indemnifying party similarly noticed, to assume at its expensethe defense thereof with counsel mutually satisfactory to the indemnifying parties with the consent of the indemnified party (whichconsent will not be unreasonably withheld, conditioned or delayed).  In the event that the indemnifying party assumes any suchdefense, the indemnified party may participate in such defense with its own counsel and at its own expense, *provided*,*however*, that the counsel for the indemnifying party shall act as lead counsel in all matters pertaining to such defense orsettlement of such claim and the indemnifying party shall only pay for such indemnified party’s expenses for the period priorto the date of its participation on such defense.  The failure to notify an indemnifying party promptly of the commencement ofany such action, if materially prejudicial to his ability to defend such action, shall relieve such indemnifying party of anyliability to the indemnified party under this Section 8 to the extent of such prejudice, but the omission so to notify theindemnifying party will not relieve him of any liability which he may have to any indemnified party otherwise other than under thisSection 8.

                        (d)          Notwithstanding anything to the contrary herein, without the prior written consent of the indemnified party, the indemnifyingparty shall not be entitled to settle any claim, suit or proceeding unless in connection with such settlement the indemnified partyreceives an unconditional release with respect to the subject matter of such claim, suit or proceeding and such settlement does notcontain any admission of fault by the indemnified party.

----

                        (e)          In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the indemnified partymakes a claim for indemnification pursuant to Section 8 hereof but is judicially determined (by the entry of a final judgment ordecree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) thatsuch indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 8 hereofprovide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of anyindemnified party, then the Company and the applicable selling Holder shall contribute to the aggregate losses, claims, damages orliabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, allreasonable costs of defense and investigation and all reasonable attorneys’ fees), in either such case (after contributionfrom others) on the basis of relative fault as well as any other relevant equitable considerations.  The relative fault shallbe determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or theomission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or theapplicable selling Holder on the other hand, and the parties’ relative intent, knowledge, access to information andopportunity to correct or prevent such statement or omission.  The Company and the Holders agree that it would not be just andequitable if contribution pursuant to this Section 8(e) were determined by pro rata allocation or by any other method of allocationwhich does not take account of the equitable considerations referred to in this Section 8(e).  The amount paid or payable byan indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above inthis Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connectionwith investigating or defending any such action or claim.  No person guilty of fraudulent misrepresentation (within themeaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of suchfraudulent misrepresentation.

                       Notwithstanding any other provision of this Section 8(e), in no event shall (i) any selling Holder be required to undertakeliability to any person under this Section 8(e) for any amounts in excess of the dollar amount of the gross proceeds to be receivedby the selling Holder from the sale of such selling Holder’s Registrable Securities (after deducting any fees, discounts andcommissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are or were to beregistered under the Securities Act and (ii) any underwriter be required to undertake liability to any person hereunder for anyamounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to theRegistrable Securities underwritten by it and distributed pursuant to the Registration Statement.

          9.          REPORTS UNDER THE EXCHANGE ACT.  With respect to each Holder, from the date of Closing until the date on which all of theRegistrable Securities that such Holder owns or has the right to acquire become freely transferable under Rule 144(k) promulgatedunder the Securities Act, the Company agrees to use its best efforts: (i) to make and keep public information available, as thoseterms are understood and defined in Rule 144, (ii) to file with the SEC all reports and other documents required to be filed by anissuer of securities registered under Sections 13 or 15(d) of the Exchange Act, and (iii) if such filings are not available viaEDGAR, to furnish to such Holder as long as the Holder owns or has the right to acquire any Registrable Securities prior to theapplicable termination date described above, a copy of the most recent annual or quarterly report of the Company, and such otherreports and documents so filed by the Company under Sections 13 or 15(d) of the Exchange Act as may be reasonably requested inavailing such Holder of any rule or regulation of the SEC permitting the selling of any such Registrable Securities withoutregistration.

----

          10.         DEFERRAL AND LOCK-UP.  Notwithstanding anything in this Agreement to the contrary, if the Company shall furnish to theselling Holders a certificate signed by the President and Chief Executive Officer of the Company stating that the Board has madethe good faith determination (i) that continued use by the selling Holders of the Registration Statement for purposes of effectingoffers or sales of Registrable Securities pursuant thereto would require, under the Securities Act, disclosure in the RegistrationStatement (or the prospectus relating thereto) of material, nonpublic information concerning the Company, its business or prospectsor any proposed transaction involving the Company, (ii) that such disclosure would be premature and would be adverse to theCompany, its business or prospects or any such proposed transaction or would make the successful consummation by the Company of anysuch transaction significantly less likely and (iii) that it is therefore essential to suspend the use by the Holders of suchRegistration Statement (and the prospectus relating thereto) for purposes of effecting offers or sales of Registrable Securitiespursuant thereto, then the right of the selling Holders to use the Registration Statement (and the prospectus relating thereto) forpurposes of effecting offers or sales of Registrable Securities pursuant thereto shall be suspended for a period (the“Suspension Period”) of not more than 60 days after delivery by the Company of the certificate referred to above inthis Section 10.  During the Suspension Period, none of the Holders shall offer or sell any Registrable Securities pursuant toor in reliance upon the Registration Statement (or the prospectus relating thereto).  The Company may not exercise this rightmore than one time in any twelve month period after the Closing.

