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 June 30, 2008




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




COMMISSION
FILE NO. 1-11602




APPLIED
NANOTECH HOLDINGS, 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 107Austin,
      Texas
            78758(Address
      of principal executive offices)
            (Zip
      Code)







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






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







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 a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See the definition of
“accelerated filer”, “large accelerated filer”, and “smaller reporting company”
in rule 12b-2 of the Act.




Large
Accelerated Filer  o   
Accelerated Filer  þ




Non-accelerated
Filer  o     Smaller
Reporting Company  o







Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).




[  ]
 Yes
       [X]   No




As of
July 29, 2008, the registrant had 107,343,549 shares of common stock, par value
$.001 per share, issued and outstanding.










APPLIED
NANOTECH HOLDINGS, INC.




INDEX









Part
      I.  Financial Information
            PageItem
      1.  Financial StatementsConsolidated
      Balance Sheets -- June 30, 2008 and December 31, 2007
            3Consolidated
      Statements of Operations --Three Months and Six Months Ended
              June
      30, 2008 and 2007
            4Consolidated
      Statements of Cash Flows -- Six Months Ended
              June
      30, 2008 and 2007
            5Notes  to
      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
            12Item 4.  Controls and
      Procedures
            12Part
      II.  Other InformationItem
      1.  Legal Proceedings
            13Item
      4.  Submission of Matters to a Vote of Security
      Holders
            14Item
      6.  Exhibits
            14Signatures
            15







2


PART
I.  FINANCIAL INFORMATION




ITEM
1.  FINANCIAL STATEMENTS




APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS









ASSETS
            
            (Unaudited)
              June
      30,
              2008
            
            
            December
      31,
              2007Current
      assets:Cash
      and cash equivalents
            
            $
            1,012,097
            
            
            $
            3,020,096Accounts
      receivable – net of allowance for doubtful accounts
            
            
            629,438
            
            
            
            253,963Prepaid
      expenses and other current assets
            
            
            106,988
            
            
            
            77,038Total
      current assets
            
            
            1,748,523
            
            
            
            3,351,097Property
      and equipment, net
            
            
            274,436
            
            
            
            278,456Other
      assets
            
            
            18,269
            
            
            
            115,305Total
      assets
            
            $
            2,041,228
            
            
            $
            3,744,858LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            574,820
            
            
            $
            447,106Obligations
      under capital lease
            
            
            31,103
            
            
            
            29,416Accrued
      liabilities
            
            
            105,979
            
            
            
            103,003Deferred
      revenue
            
            
            177,487
            
            
            
            306,427Total
      current liabilities
            
            
            889,389
            
            
            
            885,952Obligations
      under capital lease, long-term
            
            
            14,019
            
            
            
            30,004Commitments
      and contingencies
            
            
            –
            
            
            
            –Total
      Liabilities
            
            
            903,408
            
            
            
            915,956Stockholders'
      (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,107,323,549
      and 107,173,549 shares issued and outstanding atJune
      30, 2008 and December 31, 2007, respectively
            
            
            107,324
            
            
            
            107,174Additional
      paid-in capital
            
            
            108,981,953
            
            
            
            108,580,565Accumulated
      deficit
            
            
            (107,951,457
            )
            
            
            (105,858,837
            )Total
      stockholders equity
            
            
            1,137,820
            
            
            
            2,828,902Total
      liabilities and stockholders equity
            
            $
            2,041,228
            
            
            $
            3,744,858






See notes
to consolidated financial statements.






3




APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)




For the
      Three Months
              Ended
      June 30,
            
            
            For the
      Six Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesGovernment
      contracts
            
            $
            611,567
            
            
            $
            559,158
            
            
            $
            1,157,391
            
            
            $
            1,076,574Contract
      research
            
            
            174,999
            
            
            
            215,238
            
            
            
            359,357
            
            
            
            517,449Other
            
            
            66,668
            
            
            
            141,642
            
            
            
            206,500
            
            
            
            278,882Total
      Revenues
            
            
            853,234
            
            
            
            916,038
            
            
            
            1,723,248
            
            
            
            1,872,905Research
      and development
            
            
            1,207,756
            
            
            
            996,211
            
            
            
            2,389,891
            
            
            
