**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




For the
quarterly period ended March 31, 2005




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




**COMMISSION
FILE NO. 1-11602**




**NANO-PROPRIETARY,
INC.**


(Exact
name of registrant as specified in its charter)









**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)*







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




[X]
    Yes
    
    [  ]
    No







Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act)




[X]
    Yes
    
    [  ]
    No







As of
April 25, 2005, the registrant had 99,044,047 shares of common stock, par value
$.001 per share, issued and outstanding.













**NANO-PROPRIETARY,
INC.**


**INDEX**









Part
      I.  Financial Information
    **Page**Item
      1.Financial StatementsConsolidated
      Balance Sheets--March
      31, 2005 and December 31, 2004
    3Consolidated
      Statements of Operations--Three
      Months Ended
      March 31, 2005 and 2004
    4Consolidated
      Statements of Cash Flows--Three
      Months Ended
      March 31, 2005 and 2004
    5Notesto
      Consolidated Financial Statements
    6Item
      2.Management’s
      Discussion and Analysis of Financial Condition
      and
      Results of Operations
    9Item
      3. Quantitative and Qualitative Disclosures
      about Market Risk
    13Item
      4.Controls and Procedures
    13Part
      II.  Other InformationItem
      1.Legal Proceedings
    14Item
      2. Unregistered Sales of Equity Securities and Use
      of Proceeds
    14Item
      6.  Exhibits
    15Signatures
    16










2
 Table of Contents





**PART
I.  FINANCIAL INFORMATION**




**ITEM
1.  FINANCIALSTATEMENTS**




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


**CONSOLIDATED** **BALANCESHEETS**









**ASSETS**
    
    **(Unaudited)**
      **March
      31,**
      **2005**
    
    **December
      31,**
      **2004**Current
      assets:Cash
      and cash equivalents
    
    $
    2,943,277
    
    $
    901,585Accounts
      receivable, trade - net of allowance for doubtful accounts
    
    
    11,173
    
    
    6,735Prepaid
      expenses and other current assets
    
    
    100,427
    
    
    85,135Total current assets
    
    
    3,054,877
    
    
    993,455Property
      and equipment, net
    
    
    130,050
    
    
    141,373Other
      assets
    
    
    9,540
    
    
    9,540Total assets
    
    $
    3,194,467
    
    $
    1,144,368**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    272,640
    
    $
    140,597Obligations
      under capital lease
    
    
    21,975
    
    
    21,430Accrued
      liabilities
    
    
    76,126
    
    
    74,956Deferred
      revenue
    
    
    54,985
    
    
    54,985Total current liabilities
    
    
    425,726
    
    
    291,968Obligations
      under capital lease
    
    
    250
    
    
    5,944Total
      Liabilities
    
    
    425,976
    
    
    297,912Commitments
      and contingencies
    
    
    -
    
    
    -Stockholders'
      (deficit):Convertible
      preferred stock, $1.00 par value, 2,000,000 shares
authorized;
      No
      shares issued and outstanding
    
    
    -
    
    
    -Common
      stock, $.00l par value, 120,000,000 shares authorized,
      98,667,547
      and 97,246,422 shares issued and outstanding at
      March
      31, 2005 and December 31, 2004, respectively
    
    
    98,668
    
    
    97,246Additional
      paid-in capital
    
    
    84,212,430
    
    
    80,822,625Accumulated
      deficit
    
    
    (81,542,607
    )
    
    (80,073,415
    )Total stockholders' equity
    
    
    2,768,491
    
    
    846,456Total liabilities and stockholders' equity
    
    $
    3,194,467
    
    $
    1,144,368












See notes
to consolidated financial statements.







