----

----

| 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 areacode) |

| Nano-Proprietary,      Inc.     |
|---------------------------------|
| (Registrant's      Former Name) |

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

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

----

----

----

| Part      I.  Financial Information | Page                                                                                                                                                                                                                                 |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item      1.  Financial Statements                                                                                                                                                                                              |   |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     |                                                                                                                                                                                                                                 |  Consolidated      Balance Sheets--September 30, 2008 and December 31, 2007 | 3 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     |                                                                                                                                                                                                                                 |  Consolidated      Statements of Operations --Three Months and Nine Months Ended          September      30, 2008 and 2007 |  4 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     |                                                                                                                                                                                                                                 |  Consolidated      Statements of Cash Flows --Nine Months Ended          September      30, 2008 and 2007 |  5 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     |                                                                                                                                                                                                                                 |  Notes  to      Consolidated Financial Statements | 6 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item      2. Management’s Discussion and Analysis of FinancialCondition                          and Results of Operations |  9 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item      3.  Quantitative and Qualitative Disclosures about Market      Risk                                                                                                                                              | 12 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item 4.  Controls and      Procedures                                                                                                                                                                                      | 12 |
|                                     |                                                                                                                                                                                                                                 |   |   |
| Part      II.  Other Information    |                                                                                                                                                                                                                                 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item      1.  Legal Proceedings                                                                                                                                                                                            | 13 |
|                                     |                                                                                                                                                                                                                                 |   |   |
|                                     | Item      6.  Exhibits                                                                                                                                                                                                          | 13 |
|                                     |                                                                                                                                                                                                                                 |   |   |
| Signatures                               | 14                                                                                                                                                                                                                                   |

----

| ASSETS                                                                                                                                                                                                                                                                                                                                                                       |   | (Unaudited)September      30,2008 |         |   | December      31,2007 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------------|--------|-----------------------|--------|
| Current      assets:                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |
| Cash      and cash equivalents                                                                                                                                                                                                                                                                                                                                               |   | $                                 | 1,169,813    |   |                  | $      | 3,020,096 |   |
| Accounts      receivable – net of allowance for doubtful accounts                                                                                                                                                                                                                                                                                                      |   |                              | 525,585      |   |                  |   | 253,963 |   |
| Prepaid      expenses and other current assets                                                                                                                                                                                                                                                                                                                               |   |                              | 107,991      |   |                  |   | 77,038 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|                      Total current assets                                                                                                                                                                                                                                                         |   |                              | 1,803,389    |   |                  |   | 3,351,097 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
| Property      and equipment, net                                                                                                                                                                                                                                                                                                                                             |   |                              | 298,251      |   |                  |   | 278,456 |   |
| Other      assets                                                                                                                                                                                                                                                                                                                                                            |   |                              | 19,901       |   |                  |   | 115,305 |   |
|                      Total assets                                                                                                                                                                                                                                                                 |   | $                                 | 2,121,541    |   |                  | $      | 3,744,858 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
| LIABILITIES      AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                                                                              |   |                              |         |   |                  |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
| Current      liabilities:                                                                                                                                                                                                                                                                                                                                                    |   |                              |         |   |                  |   |   |   |
| Accounts      payable                                                                                                                                                                                                                                                                                                                                                        |   | $                                 | 654,471      |   |                  | $      | 447,106 |   |
| Obligations      under capital lease                                                                                                                                                                                                                                                                                                                                         |   |                              | 37,291       |   |                  |   | 29,416 |   |
| Accrued      liabilities                                                                                                                                                                                                                                                                                                                                                     |   |                              | 145,476      |   |                  |   | 103,003 |   |
| Deferred      revenue                                                                                                                                                                                                                                                                                                                                                        |   |                              | 45,090       |   |                  |   | 306,427 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|                      Total current liabilities                                                                                                                                                                                                                                                    |   |                              | 882,328      |   |                  |   | 885,952 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|  Obligations      under capital lease, long-term                                                                                                                                                                                                                                                                                                                        |   |                              | 34,553       |   |                  |   | 30,004 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
| Commitments      and contingencies                                                                                                                                                                                                                                                                                                                                           |   |                              | –      |   |                  |   | – |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|  Total      Liabilities                                                                                                                                                                                                                                                                                                                                                 |   |                              | 916,881      |   |                  |   | 915,956 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
| Stockholders'      (deficit):                                                                                                                                                                                                                                                                                                                                                |   |                              |         |   |                  |   |   |   |
|      Preferred      stock, $1.00 par value, 2,000,000 shares authorized;            No      shares issued and outstanding                                                                                                                                                               |   |                              | –      |   |                  |   | – |   |
|      Common      stock, $.00l par value, 120,000,000 shares authorized,            107,343,549      and 107,173,549 shares issued and outstanding at            September      30, 2008 and December 31, 2007, respectively |   |                              | 107,344      |   |                  |   | 107,174 |   |
| Additional      paid-in capital                                                                                                                                                                                                                                                                                                                                              |   |                              | 109,123,350  |   |                  |   | 108,580,565 |   |
| Accumulated      deficit                                                                                                                                                                                                                                                                                                                                                     |   |                              | (108,026,034 | )      |                  |   | (105,858,837 | ) |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|                      Total stockholders equity                                                                                                                                                                                                                                                    |   |                              | 1,204,660    |   |                  |   | 2,828,902 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |                              |         |   |                  |   |   |   |
|                      Total liabilities and stockholders equity                                                                                                                                                                                                                                    |   | $                                 | 2,121,541    |   |                  | $      | 3,744,858 |   |