            2,071,712Selling,
      general and administrative expenses
            
            
            1,006,738
            
            
            
            1,201,389
            
            
            
            2,062,008
            
            
            
            2,440,072Operating
      costs and expenses
            
            
            2,214,494
            
            
            
            2,197,600
            
            
            
            4,451,899
            
            
            
            4,511,784Gain
      on sale of intellectual property and other assets
            
            
            3,572
            
            
            
            –
            
            
            
            103,572
            
            
            
            –Loss
      from operations
            
            
            (1,357,688
            )
            
            
            (1,281,562
            )
            
            
            (2,625,079
            )
            
            
            (2,638,879
            )Other
      income (expense), netInterest
      Expense
            
            
            (1,400
            )
            
            
            –
            
            
            
            (2,998
            )
            
            
            (269
            )Interest
      Income
            
            
            14,047
            
            
            
            51,775
            
            
            
            35,457
            
            
            
            63,474Litigation
      Settlement
            
            
            –
            
            
            
            –
            
            
            
            500,000
            
            
            
            –Loss
      from continuing operations before taxes
            
            
            (1,345,041
            )
            
            
            (1,229,787
            )
            
            
            (2,092,620
            )
            
            
            (2,575,674
            )Provision
      for taxes
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Net
      loss
            
            $
            (1,345,041
            )
            
            $
            (1,229,787
            )
            
            $
            (2,092,620
            )
            
            $
            (2,575,674
            )Loss
      per shareBasic
      and Diluted
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.02
            )Weighted
      average shares outstandingBasic
      and Diluted
            
            
            107,283,989
            
            
            
            106,608,465
            
            
            
            107,228,769
            
            
            
            105,455,375







See notes
to consolidated financial statements.




4




APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




For the
      Six Months Ended
              June
      30,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (2,092,620
            )
            
            $
            (2,575,674
            )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depreciation
      and amortization expense
            
            
            32,913
            
            
            
            23,290Stock
      based compensation expense
            
            
            345,288
            
            
            
            282,576Changes
      in assets and liabilities:Accounts
      receivable, trade
            
            
            (375,475
            )
            
            
            (137,573
            )Prepaid
      expenses and other current assets
            
            
            67,086
            
            
            
            (116,599
            )Accounts
      payable and accrued liabilities
            
            
            130,690
            
            
            
            364,928Customer
      deposits and deferred revenue
            
            
            (128,940
            )
            
            
            357,340Total
      adjustments
            
            
            71,562
            
            
            
            773,962Net
      cash used in operating activities
            
            
            (2,021,058
            )
            
            
            (1,801,712
            )Cash
      flows from investing activities:Purchases
      of fixed assets
            
            
            (28,893
            )
            
            
            (43,622
            )Net
      cash used in investing activities
            
            
            (28,893
            )
            
            
            (43,622
            )Cash
      flows from financing activities:Repayment
      of capital leases
            
            
            (14,298
            )
            
            
            –Proceeds
      from stock issuance, net of costs
            
            
            56,250
            
            
            
            6,297,474Net
      cash provided by financing activities
            
            
            41,952
            
            
            
            6,297,474Net
      increase (decrease) in cash and cash equivalents
            
            
            (2,007,999
            )
            
            
            4,452,140Cash
      and cash equivalents, beginning of period
            
            
            3,020,096
            
            
            
            2,085,338Cash
      and cash equivalents, end of period
            
            $
            1,012,097
            
            
            $
            6,537,478







See notes
to consolidated financial statements.




5






APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)









1.
            Basis
      of Presentation




The
consolidated financial statements for the three and six month periods ended June
30, 2008 and 2007 have been prepared by us without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments necessary to present fairly our financial position,
results of operations, and cash flows as of June 30, 2008 and 2007, and for the
periods then ended, have been made. Those adjustments consist of normal and
recurring adjustments. The consolidated balance sheet as of December 31, 2007,
has been derived from the audited consolidated balance sheet as of that
date.




Certain
information and note disclosures normally included in our 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 our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, as filed with the U.S. Securities and Exchange
Commission.




