----

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Table      of Contents

**AMENDMENT NO.      2 TO**

**FORM      10-K**

|   ý |  Annual                report under Section 13 or 15(d) of the Securities Exchange Act of                1934                for the fiscal year endedDecember                31, 2004; or |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    ̈ |  Transition                report under Section 13 or 15(d) of the Securities Exchange Act of                1934                                                                          |

**NANO-PROPRIETARY,      INC.**

|  **TEXAS**(State                of Incorporation) |  **76-0273345**(IRS                Employer Identification Number) |
|--------------------------------------------------------|-------------------------------------------------------------------------|

**3006      Longhorn Boulevard, Suite 107, Austin, Texas 78758**

**(512)      339-5020**

| **Title                of each class**        | **Name                of Each Exchange on Which Registered** |
|-----------------------------------------------|--------------------------------------------------------------|
| Common                Stock, $0.001 par value | OTC                Bulletin Board                            |

**Documents      Incorporated by Reference**

----

**TABLE      OF CONTENTS**

|                        | **Page**                |
|-----------------------------|-------------------------|
| **PART                  I** |                    |
|                        | Item                1.  | Business | 1 |
|                        | Item                2.  | Properties | 9 |
|                        | Item                3.  | Legal                Proceedings | 9 |
|                        | Item                4.  | Submission                of Matters to a Vote of Security                Holders | 9 |
|                        |                    |   |   |
| **PART                II**  |                    |
|                        | Item                5.  | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities | 10 |
|                        | Item                6.  | Selected                Financial Data | 11 |
|                        | Item                7.  | Management's                Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|                        | Item                7A. | Quantitative                and Qualitative Disclosures About Market Risk | 17 |
|                        | Item                8.  | Financial                Statements and Supplementary                Data | 18 |
|                        | Item                9.  | Changes                in and Disagreements with Accountants on Accounting and Financial                Disclosure | 41 |
|                        | Item                9A. | Controls                and Procedures | 41 |
|                        | Item                9B  | Other                Information | 42 |
|                        |                    |   |   |
| **PART                III** |                    |
|                        | Item                10. | Directors                and Executive Officers of the                Registrant | 43 |
|                        | Item                11. | Executive                Compensation | 45 |
|                        | Item                12. | Security                Ownership of Certain Beneficial Owners and                Management and Related Stockholder Matters | 48 |
|                        | Item                13. | Certain                Relationships and Related                Transactions | 50 |
|                        | Item                14. | Principal                Accountant Fees and                Services | 50 |
| **PART                IV**  |                    |
|                        | Item                15. | Exhibits                and Financial Statement                Schedules | 50 |

**Important      Information Concerning Forward-Looking Statements**

** **

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**RISK      FACTORS**

**Our      success is dependent on our principal technologies**

**Our      technology development is in its early stages and the outcome is      uncertain**

**Products      using our technology may not be accepted by the market**

**Our      development partners have certain rights to jointly developed property and      to      license our technology**

----

**We      may not be able to provide system integration**

**Rapid      technological changes could render our technology obsolete and we may not remain      competitive**

**We      have limited resources and our focus on particular products may result in our      failure to capitalize on other opportunities**

**We      have limited manufacturing capacity and experience**

**We      are dependent on the availability of materials and      suppliers**

----

**We      have a history of net losses**

| Year                Ended December 31  |   |   | Net                Income(Loss) |   |
|---------------------------------------------|--------|--------|---------------------------------|--------|
|                                        |   |   |                                 |   |
| 1995                                        |   |   | ($14,389,856                    | )      |
| 1996                                        |   |   | ($13,709,006                    | )      |
| 1997                                        |   |   | ($6,320,901                     | )      |
| 1998                                        |   |   | ($3,557,548                     | )      |
| 1999                                        |   |   | ($1,118,134                     |   |
| 2000                                        |   |   | ($7,671,014                     | )      |
| 2001                                        |   |   | ($5,081,559                     | )      |
| 2002                                        |   |   | ($4,908,856                     | )      |
| 2003                                        |   |   | ($4,214,202                     | )      |
| 2004                                        |   |   | ($4,612,026                     | )      |

**We      have no current royalty agreements producing significant      revenue**

----

**Our      revenues have been dependent on government contracts in the      past**

| Year                Ended December 31 |   |   | Revenues                fromGovernmentContracts |   |   | Percentage                ofTotal                Revenue        |
|---------------------------------------|--------|--------|-------------------------------------------------|--------|--------|-----------------------------------------------------------------|
| 1995                                  |   | $      | 1,009,000                                       |   |   | 33%           |
| 1996                                  |   | $      | 2,869,000                                       |   |   | 50%                |
| 1997                                  |   | $      | 854,000                                         |   |   | 24%                |
| 1998                                  |   | $      | 0                                               |   |   | 0%                 |
| 1999                                  |   | $      | 0                                               |   |   | 0%                 |
| 2000                                  |   | $      | 352,341                                         |   |   | 13%                |
| 2001                                  |   | $      | 466,680                                         |   |   | 15%                |
| 2002                                  |   | $      | 254,152                                         |   |   | 18%                |
| 2003                                  |   | $      | 339,790                                         |   |   | 44%                |
| 2004                                  |   | $      | 305,721                                         |   |   | 80%                |

|   | · | Unilateral                termination for the convenience of the                government |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | Reduction                or modification in the event of changes in the government's requirements                or budgetary constraints |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Increased                or unexpected costs causing losses or reduced profits under fixed-price                contracts or unallowable costs under cost reimbursement                contracts |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Increased                or unexpected costs causing losses or reduced profits under fixed-price                contracts or unallowable costs under cost reimbursement                contracts |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Potential                disclosure of our confidential information to third                parties |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | The                  failure or inability of the prime contractor to perform its prime                  contract                  in circumstances where we are a                  subcontractor |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  failure of the government to exercise options provided for in the                  contracts |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | · | The right of the government to obtain a non-exclusive,                royalty free, irrevocable world-wide license to technology developed                under                contracts  funded by the government if we fail to continue                to develop                the technology |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**The      health effects of nanotechnology are unknown**

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**We      may have future capital needs and the source of that funding is      uncertain**

**We      have technologies subject to licenses**

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**We      may be unable to enforce or defend our ownership and use of proprietary      technology**

**The      loss of key personnel could adversely affect our business**

**We      are exposed to litigation liability**

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**PART      I.**

**Item      1.   **
***Business.***

**DESCRIPTION      OF BUSINESS**

**General**

**Research      and Development**

**Business       Segments**

***Applied      Nanotech, Inc***
*. *

***Electronic      Billboard Technology, Inc***

----

***Other. ***

|                                               |   | 2004   |       | 2003   |   | 2002       |   |
|----------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
| Revenues                                           |   |   |       |   |   |       |   |   |   |   |
| ANI                                                |   | $      | 382,522    |   | $      | 773,959    |   | $ | 1,284,462 |   |
| EBT                                                |   | $      | —    |   | $      | —    |   | $ | 130,386 |   |
| Other                                              |   | $      | —    |   | $      | —    |   | $ | — |   |
| Total                Revenues                      |   | $      | 382,522    |   | $      | 773,959    |   | $ | 1,414,848 |   |
|                                               |   |   |       |   |   |       |   |   |   |   |
| Net                loss from continuing operations |   |   |       |   |   |       |   |   |   |   |
| ANI                                                |   | $      | (4,030,353 | )      | $      | (2,890,175 | )      | $ | (1,502,126 | ) |
| EBT                                                |   | $      | 106,251    |   | $      | (361,784   | )      | $ | (1,369,318 | ) |
| Other                                              |   | $      | (687,924   | )      | $      | (962,243   | )      | $ | (1,811,975 | ) |
| Total                                              |   | $      | (4,612,026 | )      | $      | (4,214,202 | )      | $ | (4,683,419 | ) |
| Assets                                             |   |   |       |   |   |       |   |   |   |   |
| ANI                                                |   | $      | 310,005    |   | $      | 1,424,724  |   | $ | 146,299 |   |
| EBT                                                |   | $      | —    |   | $      | 527        |   | $ | 25,371 |   |
| Other                                              |   | $      | 834,363    |   | $      | 2,358,766  |   | $ | 150,285 |   |
| Total                                              |   | $      | 1,144,368  |   | $      | 3,784,017  |   | $ | 321,955 |   |

**Applied      Nanotech, Inc. **

**Overall**

**Display      activities**

----

***Carbon-nanotube      based large area flat screen color field emission      displays.***

***Other      large area flat screen color field emission displays.***

***HyFEDTM***

***PETS      for medium resolution large area electronic billboards***

----

***Licensing      agreements***
*.*

***Competition.***

**Sensors**

***Biosensors.***

***Hydrogen      sensors***

----

***Other      sensors***

***Competition.***

**Functional      Nanomaterials**

***Shimane      Institute of Technology***

***SouthWest      NanoTechnologies, Inc.***

***Competition.***

**Other      Electronic Applications**

***Cathodes.***

----

***Memory      Chips.***

***Shimane      Masuda Electronics.***

***Competition.***

**EBT**

**Electronic      Display Products**

***Overview.***

***Competition. ***
*** ***

**Technology      Agreements**

***Till      Keesman.***

----

***MCC***
*.*

**Intellectual       Property Rights**

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**Government      Regulation**

**Employees**

**Available      Information**

----

**Item      2.        *Properties***

** **
**Item      3. **
**       **
***Legal      Proceedings***

**Item      4.**
**        **
***Submission      of Matters to a Vote of Security Holders***

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**PART      II**

**Item      5.**
**  **
***Market      for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases      of Equity Securities***

|     |                                                       | **High** | **Low** |
|----------|------------------------------------------------------------|----------|---------|
|     |                                                       |     |    |
| **2003** | First                    Quarter                      | $0.59    | $0.16   |
|     | Second                    Quarter                          | $1.42    | $0.50   |
|     | Third                    Quarter                      | $2.31    | $0.79   |
|     | Fourth                    Quarter                     | $3.84    | $1.98   |
|     |                                                       |     |    |
| **2004** | First                    Quarter                      | $3.23    | $1.98   |
|     | Second                    Quarter                          | $2.70    | $1.38   |
|     | Third                    Quarter                      | $2.14    | $1.29   |
|     | Fourth                    Quarter                     | $2.52    | $1.80   |
|     |                                                       |     |    |
| **2005** | First                    Quarter                           | $3.53    | $2.01   |
|     | Second                    Quarter (through April 19, 2005) | $3.99    | $1.56   |

