----

----

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--June                30, 2007 and December 31, 2006 | 3 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Consolidated                Statements of Operations--Three                Months and Six Months Ended          June                30, 2007 and 2006 |  4 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Consolidated                Statements of Cash Flows--Six                Months Ended          June                30, 2007 and 2006 |  5 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               |                                                                                                                                                                                                                                                                                      | Notes                to                Consolidated Financial Statements | 6 |
|                                               |                                                                                                                                                                                                                                                                                      |   |   |
|                                               | Item                2.  Management’s                Discussion and Analysis of Financial Condition                      and                Results of Operations |  10 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
|                                               | 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                                                                                                                                                                                                                                                     | 16 |
|                                               |                                                                                                                                                                                                                                                                                      |   |
| Signatures                                         | 17                                                                                                                                                                                                                                                                                        |

----

**PART      I.  FINANCIAL INFORMATION**

**ITEM      1.  FINANCIAL STATEMENTS**

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

**CONSOLIDATED****BALANCE        SHEETS**

| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                  |   | **(Unaudited)****June                  30,****2007** |         |  **December                  31,****2006** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------------|-------------------------------------------------|--------|
| Current                  assets:                                                                                                                                                                                                                                                                                                                                                                            |   |                                                 |         |                                            |   |
| Cash                  and cash equivalents                                                                                                                                                                                                                                                                                                                                                                  |   | $                                                    | 6,537,478    |                                            | $      | 2,085,338 |   |
| Accounts                  receivable, trade - net of allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                        |   |                                                 | 502,291      |                                            |   | 364,718 |   |
| Prepaid                  expenses and other current assets                                                                                                                                                                                                                                                                                                                                                  |   |                                                 | 95,900       |                                            |   | 79,301 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
|                                  Total current assets                                                                                                                                                                                                                                                                            |   |                                                 | 7,135,669    |                                            |   | 2,529,357 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
| Property                  and equipment, net                                                                                                                                                                                                                                                                                                                                                                |   |                                                 | 174,877      |                                            |   | 154,545 |   |
| Other                  assets                                                                                                                                                                                                                                                                                                                                                                               |   |                                                 | 109,540      |                                            |   | 9,540 |   |
|                                  Total assets                                                                                                                                                                                                                                                                                    |   | $                                                    | 7,420,086    |                                            | $      | 2,693,442 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
| **LIABILITIES                  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                             |   |                                                 |              |                                            |   |  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
| Current                  liabilities:                                                                                                                                                                                                                                                                                                                                                                       |   |                                                 |              |                                            |   |  |   |
| Accounts                  payable                                                                                                                                                                                                                                                                                                                                                                           |   | $                                                    | 1,928,867    |                                            | $      | 1,562,488 |   |
| Accrued                  liabilities                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 | 85,786       |                                            |   | 87,237 |   |
| Deferred                  revenue                                                                                                                                                                                                                                                                                                                                                                           |   |                                                 | 758,795      |                                            |   | 401,455 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
|                                  Total current liabilities                                                                                                                                                                                                                                                                       |   |                                                 | 2,773,448    |                                            |   | 2,051,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
| Commitments                  and contingencies                                                                                                                                                                                                                                                                                                                                                              |   |                                                 | -            |                                            |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
|  Total                  Liabilities                                                                                                                                                                                                                                                                                                                                                                    |   |                                                 | 2,773,448    |                                            |   | 2,051,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
| 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,            107,168,549                  and 104,257,607 shares issued and outstanding at            June                  30, 2007 and December 31, 2006, respectively |   |                                                 | 107,169      |                                            |   | 104,258 |   |
| Additional                  paid-in capital                                                                                                                                                                                                                                                                                                                                                                 |   |                                                 | 108,717,089  |                                            |   | 102,139,950 |   |
| Accumulated                  deficit                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 | (104,177,620 | )                                               |   | (101,601,946 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
|                                  Total stockholders equity                                                                                                                                                                                                                                                                       |   |                                                 | 4,646,638    |                                            |   | 642,262 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                 |              |                                            |   |  |   |
|                                  Total liabilities and stockholders equity                                                                                                                                                                                                                                                       |   | $                                                    | 7,420,086    |                                            | $      | 2,693,442 |   |