3
 Table of Contents







NANO-PROPRIETARY, INC. AND
SUBSIDIARIES


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**For 
      the Three Months Ended****March
      31,****2005**
    
    **2004**RevenuesGovernment
      contracts
    
    $
    18,367
    
    $
    65,880Royalties
    
    
    3,897
    
    
    -Other
    
    
    46,551
    
    
    11,778Total
      Revenues
    
    
    68,815
    
    
    77,658Research
      and Development
    
    
    680,706
    
    
    751,595Selling,
      general and administrative expenses
    
    
    860,902
    
    
    443,925Operating
      costs and expenses
    
    
    1,541,608
    
    
    1,195,520Loss
      from operations
    
    
    (1,472,793
    )
    
    (1,117,862
    )Other
      income (expense), netInterest
      Expense
    
    
    (1,026
    )
    
    (1,172
    )Interest
      Income
    
    
    4,627
    
    
    7,268Other
    
    
    -
    
    
    125Loss
      from continuing operations before taxes
    
    
    (1,469,192
    )
    
    (1,111,641
    )Provision
      for taxes
    
    
    -
    
    
    -Net
      loss
    
    $
    (1,469,192
    )
    $
    (1,111,641
    )Loss
      per shareBasic
      and Diluted
    
    $
    (0.02
    )
    $
    (0.01
    )Weighted
      average shares outstandingBasic
      and Diluted
    
    
    97,914,179
    
    
    94,961,000





See notes
to consolidated financial statements.







4
 Table of Contents







NANO-PROPRIETARY, INC. AND
SUBSIDIARIES


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




**For the
      Three Months Ended****March
      31,****2005**
    
    
    **2004**Cash
      flows from operating activities:Net
      loss
    
    $
    (1,469,192
    )
    $
    (1,111,641
    )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depreciation
      and amortization expense
    
    
    15,026
    
    
    11,678Gain
      on sale of fixed assets
    
    
    -
    
    
    (125
    )Options
      issued for services
    
    
    19,339
    
    
    116,600Non-cash
      variable option pricing expense
    
    
    214,325
    
    
    (165,750
    )Changes
      in assets and liabilities:Accounts
      receivable, trade
    
    
    (4,438
    )
    
    14,756Prepaid
      expenses and other assets
    
    
    (15,292
    )
    
    (44,018
    )Accounts
      payable and accrued liabilities
    
    
    133,213
    
    
    155,510Total
      adjustments
    
    
    362,173
    
    
    88,651Net
      cash used in operating activities
    
    
    (1,107,019
    )
    
    (1,022,990
    )Cash
      flows from investing activities:Capital
      expenditures
    
    
    (3,703
    )
    
    (14,730
    )Proceeds
      from sale of fixed assets
    
    
    -
    
    
    125Net
      cash used in investing activities
    
    
    (3,703
    )
    
    (14,605
    )Cash
      flows from financing activities:Repayment
      of notes payable and capital lease obligations
    
    
    (5,149
    )
    
    (4,661
    )Proceeds
      of stock issuance, net of costs
    
    
    3,157,563
    
    
    1,382,605Net
      cash provided by financing activities
    
    
    3,152,414
    
    
    1,377,944Net
      increase (decrease) in cash and cash equivalents
    
    
    2,041,692
    
    
    340,349Cash
      and cash equivalents, beginning of period
    
    
    901,585
    
    
    3,564,570Cash
      and cash equivalents, end of period
    
    $
    2,943,277
    
    $
    3,904,919







See notes
to consolidated financial statements.







5
 Table of Contents




NANO-PROPRIETARY, INC. AND
SUBSIDIARIES


**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**









1.       Basis
of Presentation




The
consolidated financial statements of the Company for the three-month periods
ended March 31, 2005 and 2004, have been prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of the Company’s management, all adjustments necessary to present
fairly the financial position, results of operations, and cash flows of the
Company as of March 31, 2005 and 2004 and for the periods then ended have been
made. Those adjustments consist of normal and recurring adjustments. The
consolidated balance sheet of the Company as of December 31, 2004, has been
derived from the audited consolidated balance sheet of the Company as of that
date.




Certain
information and note disclosures normally included in the Company’s annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with a reading of the financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K/A for the fiscal year ended December 31, 2004, as filed with the Securities
and Exchange Commission.




The
results of operations for the three-month period ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year.




2.       Supplemental
Cash Flow Information




Cash paid
for interest for the three months ended March 31, 2005 and 2004, was $1,026 and
$1,172, respectively. During the three months ended March 31, 2005 and 2004, the
Company had non-cash transactions related to variable option pricing and options
issued to consultants. These transactions are described in greater detail in
Note 3.