          11.          TRANSFER OF REGISTRATION RIGHTS.  None of the rights of any Holder under this Agreement shall be transferred or assigned toany person unless (i) such person is a Qualifying Holder (as defined below), (ii) such person agrees to become a party to, andbound by all of the terms and conditions of, this Agreement by duly executing and delivering to the Company an Instrument ofAdherence in the form attached as Exhibit A hereto, (iii) the transfer or assignment is made in accordance with the applicablerequirements of the Securities Purchase Agreement and (iv) following the transfer or assignment, the further disposition of theRegistrable Securities by such person is restricted under the Securities Act and applicable state securities laws.  Forpurposes of this Section 11, the term “Qualifying Holder” shall mean, with respect to any Holder, (a) any corporation,partnership or other affiliated entity controlling, controlled by, or under common control with, such Holder, or any partner orformer partner, if such Holder is a partnership, or (b) any other direct transferee from such Holder of at least 50% of thoseRegistrable Securities held or that may be acquired by such Holder.  None of the rights of any Holder under this Agreementshall be transferred or assigned to any person (including, without limitation, a Qualifying Holder) that acquires RegistrableSecurities in the event that and to the extent that such Person is eligible to resell such Registrable Securities pursuant to Rule144(k) of the Securities Act.

----

          12.          ENTIRE AGREEMENT.  This Agreement constitutes and contains the entire agreement and understanding of the parties withrespect to the subject matter hereof, and it also supersedes any and all prior negotiations, correspondence, agreements orunderstandings with respect to the subject matter hereof.

          13.          MISCELLANEOUS.

                        (a)          This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas, and shall bebinding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors orassigns, provided that the terms and conditions of Section 11 hereof are satisfied.  This Agreement shall also be binding uponand inure to the benefit of any transferee of any of the Registrable Securities provided that the terms and conditions of Section11 hereof are satisfied.  Notwithstanding anything in this Agreement to the contrary, if at any time any Holder shall cease toown all of its Registrable Securities, all of such Holder’s rights under this Agreement shall immediately terminate.

                        (b)     (i)     Any notices, reports or other correspondence (hereinafter collectively referredto as “correspondence”) required or permitted to be given hereunder shall be sent by postage prepaid first class mail,courier (overnight or same day) or telecopy or delivered by hand to the party to whom such correspondence is required or permittedto be given hereunder.  The date of giving any notice shall be (i) if delivered by first-class mail, three business days afterso mailed, (ii) if delivered by overnight carrier, one business day after so mailed, (iii) if delivered by hand, on the date ofdelivery, or (iv) if delivered by facsimile, upon electronic confirmation of receipt.

                        (ii)        All correspondence to the Company shall be addressed as follows:

                                   Nano-Proprietary, Inc.                                   3006 Longhorn Boulevard, Suite 107                                   Austin, Texas  78758                                   Attention:  Marc Eller - Chief Executive Officer                                   Telephone:  (512) 339-5020

                                                                      with a copy to:

                                   Donald T. Locke                                   Attorney-at-Law                                   434 Fayetteville Street, Suite 600                                    Raleigh, North Carolina 27601

                        (iii)          All correspondence to any Holder shall be sent to the address set forth on such Holder’s signature page hereto (or, in thecase of a Permitted Transferee, such Permitted Transferee’s Instrument of Adherence hereto).

                        (iv)          Any party may change the address to which correspondence to it is to be addressed by notification as provided for herein.

----

                        (c)          The parties acknowledge and agree that in the event of any breach of this Agreement, remedies at law may be inadequate, and eachof the parties hereto shall be entitled to seek specific performance of the obligations of the other parties hereto and suchappropriate injunctive relief as may be granted by a court of competent jurisdiction.

                        (d)          This Agreement may be executed in a number of counterparts, each of which together shall for all purposes constitute oneAgreement, binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart.

 

 

----

 

            IN WITNESS WHEREOF, theparties hereto have executed this Registration Rights Agreement as of the date and year first above written.

NANO-PROPRIETARY, INC.

 

By:                                                                 Name:  Douglas P. BakerTitle:     Chief Financial Officer

INVESTOR:

Print Name of Investor:

                                                                       

 

By:                                                                 Name:Title:

Investor’s Address and Fax Number for Notice:

                                                                       

                                                                       

                                                                       

 

----

**EXHIBIT A**

**INSTRUMENT OF ADHERENCE**

Reference is hereby made to that certain Registration Rights Agreement, dated as ofOctober __, 2003, among Nano-Proprietary, Inc., a Texas corporation (the “Company”) and the Investors and the PermittedTransferees, as amended and in effect from time to time (the “Registration Rights Agreement’).  Capitalized termsused herein without definition shall have the respective meanings ascribed thereto in the Registration Rights Agreement.