----

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

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                                                        |   | **For the                  Three Months****Ended                  June 30,** |        | **For                   the Six Months****Ended                  June 30,** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|-------------|----------------------------------------------------------------------------------|--------|
|                                                                                        |   | **2007**                                                                          |        |  **2006**                                                                   |   |  **2007** |   |  **2006** |   |
| Revenues                                                                                    |   |                                                                              |        |                                                                             |   |   |   |   |   |
| Government                  contracts                                                       |   | $                                                                                 | 559,158     |                                                                             | $      | 7,532 |   | $ | 1,076,574 |   | $ | 71,114 |   |
| Contract                  research                                                          |   |                                                                              | 215,238     |                                                                             |   | 60,000 |   |   | 517,449 |   |   | 125,000 |   |
| Other                                                                                       |   |                                                                              | 141,642     |                                                                             |   | 47,477 |   |   | 278,882 |   |   | 81,079 |   |
|           Total                  Revenues |   |                                                                              | 916,038     |                                                                             |   | 115,009 |   |   | 1,872,905 |   |   | 277,193 |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Research                  and development                                                   |   |                                                                              | 996,211     |                                                                             |   | 872,255 |   |   | 2,071,712 |   |   | 1,654,309 |   |
| Selling,                  general and administrative expenses                               |   |                                                                              | 1,201,389   |                                                                             |   | 1,730,561 |   |   | 2,440,072 |   |   | 2,907,884 |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Operating                  costs and expenses                                               |   |                                                                              | 2,197,600   |                                                                             |   | 2,602,816 |   |   | 4,511,784 |   |   | 4,562,193 |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Gain                  on sale of intellectual property and other assets                     |   |                                                                              | -           |                                                                             |   | (1,100,000 | ) |   | - |   |   | (1,100,000 | ) |
|                                                                                        |   |                                                                              |        |                                                                             |   |   |   |   |   |   |   |   |   |
| Loss                  from operations                                                       |   |                                                                              | (1,281,562  | )                                                                                |   | (1,387,807 | ) |   | (2,638,879 | ) |   | (3,185,000 | ) |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Other                  income (expense), net                                                |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Interest                  Expense                                                           |   |                                                                              | -           |                                                                             |   | (183 | ) |   | (269 | ) |   | (296 | ) |
| Interest                  Income                                                            |   |                                                                              | 51,775      |                                                                             |   | 2,407 |   |   | 63,474 |   |   | 5,547 |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
|  Loss                  from continuing operations before taxes                         |   |                                                                              | (1,229,787  | )                                                                                |   | (1,385,583 | ) |   | (2,575,674 | ) |   | (3,179,749 | ) |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
|  Provision                  for taxes                                                  |   |                                                                              | -           |                                                                             |   | - |   |   | - |   |   | - |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Net                  loss                                                                   |   | $                                                                                 | (1,229,787  | )                                                                                | $      | (1,385,583 | ) | $ | (2,575,674 | ) | $ | (3,179,749 | ) |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Loss                  per share                                                             |   |                                                                              |        |                                                                             |   |   |   |   |   |   |   |   |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Basic                  and Diluted                                                          |   | $                                                                                 | (0.01       | )                                                                                | $      | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Weighted                  average shares outstanding                                        |   |                                                                              |        |                                                                             |   |   |   |   |   |   |   |   |   |
|                                                                                        |   |                                                                              |             |                                                                             |   |  |   |   |  |   |   |  |   |
| Basic                  and Diluted                                                          |   |                                                                              | 106,608,465 |                                                                             |   | 101,511,825 |   |   | 105,455,375 |   |   | 100,265,915 |   |

