Document:

Exhibit 4.1

    
      

    

    Exhibit
      4.1

    
 

    REGULATION
      D SUBSCRIPTION AGREEMENT

    

    

    THE
      SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
      EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY MAY
      NOT
      BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
      OR
      AN EXEMPTION TO THE REGISTRATION REQUIREMENTS OF THOSE SECURITIES
      LAWS.

    

    THIS
      SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
      OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED HEREIN BY OR TO ANY
      PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
      UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL, STATE
      OR
      FOREIGN SECURITIES AUTHORITIES, NOR HAVE ANY SUCH AUTHORITIES REVIEWED OR
      DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
      IS
      UNLAWFUL. 

    

    INVESTMENT
      IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK, INCLUDING BUT NOT LIMITED
      TO
      THOSE RISK FACTORS IDENTIFIED IN THE COMPANY’S FORM S-2 FILED ON JUNE 1, 2005
      WITH THE SECURITIES AND EXCHANGE COMMISSION. INVESTORS MUST RELY ON THEIR OWN
      ANALYSIS OF THE INVESTMENT TERMS AND CONDITIONS OF THE PROPOSED INVESTMENT
      AND
      THEIR OWN ASSESSMENT OF THE RISKS INVOLVED.

    

    This
      Regulation D Subscription Agreement (the “Agreement”) is executed by the
      undersigned (the “Subscriber”) in connection with the offer to the Subscriber
      of, and the subscription by the Subscriber for, shares of Common Stock, $.001
      par value per share (the “Common Stock”), of NANO-PROPRIETARY, INC., a Texas
      corporation (the “Company”). The Company shall sell to the Subscriber 482,393
      shares of the Company’s Common Stock at a price of $2.073 per share, for an
      aggregate purchase price of $1,000,000.00 .

    

    The
      solicitation of this Subscription by the Company, and if accepted by the
      Company, the sale of the shares of Common Stock subscribed for, are being made
      on reliance upon the provisions of Regulation D (“Regulation D”) promulgated
      under the Securities Act of 1933 (the “Securities Act”).

    

    The
      undersigned Subscriber and the Company, upon acceptance of this Agreement,
      hereby agree as follows:

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    1.    Offering

    

    1.1    Offer
      to Subscribe; Purchase Price and Closing; and Placement Fees.
      Subject
      to satisfaction of the conditions to the closing of a purchase and sale of
      Common Stock as to each purchaser of Common Stock (the “Closing”) set forth in
      Section 1.2 below, the Subscriber hereby offers to subscribe for and purchase
      shares of Common Stock, for the aggregate purchase price set forth in Section
      8
      of this Agreement, all in accordance with the terms and conditions of this
      Agreement. The Closing shall be deemed to occur when this Agreement has been
      executed by both the Subscriber and the Company, and full payment for the shares
      of Common Stock subscribed for shall have been made by the Subscriber, by wire
      transfer in United States Dollars or as otherwise agreed between the Subscriber
      and the Company, to the Company as set forth in Section 7.1(a) in consideration
      for the Company’s delivery of certificates representing the shares of Common
      Stock so subscribed for.

    

    1.2    Conditions
      to Subscriber’s Obligations.
      The
      Subscriber’s obligations hereunder are conditioned upon the occurrence of all of
      the following:

    

    
      	 	
              (a)

            	
              other
                than as described on Schedule
                1.2
                attached hereto, there have been no material adverse changes in the
                Company’s business prospects or financial condition since the date of the
                last balance sheet included in the Disclosure Documents (as defined
                below
                in Section 4.2);

            

    

    

    
      	 	
              (b)

            	
              the
                representations and warranties of the Company shall be true and correct
                in
                all material respects on the date of Closing, as if made on such
                date, and
                the Company shall deliver a certificate, signed by an officer of
                the
                Company, to such effect; and

            

    

    

    
      	 	
              (c)

            	
              the
                Subscription Agreement has been accepted by the Company.
                