The undersigned, in order to become the owner or holder of, or have the right to acquire,_______ shares of Registrable Securities, hereby agrees that, from and after the date hereof, the undersigned has become a party tothe Registration Rights Agreement in the capacity of a Permitted Transferee, and is entitled to all of the benefits under, and issubject to all of the obligations, restrictions and limitations set forth in, the Registration Rights Agreement that are applicableto Permitted Transferees.  This Instrument of Adherence shall take effect and shall become a part of the Registration RightsAgreement immediately upon execution.

Print Name of Permitted Transferee:

                                                                       

By:                                                                 Name:Title:

Permitted Transferee’s Address and Fax Number forNotice:

                                                                       

                                                                       

                                                                       

Accepted:

Nano-Proprietary, Inc.

 

By:                                                                 Name:Title:

Date:                                                              

----

**EXHIBIT B**

PLAN OF DISTRIBUTION

We are registering the shares of common stock on behalf of the selling security holders.Sales of shares may be made by selling security holders, including their respective donees, transferees, pledgees or othersuccessors-in-interest directly to purchasers or to or through underwriters, broker-dealers or through agents. Sales may be madefrom time to time on the NASDAQ OTC BB, any other exchange upon which our shares may trade in the future,in the over-the-counter market or otherwise, at market prices prevailing at the time of sale, at prices related to market prices,or at negotiated or fixed prices.  The shares may be sold by one or more of, or a combination of, the following:

> -  a block trade in which the broker-dealer so engaged will attempt to sell the shares as agent but may position andresell a portion of the block as principal to facilitate the transaction; 
-  purchases by a broker-dealer as principal and resale by such broker-dealer, including resales for its account,pursuant to this prospectus; 
-  ordinary brokerage transactions and transactions in which the broker solicits purchases; 
-  through options, swaps or derivatives; 
-  in privately negotiated transactions; 
-  in making short sales or in transactions to cover short sales; and 
-  put or call option transactions relating to the shares. 

The selling security holders may effect these transactions by selling shares directly topurchasers or to or through broker-dealers, which may act as agents or principals.  These broker-dealers may receivecompensation in the form of discounts, concessions or commissions from the selling security holders and/or the purchasers of sharesfor whom such broker-dealers may act as agents or to whom they sell as principals, or both (which compensation as to a particularbroker-dealer might be in excess of customary commissions). The selling security holders may also sell shares of common stock shortand deliver shares covered by this prospectus to close out short positions, provided that the short sale is made after theregistration statement is declared effective and a copy of this prospectus is delivered in connection with the short sale. The selling security holders have advised us that they have not entered into any agreements, understandings or arrangements withany underwriters or broker-dealers regarding the sale of their securities.

The selling security holders may enter into hedging transactions with broker-dealers orother financial institutions.  In connection with those transactions, the broker-dealers or other financial institutions mayengage in short sales of the shares or of securities convertible into or exchangeable for the shares in the course of hedgingpositions they assume with the selling security holders.  The selling security holders may also enter into options or othertransactions with broker-dealers or other financial institutions which require the delivery of shares offered by this prospectus tothose broker-dealers or other financial institutions.  The broker-dealer or other financial institution may then resell theshares pursuant to this prospectus (as amended or supplemented, if required by applicable law, to reflect thosetransactions).

----

The selling security holders and any broker-dealers that act in connection with the saleof shares may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act of 1933, and anycommissions received by broker-dealers or any profit on the resale of the shares sold by them while acting as principals may bedeemed to be underwriting discounts or commissions under the Securities Act.  The selling security holders may agree toindemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against liabilities,including liabilities arising under the Securities Act.  The Company has agreed to indemnify each of the selling securityholders and each selling security holder has agreed, severally and not jointly, to indemnify the Company against some liabilitiesin connection with the offering of the shares, including liabilities arising under the Securities Act.

The selling security holders will be subject to the prospectus delivery requirements ofthe Securities Act.  We have informed the selling security holders that the anti-manipulative provisions of Regulation Mpromulgated under the Securities Exchange Act of 1934 may apply to their sales in the market.

Selling security holders also may resell all or a portion of the shares in open markettransactions in reliance upon Rule 144 under the Securities Act, provided they meet the criteria and conform to the requirements ofRule 144.

Upon being notified by a selling security holder that a material arrangement has beenentered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution orsecondary distribution or a purchase by a broker or dealer, we will file a supplement to this prospectus, if required pursuant toRule 424(b) under the Securities Act, disclosing:

> -  the name of each such selling security holder and of the participating broker-dealer(s); 
-  the number of shares involved; 
-  the initial price at which the shares were sold; 
-  the commissions paid or discounts or concessions allowed to the broker-dealer(s), where applicable; 
-  that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference inthis prospectus; and 
-  other facts material to the transactions. 

In addition, we will file a supplement to this prospectus when a selling security holdernotifies us that a donee or pledgee intends to sell more than 500 shares of common stock.

*Expenses Associated with Registration. *

We are paying all expenses and fees in connection with the registration of the shares. Theselling security holders will bear all brokerage or underwriting discounts or commissions paid to broker-dealers in connection withthe sale of the shares.