3.       Stockholders’
Equity




In the
three months ended March 31, 2005, the Company issued 1,200,000 restricted
shares of its common stock and received net proceeds of $3,000,000 in an exempt
offering under Regulation D of the Securities Act of 1933. The Company issued
221,125 shares of its common stock and received $157,563 in connection with the
exercise of employee stock options. In the three months ended March 31, 2004,
the Company issued 401,887 restricted shares of its common stock and received
net proceeds of $1,065,000 in an exempt offering under Regulation D of the
Securities Act of 1933. The Company issued 278,000 shares of its common stock
and received $299,205 in connection with the exercise of employee stock options,
primarily by former employees of the Company, and issued 20,000 shares and
received $18,400 in connection with the exercise of warrants.




In April
2001, the Company repriced a total of 900,500 options to lower the exercise
price of these options to $1.50, which was approximately 160% of the market
price of the stock at the time of the repricing. The repricing of these options
resulted in a new measurement date for accounting purposes and reclassification
of these options as variable plan awards beginning on the date of the repricing.
The Company previously accounted for these option grants as fixed plan awards.
From the date of the repricing through December 31, 2003, the quoted value of
the Company’s common stock exceeded the exercise price and remained above it,
closing at $2.73 per share on December 31, 2003. The Company recorded $749,755
in non-cash option expense for the cumulative effects of the repricing and
increased additional paid-in capital by the same amount in 2003. During the
quarter ended March 31, 2004, the price of the Company’s common stock declined
and closed at $2.39 on March 31, 2004. The Company reversed $165,750 of the
previously recorded expense in the quarter ended March 31, 2004, as a result of
this price decline. During the quarter ended March 31, 2005, the priced of the
Company’s common stock increased from its closing price of $2.17 on December 31,
2004 to $3.00 on March 31, 2005. As a result, the company recorded $214,325 in
non-cash option expense and increased additional paid-in capital by the same
amount in the quarter ended March 31, 2005.




In the
quarter ended March 31, 2005, the Company issued 20,000 options to a consultant,
10,000 with an exercise price of $2.54 per share and 10,000 with an exercise
price of $2.86 per share. In connection with these options, the Company recorded
$19,339 as an expense during the period. In the quarter ended March 31, 2004,
the Company issued 100,000 options to a consultant with an exercise price of
$3.08 per share. In connection with the options, the Company recorded $116,600
as an expense during the period.







6
 Table of Contents










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


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**









4.       Contingencies




*Litigation*




The
Company is a defendant in minor lawsuits described in greater detail in its 2004
annual report on Form 10-K/A. The Company expects any potential eventual payment
to have no material affect on the financial statements. In addition, as
described in greater detail in note 6, the company initiated a lawsuit against
Canon, Inc. in April 2005.




5.       Business
Segments




Following
is information related to the Company’s business segments for the three months
ended March 31, 2004 and 2003:




ANI
    
    EBT
    
    All
      Other
    
    Total2005Revenue
    
    $
    68,815
    
    $
    -
    
    $
    -
    
    $
    68,815Profit
      (Loss)
    
    (1,104,922)
    
    -
    
    (364,270)
    
    (1,469,192)Expenditures
      forlong-lived
      assets
    
    3,703
    
    -
    
    -
    
    3,7032004Revenue
    
    $
    77,658
    
    $
    -
    
    $
    -
    
    $
    77,658Profit
      (Loss)
    
    (1,029,273)
    
    53,097
    
    (135,465)
    
    (1,111,641)Expenditures
      forlong-lived
      assets
    
    12,357
    
    -
    
    2,373
    
    14,730







6.       Subsequent
Events




On April
11, 2005, we filed suit against Canon, Inc. in the U.S. District Court for the
Western District of Texas, Austin Division. We are seeking a declaratory
judgment that new SED color television products, scheduled to be
manufactured by Canon and/or Toshiba beginning in August 2005, are not covered
under a 1999 patent license agreement that we have with Canon.  We
assert that Canon is improperly using our patented technology to produce
surface conductor electron emitter display screens (SED) for a new generation of
flat screen color televisions. We  also
assert that a joint venture formed by Canon and Toshiba Corporation to
produce the SED display screens, SED, Inc., is not a licensed subsidiary
under the 1999 agreement and that Canon is improperly transferring its
license rights under Nano-Proprietary's patents to the joint venture and
Toshiba.