**Recent      Sales of Unregistered Securities**

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**Item      6.**
***Selected      Financial Data***

|                                                              |   |   | **2004**   |   |   | **2003**   |   |   | **2002**   |   |   | **2001**   |   |   | **2000**   |   |
|-------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|--------|------------|--------|--------|------------|--------|--------|------------|--------|
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Revenues                from continuing operations                |   | $      | 382,522    |   | $      | 773,959    |   | $      | 1,414,848  |   | $      | 1,101,951  |   | $      | 467,817    |   |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Income                (loss) from continuing operations           |   | $      | (4,612,026 | )      | $      | (4,214,202 | )      | $      | (4,683,419 | )      | $      | (4,850,770 | )      | $      | (6,612,354 | )      |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Income                (loss) from continuing operations per share |   | $      | (0.05      | )      | $      | (0.05      | )      | $      | (0.07      | )      | $      | (0.07      | )      | $      | (0.12      | )      |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Total                assets                                       |   | $      | 1,144,368  |   | $      | 3,784,017  |   | $      | 321,955    |   | $      | 1,839,055  |   | $      | 1,641,565  |   |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Long-term                obligations                              |   | $      | 5,944      |   | $      | 27,353     |   | $      | 46,283     |   | $      | 121,651    |   | $      | —    |   |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Net                shareholders’ equity (deficit)           |   | $      | 846,456    |   | $      | 3,552,829  |   | $      | (2,460,595 | )      | $      | (945,614   | )      | $      | 65,775     |   |
|                                                              |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |
| Cash                dividends per common share                    |   | $      | —    |   | $      | —    |   | $      | —    |   | $      | —    |   | $      | —    |   |

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**Item      7.*****Management’s      Discussion and Analysis of Financial Condition and Results of      Operations***

**OVERVIEW**

**OUTLOOK**

**Critical      Accounting Policies**

***Stock      based compensation***

----

***Other***

**LIQUIDITY      AND CAPITAL RESOURCES**

----

| Contractual                Obligations            |   |   | Total   |   |   | 2005    |   |   | 2006    |   |   | 2007    |   |   | 2008    |   |
|---------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
| Notes                payable including interest   |   | $      | — |   | $      | — |   | $      | — |   | $      | — |   | $      | — |   |
| Long-term                debt including interest  |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |
| Operating                leases                   |   |   | 243,294 |   |   | 114,491 |   |   | 114,491 |   |   | 14,312  |   |   | — |   |
| Capital                leases including interest  |   |   | 29,228  |   |   | 23,184  |   |   | 6,044   |   |   | — |   |   | — |   |
| Total                contractual cash obligations |   | $      | 272,522 |   | $      | 137,675 |   | $      | 120,535 |   | $      | 14,312  |   | $      | — |   |

**RESULTS      OF OPERATIONS**

|                                          |   |   | 2004    |   |   | 2003    |   |   | 2002      |   |
|-----------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|-----------|--------|
| Government                Revenues            |   | $      | 305,721 |   | $      | 339,790 |   | $      | 254,142   |   |
| Futaba                Contract Research       |   | $      | — |   | $      | 400,000 |   | $      | 1,000,000 |   |
| Total                ANI Revenues             |   | $      | 382,522 |   | $      | 773,959 |   | $      | 1,284,452 |   |
| Total                EBT Revenues             |   | $      | — |   | $      | — |   | $      | 130,386   |   |
| Total                Revenues                 |   | $      | 382,522 |   | $      | 773,959 |   | $      | 1,414,848 |   |
|                                          |   |   |    |   |   |    |   |   |      |   |
| Revenue                backlog at December 31 |   | $      | 130,000 |   | $      | 425,000 |   | $      | 400,000   |   |

----

|                                          |   |   | 2004      |   |   | 2003      |   |   | 2002      |   |
|-----------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|
|                                          |   |   |      |   |   |      |   |   |      |   |
| ANI                Research and development   |   | $      | 2,611,583 |   | $      | 1,861,660 |   | $      | 1,799,943 |   |
| EBT                Research and development   |   | $      | —   |   | $      | —   |   | $      | 742,019   |   |
| Total                Research and development |   | $      | 2,611,583 |   | $      | 1,861,660 |   | $      | 2,541,962 |   |

|                                                      |   |   | 2004      |   |   | 2003      |   |   | 2002      |   |
|-----------------------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|
|                                                      |   |   |      |   |   |      |   |   |      |   |
| Variable                option pricing                    |   | $      | (267,696  | )      | $      | 749,755   |   | $      | —   |   |
| EBT                related S, G, & A                  |   | $      | —   |   | $      | —   |   | $      | 1,032,361 |   |
| Other                S, G, & A                        |   | $      | 2,201,059 |   | $      | 1,934,357 |   | $      | 2,087,040 |   |
| Total                selling, general, and administrative |   | $      | 1,903,363 |   | $      | 2,684,112 |   | $      | 3,119,401 |   |
|                                                      |   |   |      |   |   |      |   |   |      |   |
| Pro-forma                SFAS No. 123 Expense             |   | $      | 2,259,387 |   | $      | 552,927   |   | $      | 544,034   |   |

----

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|                                      |   |   | 2004    |   |   | 2003    |   |   | 2002     |   |
|-------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|----------|--------|
|                                      |   |   |    |   |   |    |   |   |     |   |
| Interest                expense           |   | $      | (4,584  | )      | $      | (56,065 | )      | $      | (711,331 | )      |
| Lawsuit                settlement         |   | $      | — |   | $      | — |   | $      | 435,240  |   |
| Miscellaneous                other income |   | $      | 24,982  |   | $      | 13,676  |   | $      | 15,473   |   |

**SEASONALITY      AND INFLATION**

**ACCOUNTING      PRONOUNCEMENTS**

**Item      7A. **
***Quantitative      and Qualitative Disclosures About Market Risk***
** **

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**Item      8.**
**        **
***Financial      Statements***

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

**OF      NANO-PROPRIETARY, INC.**

**CONSOLIDATED      FINANCIAL STATEMENTS **

| Independent                Auditor’s Report                                                                                   | 19 |
|-------------------------------------------------------------------------------------------------------------------------------------|----|
| Consolidated                Balance Sheets - December 31, 2004 and 2003                                                             | 20 |
| Consolidated                Statement of Operations - Years Ended December 31, 2004, 2003, and                2002                  | 21 |
| Consolidated                Statements of Shareholders’ Equity - Years Ended December 31, 2004, 2003,                and 2002 | 22 |
| Consolidated                Statements of Cash Flows - Years Ended December 31, 2004, 2003, and                2002                 | 23 |
| Notes                to Consolidated Financial Statements                                                                           | 24 |

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**INDEPENDENTAUDITOR’S      REPORT**

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

**CONSOLIDATED      BALANCE SHEETS**

| **ASSETS**                                                                                                                                                                                                                                                                                                          |   |                              |        |   |   |        |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|--------|--------|-------------|--------|
|                                                                                                                                                                                                                                                                                                                |   | **December                  31,** |        |
|                                                                                                                                                                                                                                                                                                                |   |                              | **2004**    |   |   | **2003**    |   |
| Current                  assets:                                                                                                                                                                                                                                                                                    |   |                              |             |   |   |             |   |
|        Cash                  and cash equivalents                                                                                                                                                                                                                                |   | $                                 | 901,585     |   | $      | 3,564,570   |   |
|        Accounts                  receivable, trade - net of allowance for doubtful accounts                                                                                                                                                                                      |   |                              | 6,735       |   |   | 41,132      |   |
|        Prepaid                  expenses and other current assets                                                                                                                                                                                                                |   |                              | 85,135      |   |   | 100,201     |   |
|           Total                  current assets                                                                                                                                                                                                                   |   |                              | 993,455     |   |   | 3,705,903   |   |
| Property                  and equipment, net                                                                                                                                                                                                                                                                        |   |                              | 141,373     |   |   | 77,314      |   |
| Other                  assets                                                                                                                                                                                                                                                                                       |   |                              | 9,540       |   |   | 800         |   |
|               Total                  assets                                                                                                                                                                                                   |   | $                                 | 1,144,368   |   | $      | 3,784,017   |   |
| **LIABILITIES                  AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                                                           |   |                              |        |   |   |        |   |
| Current                  liabilities:                                                                                                                                                                                                                                                                               |   |                              |             |   |   |             |   |
|        Accounts                  payable                                                                                                                                                                                                                                         |   | $                                 | 140,597     |   | $      | 126,809     |   |
|        Obligations                  under capital lease                                                                                                                                                                                                                          |   |                              | 21,430      |   |   | 19,380      |   |
|        Accrued                  liabilities                                                                                                                                                                                                                                      |   |                              | 74,956      |   |   | 57,646      |   |
|        Deferred                  Revenue                                                                                                                                                                                                                                         |   |                              | 54,985      |   |   | —     |   |
|               Total                  current liabilities                                                                                                                                                                                      |   |                              | 291,968     |   |   | 203,835     |   |
| Obligations                  under capital lease, long-term                                                                                                                                                                                                                                                         |   |                              | 5,944       |   |   | 27,353      |   |
| Commitments                  and contingencies                                                                                                                                                                                                                                                                      |   |                              | —     |   |   | —     |   |
|               Total                  liabilities                                                                                                                                                                                         |   |                              | 297,912     |   |   | 231,188     |   |
| Shareholders'                  equity :                                                                                                                                                                                                                                                                             |   |                              |        |   |   |        |   |
|        Preferred                  stock, $1.00 par value, 2,000,000 shares authorized;              no                  shares issued and outstanding at December 31, 2004 or 2003                         |   |                              | —     |   |   | —     |   |
|        Common                  stock, 120,000,000 shares authorized, $.001 par value,                  97,246,422              and                  95,612,990 shares issued and outstanding, respectively |   |                              | 97,246      |   |   | 95,613      |   |
|        Additional                  paid-in capital                                                                                                                                                                                                                               |   |                              | 80,822,625  |   |   | 78,918,605  |   |
|        Accumulated                  deficit                                                                                                                                                                                                                                      |   |                              | (80,073,415 | )      |   | (75,461,389 | )      |
|               Total                  shareholders' equity                                                                                                                                                                                |   |                              | 846,456     |   |   | 3,552,829   |   |
|               Total                  liabilities and shareholders' equity                                                                                                                                                                     |   | $                                 | 1,144,368   |   | $      | 3,784,017   |   |