----

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

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                                                 |   | **For                   the Six Months Ended****June                  30,** |       |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|------------|
|                                                                                                 |   | **2007**                                                                         |       |  **2006** |   |
| Cash                  flows from operating activities:                                               |   |                                                                             |       |    |   |
|  Net                  loss                                                                      |   | $                                                                                | (2,575,674 | ) | $ | (3,179,749 | ) |
| Adjustments                  to reconcile net loss to net                                            |   |                                                                             |            |   |   |  |   |
| cash                  used in operating activities:                                                  |   |                                                                             |            |   |   |  |   |
| Depreciation                  and amortization expense                                               |   |                                                                             | 23,290     |   |   | 21,206 |   |
| Stock                  based compensation expense                                                    |   |                                                                             | 282,576    |   |   | 787,866 |   |
| Issuance                  of shares to ATI                                                           |   |                                                                             | -          |   |   | 400,000 |   |
| Changes                  in assets and liabilities:                                                  |   |                                                                             |            |   |   |  |   |
| Accounts                  receivable, trade                                                          |   |                                                                             | (137,573   | ) |   | 26,505 |   |
| Prepaid                  expenses and other current assets                                           |   |                                                                             | (116,599   | ) |   | (71,479 | ) |
| Accounts                  payable and accrued liabilities                                            |   |                                                                             | 364,928    |   |   | 1,005,591 |   |
| Customer                  deposits and deferred revenue                                              |   |                                                                             | 357,340    |   |   | - |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Total                  adjustments                                                                   |   |                                                                             | 773,962    |   |   | 2,169,689 |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Net                  cash used in operating activities                                               |   |                                                                             | (1,801,712 | ) |   | (1,010,060 | ) |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Cash                  flows from investing activities:                                               |   |                                                                             |            |   |   |  |   |
| Purchases                  of fixed assets                                                           |   |                                                                             | (43,622    | ) |   | (17,629 | ) |
|        Net                  cash used in investing activities     |   |                                                                             | (43,622    | ) |   | (17,629 | ) |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Cash                  flows from financing activities:                                               |   |                                                                             |            |   |   |  |   |
| Repayment                  of capital leases                                                         |   |                                                                             | -          |   |   | (4,348 | ) |
| Proceeds                  of stock issuance, net of costs                                            |   |                                                                             | 6,297,474  |   |   | 1,500,000 |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
|        Net                  cash provided by financing activities |   |                                                                             | 6,297,474  |   |   | 1,495,652 |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Net                  increase in cash and cash equivalents                                           |   |                                                                             | 4,452,140  |   |   | 467,963 |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Cash                  and cash equivalents, beginning of period                                      |   |                                                                             | 2,085,338  |   |   | 897,247 |   |
|                                                                                                 |   |                                                                             |            |   |   |  |   |
| Cash                  and cash equivalents, end of period                                            |   | $                                                                                | 6,537,478  |   | $ | 1,365,210 |   |

----

**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*

----

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

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Keesmann        litigation*

|                                                             |   | ANI                |            | EBT           |    | All                  Other |   | Total        |
|------------------------------------------------------------------|--------|--------------------|-----------------|---------------|---------|----------------------------|--------|--------------|
| 2007                                                             |   |               |            |          |    |                       |   |         |
| Revenue                                                          |   | $             | 1,872,905  |          | $  |  -               |   | $            |  -  |   | $  | 1,872,905  |
|                                                             |   |               |            |          |    |                       |   |         |
| Profit                  (Loss)                                   |   | (1,929,676)        |            | (1,298)       |    | (644,700)                  |   | (2,575,674)  |
|                                                             |   |               |            |          |    |                       |   |         |
| Expenditures                  for                                |   |               |            |          |    |                       |   |         |
|      long-lived                  assets |   | 43,622   |            | -        |    | -                     |   | 43,622  |
|                                                             |   |               |            |          |    |                       |   |         |
| 2006                                                             |   |               |            |          |    |                       |   |         |
| Revenue                                                          |   | $             | 277,193    |          | $  |  -               |   | $            |  -  |   | $  | 277,193  |
|                                                             |   |               |            |          |    |                       |   |         |
| Profit                  (Loss)                                   |   | (3,233,473)        |            | 973,019  |    | (919,295)                  |   | (3,179,749)  |
|                                                             |   |               |            |          |    |                       |   |         |
| Expenditures                  for                                |   |               |            |          |    |                       |   |         |
|      long-lived                  assets |   | 17,629   |            | -        |    | -                     |   | 17,629  |

----

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

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

----

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

**FORWARD-LOOKING        STATEMENTS **

**Six        months ended June 30, 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**

**FINANCIAL        CONDITION AND LIQUIDITY**

----

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

**RESULTS        OF OPERATIONS**

----

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

**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:     July                  27, 2007 |      /s/ Thomas                  F.                  Bijou                                                                                         Thomas                  F. BijouChief                  Executive Officer(Principal                  Executive Officer) |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Date:     July                  27, 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 |