For the
period from April 1, 2005 through April 25, 2005, the Company issued a total of
376,500 shares of common stock and received proceeds of $168,500 in connection
with the exercise of options under the Company’s stock option
plans.







7
 Table of Contents





7.       Recently
Issued Accounting Standards




In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995. The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will no
longer be an alternative. SFAS 123R is effective for the first annual period
beginning after June 15, 2005. Accordingly, we will adopt this provision for its
financial statements for the quarter ended March 31, 2006. The financial impact
of adopting SFAS 123R cannot be predicted, however it will likely have a
material impact on the Company’s financial statements.







8
 Table of Contents





**ITEM2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS**


**OF
OPERATIONS**




The
following is management’s discussion and analysis of certain significant factors
that have affected the Company’s financial position and operating results during
the periods included in the accompanying consolidated financial
statements.




**FORWARD-LOOKING
STATEMENTS**




This
Form 10-Q contains certain forward-looking statements that we believe are within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created by such acts. For this purpose, any statements that are not
statements of historical fact may be deemed to be forward-looking statements,
including the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding our strategy, future
operations, future expectations or future estimates, financial position and
objectives of management. Those statements in this Form 10-Q containing the
words "believes," "anticipates," "plans," "expects" and similar expressions
constitute forward-looking statements, although not all forward-looking
statements contain such identifying words. These forward-looking statements are
based on our current expectations and are subject to a number of risks,
uncertainties and assumptions relating to our operations, results of operations,
competitive factors, shifts in market demand and other risks and
uncertainties.




Although
we believe that the assumptions underlying our forward-looking statements are
reasonable, any of the assumptions could be inaccurate and actual results may
differ from those indicated by the forward-looking statements included in this
Form 10-Q. In light of the significant uncertainties inherent in the
forward-looking statements included in this Form 10-Q, you should not consider
the inclusion of such information as a representation by us or anyone else that
we will achieve such results. Moreover, we assume no obligation to update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements.




**Three
months ended March 31, 2005 and 2004**




**OVERVIEW**




We
are primarily a nanotechnology company engaged in the development of proofs of
concepts of products and materials , and the performance of services based
principally on our intellectual property. During the three months ended March
31, 2005, our primary revenues were earned as a result of reimbursed research
expenditures at our Applied Nanotech, Inc. (“ANI”) subsidiary. As more fully
discussed in our Annual Report on Form 10-K/A for the year ended December 31,
2004, we expect to incur additional research and development expenses throughout
2005 in developing our technology. We are focused on licensing our technology
and obtaining sufficient revenue to cover our ongoing research
expenditures.




**OUTLOOK**




We
expect our present cash balances of approximately $2.6 million as of the date of
this filing, when combined with expected revenue sources, to enable us to
operate at least through the end of the year and into 2006.  We have a plan
to achieve profitability in 2006. There can be no assurance that we will achieve
profitability, or even break-even, in the future. To the extent our revenues do
not allow us to break-even, or if the timing of revenues does not match with
expenses, we could be required to raise additional funds through the issuance of
debt or equity securities to enable us to maintain operations at the present
level. The mix of revenues received could also cause the revenues required to
reach break-even to increase. If revenue producing projects require
unanticipated expenses, or heavier than anticipated use of outside services or
materials, we may be unable to achieve profitability at the expected level of
revenues.




We
have developed a plan to allow ourselves to maintain operations until we are
able to sustain ourselves on our own revenue. Our plan is primarily dependent on
raising funds through the licensing of our technology and reimbursed research
contracts. Our current cash of approximately $2.6 million as of the date of this
filing is sufficient to allow us to maintain operations through at least the end
of the year and into 2006. We expect additional revenue producing projects or
license agreements to be finalized during that time period. We believe that we
have the ability to continue to raise funding, if necessary, to enable us to
continue operations until our plan can be completed.