----

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

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

|                                                                                                                                                                 |   | **Year                ended December 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                                                                                                 |   |                                       | **2004**   |   |   | **2003** |   |   | **2002** |   |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Revenues                                                                                                                                                             |   |                                       |            |   |   |  |   |   |  |   |
|      Contract                research                                                                                                       |   | $                                          | —    |   | $ | 400,000 |   | $ | 1,000,000 |   |
|      Government                contracts                                                                                                    |   |                                       | 305,721    |   |   | 339,790 |   |   | 254,152 |   |
|      License                fees and royalties                                                                                              |   |                                       | 10,852     |   |   | 2,248 |   |   | — |   |
|      Other                                                                                                                                  |   |                                       | 65,949     |   |   | 31,921 |   |   | 160,696 |   |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
|                     Total                revenues           |   |                                       | 382,522    |   |   | 773,959 |   |   | 1,414,848 |   |
|                                                                                                                                                                 |   |                                       |       |   |   |   |   |   |   |   |
| Operating                costs                                                                                                                                       |   |                                       |       |   |   |   |   |   |   |   |
| Research                and development                                                                                                                         |   |                                       | 2,611,583  |   |   | 1,861,660 |   |   | 2,541,962 |   |
| Selling,                general and administrative expenses                                                                                                          |   |                                       | 1,903,363  |   |   | 2,684,112 |   |   | 3,119,401 |   |
| Royalty                expense                                                                                                                                       |   |                                       | 500,000    |   |   | 400,000 |   |   | — |   |
| Impairment                charge                                                                                                                                     |   |                                       | —    |   |   | — |   |   | 176,286 |   |
|           Total                operating costs                                                                     |   |                                       | 5,014,946  |   |   | 4,945,772 |   |   | 5,837,649 |   |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
|                     Income                (loss) from operations |   |                                       | (4,632,424 | ) |   | (4,171,813 | ) |   | (4,422,801 | ) |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Other                income (expense):                                                                                                                               |   |                                       |       |   |   |  |   |   |  |   |
|           Gain                (loss) on disposal of assets                                                    |   |                                       | 125        |   |   | 4,695 |   |   | 18,418 |   |
|           Interest                income                                                                           |   |                                       | 24,857     |   |   | 8,981 |   |   | — |   |
|           Interest                expense                                                                          |   |                                       | (4,584     | ) |   | (56,065 | ) |   | (711,331 | ) |
|           Lawsuit                settlement                                                                        |   |                                       | —    |   |   | — |   |   | 435,240 |   |
|           Other                income (loss)                                                                       |   |                                       | —    |   |   | — |   |   | (2,945 | ) |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Loss                from continuing operations before taxes                                                                                                          |   |                                       | (4,612,026 | ) |   | (4,214,202 | ) |   | (4,683,419 | ) |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Provision                for taxes                                                                                                                                   |   |                                       | —    |   |   | — |   |   | — |   |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Loss                from continuing operations                                                                                                                       |   |                                       | (4,612,026 | ) |   | (4,214,202 | ) |   | (4,683,419 | ) |
| Discontinued                operations                                                                                                                               |   |                                       |       |   |   |  |   |   |  |   |
|           Loss                from the operation of Sign Builders of America, Inc.                                 |   |                                       | —    |   |   | — |   |   | (90,941 | ) |
|           Loss                on disposal of Sign Builders of America, Inc.                                        |   |                                       | —    |   |   | — |   |   | (134,496 | ) |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Net                loss                                                                                                                                              |   |                                       | (4,612,026 | ) |   | (4,214,202 | ) |   | (4,908,856 | ) |
|                                                                                                                                                                 |   |                                       |       |   |   |  |   |   |  |   |
| Accretion                on convertible preferred stock                                                                                                         |   |                                       | —    |   |   | — |   |   | (37,495 | ) |
|                                                                                                                                                            |   |                                       |       |   |   |   |   |   |   |   |
| Net                income (loss) applicable to common shareholders                                                                                                   |   | $                                          | (4,612,026 | ) | $ | (4,214,202 | ) | $ | (4,946,351 | ) |
| Earnings                (loss) per share                                                                                                                             |   |                                       |       |   |   |  |   |   |  |   |
|           Basic                and diluted                                                                    |   | $                                          | (0.05      | ) | $ | (0.05 | ) | $ | (0.07 | ) |
|  Weighted                average common shares outstanding                                                                                                      |   |                                       |       |   |   |   |   |   |   |   |
|           Basic                and diluted                                                                    |   |                                       | 96,609,237 |   |   | 87,366,507 |   |   | 71,829,575 |   |

----

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

**CONSOLIDATED      **
**STATEMENTS      OF SHAREHOLDERS' EQUITY (DEFICIT)**

|                                                              |   | Preferred  |        | Common |   | Additional |   |   |       |   |   |   |   |
|--------------------------------------------------------------|--------|-----------------|--------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                                         |   |            | Shares |   |   | Amount     |   |   | Shares     |   |   | Amount |   |   | Paid-In                Capital |   |   | AccumulatedDeficit |   |   | Total |   |
|                                                         |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                January 1, 2002                       |   |            | 850    |   | $      | 850        |   |   | 66,899,584 |   | $      | 66,900 |   | $ | 65,324,967 |   | $ | (66,338,331 | ) | $ | (945,614 | ) |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                compensation                               |   |            | -      |   |   | -          |   |   | 75,000     |   |   | 75     |   |   | 20,925 |   |   | - |   |   | 21,000 |   |
| Issuance                of common stock for patents          |   |            | -      |   |   | -          |   |   | 523,729    |   |   | 524    |   |   | 85,891 |   |   | - |   |   | 86,415 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                a                result of the exercise of |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| employee                stock options                        |   |            | -      |   |   | -          |   |   | 230,000    |   |   | 230    |   |   | 136,020 |   |   | - |   |   | 136,250 |   |
| Issuance                of common stock for cash             |   |            | -      |   |   | -          |   |   | 5,792,554  |   |   | 5,793  |   |   | 1,978,109 |   |   | - |   |   | 1,983,902 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                payment of accounts payable                |   |            | -      |   |   | -          |   |   | 655,000    |   |   | 655    |   |   | 156,595 |   |   | - |   |   | 157,250 |   |
| Issuance                of common stock as                   |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| result                of convertible notes payable           |   |            | -      |   |   | -          |   |   | 1,527,308  |   |   | 1,527  |   |   | 697,531 |   |   | - |   |   | 699,058 |   |
| Conversion                of Series G Preferred              |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                common stock                               |   |            | (850   | )      |   | (850       | )      |   | 1,267,617  |   |   | 1,267  |   |   | (417 | ) |   | - |   |   | - |   |
| Covnversion                value of debt issued              |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | 310,000 |   |   | - |   |   | 310,000 |   |
| Net                (loss)                                    |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | - |   |   | (4,908,856 | ) |   | (4,908,856 | ) |
|                                                         |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                December 31, 2002                     |   |            | -      |   |   | -          |   |   | 76,970,792 |   |   | 76,971 |   |   | 68,709,621 |   |   | (71,247,187 | ) |   | (2,460,595 | ) |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| options                as compensation                       |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | 101,400 |   |   | - |   |   | 101,400 |   |
| Issuance                of common stock for patents          |   |            | -      |   |   | -          |   |   | 71,021     |   |   | 71     |   |   | 13,565 |   |   | - |   |   | 13,636 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                a                result of the exercise of |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| employee                stock options                        |   |            | -      |   |   | -          |   |   | 3,132,060  |   |   | 3,132  |   |   | 2,508,765 |   |   | - |   |   | 2,511,897 |   |
| Issuance                of common stock for cash             |   |            | -      |   |   | -          |   |   | 7,607,097  |   |   | 7,607  |   |   | 4,805,336 |   |   | - |   |   | 4,812,943 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                payment of accounts payable                |   |            | -      |   |   | -          |   |   | 125,000    |   |   | 125    |   |   | 276,657 |   |   | - |   |   | 276,782 |   |
| Issuance                of common stock as                   |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| result                of convertible notes payable           |   |            | -      |   |   | -          |   |   | 7,707,020  |   |   | 7,707  |   |   | 1,753,506 |   |   | - |   |   | 1,761,213 |   |
| Variable                Option Pricing                       |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | 749,755 |   |   | - |   |   | 749,755 |   |
| Net                (loss)                                    |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | - |   |   | (4,214,202 | ) |   | (4,214,202 | ) |
|                                                         |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                December 31, 2003                     |   |            | -      |   |   | -          |   |   | 95,612,990 |   |   | 95,613 |   |   | 78,918,605 |   |   | (75,461,389 | ) |   | 3,552,829 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| options                as compensation                       |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | 116,600 |   |   | - |   |   | 116,600 |   |
| Issuance                of common stock                      |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                a                result of the exercise of |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| employee                stock options                        |   |            | -      |   |   | -          |   |   | 1,211,545  |   |   | 1,211  |   |   | 972,138 |   |   | - |   |   | 973,349 |   |
| Issuance                of common stock for cash             |   |            | -      |   |   | -          |   |   | 421,887    |   |   | 422    |   |   | 1,082,978 |   |   | - |   |   | 1,083,400 |   |
| Variable                Option Pricing                       |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | (267,696 | ) |   | - |   |   | (267,696 | ) |
| Net                (loss)                                    |   |            | -      |   |   | -          |   |   | -          |   |   | -      |   |   | - |   |   | (4,612,026 | ) |   | (4,612,026 | ) |
|                                                         |   |            |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                December 31, 2004                     |   |            | -      |   | $      | -          |   |   | 97,246,422 |   | $      | 97,246 |   | $ | 80,822,625 |   | $ | (80,073,415 | ) | $ | 846,456 |   |