The
results of operations for the three and six month periods ended June 30, 2008,
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 six months ended June 30, 2008 and 2007, was $2,998 and
$269, respectively. During the six months ended June 30, 2008 and 2007, the
Company had non-cash transactions related to share based payments covered by FAS
123R. These transactions are described in greater detail in Note 4.




3.
            Stockholders’
      Equity




During
the six months ended June 30, 2007, we issued 2,608,698 restricted shares of
common stock and received net proceeds of $6,000,000 in an exempt offering under
Regulation D of the Securities Act of 1933. In connection with this offering, we
also issued warrants enabling the holders to purchase 1,304,353 shares of our
common stock at a price of $2.50 per share through December 2008. We also issued
302,244 shares of common stock and received proceeds of $297,474 in connection
with the exercise of stock options during the six months ended June 30,
2007.




In the
six months ended June 30, 2008, we issued 150,000 shares of common stock and
received proceeds of $56,250 in connection with the exercise of stock
options




4.
            Share-Based
      Payments




Effective January 1, 2006, the Company
adopted FASB Statement of Financial Accounting Standards No. 123R (Revised
2004), Share-Based Payment, 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 recorded $320,372 in
compensation expense in the period ended June 30, 2008, related to options
issued under its stock-based incentive compensation plans. This includes expense
related to both options issued in the current year and options issued in prior
years for which the requisite service period for those options includes the
current year. The fair value of these options was calculated using the
Black-Scholes option pricing model. Information related to the assumptions used
in this model is set forth in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. For options issued in 2008, the same
assumptions were used except that risk free interest rates ranging from 1.74% to
3.13% were used and an annualized volatility rate of approximately 75% was used.
The period ended June 30, 2008 also includes $24,916 of expense related to
restricted stock provided to non-employee Directors of the Company as
compensation.




The Company recorded $282,576 in
compensation expense in the period ended June 30, 2007, related to options
issued under its stock-based incentive compensation plans.




6







APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




5.
            Contingencies




Litigation




The Company is a defendant in minor
lawsuits described in greater detail in its 2007 Annual Report on Form 10-K. The
Company expects any potential eventual payment to have no material affect on the
financial statements.




Canon
Litigation




In April 2005, we filed suit against
the Japanese camera and copier manufacturer Canon, Inc., and its wholly-owned
U.S. subsidiary Canon USA, Inc., in the U.S. District Court for the Western
District of Texas, Austin Division, seeking a declaratory
judgment that new SED color television products being developed
and manufactured by a Canon/Toshiba joint venture are not covered under a
non-exclusive 1999 patent license agreement that we granted to Canon. 
We asserted that the Canon/Toshiba joint-venture – SED, Inc. – was not a
licensed party under that agreement.  The original complaint asserted
additional claims related to whether the Canon/Toshiba joint venture’s
television panels constituted excluded products under the 1999 license, as well
as breach of covenant of good faith and fair dealing, tortious interference and
a Lanham Act violation by Canon. In the fall of 2005, Canon moved to dismiss
Canon U.S.A. from the litigation, and moved to dismiss several of the counts
asserted.  The court denied the motion, in part, by ruling that Canon
U.S.A. was an appropriate defendant and refusing to dismiss our claims for
breach of the covenant of good faith and fair dealing.  Our tortious
interference and Lanham Act claims were dismissed, without
prejudice.




After initial discovery, in April 2006,
we amended the complaint to drop one count related to the definition of excluded
products in the 1999 license, and add two counts for fraudulent inducement and
fraudulent non-disclosure related to events and representations made during our
negotiations on the license,  and leading up to and following the
formation by Canon and Toshiba of their joint venture effort, including Canon’s
failure to disclose an ongoing relationship with Toshiba and misrepresentations
made to us about the joint venture’s structure and operation.  Canon
moved to dismiss the fraud claims, and the Court denied Canon’s motion in May
2006.  Discovery was completed in August 2006. Upon completion of
discovery, Canon filed a motion for partial summary judgment seeking to dismiss
the claim that SED is not a licensed party under the agreement. Canon did not
file a motion for summary judgment seeking to dismiss the other claims. In
November 2006, the Court denied Canon’s partial motion for summary judgment,
describing SED, Inc. as a “corporate fiction designed for the sole purpose of
evading Canon’s contractual obligations”.