9
 Table of Contents





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


**OF
OPERATIONS (cont.)**









This
plan is based on current development plans, current operating plans, the current
regulatory environment, historical experience in the development of electronic
products and general economic conditions. Changes could occur which would cause
certain assumptions on which this plan is based to be no longer valid. Although
we do not expect funding our operations to be a problem, if adequate funds are
not available from operations, or additional sources of financing, we may have
to eliminate, or reduce substantially, expenditures for research and
development, testing and production of its products, or obtain funds through
arrangements with other entities that may require us to relinquish rights to
certain of our technologies or products. Such results would materially and
adversely affect us.




**RECENT
DEVELOPMENTS**




On
April 11, 2005, we filed suit against Canon, Inc. in the U.S. District Court for
the Western District of Texas, Austin Division. We are seeking a declaratory
judgment that new SED color television products, scheduled to be
manufactured by Canon and/or Toshiba beginning in August 2005, are not covered
under a 1999 patent license agreement that we have with Canon.  We
assert that Canon is improperly using our patented technology to produce
surface conductor electron emitter display screens (SED) for a new generation of
flat screen color televisions. We  also
assert that a joint venture formed by Canon and Toshiba Corporation to
produce the SED display screens, SED, Inc., is not a licensed subsidiary
under the 1999 agreement and that Canon is improperly transferring its
license rights under Nano-Proprietary's patents to the joint venture and
Toshiba.




We
completed a private placement of shares of our common stock in February 2005. As
a result of this private placement we issued 1,200,000
shares of our common stock in exchange for gross proceeds of
$3,000,000.  Expenses
associated with this transaction were negligible. We expect that the proceeds of
this transaction, when combined with our existing cash and expected revenues,
will enable us to operate at least through the end of the year and into
2006.




**RECENT
ACCOUNTING PRONOUNCEMENTS**




In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995. The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will no
longer be an alternative. SFAS 123R is effective for the first annual period
beginning after June 15, 2005. Accordingly, we will adopt this provision for its
financial statements for the quarter ended March 31, 2006. The financial impact
of adopting SFAS 123R cannot be predicted, however it will likely have a
material impact on the Company’s financial statements.







10
 Table of Contents





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


**OF
OPERATIONS (cont.)**









**FINANCIAL
CONDITION AND LIQUIDITY**




Our
cash position increased during the period. At March 31, 2005 we had cash and
cash equivalents in the amount of $2,943,277 as compared with cash and cash
equivalents of $901,585 at December 31, 2004. This increase in cash is primarily
the result of cash provided by financing activities, offset by cash used in
operating activities.




As
described in greater detail in the notes to the financial statements, we
received net proceeds of $3,157,563 from the issuance of common stock related to
private placements and option exercises during the quarter ended March 31, 2005
(the “2005 Period”), as compared with $1,382,605 from the issuance of common
stock during the quarter ended March 31, 2004 (the “2004 Period”). The majority
of the common stock issued in the 2005 Period was the result of the private
placement in February 2005 in which 1,200,000 shares of stock were issued in
exchange for net proceeds of $3,000,000. We do not expect to raise any
additional equity in 2005, however there may be additional proceeds from common
stock as the result of the exercise of options.




Our cash used in operating activities increased from $1,022,990 in the 2004
Period to $1,107,109 in the 2005 Period. This is primarily the result of
operating factors discussed below in the “Results of Operations” section. We
would expect our cash used in operating activities to decrease in future
quarters in 2005 as a result of increasing revenues, while expenses remain
relatively constant.




We
used net cash of $14,605 for investing activities in the 2004 Period related to
the purchase of research equipment, compared with cash used in investing
activities related to equipment purchases of $3,703 in the 2005 Period. We
expect cash used in investing activities to remain at relatively insignificant
levels for the balance of 2005.




The
principal source of our liquidity has been funds received from exempt offerings
of common stock. In the event that we need additional funds, we may seek to sell
additional debt or equity securities. While we expect to be able to obtain any
funds needed for operations, there can be no assurance that any of these
financing alternatives can be arranged on commercially acceptable terms. We
believe that our success in reaching profitability will be dependent on our
patent portfolio and upon the viability of products using our technology and
their acceptance in the marketplace, as well as our ability to obtain additional
debt or equity financings in the future, if needed.




