----

----

Index

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      DC 20549**

**FORM      10-Q**

|  |                 ý |                       Quarterly report under Section 13 or 15(d) of the Securities Exchange                Act                of 1934 |
|--|----------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |                  ̈ | Transition                report pursuant to Section 13 or 15(d) of the Securities Exchange                Act of                1934 |
|--|----------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|

**COMMISSION      FILE NO. 1-11602**

**NANO-PROPRIETARY,      INC.**

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

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

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

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

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

----

**NANO-PROPRIETARY,      INC.**

**INDEX**

| Part                I.  Financial Information | **Page**                                                                                                                                                                                                                                                                                  |
|----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               | Item                1.  Financial                Statements                                                                                                                                                                                                                          |   |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Consolidated                Balance Sheets--March                31, 2007 and December 31, 2006 | 3 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Consolidated                Statements of Operations--Three                Months Ended          March                31, 2007 and 2006 |  4 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Consolidated                Statements of Cash Flows--Three                Months Ended          March                31, 2007 and 2006 |  5 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Notes                to                Consolidated Financial Statements | 6 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               | Item                2.  Management’s                Discussion and Analysis of Financial Condition                      and                Results of Operations |  9 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | Item                3.  Quantitative and Qualitative Disclosures about                Market Risk                                                                                                                                                                                    | 13 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | Item                4.  Controls                and Procedures                                                                                                                                                                                                                       | 13 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
| Part                II.  Other Information    |                                                                                                                                                                                                                                                                                      |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | Item                1.  Legal                Proceedings                                                                                                                                                                                                                             | 14 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | Item                2.  Unregistered Sales of Equity Securities and                Use of Proceeds                                                                                                                                                                                   | 15 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | Item                6.  Exhibits                                                                                                                                                                                                                                                     | 15 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
| Signatures                                         | 16                                                                                                                                                                                                                                                                                        |

----

**PART      I.  FINANCIAL INFORMATION**

**ITEM      1.  FINANCIAL STATEMENTS**

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

**CONSOLIDATED****BALANCE      SHEETS**

| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                | **(Unaudited)****March                31,****2007** |            |  **December                31,****2006** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|-----------------|-----------------------------------------------|
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                |                                                |            |                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Cash                and cash equivalents                                                                                            |  $                                             | 1,375,687  | $                                             | 2,085,338  |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Accounts                receivable, trade - net of allowance for doubtful accounts                                                  |                                                | 559,155    |                                          | 364,718  |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Prepaid                expenses and other current assets                                                                            |                                                | 42,332     |                                          | 79,301  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                Total current assets      |                                                | 1,977,174  |                                          | 2,529,357  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Property                and equipment, net                                                                                          |                                                | 185,928    |                                          | 154,545  |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Other                assets                                                                                                         |                                                | 109,540    |                                          | 9,540  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                Total assets              | $                                                   | 2,272,642  | $                                             | 2,693,442  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                   | **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                       |                                                |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                |                                                |            |                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Accounts                payable                                                                                                     | $                                                   | 1,967,989  | $                                             | 1,562,488  |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Accrued                liabilities                                                                                                  |                                                | 87,438     |                                          | 87,237  |
|                                                                                                                                                                                                                                                                                                                                                                                                   | Deferred                Revenue                                                                                                     |                                                | 623,719    |                                          | 401,455  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                Total current liabilities |                                                | 2,679,146  |                                          | 2,051,180  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
| Commitments                and contingencies                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                | -                                              |            | -                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
|  Total                Liabilities                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                |  2,679,146                                |            | 2,051,180                                |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |   |
| Stockholders'                (deficit):                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                |                                                |            |                                          |
|      Convertible                preferred stock, $1.00 par value, 2,000,000 shares                authorized;            No                shares issued and outstanding                                                                                                                                          |                                                                                                                                | -                                              |            | -                                   |
|      Common                stock, $.00l par value, 120,000,000 shares authorized,            104,393,474                and 104,257,607 shares issued and outstanding at            March                31, 2007 and December 31, 2006, respectively |                                                                                                                                | 104,394                                        |            | 104,258                                  |
| Additional                paid-in capital                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                | 102,436,935                                    |            | 102,139,950                              |
| Accumulated                deficit                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                | (102,947,833)                                       |            | (101,601,946)                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |
|                                Total stockholders' equity                                                                                                                                                                                                                                                                   |                                                                                                                                | (406,504)                                           |            | 642,262                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |                                                |            |                                          |
|                                Total liabilities and stockholders' equity                                                                                                                                                                                                                                                   | $                                                                                                                                   | 2,272,642                                      | $               | 2,693,442                                |