In January 2007, Canon filed another
motion for partial summary judgment seeking a declaration that a reconstituted
SED, Inc. which is purportedly owned 100% by Canon but which still involved
numerous reciprocal agreements with Toshiba, would be considered a Canon
subsidiary. At the same time, we filed a motion for partial summary judgment,
seeking the Court’s affirmation of our termination of the license agreement due
to Canon’s breach of contract in 2004. On February 22, 2007, the Court issued a
ruling denying Canon’s motion and granting our motion for partial summary
judgment, ruling our termination of the contract effective December 1, 2006 to
be valid.




A trial on the case began on April 30,
2007 and a final judgment was entered in the case in May 2007. The final
judgment reaffirmed Canon’s material breach of the patent license, while
awarding no additional damages. Both parties have filed appeals related to the
litigation. All appeal briefs and responses have been filed with the Fifth
Circuit Court of Appeals and oral arguments in the case were held on June 4,
2008. In July 2008, the Appeals Court reversed the District Court’s ruling
related to our termination of the contract and reinstated Canon’s non-exclusive
license. The appeals court also affirmed the District Court’s ruling related our
appeal of the District Court’s exclusion of certain evidence at the time of
trial.




Keesmann
Litigation




In June 2008 we settled the litigation
that was in process with Mr. Till Keesmann and there is no longer any contingent
liability associated with that litigation.




7







APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




6.
            Business
      Segments




Following
is information related to our business segments for the six months ended June
30, 2008 and 2007:




ANI
            
            
            EBT
            
            
            All
      Other
            
            
            Total2008Revenue
            
            $
            1,723,248
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,723,248Profit
      (Loss)
            
            
            (1,470,759
            )
            
            
            (520
            )
            
            
            (621,341
            )
            
            
            (2,092,620
            )Expenditures
      forlong-lived
      assets
            
            
            28,893
            
            
            
            -
            
            
            
            -
            
            
            
            28,8932007Revenue
            
            $
            1,872,905
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,872,905Profit
      (Loss)
            
            
            (1,929,676
            )
            
            
            (1,298
            )
            
            
            (644,700
            )
            
            
            (2,575,674
            )Expenditures
      forlong-lived
      assets
            
            
            43,622
            
            
            
            -
            
            
            
            -
            
            
            
            43,622







8.
            Subsequent
      Events




In
July 2008, we entered into a transaction with IP Verwertungs GmbH (“IPV”)
related to our license agreement with Mr. Till Keesmann. In connection with this
agreement, we received $1.2 million in July 2008. An additional $200,000 will be
placed in escrow by IPV and will be released at a future date - either to us, or
back to IPV, depending on licensing activity under the Keesmann license. In
exchange for its payment, IPV will receive a portion of the royalties received
as a result of Keesmann sublicenses. Initially, IPV will receive 25% of our
portion of the royalties received from sublicenses. That percentage will
increase to 50% once total royalties related to the Keesmann patents of
approximately $5.0 million have been generated.




8


ITEM
2:  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 our 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.




Six
months ended June 30, 2008 and 2007




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 all periods presented, 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 for the year ended December 31, 2007, we expect to
incur additional research and development expenses throughout 2008 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, which are approximately $2 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 2008.  We have a plan to achieve
profitability in 2008 -however an integral component of that plan is signing one
or more licensing agreements with up-front payments. There can be no assurance
that we will achieve profitability, or even break-even, or that expected revenue
sources will all occur as planned. 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 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.




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.




9


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









RECENT
DEVELOPMENTS




In June 2008, we settled
our  litigation with Mr. Till Keesmann. The settlement agreement
resulted in no payment to either party. In addition, at the same time, the
license agreement with Mr. Keesmann was amended. The amendment set forth minimum
terms for future sublicense agreements, clarified future licensing
responsibilities, provided Mr. Keesmann the opportunity for advances against
future royalties, and also provided Mr. Keesmann options for services to be
rendered.