We
expect to continue to incur substantial expenses for research and development
("R&D"). Further, we believe that certain products that may be developed by
potential licensees of our technology may not be available for commercial sale
or routine use for a period of one to two years. Others are expected to be
available in 2005. While we would likely receive initial license payments,
ongoing royalty streams related to those licenses will not be available until
potential licensees have introduced products using our technology. Therefore, it
is possible that the commercialization of our existing and proposed products may
require additional capital in excess of our current funding. We do, however,
have a plan to operate profitably in 2005 based on the receipt of research
funding and other revenues. Achievement of at least break-even would enable us
to continue our research without seeking additional debt or equity
financing.




Because
the timing and receipt of revenues from the license or royalty agreements will
be tied to the achievement of certain product development, testing and marketing
objectives, which cannot be predicted with certainty, there may be substantial
fluctuations in our results of operations. If revenues do not increase as
rapidly as anticipated, or if product development and testing require more
funding than anticipated, we may be required to curtail our operations or seek
additional financing from other sources. The combined effect of the foregoing
may prevent us from achieving sustained profitability for an extended period of
time.







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


**OF
OPERATIONS (cont.)**




**RESULTS
OF OPERATIONS**




Our
loss for the 2005 Period was $1,469,192 as compared with the loss of $1,111,641
for 2004 Period. Our total revenues for the two periods were virtually the same;
however our costs were higher during the 2005 Period, which accounted for the
increased loss. The most significant portion of the cost increase resulted from
the variable option pricing as discussed below.




Our
revenues for the quarter ended March 31, 2005, totaled $68,815 compared to
$77,658 for the same quarter in 2004. The revenues in both periods were all from
ANI and substantially all the result of reimbursed research expenditures.




During the 2005 Period, $18,367 of the revenue came from government contracts,
$3,897 from royalties, and $46,551 from other miscellaneous sources. During the
2004 Period, $65,880 of the revenue came from government contracts and $11,778
came from other miscellaneous sources. At the present stage of our development,
significant conclusions cannot be drawn by comparing revenues from period to
period. Our business strategy is built on developing a royalty stream from
licensing our intellectual property. To supplement this, we also seek funding
from both governmental and private sources to help fund our research. Until we
are able to develop a steady revenue stream from royalties, our revenues will
tend to fluctuate greatly from quarter to quarter. Our private research funding
tends to come in large amounts at sporadic times.




We
have a revenue backlog of approximately $435,000 as of the date of this filing.
We had a total revenue backlog of approximately $370,000 as of March 31, 2004.
Our ability to perform continued research, or fulfill our backlog, should not
require significant additional personnel.




We
incurred research and development expenses of $680,706 for the 2005 Period,
which was a decrease from the $751,595 incurred in the 2004 Period. In the 2004
Period, we had significant expenditures related to the development of our
14-inch color CNT proof of concept. We expect research and development
expenditures to remain relatively constant for the remainder of the year.
Significant new revenue producing research programs could, however, cause
research and development expenditures to increase.




Our selling, general, and administrative expenses were $860,902 for the 2005
Period, compared with $443,925 for the 2004 Period - an increase of $416,977. Of
this increase, $380,075 related to a non-cash item resulting from variable
option accounting. In April 2001, we repriced a total of 900,500 options to
lower the exercise price of these options to $1.50, which was approximately 160%
of the market price of the stock at the time of the repricing. The repricing of
these options resulted in a new measurement date for accounting purposes and
reclassification of these options as variable plan awards beginning on the date
of the repricing. The effect of this was to cause us to record additional
expense in periods when our stock price increases and to decrease expense in
periods when our stock price decreases. In the 2005 Period, we recorded
additional expense of $214,325 related to the variable option accounting, as
opposed to the 2004 Period when we reduced expense by $165,750 for the same
reason. The remainder of the increase in selling, general, and administrative
expense in 2005 related to legal expense incurred prior to the initiation of our
previously discussed litigation against Canon, Inc.