----

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

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                                                        |   | **For                   the Three Months Ended****March                  31,**  |        |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|-------------|
|                                                                                        |   | **2007**                                                                                  |        |  **2006** |   |
| Revenues                                                                                    |   |                                                                                      |        |   |   |
| Government                  contracts                                                       |   | $                                                                                         | 517,416     |   | $ | 63,582 |   |
| Contract                  Research                                                          |   |                                                                                      | 302,211     |   |   | 65,000 |   |
| Other                                                                                       |   |                                                                                      | 137,240     |   |   | 33,602 |   |
|           Total                  Revenues |   |                                                                                      | 956,867     |   |   | 162,184 |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Research                  and Development                                                   |   |                                                                                      | 1,075,501   |   |   | 782,054 |   |
| Selling,                  general and administrative expenses                               |   |                                                                                      | 1,238,683   |   |   | 1,177,323 |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Operating                  costs and expenses                                               |   |                                                                                      | 2,314,184   |   |   | 1,959,377 |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Loss                  from operations                                                       |   |                                                                                      | (1,357,317  | ) |   | (1,797,193 | ) |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Other                  income (expense), net                                                |   |                                                                                      |             |   |   |  |   |
| Interest                  Expense                                                           |   |                                                                                      | (269        | ) |   | (113 | ) |
| Interest                  Income                                                            |   |                                                                                      | 11,699      |   |   | 3,140 |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Loss                  from continuing operations before taxes                               |   |                                                                                      | (1,345,887  | ) |   | (1,794,166 | ) |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Provision                  for taxes                                                        |   |                                                                                      | -           |   |   | - |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Net                  loss                                                                   |   | $                                                                                         | (1,345,887  | ) | $ | (1,794,166 | ) |
| Loss                  per share                                                             |   |                                                                                      |             |   |   |  |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Basic                  and Diluted                                                          |   | $                                                                                         | (0.01       | ) | $ | (0.02 | ) |
| Weighted                  average shares outstanding                                        |   |                                                                                      |             |   |   |  |   |
|                                                                                        |   |                                                                                      |             |   |   |  |   |
| Basic                  and Diluted                                                          |   |                                                                                      | 104,289,473 |   |   | 100,017,273 |   |

----

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

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                | **For the                Three Months Ended****March                31,** |
|---------------------------------------------------------------------|--------------------------------------------------------------------------------|
|                                                                | **2007**                                                                       |   |   | **2006** |
| Cash                flows from operating activities:                |                                                                           |   |   |   |   |
|                                                                |  Net                loss                                                  | $ | (1,345,887) | $ | (1,794,166) |
|                                                                |                                                                           | Adjustments                to reconcile net loss to net |   |   |   |   |
|                                                                |                                                                           |   | cash                used in operating activities: |   |   |   |   |
|                                                                |                                                                           |   | Depreciation                and amortization expense |   | 11,327  |   | 13,307  |
|                                                                |                                                                           |   | Stock                based compensation expense |   | 189,868  |   | 446,148  |
|                                                                |                                                                           |   | Changes                in assets and liabilities: |   |   |   |   |
|                                                                |                                                                           |   |   | Accounts                receivable, trade |   | (194,437) |   | (7,614) |
|                                                                |                                                                           |   |   | Prepaid                expenses and other assets |   | (63,031) |   |  36,764  |
|                                                                |                                                                           |   |   | Accounts                payable and accrued liabilities |   | 405,702  |   | 122,890  |
|                                                                |                                                                           |   |   | Deposits                and Deferred Revenue |   | 222,264   |   | 100,000  |
|                                                                |                                                                           |   |   |   |   |   |   |   |
|                                                                |                                                                           |   |   | Total                adjustments |   | 571,693  |   | 711,495  |
|                                                                |                                                                           |   |   |   |   |   |   |   |
|                                                                |                                                                           |   | Net                cash used in operating activities |   | (774,194) |   | (1,082,671) |
|                                                                |                                                                           |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                |                                                                           |   |   |   |
|                                                                |                                                                           | Capital                expenditures |   | (42,710) |   | (5.692) |
|                                                                |                                                                           |    Net                cash used                in investing activities |   | (42,710) |   | (5,692) |
|                                                                |                                                                           |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                |                                                                           |   |   |   |
|                                                                |                                                                           | Repayment                of notes payable and capital lease obligations |   | -  |   | (4,049) |
|                                                                |                                                                           | Proceeds                of stock issuance, net of costs |   | 107,253  |   | 1,500,000  |
|                                                                |                                                                           |   |   |   |   |   |   |   |
|                                                                |                                                                           |    Net                cash                provided by financing activities |   | 107,253  |   | 1,495,951 |
|                                                                |                                                                           |   |   |   |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents |                                                                           | (709,651) |   | 407,588 |
|                                                                |                                                                           |   |   |   |   |   |   |   |
| Cash                and cash equivalents, beginning of period       |                                                                           | 2,085,338  |   | 897,247  |
|                                                                |                                                                           |   |   |   |   |   |   |   |
| Cash                and cash equivalents, end of period             | $                                                                              | 1,375,687  |   | $ | 1,304,835  |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Litigation*