----

|                                                                            |   | For the      Three Months Ended      September 30, |        |   | For       the Nine MonthsEnded      September 30, |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------------------------|-------------|--------|--------------------------------------------------------|--------|
|                                                                            |   | 2008                                                    |        |   | 2007                                                   |   |   | 2008 |   |   | 2007 |   |
| Revenues                                                                        |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |
| Government      contracts                                                       |   | $                                                       | 625,484     |   |                                                   | $      | 664,541 |   |   | $ | 1,782,875 |   |   | $ | 1,741,115 |   |
| Contract      research                                                          |   |                                                    | 230,001     |   |                                                   |   | 203,708 |   |   |   | 589,358 |   |   |   | 721,157 |   |
| Other                                                                           |   |                                                    | 36,368      |   |                                                   |   | 181,500 |   |   |   | 242,868 |   |   |   | 460,382 |   |
|           Total      Revenues |   |                                                    | 891,853     |   |                                                   |   | 1,049,749 |   |   |   | 2,615,101 |   |   |   | 2,922,654 |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Research      and development                                                   |   |                                                    | 1,167,488   |   |                                                   |   | 1,136,220 |   |   |   | 3,557,379 |   |   |   | 3,207,932 |   |
| Selling,      general and administrative expenses                               |   |                                                    | 1,029,750   |   |                                                   |   | 704,222 |   |   |   | 3,091,758 |   |   |   | 3,144,294 |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      costs and expenses                                               |   |                                                    | 2,197,238   |   |                                                   |   | 1,840,442 |   |   |   | 6,649,137 |   |   |   | 6,352,226 |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Gain      on sale of intellectual property and other assets                     |   |                                                    | 1,225,999   |   |                                                   |   | – |   |   |   | 1,329,571 |   |   |   | – |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from operations                                                       |   |                                                    | (79,386     | )      |                                                   |   | (790,693 | ) |   |   | (2,704,465 | )  |   |   | (3,429,572 | )  |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Other      income (expense), net                                                |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      Expense                                                           |   |                                                    | (2,010      | )      |                                                   |   | (80 | ) |   |   | (5,008 | )  |   |   | (349 | ) |
| Interest      Income                                                            |   |                                                    | 6,819       |   |                                                   |   | 30,863 |   |   |   | 42,276 |   |   |   | 94,337 |   |
| Litigation      Settlement                                                      |   |                                                    | –     |   |                                                   |   | – |   |   |   | 500,000 |   |   |   | – |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from continuing operations before taxes                               |   |                                                    | (74,577     | )      |                                                   |   | (759,910 | ) |   |   | (2,167,197 | )  |   |   | (3,335,584 | ) |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for taxes                                                        |   |                                                    | –     |   |                                                   |   | – |   |   |   | – |   |   |   | – |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      loss                                                                   |   | $                                                       | (74,577     | )      |                                                   | $      | (759,910 | ) |   | $ | (2,167,197 | ) |   | $ | (3,335,584 | ) |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      per share                                                             |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic      and Diluted                                                          |   | $                                                       | (0.00       | )      |                                                   | $      | (0.01 | ) |   | $ | (0.02 | ) |   | $ | (0.03 | ) |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted      average shares outstanding                                        |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                            |   |                                                    |        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic      and Diluted                                                          |   |                                                    | 107,338,332 |   |                                                   |   | 107,173,060 |   |   |   | 107,265,556 |   |   |   | 106,034,229 |   |