----

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

**CONSOLIDATED      STATEMENTS OF **
**CASH      FLOWS**

|                                                                                                                                       |   | **Year                Ended****December                31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------|
|                                                                                                                                       |   | **2004**                                                     |       | **2003** |   | **2002** |   |
| Cash                flows from operating activities:                                                                                       |   |                                                         |            |   |   |  |   |   |  |   |
|   Net                loss                                                                                                        |   | $                                                            | (4,612,026 | ) | $ | (4,214,202 | ) | $ | (4,908,856 | ) |
| Adjustments                to reconcile loss to net     cash                used in operating activities:         |   |                                                         |       |   |   |  |   |   |  |   |
| Depreciation                and amortization expense                                                                                       |   |                                                         | 54,928     |   |   | 44,419 |   |   | 278,949 |   |
| Amortization                of discount on debt                                                                                            |   |                                                         | —    |   |   | — |   |   | 461,698 |   |
| (Gain)                loss on disposal of assets                                                                                           |   |                                                         | (125       | ) |   | (4,695 | ) |   | (17,952 | ) |
| Non-cash                loss on disposal of SBOA                                                                                           |   |                                                         | —    |   |   | — |   |   | 106,572 |   |
| Stock                and options issued for services                                                                                       |   |                                                         | 116,600    |   |   | 101,400 |   |   | 21,000 |   |
| Stock                issued for patent option                                                                                              |   |                                                         | —    |   |   | 13,636 |   |   | 86,415 |   |
| Variable                option accounting charge                                                                                           |   |                                                         | (267,696   | ) |   | 749,755 |   |   | — |   |
| Impairment                charge                                                                                                           |   |                                                         | —    |   |   | — |   |   | 176,286 |   |
| Net                realized and unrealized losses on marketable securities                                                                 |   |                                                         | —    |   |   | — |   |   | 3,397 |   |
| Changes                in assets and liabilities:                                                                                          |   |                                                         |       |   |   |  |   |   |  |   |
|        Accounts                receivable, trade                                                        |   |                                                         | 34,397     |   |   | (8,816 | ) |   | 174,504 |   |
|        Inventories                                                                                      |   |                                                         | —    |   |   | — |   |   | (46,739 | ) |
|        Prepaid                expenses and other assets                                                 |   |                                                         | 6,326      |   |   | 57,531 |   |   | 6,845 |   |
|        Accounts                payable                                                                  |   |                                                         | 13,788     |   |   | (181,287 | ) |   | 232,226 |   |
|        Accrued                expenses                                                                  |   |                                                         | 17,310     |   |   | (274,705 | ) |   | 495,631 |   |
|        Customer                deposits and other current liabilities                                   |   |                                                         | 54,985     |   |   | — |   |   | 14,412 |   |
|                                                                                                                                       |   |                                                         |       |   |   |   |   |   |   |   |
|             Total                adjustments                                   |   |                                                         | 30,513     |   |   | 497,238 |   |   | 1,993,244 |   |
|                                                                                                                                       |   |                                                         |       |   |   |   |   |   |   |   |
|        Net                cash used in operating activities                                             |   |                                                         | (4,581,513 | ) |   | (3,716,964 | ) |   | (2,915,612). |   |
|                                                                                                                                       |   |                                                         |       |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                                                                                       |   |                                                         |            |   |   |  |   |   |  |   |
| Purchase                of marketable securities                                                                                           |   |                                                         | —    |   |   | — |   |   | (25,860 | ) |
| Sale                of marketable securities                                                                                               |   |                                                         | —    |   |   | — |   |   | 46,313 |   |
| Capital                expenditures                                                                                                        |   |                                                         | (118,987   | ) |   | (6,494 | ) |   | (231,880 | ) |
| Proceeds                from the sale of SBOA                                                                                              |   |                                                         | —    |   |   | — |   |   | 250,000 |   |
| Proceeds                from sale of assets                                                                                                |   |                                                         | 125        |   |   | 4,695 |   |   | 44,383 |   |
|                                                                                                                             |   |                                                         |       |   |   |   |   |   |   |   |
|        Net                cash provided by (used in) investing activities                               |   |                                                         | (118,862   | ) |   | (1,799 | ) |   | 82,956 |   |
|                                                                                                                                       |   |                                                         |       |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                                                                                       |   |                                                         |       |   |   |  |   |   |  |   |
| Proceeds                from short-term notes payable                                                                                      |   |                                                         | —    |   |   | — |   |   | 1,150,000 |   |
| Repayment                of short-term notes payable                                                                                       |   |                                                         | —    |   |   | — |   |   | (600,000 | ) |
| Proceeds                from issuance of common stock                                                                                      |   |                                                         | 2,056,749  |   |   | 7,324,840 |   |   | 2,120,152 |   |
| Repayment                of long-term notes payable and capital lease                       obligations |   |                                                         | (19,359    | ) |   | (57,375 | ) |   | (83,489 | ) |
|                                                                                                                                  |   |                                                         |       |   |   |  |   |   |  |   |
| Net                cash provided by financing activities                                                                                   |   |                                                         | 2,037,390  |   |   | 7,267,465 |   |   | 2,586,663 |   |
| Net                increase (decrease) in cash and cash equivalents                                                                        |   |                                                         | (2,662,985 | ) |   | 3,548,702 |   |   | (245,993 | ) |
| Cash                and cash equivalents, beginning of year                                                                           |   |                                                         | 3,564,570  |   |   | 15,868 |   |   | 261,861 |   |
| Cash                and cash equivalents, end of year                                                                                      |   | $                                                            | 901,585    |   | $ | 3,564,570 |   | $ | 15,868 |   |

----

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

**NOTES**
**      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.    **
**Organization,      Operations, and Liquidity**
**:**

**2.    **
**Summary      of Significant Accounting Policies**
**:**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**2.    **
**Summary      of Significant Accounting Policies (continued)**
**:**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**2.    **
**Summary      of Significant Accounting Policies (continued)**
**:**

|                                           |   | 2004   |      | 2003   |   | 2002      |   |
|------------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|
|                                           |   |   |      |   |   |      |   |
| Options                                        |   |   | 5,398,703 |   |   | 5,253,175 |   |   | 6,965,629 |   |
| Warrants                                       |   |   | 95,000    |   |   | 155,000   |   |   | 155,000 |   |
| Convertible                notes payable       |   |   | —   |   |   | —   |   |   | 8,682,972 |   |
| Weighted                average exercise price |   | $      | 1.29      |   | $      | 1.10      |   | $ | 0.45 |   |

|                                                                                                                                                                                                                                                                                                                                                                |   | **2004** |       | **2003** |   | **2002**   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
| Net                Loss                                                          |   |     |       |     |   |            |   |   |   |   |
| As                reported                                                                                                                                                                                                                                                                                                                                                    |   | $        | (4,612,026 | )        | $      | (4,214,202 | )      | $ | (4,908,856 | ) |
| SFAS                No. 123 Charge                                                                                                                                                                                                                                                                                                                                            |   |     | 2,259,387  |     |   | 552,927    |   |   | 544,034 |   |
| Pro                Forma                                                                                                                                                                                                                                                                                                                                                      |   |     | (6,871,413 | )        |   | (4,767,129 | )      |   | (5,452,890 | ) |
| Net                income (loss) per common share - basic and                diluted                                                                                                                                                                                                                                                                                |   |     |       |     |   |       |   |   |   |   |
| As                reported                                                                                                                                                                                                                                                                                                                                                    |   | $        | (0.05      | )        | $      | (0.05      | )      | $ | (0.07 | ) |
| Pro                Forma                                                                                                                                                                                                                                                                                                                                                 |   | $        | (0.07      | )        | $      | (0.05      | )      | $ | (0.08 | ) |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**2.    **
**Summary      of Significant Accounting Policies (continued)**
**:**

|                                    |   |   | 2004                   |   |   | 2003                   |   |   | 2002                   |   |
|-----------------------------------------|--------|--------|------------------------|--------|--------|------------------------|--------|--------|------------------------|--------|
|                                    |   |   |                   |   |   |                   |   |   |                   |   |
| Dividend                Yield           |   |   | 0                      | %      |   | 0                      | %      |   | 0                      | %      |
| Risk                Free Interest Rate  |   |   | 3.5                    | %      |   | 3                      | %      |   | 3                      | %      |
| Expected                Option Life     |   |   | 5                Years |   |   | 5                Years |   |   | 5                Years |   |
| Turnover/Forfeiture                Rate |   |   | 45                     | %      |   | 25                     | %      |   | 25                     | %      |
| Volatility                              |   |   | 72                     | %      |   | 108                    | %      |   | 111                    | %      |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**3.    **
**Other      Income**

**4.    **
**Operating      Lease Obligations**
**      :**

| 2005                                                                     |   | $      | 114,491 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| 2006                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 114,491 |   |
| 2007                and thereafter                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 14,312  |   |
| Total                future minimum lease payments                                                                                                                                                                                                                                                                                                                                                                           |   | $      | 243,294 |   |

**5.    **
**Capital      Lease Obligations**
**      :**

|                                                                                                           |   | **2004** |   | **2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Capital                leases for copier equipment due inmonthly                installments  totaling $1,932 through 2006.The                equipment value and lease obligation was determinedusing                a discount rate of 10%.  The equipment is included inoffice                equipment at December 31, 2004 at a cost of $94,383and                with accumulated amortization of $72,142.                                                                                                                                                                                                                             |   | $        | 29,228 |     | $      | 52,412 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |   |     |   |   |   |
| Less                interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |     | 1,854  |     |   | 5,679 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |   |     |   |   |   |
| Less                current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |     | 21,430 |     |   | 19,380 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |   |     |   |   |   |
| Capital                Lease Obligations, long-term                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $        | 5,944  |     | $      | 27,353 |   |

| 2005   |   | $      | 21,430 |   |
|--------|--------|--------|--------|--------|
| 2006   |   |   | 5,944  |   |
|   |   |   |   |   |
| Total  |   | $      | 27,374 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**6.    **
**Details      of Certain Balance Sheet Accounts**
**:**

|                                                                                                                  |   | **December                31,** |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2004**                        |     | **2003** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |     |   |   |   |   |
| Property                and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                            |          |   |   |  |   |
|        Plant                and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |        | $                               | 755,436  |   | $ | 667,385 |   |
|        Furniture                and office equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                            | 182,512  |   |   | 165,959 |   |
|        Leasehold                Improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                            | 14,382   |   |   | — |   |
|             Total                carrying cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                            | 952,330  |   |   | 833,344 |   |
|        Less                accumulated depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                            | (810,957 | ) |   | (756,030 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                               | 141,373  |   | $ | 77,314 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |     |   |   |   |   |
| Accrued                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                            |     |   |   |   |   |
|      Payroll                and related accruals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                               | 37,927   |   | $ | 32,646 |   |
|      Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                            | 37,029   |   |   | 25,000 |   |
|  Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                               | 74,956   |   | $ | 57,646 |   |

**7.**
**Impairment      of Assets**
**      :**

| Personal                property and                equipment                  |   | $      | 92,886  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Leasehold                improvements                                                                                                                               |   |   | 83,400  |   |
|  Total                impairment of assets                                                                                                                     |   | $      | 176,286 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**8.    **
**Income      Taxes**
**      :**

|                                                              |   | **December                31,** |        |
|-------------------------------------------------------------------|--------|---------------------------------|-------------|
|                                                              |   | **2004**                        |        |  **2003** |   |
| Deferred                tax assets:                               |   |                            |        |   |   |   |   |
| Net                operating loss carry forwards                  |   | $                               | 28,759,000  |   | $ | 26,227,000 |   |
| Research                and experimentation credits               |   |                            | 469,000     |   |   | 469,000 |   |
| Foreign                tax credit credits                         |   |                            | —     |   |   | 556,000 |   |
| Capitalized                intangible assets                      |   |                            | 223,000     |   |   | 261,000 |   |
| Depreciation                assets                                |   |                            | 12,000      |   |   | 13,000 |   |
| Accrued                expenses not deductible until paid         |   |                            | 15,000      |   |   | 243,000 |   |
| Total                deferred tax assets                          |   |                            | 29,478,000  |   |   | 27,769,000 |   |
|                                                              |   |                            |        |   |   |   |   |
| Deferred                tax liabilities:                          |   |                            | —     |   |   | — |   |
|                                                              |   |                            |        |   |   |   |   |
| Net                deferred tax assets before valuation allowance |   |                            | 29,478,000  |   |   | 27,769,000 |   |
|                                                              |   |                            |        |   |   |   |   |
| Valuation                allowance                                |   |                            | (29,478,000 | ) |   | (27,769,000 | ) |
|                                                              |   |                            |        |   |   |   |   |
| Net                deferred tax asset                             |   |                            |        |   |   |   |   |
|                                                              |   | $                               | —     |   | $ | — |   |