In July 2008, we entered into a
transaction with IP Verwertungs GmbH (“IPV”) related to our license agreement
with Mr. Till Keesmann. In connection with this agreement, we received $1.2
million in July 2008. An additional $200,000 will be placed in escrow by IPV and
will be released at a future date - either to us, or back to IPV, depending on
licensing activity under the Keesmann license. In exchange for its payment, IPV
will receive a portion of the royalties received as a result of Keesmann
sublicenses. Initially, IPV will receive 25% of our portion of the royalties
received from sublicenses. That percentage will increase to 50% once total
royalties related to the Keesmann patents of approximately $5.0 million have
been generated.




Effective July 1, 2008, we changed our
name from Nano-Proprietary, Inc. to Applied Nanotech Holdings, Inc. On the same
date, our trading symbol changed from NNPP to APNT.




As described in greater detail in Note
5 to the financial statements and  Part II, Item 1, of this report, in
July 2008, the Appeals Court reversed the District Court’s ruling related to our
termination of the contract and reinstated Canon’s non-exclusive license to
certain of our display technology.




RECENT
ACCOUNTING PRONOUNCEMENTS




There are no recent accounting
pronouncements that we have not implemented that are expected to have a material
impact on our financial statements.




FINANCIAL
CONDITION AND LIQUIDITY




Our cash
position decreased during the period. At June 30, 2008 we had cash and cash
equivalents in the amount of $1,012,097 as compared with cash and cash
equivalents of $3,020,096 at December 31, 2007.  This decrease in cash
is primarily the result of cash used in operating activities.




We
received net cash from financing activities of $41,952 during the six months
ended June 30, 2008 (the “2008 Period”), as compared with cash flow from
financing activities of $6,297,474 during the six months ended June 30, 2007
(the “2007 Period”). The cash flow in the 2007 Period resulted from the issuance
of common stock in connection with a private placement of our common stock and
from the exercise of stock options. The cash flow in the 2008 Period was the
result of the exercise of stock options, partially offset by payments on capital
leases.




Our net
cash used in operating activities increased from approximately $1.8 million in
the 2007 Period to approximately $2.0 million in the 2008 Period. This is
primarily the result of operating factors discussed below in the “Results of
Operations” We would expect our cash used in operating activities to decrease in
future quarters in 2008. We expect reduced cash used in operations, or positive
cash flow from operations, in the third quarter of 2008 as a result
of  the previously mentioned IPV transaction. We also expect reduced
cash used in operations, or positive cash flow from operations, in the third
quarter of 2008 as a result of  increasing revenues and decreasing
expenses.




Cash used
in investing activities in both periods was insignificant and related to the
purchase of capital equipment. We expect cash used in investing activities to
remain at relatively insignificant levels for the balance of 2008.




10







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




The
principal source of our liquidity has been funds received from exempt offerings
of common stock. Our current cash balance, which is approximately $2.0 million,
is sufficient to last us at least through the end of 2008. We also expect to
sign agreements during that period which will extend the time period that cash
will last. However in the event that we do determine that we need additional
cash, we may seek to sell additional debt or equity securities. While we expect
to continue 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 2008 and 2009. While we would likely receive initial license
payments, ongoing royalty streams related to some 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 2008 based on the
receipt of research funding and other revenues. A significant component of this
plan involves signing one or more license agreements with up front payments.
Achievement of at least break-even would enable us to continue our research
without seeking additional debt or equity financing in the future.




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 at some point in the future. The
combined effect of the foregoing may prevent us from achieving sustained
profitability for an extended period of time.




RESULTS
OF OPERATIONS




Our net
loss for the second quarter ended June 30, 2008 was $1,345,041 as compared with
the loss of $1,229,787 for the same period last year. Our net loss of $2,092,620
for the six months ended June 30, 2007 was lower than the loss of $2,575,674 for
the six months ended June 30, 2007. This decreased loss was the result of
reasons set forth below. We expect our quarterly loss to be reduced in the third
and fourth quarters of 2008.