*Canon      litigation*

*Keesmann      litigation*

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

|                                                           |   | ANI          |                | EBT           |    | All                Other |   | Total        |
|----------------------------------------------------------------|--------|--------------|---------------------|---------------|---------|--------------------------|--------|--------------|
| 2007                                                           |   |         |                |          |    |                     |   |         |
|                                                           |   |         |                |          |    |                     |   |         |
| Revenue                                                        |   | $       | 956,867   |          | $  |  -             |   | $            |  -  |   | $  | 956,867  |
|                                                           |   |         |                |          |    |                     |   |         |
| Profit                (Loss)                                   |   | (956,574)    |                | (1,298)  |    | (388,015)                |   | (1,345,887)  |
|                                                           |   |         |                |          |    |                     |   |         |
| Expenditures                for                                |   |         |                |          |    |                     |   |         |
|      long-lived                assets |   | 42,710  |                | -        |    | -                   |   | 42,710  |
|                                                           |   |         |                |          |    |                     |   |         |
| 2006                                                           |   |         |                |          |    |                     |   |         |
|                                                           |   |         |                |          |    |                     |   |         |
| Revenue                                                        |   | $       | 162,184   |          | $  |  -             |   | $            |  -  |   | $  | 162,184  |
|                                                           |   |         |                |          |    |                     |   |         |
| Profit                (Loss)                                   |   | (1,229,535)  |                | (7,199)  |    | (557,432)                |   | (1,794,166)  |
|                                                           |   |         |                |          |    |                     |   |         |
| Expenditures                for                                |   |         |                |          |    |                     |   |         |
|      long-lived                assets |   | 5,692   |                | -        |    | -                   |   | 5,692   |

----

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

**FORWARD-LOOKING      STATEMENTS **

**Three      months ended March 31, 2007 and 2006**

**OVERVIEW**

**OUTLOOK**

----

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

**RECENT      DEVELOPMENTS**

**RECENT      ACCOUNTING PRONOUNCEMENTS**

----

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

**FINANCIAL      CONDITION AND LIQUIDITY**

----

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

**RESULTS      OF OPERATIONS**

----

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

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

----

**PART      II. OTHER INFORMATION**

**ITEM      1.       LEGAL      PROCEEDINGS**

*Canon      litigation*

*Keesmann      litigation*

----

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

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

----

**SIGNATURES**

|                                                            | NANO-PROPRIETARY,                  INC.(Registrant)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Date:     May                  1, 2007 |      /s/ Thomas                  F.                  Bijou                                                                                         Thomas                  F. BijouChief                  Executive Officer (Principal                  Executive Officer) |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Date:     May                  1, 2007 |     /s/                  Douglas P.                  Baker                                                               Douglas                  P. BakerChief                  Financial Officer(Principal                  Financial Officer and PrincipalAccounting                  Officer)                                                                                                                      |

----

**INDEX        TO EXHIBITS**

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