|                                                |   |  **December                31,** |       |
|--------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                               |   | **2004**                              |       | **2003** |   | **2002** |   |
|                                                               |   |                                  |       |   |   |   |   |
| Expected                income tax expense (benefit)               |   | $                                     | (1,568,000 | ) | $ | (1,433,000 | ) | $ | (1,652,000 | ) |
| Deductible                expenses not charged against book income |   |                                  | (614,000   | ) |   | (1,158,000 | ) |   | (3,000 | ) |
| Non-taxable                income                                  |   |                                  | (91,000    | ) |   | — |   |   | — |   |
| Non-deductible                expenses                             |   |                                  | 7,000      |   |   | 260,000 |   |   | 7,000 |   |
| Expiration                of Foreign Tax Credits                   |   |                                  | 556,000    |   |   | — |   |   | — |   |
| Other                                                              |   |                                  | 1,000      |   |   | 11,000 |   |   | (26,000 | ) |
| Increase                in Valuation Allowance                     |   |                                  | 1,709,000  |   |   | 2,320,000 |   |   | 1,674,000 |   |
| Total                Tax                                           |   | $                                     | —    |   | $ | — |   | $ | — |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**9.    **
**Capital      Stock**
**:**

|   |   |  Shares |      |  Proceeds |   |
|--------|--------|--------------|-----------|----------------|--------|
| 2004   |   |         | 401,887   |           | $      | 1,065,000 |   |
| 2003   |   |         | 7,607,097 |           | $      | 4,812,943 |   |
| 2002   |   |         | 5,792,554 |           | $      | 1,983,902 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**9.    **
**Capital      Stock (continued)**
**:**

| Exercise                of stock warrants                  |   |   | 95,000    |   |
|------------------------------------------------------------|--------|--------|-----------|--------|
| Exercise                and future grants of stock options |   |   | 9,530,885 |   |
|                                                       |   |   |      |   |
| Total                shares reserved                       |   |   | 9,625,885 |   |

**10.    **
**Stock      Options**
**:**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**10.              **
**Stock      Options (continued)**
**:**

|                                                                                                              |   |  Number                ofShares |       | Wgtd.                Ave.ExercisePrice |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|----------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |
|  Options                outstanding at January 1, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                 | 5,813,212  |                                   | $      | 0.82 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 |       |                                   |   |  |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 2,441,417  |                                   | $      | 0.66 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (230,000   | )                                      | $      | 0.60 |   |
| Canceled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                 | (1,059,000 | )                                      | $      | 0.69 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |   |   |
| Options                outstanding at December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 6,965,629  |                                   | $      | 0.79 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |   |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 1,496,995  |                                   | $      | 1.88 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (3,132,060 | )                                      | $      | 0.80 |   |
| Cancelled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (77,389    | )                                      | $      | 0.82 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |   |   |
| Options                outstanding at December 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 5,253,175  |                                   | $      | 1.09 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |   |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 2,457,073  |                                   | $      | 2.73 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (1,211,545 | )                                      | $      | 0.80 |   |
| Cancelled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (1,100,000 | )                                      | $      | 2.94 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |       |                                   |   |   |   |
|  Options                outstanding at December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 | 5,398,703  |                                   | $      | 1.52 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**10.   **
**Stock      Options (continued)**
**      :**

|                                                        |   | **Options                Outstanding**                                                     |      |                                                                                                          |   | **Options                Exercisable**                 |   |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                        |        |                                                                                       |      |                                                                                                          |   |                                                   |   |
|  Range                ofExercise                Prices |   |  Number                   Outstandingat                12/31/04   |      |  Wgtd.  Avg.Remaining                 ContractualLife       |   | Wgtd.                Avg.Exercise                Price |   | Number                  Exercisableat                12/31/04 |   | Wgtd.                Avg.Exercise                Price |   |
|                                                        |   |                                                                                  |      |                                                                                                          |   |                                                   |   |   |   |   |   |
| $0.00                - $0.50                                |   |                                                                                       | 1,327,214 |                                                                                                          |   | 4.8                Years                               |   | $ | 0.43 |   |   | 1,327,214 |   | $ | 0.43 |   |
| $0.51                - $1.00                                |   |                                                                                       | 1,322,583 |                                                                                                          |   | 6.7                Years                               |   | $ | 0.84 |   |   | 1,322,583 |   | $ | 0.84 |   |
| $1.01                - $2.00                                |   |                                                                                       | 841,833   |                                                                                                          |   | 6.6                Years                               |   | $ | 1.54 |   |   | 841,833 |   | $ | 1.54 |   |
| $2.01                - $2.99                                |   |                                                                                       | 1,907,073 |                                                                                                          |   | 8.9                Years                               |   | $ | 2.75 |   |   | 1,157,073 |   | $ | 2.63 |   |
|                                                        |   |                                                                                       |      |                                                                                                          |   |                                                        |   |   |  |   |   |   |   |   |  |   |
|                      Total         |   |                                                                                       | 5,398,703 |                                                                                                          |   | 7.0                Years                               |   | $ | 1.52 |   |   | 4,648,703 |   | $ | 1.29 |   |
|                                                        |   |                                                                                       |      |                                                                                                          |   |                                                        |   |   |  |   |   |   |   |   |  |   |

|                      |   | 2004 |   | 2003   |   | 2002 |   |
|-------------------------------------|--------|------|--------|--------|--------|------|--------|
| Discounted                options   |   | $    | 0.00   |   | $      | 0.00 |   | $ | 0.00 |   |
| At-the-money                options |   | $    | 1.71   |   | $      | 1.58 |   | $ | 0.50 |   |
| Premium                options      |   | $    | 1.28   |   | $      | 0.38 |   | $ | 0.29 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**11.    **
**Stock      Warrants**
**:**

|                                                                                                                              |   | **Number                of****Shares** |     | **Exercise                Price** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|----------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                   |     |                              |   |
| Warrants                outstanding at January 1, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                   | 330,000  |                              | $      | 0.88-2.15 |   |
| Expired                or canceled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                   | (175,000 | )                                 | $      | 1.00 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                   |          |                              |   |  |   |
| Warrants                outstanding at December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                   | 155,000  |                              | $      | 0.88-2.15 |   |
| Expired                or canceled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                   | —  |                              |   | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                   |     |                              |   |   |   |
| Warrants                outstanding at December 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                   | 155,000  |                              | $      | 0.88-2.15 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                   | (20,000  | )                                 | $      | 0.88 |   |
| Expired                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                   | (40,000  | )                                 | $      | 2.15 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                   |          |                              |   |  |   |
| Warrants                outstanding at December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                   | 95,000   |                              | $      | 1.00-2.00 |   |

**12.    **
**Supplemental      Cash Flow Information**
**:**

|                                                                       |   | 2004   |    | 2003   |   | 2002      |   |
|----------------------------------------------------------------------------|--------|--------|---------|--------|--------|-----------|--------|
|                                                                       |   |   |    |   |   |      |   |
| Non-cash                financing activities:                              |   |   |    |   |   |      |   |   |   |   |
| Conversion                of notes payable and interest into common shares |   |   | — |   | $      | 1,761,213 |   | $ | 699,058 |   |
| Issuance                of common shares in payment of accounts payable    |   |   | — |   | $      | 276,782   |   | $ | 157,250 |   |
| Non-cash                investing activities:                              |   |   |    |   |   |           |   |   |  |   |
| Common                shares issued for patent                             |   |   | — |   | $      | 13,636    |   | $ | 86,415 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**13.    **
**Commitments      and Contingencies**
**:**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**13.    **
**Commitments      and Contingencies (continued)**
**:**

**14.    **
**Concentrations      of Credit Risk:**

**15.    **
**Research      and Development Contracts**
**:**

|                                                                                                    |   | 2004 |    | 2003   |   | 2002    |   |
|---------------------------------------------------------------------------------------------------------|--------|------|---------|--------|--------|---------|--------|
| Contract                research revenues                                                               |   | $    | 305,721 |   | $      | 739,790 |   | $ | 1,254,152 |   |
| Costs                incurred charged to operations included in research and                development |   | $    | 278,928 |   | $      | 405,962 |   | $ | 764,632 |   |
| Amount                of additional funding commitments                                                 |   | $    | 129,090 |   | $      | 424,075 |   | $ | - |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**16.**
**Segment      Information**
**      :**

| **                                                  ** |   |          |       | **                        ** |   |                        |   |                       |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                                                                                                                                                             |   |  **ANI** |       |  **EBT**                                                                                                                                        |   |  **All                Other**                                                                                                   |   |  **Total**                                                                                                                |       |
| **2004**                                                                                                                                                                                                                                                                                                         |   |          |       |                                                                                                                                                 |   |                                                                                                                                 |   |                                                                                                                           |       |
| Revenue                                                                                                                                                                                                                                                                                                          |   | $             | 382,522    |                                                                                                                                                 | $      | -                                                                                                                                    |   | $                                                                                                                              | -          |   | $ | 382,522 |   |
| Interest                Expense                                                                                                                                                                                                                                                                                  |   |          | 3,949      |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | 635        |   |   | 4,584 |   |
| Depreciation                and Amortization                                                                                                                                                                                                                                                                     |   |          | 50,185     |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | 4,743      |   |   | 54,928 |   |
| Research                and Development                                                                                                                                                                                                                                                                          |   |          | 2,611,583  |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | -          |   |   | 2,611,583 |   |
| Income                (Loss) from Continuing Operations                                                                                                                                                                                                                                                          |   |          | (4,030,353 | )                                                                                                                                                    |   | 106,251                                                                                                                              |   |                                                                                                                           | (687,924   | ) |   | (4,612,026 | ) |
| Assets                                                                                                                                                                                                                                                                                                           |   |          | 310,005    |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | 834,363    |   |   | 1,144,368 |   |
| Capital                Expenditures                                                                                                                                                                                                                                                                              |   |          | 116,613    |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | 2,374      |   |   | 118,987 |   |
|                                                                                                                                                                                                                                                                                                             |   |          |       |                                                                                                                                                 |   |                                                                                                                                 |   |                                                                                                                           |       |   |   |   |   |
| **2003**                                                                                                                                                                                                                                                                                                         |   |          |            |                                                                                                                                                 |   |                                                                                                                                      |   |                                                                                                                           |            |   |   |  |   |
| Revenue                                                                                                                                                                                                                                                                                                          |   |          | 773,959    |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | -          |   |   | 773,959 |   |
| Interest                Expense                                                                                                                                                                                                                                                                                  |   |          | 5,999      |                                                                                                                                                 |   | 20                                                                                                                                   |   |                                                                                                                           | 50,046     |   |   | 56,065 |   |
| Depreciation                and Amortization                                                                                                                                                                                                                                                                     |   |          | 37,653     |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | 6,766      |   |   | 44,419 |   |
| Research                and Development                                                                                                                                                                                                                                                                          |   |          | 1,861,660  |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | -          |   |   | 1,861,660 |   |
| Loss                from Continuing Operations                                                                                                                                                                                                                                                                   |   |          | (2,890,175 | )                                                                                                                                                    |   | (361,784                                                                                                                             | )      |                                                                                                                           | (962,243   | ) |   | (4,214,202 | ) |
| Assets                                                                                                                                                                                                                                                                                                           |   |          | 1,424,724  |                                                                                                                                                 |   | 527                                                                                                                                  |   |                                                                                                                           | 2,358,766  |   |   | 3,784,017 |   |
| Capital                Expenditures                                                                                                                                                                                                                                                                              |   |          | 6,494      |                                                                                                                                                 |   | -                                                                                                                                    |   |                                                                                                                           | -          |   |   | 6,494 |   |
|                                                                                                                                                                                                                                                                                                             |   |          |            |                                                                                                                                                 |   |                                                                                                                                      |   |                                                                                                                           |            |   |   |  |   |
| **2002**                                                                                                                                                                                                                                                                                                         |   |          |            |                                                                                                                                                 |   |                                                                                                                                 |   |                                                                                                                           |            |   |   |  |   |
| Revenue                                                                                                                                                                                                                                                                                                          |   |          | 1,284,462  |                                                                                                                                                 |   | 130,386                                                                                                                              |   |                                                                                                                           | -          |   |   | 1,414,848 |   |
| Interest                Expense                                                                                                                                                                                                                                                                                  |   |          | 9,237      |                                                                                                                                                 |   | 2,696                                                                                                                                |   |                                                                                                                           | 699,398    |   |   | 711,331 |   |
| Depreciation                and Amortization                                                                                                                                                                                                                                                                     |   |          | 29,046     |                                                                                                                                                 |   | 109,943                                                                                                                              |   |                                                                                                                           | 139,960    |   |   | 278,949 |   |
| Research                and Development                                                                                                                                                                                                                                                                          |   |          | 1,799,943  |                                                                                                                                                 |   | 742,019                                                                                                                              |   |                                                                                                                           | -          |   |   | 2,541,962 |   |
| Loss                from Continuing Operations                                                                                                                                                                                                                                                                   |   |          | (1,502,126 | )                                                                                                                                                    |   | (1,369,318                                                                                                                           | )      |                                                                                                                           | (1,811,975 | ) |   | (4,683,419 | ) |
| Assets                                                                                                                                                                                                                                                                                                           |   |          | 146,299    |                                                                                                                                                 |   | 25,371                                                                                                                               |   |                                                                                                                           | 150,285    |   |   | 321,955 |   |
| Capital                Expenditures                                                                                                                                                                                                                                                                              |   |          | 52,327     |                                                                                                                                                 |   | 172,444                                                                                                                              |   |                                                                                                                           | 7,199      |   |   | 231,880 |   |