Our
revenues for the quarter ended June 30, 2008 totaled $853,234 compared to
$916,038 for the same quarter of 2007. For the six-month period ended June 30,
2008 (the “2008 Period”), our revenues were $1,723,248 as compared with
$1,872,905 for the six-month period ended June 30, 2007 (the “2007 Period”), a
slight decrease. The revenues in both periods were all from ANI and
substantially all the result of reimbursed research expenditures. The majority
of revenues in both periods came primarily from government contracts. At the
present stage of our development, significant conclusions cannot be drawn by
comparing revenues from period to period; however, we would expect the revenue
for the balance of 2008 to increase above the level of the first six months. 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 $3.4 million as of the date of this filing, a substantial increase
over our backlog of approximately $2.1 million as of June 30, 2007, and we
expect our revenue to remain at or above current levels in future quarters as a
result of this backlog. Our ability to perform continued research, or fulfill
our backlog, will not require additional personnel. We do not anticipate hiring
any additional people for the balance of the year, unless we receive significant
new revenues.




We
incurred research and development expenses of $2,389,891 in the 2008 Period,
which was higher than the amount of $2,071,712 incurred in the 2007 Period. This
reflects a general increase in the level of our activity and the costs
associated with the revenue producing projects. We expect research and
development expenditures to gradually decrease for the remainder of the year as
we cut back our spending on projects that are not funded by outside
sources.  Significant new revenue producing research programs beyond
those already identified could, however, cause research and development
expenditures to increase further.




11


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




Our
selling, general, and administrative expenses were $2,062,008 for the 2008
Period, compared with $2,440,072 for the 2007 Period – a decrease of
approximately $380,000. The main reason for this decrease was decreased
litigation expenses. We had litigation related expenses of approximately
$900,000 in the 2007 Period, but only approximately $200,000 in the 2008 Period.
The majority of the litigation expense in the 2007 Period related to the Canon
litigation and expenses associated with the trial. The majority of the
litigation expense in the 2008 Period related to the Keesmann litigation and the
related multipart settlement. We expect litigation expenses to decline even
further from current levels in the third and fourth quarters of 2008 as a result
of the completion of the Canon appeal and the settlement of the Keesmann
litigation.




Offsetting
this increase in litigation expense were increases in other areas. Our stock
based compensation expense increased from approximately $215,000 in the 2007
Period to approximately $275,000 in the 2008 Period. In addition, our payroll
and related expenses increased from approximately $550,000 in the 2007 Period to
approximately $630,000 in the 2008 Period as a result of additional
administrative employees and other increased costs. We also incurred increased
costs in the area of patent filings and maintenance fees, consultants, and as a
result of our annual shareholders meeting.  We would expect our
selling, general and administrative expenses to be lower in the third and fourth
quarters of 2008 than in the first two quarters of 2008 as a result of the
expected decrease in litigation expenses discussed in the preceding paragraph
and other cost saving measures that we have implemented.




Our
interest income is insignificant, but decreased during the 2008 Period as a
result of a lower average level of invested cash balances. 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. We expect our interest income to remain at insignificant levels
for the balance of 2008. Our interest expense was insignificant in both periods
and is expected to remain so for the balance of the year.




During
the 2008 Period, we also had a gain of $100,000 from the sale of certain excess
patents, which we were no longer using and which did not relate to any of our
current technology platforms. The 2008 Period also included a gain of $500,000
from the  settlement related to the additional defendants in the
Keesmann litigation, which is discussed in greater deal in Part II, Item 1 to
this report. No similar items were included in 2007.







ITEM
3.       QUANTITATIVE AND 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.       CONTROLS AND 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-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of the end of the period covered by 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 or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and therefore, there were no corrective
actions taken.




12


PART
II.  OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS




Canon
litigation




In April 2005, we filed suit against
the Japanese camera and copier manufacturer Canon, Inc., and its wholly-owned
U.S. subsidiary Canon USA, Inc., in the U.S. District Court for the Western
District of Texas, Austin Division, seeking a declaratory
judgment that new SED color television products being developed
and manufactured by a Canon/Toshiba joint venture are not covered under a
non-exclusive 1999 patent license agreement that we granted to Canon. 
We asserted that the Canon/Toshiba joint-venture – SED, Inc. – was not a
licensed party under that agreement.  The original complaint asserted
additional claims related to whether the Canon/Toshiba joint venture’s
television panels constituted excluded products under the 1999 license, as well
as breach of covenant of good faith and fair dealing, tortious interference and
a Lanham Act violation by Canon. In the fall of 2005, Canon moved to dismiss
Canon U.S.A. from the litigation, and moved to dismiss several of the counts
asserted.  The court denied the motion, in part, by ruling that Canon
U.S.A. was an appropriate defendant and refusing to dismiss our claims for
breach of the covenant of good faith and fair dealing.  Our tortious
interference and Lanham Act claims were dismissed, without
prejudice.