Because
of the significant effect of the variable option accounting, it is not possible
to predict the level of selling, general, and administrative expense for the
remainder of the year since that would require a prediction of our underlying
stock price in the future. Each increase or decrease of $1 in our stock price
will result in an increase or decrease in expense of approximately $185,000
based on the remaining repriced options outstanding at March 31, 2005. Ignoring
the effects of variable option accounting, we would expect the remaining
selling, general, and administrative expenses to remain constant, or even
decline slightly for the balance of 2005. Since the law firm handling our
litigation against Canon, Inc. is handling it on a contingency basis, we do not
expect that lawsuit to materially affect our selling, general, and
administrative expenses, although we may incur expenses related to that lawsuit
from time to time.




Our
interest income and expense is insignificant and relatively constant between the
2005 Period and the 2004 Period. Our only interest expense relates to capital
leases. Our interest income results from the investment of excess funds in short
term interest bearing instruments, primarily certificates of deposit, commercial
paper, and money market funds.







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




We do not
use any derivative financial instruments for hedging, speculative, or trading
purposes. Our exposure to market risk is currently immaterial.









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




Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, within 90 days of the filing date of this
report (the "Evaluation Date"). Based upon this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms relating to the
Company, including, our consolidated subsidiaries, and was made known to them by
others within those entities, particularly during the period when this report
was being prepared.




In
addition, there were no significant changes in our internal controls over
financial reporting or in other factors that could significantly affect these
controls subsequent to the Evaluation Date. We have not identified any material
weaknesses in our internal controls, and therefore, no corrective were actions
taken.







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**PARTII. OTHER INFORMATION**




**ITEM
1.  LEGALPROCEEDINGS**




On
April 11, 2005, we filed suit against Canon, Inc. in the U.S. District Court for
the Western District of Texas, Austin Division. We are seeking a declaratory
judgment that new SED color television products, scheduled to be
manufactured by Canon and/or Toshiba beginning in August 2005, are not covered
under a 1999 patent license agreement that we have with Canon.  We
assert that Canon is improperly using our patented technology to produce
surface conductor electron emitter display screens (SED) for a new generation of
flat screen color televisions. We  also
assert that a joint venture formed by Canon and Toshiba Corporation to
produce the SED display screens, SED, Inc., is not a licensed subsidiary
under the 1999 agreement and that Canon is improperly transferring its
license rights under Nano-Proprietary's patents to the joint venture and
Toshiba.




**ITEM
2.  UNREGISTEREDSALES OF EQUITY SECURITIES
AND USE OF PROCEEDS**




From
January 1, 2005 through March 31, 2005, in a private placement only to
accredited investors under Rule 506 of Regulation D of the Securities Act of
1933, we issued a total of 1,200,000 shares of our common stock in exchange for
$3,000,000. These shares were issued at a price of $2.50 per share, which
represented a slight discount to the market price of our common stock at the
time of issuance. The Company filed registration statements in April 2005 to
register these shares. Following is a listing of those shares
issued:




Common
      sharesShareholder
    
    issuedKarrison
      Nichols
    
    200,000JLF
      Partners I
    
    329,000JLF
      Partners II
    
    26,000JLF
      Offshore Partners
    
    523,000Guggenheim
      Partners
    
    122,000















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




(a)     Exhibits:
See Index to Exhibits on page 17 for a descriptive response to this
item.







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**SIGNATURES**




Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.









NANO-PROPRIETARY,
      INC.
      (Registrant)Date:     May
      3, 2005
    /s/
      Marc W. Eller
      Marc W. Eller
      Chairman
      and Chief Executive
      Officer
      (Principal Executive Officer)Date:     May
      3, 2005
    /s/
      Douglas P. Baker
      Douglas P. Baker
      Chief
      Financial Officer
      (Principal
      Financial Officer and Principal
      Accounting
      Officer)















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**INDEX
TO EXHIBITS**




The
following documents are filed as part of this Report:





Exhibit11
    Computation
      of (Loss) Per Common Share31.1
    Rule
      13a-14(a)/15d-14(a) Certificate of Marc W. Eller31.2
    Rule
      13a-14(a)/15d-14(a) Certificate of Douglas P. Baker32.1
    Section
      1350 Certificate of Marc W. Eller32.2
    Section
      1350 Certificate of Douglas P. Baker








17