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**17.    **
**Retirement      Plan**
**:**

**18.    **
**Discontinued      Operations:**

| Cash                                                                                                                                         |   | $      | 6,469    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|
| Accounts                receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | 321,327  |   |
| Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 279,128  |   |
| Property,                plant, and equipment - net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 245,679  |   |
| Accounts                payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | (195,556 | )      |
| Accrued                expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | (51,059  | )      |
| Customer                deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | (226,202 | )      |
| Capital                lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   | (18,472  | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |          |   |
| Net                Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 361,314  |   |
| ecorded                loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 111,314  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |     |   |
| Net                carrying value of assets sold                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $      | 250,000  |   |

**19.   **
**Significant      Customers**
**:**

**20.   **
**Subsequent      Events**
**:**

----

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

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)**

**21.**
**Quarterly      Financial Information (Unaudited)**
**:**

|                                     |   | First   |       | Second  |   | Third      |   | Fourth  |       | Total  |   |
|------------------------------------------|--------|---------|------------|---------|--------|------------|--------|---------|------------|--------|--------|
|                                     |   | Quarter |       | Quarter |   | Quarter    |   | Quarter |       | Year   |   |
| 2004                                     |   |    |       |    |   |       |   |    |       |   |   |
| Revenues                                 |   | $       | 77,658     |    | $      | 100,718    |   | $       | 100,473    |   | $      | 103,673 |   | $ | 382,522 |   |
| Operating                income (loss)   |   |    | (1,117,862 | )       |   | (1,269,201 | )      |    | (1,108,338 | )      |   | (1,137,023 | ) |   | (4,632,424 | ) |
| Net                (loss)                |   |    | (1,111,641 | )       |   | (1,263,529 | )      |    | (1,100,534 | )      |   | (1,136,322 | ) |   | (4,612,026 | ) |
| Earnings                (loss) per share |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| Basic                and Diluted         |   |    | (0.01      | )       |   | (0.01      | )      |    | (0.01      | )      |   | (0.01 | ) |   | (0.05 | ) |
|                                     |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| 2003                                     |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| Revenues                                 |   |    | 444,452    |    |   | 160,380    |   |    | 88,195     |   |   | 80,932 |   |   | 773,959 |   |
| Operating                income (loss)   |   |    | (749,524   | )       |   | (681,333   | )      |    | (1,200,627 | )      |   | (1,540,329 | ) |   | (4,171,813 | ) |
| Net                (loss)                |   |    | (770,969   | )       |   | (696,056   | )      |    | (1,212,280 | )      |   | (1,534,897 | ) |   | (4,214,202 | ) |
| Earnings                (loss) per share |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| Basic                and Diluted         |   |    | (0.01      | )       |   | (0.01      | )      |    | (0.01      | )      |   | (0.02 | ) |   | (0.05 | ) |
|                                     |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| 2002                                     |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
|                                     |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| Revenues                                 |   |    | 285,437    |    |   | 480,284    |   |    | 218,990    |   |   | 430,137 |   |   | 1,414,848 |   |
| Operating                income (loss)   |   |    | (1,153,914 | )       |   | (1,269,443 | )      |    | (1,527,982 | )      |   | (471,462 | ) |   | (4,422,801 | ) |
| (Loss)                from               |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| continuing                operations     |   |    | (1,371,151 | )       |   | (1,466,153 | )      |    | (1,238,700 | )      |   | (607,415 | ) |   | (4,683,419 | ) |
| Income                (loss) from        |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| discontinued                operations   |   |    | 2,209      |    |   | (21,810    | )      |    | (212,654   | )      |   | 6,818 |   |   | (225,437 | ) |
| Net                (loss)                |   |    | (1,368,942 | )       |   | (1,487,963 | )      |    | (1,451,354 | )      |   | (600,597 | ) |   | (4,908,856 | ) |
| Earnings                (loss) per share |   |    |       |    |   |       |   |    |       |   |   |   |   |   |   |   |
| Basic                and Diluted         |   |    | (0.02      | )       |   | (0.02      | )      |    | (0.02      | )      |   | (0.01 | ) |   | (0.07 | ) |

----

**Item      9.**
***Changes      in and Disagreements with Accountants on Accounting and Financial      Disclosure.***

**Item      9A.**
***Controls and Procedures.***

**Disclosure        Controls and Procedures**

**Report      on Management’s Assessment of Internal Control over Financial Reporting**

|   | •   | Pertain                to the maintenance of records that, in reasonable detail, accurately                and                fairly reflect the transactions and dispositions of the assets of                the                Company;                                                                                                                                                                                                                    |
|--------|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | •   | Provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements in accordance with U.S. generally                accepted accounting principles, and that receipts and expenditures                of the                Company are being made only in accordance with authorizations of                management and the directors of the Company; and |
|   | •   | Provide                reasonable assurance regarding prevention or timely detection of                unauthorized acquisition, use or disposition of the Company’s assets that                could have a material effect on the financial statements.                                                                                                                                                                                               |

----

**Changes        in Internal Control over Financial Reporting **

**Report        of Independent Registered Public Accounting Firm**

*Internal        Control — Integrated Framework, *

*        Internal Control — Integrated Framework, *
*Internal        Control — Integrated Framework, *

**Item      9B.**
***Other Information.***

----

**PART      II****I**

| **Item                10.** | ***Directors                and Executive Officers of the                Registrant*** |
|-----------------------------|----------------------------------------------------------------------------------------|

|  ***Name****** ***                                                                                                                                                                                                                                                   |  ***Age***                                        |  ***Class***                                                                                            |  ***Position***                                                                                                                                                                                                                                                                             |  ***Director/Officer                Since***                                                                                                                  |  ***Term                Expires***                                                                                  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                               |           |                    |                                                  |                             |                      |
| Marc                W.  Eller                                                                                                                                                                                                                                        | 49                                                     | III                                                                                                          | Director,                Chairman,Chief                Executive Officer                                                                                                                                                                                                                         | November                1995                                                                                                                                       | 2006                                                                                                                     |
| Dr. Zvi                Yaniv                                                                                                                                                                                                                                              | 58                                                     | II                                                                                                           | Director,                President, Chief                Operating Officer                                                                                                                                                                                                                  | July                1996                                                                                                                                           | 2005                                                                                                                     |
| Douglas                P. Baker                                                                                                                                                                                                                                                | 48                                                     | N/A                                                                                                          | Chief                Financial Officer                                                                                                                                                                                                                                                           | June                1996                                                                                                                                           | N/A                                                                                                                      |
| Charles                C.  Bailey                                                                                                                                                                                                                                    | 56                                                     | I                                                                                                  | Director                                                                                                                                                                                                                                                                                         | November                1999                                                                                                                                       | 2005                                                                                                                     |
| Ronald                J.  Berman                                                                                                                                                                                                                                     | 48                                                     | III                                                                                                          | Director                                                                                                                                                                                                                                                                                         | May                1996                                                                                                                                            | 2006                                                                                                                     |
| Eddie                Lee                                                                                                                                                                                                                                                       | 42                                                     | II                                                                                                      | Director                                                                                                                                                                                                                                                                                         | October                2001                                                                                                                                        | 2005                                                                                                                     |
| Dr.                Robert Ronstadt                                                                                                                                                                                                                                             | 63                                                     | II                                                                                                           | Director                                                                                                                                                                                                                                                                                         | January                2003                                                                                                                                        | 2005                                                                                                                     |
| David                R.  Sincox                                                                                                                                                                                                                                      | 66                                                     | I                                                                                                  | Director                                                                                                                                                                                                                                                                                         | October                1994                                                                                                                                        | 2005                                                                                                                     |