After initial discovery, in April 2006,
we amended the complaint to drop one count related to the definition of excluded
products in the 1999 license, and add two counts for fraudulent inducement and
fraudulent non-disclosure related to events and representations made during our
negotiations on the license,  and leading up to and following the
formation by Canon and Toshiba of their joint venture effort, including Canon’s
failure to disclose an ongoing relationship with Toshiba and misrepresentations
made to us about the joint venture’s structure and operation.  Canon
moved to dismiss the fraud claims, and the Court denied Canon’s motion in May
2006.  Discovery was completed in August 2006. Upon completion of
discovery, Canon filed a motion for partial summary judgment seeking to dismiss
the claim that SED is not a licensed party under the agreement. Canon did not
file a motion for summary judgment seeking to dismiss the other claims. In
November 2006, the Court denied Canon’s partial motion for summary judgment,
describing SED, Inc. as a “corporate fiction designed for the sole purpose of
evading Canon’s contractual obligations”.




In January 2007, Canon filed another
motion for partial summary judgment seeking a declaration that a reconstituted
SED, Inc. which is purportedly owned 100% by Canon but which still involved
numerous reciprocal agreements with Toshiba, would be considered a Canon
subsidiary. At the same time, we filed a motion for partial summary judgment,
seeking the Court’s affirmation of our termination of the license agreement due
to Canon’s breach of contract in 2004. On February 22, 2007, the Court issued a
ruling denying Canon’s motion and granting our motion for partial summary
judgment, ruling our termination of the contract effective December 1, 2006 to
be valid.




A trial on the case began on April 30,
2007 and a final judgment was entered in the case in May 2007. The final
judgment reaffirmed Canon’s material breach of the patent license, while
awarding no additional damages. Both parties have filed appeals related to the
litigation. All appeal briefs and responses have been filed with the Fifth
Circuit Court of Appeals and oral arguments in the case were held on June 4,
2008. In July 2008, the Appeals Court reversed the District Court’s ruling
related to our termination of the contract and reinstated Canon’s non-exclusive
license. The appeals court also affirmed the District Court’s ruling related our
appeal of the District Court’s exclusion of certain evidence at the time of
trial.




Keesmann
litigation




In May
2006 we filed suit in the U.S. District Court for the Northern District of
Illinois against Till Keesmann, a German citizen who in 2000 granted us an
exclusive and perpetual license to certain of his U.S. and European patents in
carbon nanotube cathode technology.   The complaint, which
resulted from Keesmann’s attempted termination of the license in March 2006,
seeks a declaratory judgment that Keesmann had no right to terminate the
exclusive license. We also filed for a Temporary Restraining Order and
Preliminary Injunction to prevent Keesmann from taking any actions inconsistent
with his obligations under the exclusive license.




In June
2006, Keesmann filed an Answer and Counterclaim, denying that the purported
termination was null and void, and asserted a counterclaim that asks the court
to find that we breached the exclusive license by, among other things, not
actively marketing the Keesmann patents.  The Court granted a consent
order that prevented Keesmann from licensing the patents pending an injunction
hearing and decision.




In
January 2007, the Court granted our motion for preliminary injunction, ruling
that there was a reasonable likelihood that we would prevail on the merits of
the case. The preliminary injunction enjoined Keesmann, his agents, employees,
and all those acting in concert with him from terminating the license agreement
for the reasons asserted in the March 2006 default notice, or otherwise acting
in violation of the license agreement. In connection with this injunction, the
Court set a surety bond, which is required by law, at $100,000. We posted the
bond in February 2007. That bond was released back to us in July
2008.