----

|                                                                                     | For       the Nine Months EndedSeptember      30, |   |
|------------------------------------------------------------------------------------------|--------------------------------------------------------|--------|
|                                                                                     | 2008                                                   |   |   | 2007 |   |
| Cash      flows from operating activities:                                               |                                                   |   |   |   |   |   |
|  Net      loss                                                                      |                                                   | $      | (2,167,197 | ) |   | $ | (3,335,584 | ) |
| Adjustments      to reconcile net loss to net                                            |                                                   |   |   |   |   |   |   |   |
| cash      used in operating activities:                                                  |                                                   |   |   |   |   |   |   |   |
| Depreciation      and amortization expense                                               |                                                   |   | 51,900 |   |   |   | 31,394 |   |
| Stock      based compensation expense                                                    |                                                   |   | 481,705 |   |   |   | 204,800 |   |
| Changes      in assets and liabilities:                                                  |                                                   |   |   |   |   |   |   |   |
| Accounts      receivable, trade                                                          |                                                   |   | (271,622 | ) |   |   | (147,203 | ) |
| Prepaid      expenses and other current assets                                           |                                                   |   | 64,451 |   |   |   | (161,045 | ) |
| Accounts      payable and accrued liabilities                                            |                                                   |   | 249,838 |   |   |   | 398,494 |   |
| Customer      deposits and deferred revenue                                              |                                                   |   | (261,337 | ) |   |   | 322,784 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Total      adjustments                                                                   |                                                   |   | 314,935 |   |   |   | 649,224 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Net      cash used in operating activities                                               |                                                   |   | (1,852,262 | ) |   |   | (2,686,360 | ) |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Cash      flows from investing activities:                                               |                                                   |   |   |   |   |   |   |   |
| Purchases      of fixed assets                                                           |                                                   |   | (36,705 | ) |   |   | (51,470 | ) |
|        Net      cash used in investing activities     |                                                   |   | (36,705 | ) |   |   | (51,470 | ) |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Cash      flows from financing activities:                                               |                                                   |   |   |   |   |   |   |   |
| Repayment      of capital leases                                                         |                                                   |   | (22,566 | ) |   |   | – |   |
| Proceeds      from stock issuance, net of costs                                          |                                                   |   | 61,250 |   |   |   | 6,304,424 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
|        Net      cash provided by financing activities |                                                   |   | 38,684 |   |   |   | 6,304,424 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Net      increase (decrease) in cash and cash equivalents                                |                                                   |   | (1,850,283 | ) |   |   | 3,566,594 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Cash      and cash equivalents, beginning of period                                      |                                                   |   | 3,020,096 |   |   |   | 2,085,338 |   |
|                                                                                     |                                                   |   |   |   |   |   |   |   |
| Cash      and cash equivalents, end of period                                            |                                                   | $      | 1,169,813 |   |   | $ | 5,651,932 |   |

----

----

----

|                                                 |   | ANI    |       |   | EBT    |   |    | All      Other |   |   | Total    |   |
|------------------------------------------------------|--------|--------|------------|--------|--------|--------|---------|----------------|--------|--------|----------|--------|
| 2008                                                 |   |   |       |   |   |   |    |           |   |   |     |   |
| Revenue                                              |   | $      | 2,615,101  |   |   | $      |  - |           |   | $      | -        |   |   | $ | 2,615,101 |   |
|                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| Profit      (Loss)                                   |   |   | (1,245,088 | )      |   |   | (520    | )              |   |   | (921,589 | )      |   |   | (2,167,197 | ) |
|                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| Expenditures      for                                |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
|      long-lived      assets |   |   | 36,705     |   |   |   | -       |           |   |   | -        |   |   |   | 36,705 |   |
|                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| 2007                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| Revenue                                              |   | $      | 2,922,654  |   |   | $      |  - |           |   | $      | -        |   |   | $ | 2,922,654 |   |
|                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| Profit      (Loss)                                   |   |   | (2,365,586 | )      |   |   | (1,298  | )              |   |   | (968,700 | )      |   |   | (3,335,584 | ) |
|                                                 |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
| Expenditures      for                                |   |   |       |   |   |   |    |           |   |   |     |   |   |   |   |   |
|      long-lived      assets |   |   | 51,470     |   |   |   | -       |           |   |   | -        |   |   |   | 51,470 |   |

----

----

----

----

----

----

|                                                     | APPLIED      NANOTECH HOLDINGS, INC.(Registrant)                                                                                                                                                                                                                                                                                                                                                 |
|----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |
| Date:     October      31, 2008 |      /s/ Thomas F.      Bijou                                             Thomas      F. BijouChief      Executive Officer(Principal      Executive Officer)                                       |
|                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |
| Date:     October      31, 2008 |      /s/      Douglas P.      Baker                                       Douglas      P. BakerChief      Financial Officer(Principal      Financial Officer and PrincipalAccounting      Officer) |

----

| 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              |

----