----

**Section        16(a) Beneficial Ownership Reporting Compliance**

----

**Item        11.**
** **
***Executive        Compensation***

**SUMMARY          COMPENSATION TABLE**

| **                                               ** |   | **                ** |   |  **Annual                    Compensation** |   |  **Long-Term****Compensation** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------|--------|
|  **Name                    and Principal Position**                                                                                                                                                                                                                                       |   |  **Year**                                                                                       |   |  **Salary($)**                              |   |  **Bonus($)**                  |   |  **Other****Annual****Compensation(1)** |   |  **Securities****Underlying****Options(#)** |   |
|                                                                                                                                                                                                                                                                                           |   |                                                                                                 |   |                                             |   |                                |   |   |   |   |   |
| Marc                    W.  Eller,                                                                                                                                                                                                                                                        |   |                                                                                                 | 2004   |                                             | $      | 200,000                             |   |   | -0- |   |   | -0- |   |   | 750,000 |   |
| Chief                    Executive Officer (2)                                                                                                                                                                                                                                                 |   |                                                                                                 | 2003   |                                             | $      | 145,000                             |   |   | -0- |   |   | -0- |   |   | 280,000 |   |
|                                                                                                                                                                                                                                                                                           |   |                                                                                                 | 2002   |                                             | $      | 148,333                             |   | $ | 150,000 |   |   | -0- |   |   | -0- |   |
|                                                                                                                                                                                                                                                                                 |   |                                                                                                 |        |                                             |   |                                     |   |   |  |   |   |  |   |   |   |   |
| Zvi                    Yaniv, President and                                                                                                                                                                                                                                                    |   |                                                                                                 | 2004   |                                             | $      | 200,000                             |   |   | -0- |   |   | -0- |   |   | 750,000 |   |
| Chief                    Operating Officer                                                                                                                                                                                                                                                     |   |                                                                                                 | 2003   |                                             | $      | 145,000                             |   | $ | 147,917 |   |   | -0- |   |   | 280,000 |   |
|                                                                                                                                                                                                                                                                                           |   |                                                                                                 | 2002   |                                             | $      | 181,667                             |   |   | -0- |   |   | -0- |   |   | -0- |   |
|                                                                                                                                                                                                                                                                                           |   |                                                                                                 |        |                                             |   |                                     |   |   |  |   |   |  |   |   |   |   |
| Douglas                    P. Baker,                                                                                                                                                                                                                                                           |   |                                                                                                 | 2004   |                                             | $      | 150,000                             |   |   | -0- |   |   | -0- |   |   | 400,000 |   |
| Chief                    Financial Officer                                                                                                                                                                                                                                                     |   |                                                                                                 | 2003   |                                             | $      | 127,083                             |   |   | -0- |   |   | -0- |   |   | 213,000 |   |
|                                                                                                                                                                                                                                                                                           |   |                                                                                                 | 2002   |                                             | $      | 140,833                             |   | $ | 45,000 |   |   | -0- |   |   | 100,000 |   |

|  (1) |  No                  Named Executive Officers received perquisites that exceeded in                  value the                  lesser of $50,000 or 10% of such officers' salary and bonus.                                                                                                                                          |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  (2) |  In                  2002, Mr. Eller was awarded a bonus. Only $80,000 of this bonus                  was paid                  in 2002. The remainder was deferred until such time as cash flow                  permitted                  payment. The remaining $70,000 was paid to Mr. Eller in September                  2003. |

----

**EMPLOYMENT        AGREEMENTS**

**OPTION        GRANTS IN LAST FISCAL YEAR**

|                                |                                                                                                     |                                                                                                                                                       |                                                    |                                    |                                                                      |
|-------------------------------------|----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|-----------------------------------------|---------------------------------------------------------------------------|
|  **Name**                      | **Number                    of****Securities                    Underlying****Options****Granted(#)(1)** | **Percent                    of Total****Options                    Granted to****Employees                    in****Fiscal                    Year 2004** | **Exercise****or                    Base Price ($/Sh)** | **Expiration                    Dates** | **Grant                    Date****Present                    Value (4)** |
|                                |                                                                                                     |                                                                                                                                                       |                                                    |                                    |                                                                      |
| Marc                    W. Eller    | 700,000 (2)                                                           | 28.49%                                                                                                                  | $2.93                                                   |                      1/23/14       | $496,000                                         |
|                                | 50,000 (3)                                                            |  2.03%                                                                                                                  | $2.17                                                   | 12/31/14                                | $66,000                                          |
|                                |                                                                                                     |                                                                                                                                                       |                                                    |                                    |                                                                      |
| Dr.                    Zvi Yaniv    | 700,000 (2)                                                           | 28.49%                                                                                                                       | $2.93                                                   |                      1/23/14       | $496,000                                              |
|                                | 50,000 (3)                                                            | 2.03%                                                                                                                        | $2.17                                                   | 12/31/14                                | $66,000                                               |
|                                |                                                                                                     |                                                                                                                                                       |                                                    |                                    |                                                                      |
| Douglas                    P. Baker | 350,000                    (2)                                             | 14.24%                                                                                                                       | $2.93                                                   |                      1/23/14       | $248,000                                              |
|                                | 50,000 (3)                                                            | 2.03%                                                                                                                        | $2.17                                                   | 12/31/14                                | $66,000                                               |

|  (1)       |  The                  options were granted for a term of ten (10) years, subject to earlier                  termination in certain events related to termination of                  employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   (2) |  For                  Mr. Eller and Dr. Yaniv, these options vest as follows: 200,000                  if royalty                  agreements totaling $3 million are signed in 2004, an additional                  200,000                  if options the Company achieves profitability in 2004, and 100,000                  for                  each of the years 2005, 2006, and 2007, if the Company achieves                  profitability in those years. The options for Mr. Baker vest according                  to                  the same milestones, but the amounts are 100,000 related to royalties,                  100,000 related to 2004 profitability, and 50,000 for profitability                  in                  each of the years 2005, 2006, and 2007. Since the Company did not                  receive                  $3,000,000 in royalties in 2004 and did not achieve profitability                  in 2004,                  all options related to those milestones did not vest and expired                  December                  31, 2004. The present value includes all options granted, including                  those                  which expired. |
|   (3) |  These                  options became exercisable in full on the date of the grant in                  2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   (4) | The                  fair value of these options at the date of grant was estimated                  using a                  Black-Scholes option pricing model. The following weighted average                  assumptions were used to estimate the value of the options January                  23,                  2004 and December 31, 2004: a 5 year expected life of the options,                  a                  dividend yield of 0%, expected volatility for the shares of 71.65,                  a                  turnover/forfeiture percentage of 45%, and a risk free rate of                  return of                  3.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

**AGGREGATED        OPTION EXERCISES IN LAST FISCAL YEAR**

**AND        FISCAL YEAR-END OPTION VALUES**

| **Name**                                    |   | **Shares****Acquired****on                    Exercise (#)** |   | **Value****Realized                    ($)** |   | **Number                    of****Unexercised****Securities****Underlying****Options                    at****December                    31, 2004 (#)****Exercisable/****Unexercisable** |   | **Value                    of****Unexercised****In-the-Money****Options                    at****December                    31, 2004 ($)****Exercisable/****Unexercisable** |
|---------------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        |   |                                                         |   |                                         |   |                                                                                                                                                                                      |        |                                                                                                                                                                         |
| Marc                    W.  Eller |   | 0                                                            |   | 0                                            |   | 230,000 / 300,000                                                                                                                                                               |   | $0 / $0                                                                                                                                                            |
| Dr. Zvi                    Yaniv       |   | 0                                                            |   | 0                                            |   | 710,000                     / 300,000                                                                                                                                                |   | $440,900 / $0                                                                                                                                                      |
| Douglas                    P. Baker         |   | 0                                                            |   | 0                                            |   | 725,000                     / 150,000                                                                                                                                           |   | $576,270 / $0                                                                                                                                                      |

**DIRECTOR        COMPENSATION FOR 2004**

----

**Item        12.**
** **
***Security        Ownership of Certain Beneficial Owners and Management and Related Stockholder        Matters.***

**CERTAIN        BENEFICIAL OWNERS**

|                                                                                                                                                                             |   | Beneficial                    Ownership |   | Percent                    of Outstanding Common                    Stock |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------------------------------|
|                                                                                                                                                                             |   |                                    |   |                                                                      |
| Pinnacle                    Fund, L.P.Barry                      Kitt, General Partner4965                      Preston Park Blvd.,Suite 240Plano,                      TX 75093 |   | 7,100,668                               |   | 7.48%                                                                     |
|                                                                                                                                                                                  |   |                                    |   |                                                                      |
| Jeffrey                    L. FeinbergJLF                      Asset Management LLC2775                      Via de la Valle, Suite 204Del                      Mar, CA 92014    |   | 5,409,450                               |   | 5.69%                                                                     |

**SECURITY        OWNERSHIP OF MANAGEMENT**

|                                                                                                   |                                                                                                            |                                                           |                                          |
|--------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|-----------------------------------------------|
|  **Name**                                                                                         | **Options                    Included****in                    Beneficial****Ownership                    (1)** | **Common                    Stock****Beneficial****Ownership** | **Percentage****of                    Class** |
| Dr.                    Robert Ronstadt                                                                 | 75,000                                                                  | 75,000                 | *                                             |
| David                    R. Sincox                                                                     | 395,000                                                                 | 520,000                | *                                             |
| Charles                    C. Bailey                                                                   | 268,333                                                                 | 268,333                | *                                             |
| Marc                    W. Eller                                                                       |  230,000                                                           |  451,796          | *                                             |
| Eddie                    Lee                                                                           |  166,667                                                           |  166,667          | *                                             |
| Ronald                    J. Berman                                                                    | 639,383                                                                 | 1,144,925              | 1.15%                                         |
| Dr.                    Zvi Yaniv                                                                       | 560,000                                                                 | 596,000                | *                                             |
| Douglas                    P. Baker                                                                    | 564,500                                                                 | 564,500                |  *                                       |
| All                    Executive Officers and Directors                    as a group (8 persons) | 2,889,383                                                               | 3,787,221              | 3.72%                                         |

|  *         |   Less                    than 1%                                                                                                                                                                                                                                                                                   |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   (1) |   This                    column lists shares that are subject to options exercisable within                    sixty                    (60)-days of April 19, 2005, and are included in common stock                    beneficial                    ownership pursuant to Rule 13d-3(d)(1) of the Exchange Act. |

----

**SECURITIES        AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION        PLANS**

|  **Equity                  Compensation****Plans                  Not Approved by****the                  Shareholders of****the                  Nano-Proprietary** |  **Number                  of Securities to****be                  issued upon exercise****of                  outstanding options** |  **Weighted-average****exercise                  price of****outstanding                  options** |  **Number                  of Securities****remaining                  available****for future                  issuance under****equity                  compensation****plans                  (3)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                      | (a)                                                                                                                                            | (b)                                                                                                      | (c)                                                                                                                                                                                                              |
| 1992                  Employee Plan (1)                                                                                                                                   | 1,091,000                                                                                                                                      | $1.01                                                                                                    | -                                                                                                                                                                                                                |
| 1992                  Outside Directors                     Plan (2)                                                                                  |  497,716                                                                                                                                  |  $0.95                                                                                              |  -                                                                                                                                                                                                          |
| 1998                  Directors and                      Officers Plan                                                                                |  900,000                                                                                                                                  |  $0.46                                                                                              |  -                                                                                                                                                                                                          |
| 2002                  Equity                       Compensation Plan                                                                             |  2,909,987                                                                                                                                |  $2.12                                                                                              |  4,132,182                                                                                                                                                                                                  |
|  Total                                                                                                                                                               |  5,398,703                                                                                                                                |  $1.52                                                                                              |  4,132,182                                                                                                                                                                                                  |

|  (1) |  The                  1992 Employee Plan was originally approved by shareholders and                  authorized                  3.0 million shares. The plan was subsequently amended twice by                  the Board                  to increase the authorized number of shares and is therefore classified                  as                  a plan not approved by our shareholders. |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  (2) |  The                  1992 Outside Directors Plan was originally approved by shareholders                  and                  authorized 500,000 shares. The plan was subsequently amended by                  the Board                  to increase the authorized number of shares and is therefore classified                  as                  a plan not approved by our shareholders   |
|  (3) |  This                  column excludes securities reflected in column                  (a)                                                                                                                                                                                                                                                                                                         |