13


In 2005,
Keesmann conveyed part of his interests in the Exclusive License to investors
associated with a German patent evaluation firm, IP Bewertungs AG
(“IPB”).  In December 2006, we amended our original complaint to add
these investors as additional defendants. The amended complaint also contained
additional claims including breach of contract, conversion, aiding and abetting
conversion, conspiracy to commit conversion, misappropriation, aiding and
abetting misappropriation, conspiracy to commit conversion, Lanham Act
violations, tortious interference with a prospective economic relationship,
aiding and abetting tortious interference with a prospective economic
relationship, and conspiracy to tortiously interfere with a prospective economic
relationship. We completed a settlement agreement with these additional
defendants in February 2008. As a result of this settlement agreement, we
received a payment of $500,000 in exchange for dropping all claims against these
defendants. Mr. Keesmann did not participate in that settlement and the
litigation against Mr. Keesmann continued.




In June
2008, we settled the remaining litigation with Mr. Keesmann. The settlement
agreement resulted in no payment to either party. In addition, at the same time,
the license agreement with Mr. Keesmann was amended. The amendment set forth
minimum terms for future sublicense agreements, clarified future licensing
responsibilities, provided Mr. Keesmann the opportunity for advances against
future royalties, and also provided Mr. Keesmann options for services to be
rendered.




ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS




On May 20, 2008 the Company held its
2008 Annual Meeting of Shareholders. The following items were presented to a
vote of the holders (the “Shareholders”) of the Company’s issued and outstanding
Common Stock:




(1)
            Election
      of Directors.





(2)
            To
      approve a proposal to amend the Company’s Amended and Restated Articles of
      Incorporation to change the name of the Company from Nano-Proprietary,
      Inc. to Applied Nanotech Holdings,
Inc.





(3)
            To
      approve a proposal to ratify the Company’s Amended and Restated 2002
      Equity Compensation Plan.





(4)
            To
      ratify the appointment of Padgett, Stratemann  & Co., L.L.P.
      as the Company’s independent public accountants for the fiscal year ending
      December 31, 2008.





The number of votes cast for each of
the above is summarized in the table below. All numbers in the table below
represent shares of Common Stock or the voting equivalent thereof):




Item
      Submitted to Shareholders
            For
            Against
            Abstain
            Non-Votes
            Total(1)
      Election of DirectorsElection
      of Bradford S. Lamb
            96,579,934
            816,710
            0
            0
            97,396,644Election
      of Howard Westerman
            96,600,164
            796,480
            0
            0
            97,396,644Election
      of Douglas P. Baker
            96,644,264
            752,380
            0
            0
            97,396,644Election
      of Dr. Robert Ronstadt
            96,622,649
            773,995
            0
            0
            97,396,644Election
      of Dr. Zvi Yaniv
            96,647,689
            748,955
            0
            0
            97,396,644Election
      of Dr. Tracy Bramlett
            96,596,114
            800,530
            0
            0
            97,396,644Election
      of Ronald J. Berman
            96,592,964
            803,680
            0
            0
            97,396,644Election
      of Patrick V. Stark
            96,600,164
            796,480
            0
            0
            97,396,644Election
      of Thomas F. Bijou
            96,647,099
            749,545
            0
            0
            97,396,644(2)
      Approval of Name Change
            96,135,340
            1,096,012
            165,292
            0
            97,396,644(3)
      Ratification of Amended 2002Equity
      Compensation Plan
            35,530,069
            4,481,865
            598,493
            56,786,217
            97,396,644(4)
      Ratification of Padgett, Stratemann&
      Co. LLP as auditors
            95,718,926
            398,190
            1,279,528
            0
            97,396,644







ITEM
6.     EXHIBITS




Exhibits:
See Index to Exhibits on page 16 for a descriptive response to this
item.




14


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.








APPLIED
      NANOTECH HOLDINGS, INC.
              (Registrant)Date:     July
      31, 2008
            /s/
      Thomas F. Bijou
              Thomas
      F. Bijou
              Chief
      Executive Officer
              (Principal
      Executive Officer)Date:     July
      31, 2008
            /s/
      Douglas P.
      Baker
              Douglas
      P. Baker
              Chief
      Financial Officer
              (Principal
      Financial Officer and Principal
              Accounting
      Officer)











15


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 Thomas F. Bijou31.2
            
            Rule
      13a-14(a)/15d-14(a) Certificate of Douglas P. Baker32.1
            
            Section
      1350 Certificate of Thomas F. Bijou32.2
            
            Section
      1350 Certificate of Douglas P.
Baker