----

**Item        13.**
** **
***Certain        Relationships and Related Transactions***

**Item        14**
**.**
** **
***Principal        Accountant Fees and Services***

**Audit        Fees **

**Audit-Related        Fees **

**Tax        Fees **

** All        Other Fees **

**PART        IV**

**Item        1**
**5.**
** **
***Exhibits        and Financial Statement Schedules***

|   | (a) | Exhibits:                    See Index to Exhibits on page 53 for a descriptive response to                    this                    item. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | None |
|--------|-----|------|

----

**SIGNATURES**

|         |                                                    |                                                               |
|--------------|---------------------------------------------------------|--------------------------------------------------------------------|
|         | **NANO-PROPRIETARY,                      INC.**         |
|    |                                               |                                                          |
|         | By:                                           | /s/ Marc                    W.                    Eller  |
|         | Marc W. Eller ,Chief Executive Officer             |
|         | September                    7,                    2005 |

|  Signature                                                                                                                                                                                                                                                                                                           |  Title                                                                                                                                                            |   Date                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
|  /s/* *Marc                    W. EllerMarc                    W.  Eller                                                                                                                                                                                                                         | Chairman,                    Chief Executive Officer                    (Principal Executive Officer andDirector)                                                 | September                    7, 2005 |
| /s/                    Douglas P.  BakerDouglas                    P.  Baker                                                                                                                                                                                                                     | Vice                    President andChief                    Financial Officer (Principal                    Financial Officer and Principal Accounting Officer) | September                    7, 2005 |
| Dr.                    Robert Ronstadt*David                    R.  Sincox*Eddie                    Lee*Ronald                    J.  Berman* Charles                    G.  Bailey*Dr. Zvi                    Yaniv*           | Directors                                                                                                                                                              | September                    7, 2005 |

----

| **EXHIBIT                  NUMBER** |  **DESCRIPTION                  OF EXHIBIT**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(i).1*                        | Restated                  Articles of Incorporation of Company, as filed December 9, 1999                  with the                  Secretary of State for the State of Texas. (Exhibit 3(i)1 to the                  Company’s                  Annual Report on Form 10-KSB for the fiscal year ended December                  31,                  1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3(i).2*                        | Amendment                  to the Restated Articles of Incorporation of the Company, as filed                  with                  the Secretary of State for the State of Texas. (Exhibit 3(i).2                  to the                  Company’s Current Report on Form 8-K dated as of July 1,                  2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3(ii).1*                            | Amended                  and Restated Bylaws of the Company (Exhibit 3(ii) to the Company’s                  Quarterly Report on Form 10-QSB for the fiscal quarter ended March                  31,                  1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1                  *         | Form                  of Certificate for shares of the Company’s common stock (Exhibit 4.1 to                  the Company’s Registration Statement on Form SB-2[No.33-51446-FW] dated                  January 7, 1993).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2*                           | Amended                  and Restated Rights Agreement dated as of November 16, 2000, between                  the                  Company and American Securities Transfer, Incorporated, as Rights                  Agent,                  which includes as Exhibit A the form of Statement of Resolution                  establishing and designating series of preferred stock as “Series  H                  Junior Participating Preferred Stock” and fixing and determining the                  relative rights and preferences thereof, as Exhibit B the form                  of Rights                  Certificate, and as Exhibit C the Summary of Rights to Purchase                  Preferred                  Shares. (Exhibit 4.1 to the Company’s Current Report on Form 8-K dated as                  of November 16, 2000). |
| 4.3*                           | Form                  of Regulation D Subscription agreement by and between the Company                  and the                  participants of private placements. (Exhibit 4.3 to the Company’s Annual                  Report on Form 10-K for the fiscal year ended December 31,                  2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4*                           | Form                  of Registration Rights Agreement by and between the Company and                  the                  participants of private placements. (Exhibit 4.4 to the Company’s Annual                  Report on Form 10-K for the fiscal year ended December 31,                  2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1*                          | Amended                  and Restated 1992 Outside Directors’ Stock Option Plan (Exhibit 4.2 to the                  Company’s Registration Statement on Form S-8 [No. 333-56547] dated June                  9,                  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2*                               | 1998                  Directors and Officers Stock Option Plan (Exhibit 4.3 to the Company’s                  Registration Statement on Form S-8 [No. 333-56547] dated June 9,                  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3*                               | Amended                  and Restated 1992 Stock Option Plan (Exhibit 4.1 to the Company’s                  Registration Statement on Form S-8 [No. 333-56457] dated June 9,                  1998)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4*                               | Amended                  and Restated 2002 Equity Compensation Plan. (Exhibit 10.4.to the                  Company’s                  Annual Report on Form 10-K for the fiscal year ended December 31,                  2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5*                          | Patent                  Assignment and Royalty Agreement between Electronic Billboard Technology,                  Inc. and Advanced Technology, Incubator, Inc. dated as of October                  6, 1998.                  (Exhibit 10.18 to the Company’s Current Report on Form 10-KSB dated as of                  March 31, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6*                          | Lease                  agreement between the Company and Industrial Properties Corporation                  dated                  as of June 2, 1998. (Exhibit 10.2 to the Company’s Current Report on Form                  8-K dated as of December 7, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7*                          | Lease                  agreement between the Company and Industrial Properties Corporation                  dated                  as of February 15, 2004. (Exhibit 10.11 to the Company’s Annual Report on                  Form 10-KSB for the fiscal year ended December 31,                  2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8*                          | Patent                  License Agreement, dated as of March 26, 1999, by and between the                  Company                  and Canon, Inc. (Exhibit 10.1 to the Company’s amended Current Report on                  Form 8-K/A dated as of April 16, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9*                          | Agreement                  of Research and Development by and between the Applied Nanotech,                  Inc. and                  Futaba Corporation (Exhibit 10.1 to the Company’s Current Report on Form                  8-K dated as of January  1,                  2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

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| **EXHIBIT****NUMBER** | **DESCRIPTION                  OF EXHIBIT**                                                                                                                                                                                                                                                                                                    |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10*           | Agreement                  of Research and Development by and between the Applied Nanotech,                  Inc. and                  Futaba Corporation for Phase II development (Exhibit 10.14 to the                  Company’s Annual Report on From 10-KSB for the fiscal year ended December                  31, 2001).          |
| 10.11*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Electrovac Ges.m.b.H. (Exhibit 10.2                  to the                  Company’s Current Report on Form S-2 date August 24,                  2001)                       |
| 10.12*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Imaging System Technology, Inc. (Exhibit                  10.3                  to the Company’s Current Report on Form S-2 date August 24,                  2001)             |
| 10.13*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Supertex, Inc. (Exhibit 10.4 to the                  Company’s                  Current Report on Form S-2 date August 24, 2001)                                               |
| 10.14*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Schott Fiber Optics. (Exhibit 10.5                  to the                  Company’s Current Report on Form S-2 date August 24,                  2001)                        |
| 10.15*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Lead Sangyo Co., Ltd. (Exhibit 10.6                  to the                  Company’s Current Report on Form S-2 date August 24,                  2001)                       |
| 10.16*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Shanghai Novel Color Picture Tube                  Co., Ltd.                  (Exhibit 10.7 to the Company’s Current Report on Form S-2 date August 24,                  2001) |
| 10.17*                | Agreement                  for HyFEDTM Development Team Phase II by and between Field Emission Picture                  Element Technology, Inc. and Shanghai Vacuum Electron Devices Co.,                  Ltd.                  (Exhibit 10.8 to the Company’s Current Report on Form S-2 date August 24,                  2001)  |
| 10.18*                | Nano-Proprietary,                  Inc. Audit Committee Charter (Exhibit 10.23 to the Company’s Annual Report                  on Form 10-KSB for the fiscal year ended December 31,                  2002)                                                                                                                              |
| 10.19*                | Research/Development                  and License Agreement entered into by Applied Nanotech, Inc. dated                  as of                  September 11, 2002 (Exhibit 10.1 to the Company’s Current Report on Form                  8-K dated as of September 27, 2002).                                                          |
| 10.20*                | Asset                  Purchase Agreement by and among Fith, Inc., Electronic Billboard                  Technology, Inc. and Sign Builders of America, Inc. (Exhibit 10.1                  to the                  Company’s Current Report on Form 8-K dated as of October 8,                  2002).                                  |
| 10.21*                | Second                  Addendum to Patent License Agreement by and among Nano-Proprietary,                  Inc.                  and Till Keesman (Exhibit 10.1 to the Company’s Current Report on Form 8-K                  dated as of November 18, 2002).                                                                           |
| 10.22*                | Strategic                  Partnership agreement with SouthWest Nanotechnologies, Inc. (Exhibit                  4.1                  to the Company’s Quarterly report on Form 10-QSB for the quarter ended                  June 30, 2005).                                                                                            |
| 11*                   | Computation                  of (Loss) per Common Share (Exhibit 11 to the Company’s Annual Report on                  Form 10-K for the fiscal year ended December 31, 2004)                                                                                                                                                            |
| 14*                   | Nano-Proprietary,                  Inc. Code of Ethics (Exhibit 14 to the Company’s Annual Report on Form                  10-KSB for the fiscal year ended December 31, 2004)                                                                                                                                                           |
| 21*                   | Subsidiaries                  of the Company (Exhibit 21 to the Company’s Annual Report on Form 10-K for                  the fiscal year ended December 31, 2004)                                                                                                                                                                       |
| 24*                   | Powers                  of Attorney (Exhibit 24 to the Company’s Annual Report on Form 10-K for                  the fiscal year ended December 31, 2004).                                                                                                                                                                               |
| 31.1                  | Rule                  13a-14(a)/15d-14(a) Certificate of Marc W. Eller, Chief Executive                  Officer                                                                                                                                                                                                                               |
| 31.2                  | Rule                  13a-14(a)/15d-14(a) Certificate of Douglas P. Baker, Chief Financial                  Officer                                                                                                                                                                                                                            |
| 32.1                  | Section                  1350 Certificate of Marc W. Eller, Chief Executive                  Officer                                                                                                                                                                                                                                           |
| 32.2                  | Section                  1350 Certificate of Douglas P. Baker, Chief Financial Officer                                                                                                                                                                                                                                                         |