            

    

    

    1.3    Covenant
      to Include Stock in Registration Statement on Form S-2.
      The
      Company hereby covenants and agrees that these shares of Common Stock subscribed
      for herein will be registered on a registration statement on Form S-2 to be
      filed within the Securities and Exchange Commission under the Securities Act
      of
      1933, as amended.

    

    2.    Representations
      and Warranties of the Subscriber.
      The
      Subscriber hereby represents and warrants to the Company as follows (which
      representations and warranties shall be true as of the date of
      Closing):

    

    2.1    Accredited
      Investor.
      The
      Subscriber hereby represents and warrants to the Company that it is an
“accredited investor,” as defined in Rule 501 of Regulation D, and has marked
      the applicable box set forth in Section 9 of this Agreement signifying such
      status.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    

    
      	 	 	
              2.2

            	
              Investment
                Experience; Access to Information; Independent
                Investigation.

            

    

    

    2.2.1    Access
      to Information.
      The
      Subscriber or its professional advisor has been granted the opportunity to
      ask
      questions of and receive answers from representatives of the Company, and its
      officers, directors, employees and agents concerning the terms and conditions
      of
      the Offering, and the Company and its business and prospects, and to obtain
      any
      additional information which the Subscriber or its professional advisor deems
      necessary to verify the accuracy of the information received. The foregoing,
      however, does not limit or modify the Subscriber’s right to rely upon
      representations and warranties of the Company in Section 4 of this
      Agreement.

    

    2.2.2    Ability
      to Evaluate.
      The
      Subscriber has such knowledge and experience in financial and business matters
      that it is fully capable of evaluating the merits and risks of an investment
      in
      the Company, including without limitation those set forth in the Disclosure
      Documents (as defined below in Section 4.2).

    

    2.2.3    Disclosure
      Documents.
      The
      Subscriber has received and reviewed the Disclosure Documents (as defined below
      in Section 4.2). The foregoing, however, does not limit or modify the
      Subscriber’s right to rely upon the representations and warranties of the
      Company in Section 4 of this Agreement.

    

    2.2.4    Investment
      Experience; Fend for Self.
      The
      Subscriber has substantial experience in investing in securities and has made
      investments in securities other than those of the Company. The Subscriber
      acknowledges that it is able to fend for itself in the transaction contemplated
      by this Agreement and that it has the ability to bear the economic risk of
      its
      investment in the Company. The Subscriber has not been organized for the purpose
      of investing in securities of the Company.

    

    2.2.5    Not
      an Affiliate.
      The
      Subscriber is not an officer, director or “affiliate” (as that term is defined
      in Rule 415 of the Securities Act) of the Company.

    

    2.3    Exempt
      Offering Under Regulation D

    

    2.3.1    Investment;
      No Distribution.
      The
      Subscriber is acquiring the shares of Common Stock subscribed for (the “Common
      Shares”) solely for investment purposes for the Subscriber’s own account (or for
      beneficiaries’ accounts over which the Subscriber has investment discretion but
      no discretionary authority as to voting or disposition) and not with a view
      to a
      distribution of all or any part thereof. The Subscriber is aware that there
      are
      legal and practical limits on its ability to sell or dispose of the Common
      Shares and therefore, that the Subscriber must bear the economic risk of its
      investment for an indefinite period of time. The Subscriber has adequate means
      of providing for its current needs and anticipated contingencies and has no
      need
      for liquidity of this investment. The Subscriber’s commitment to illiquid
      investments is reasonable in relation to its net worth.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    

    2.3.2    No
      General Solicitation.
      The
      Common Shares were not offered to the Subscriber through, and the Subscriber
      is
      not aware of, any form of general solicitation or general advertising,
      including, without limitation, (i) any advertisement, articles, notice or other
      communication published in any newspaper, magazine or similar media or broadcast
      over television or radio, and (ii) any seminar or meeting whose attendees have
      been invited by any general solicitation or general advertising. 

    

    2.3.3    No
      Registration of Common Shares.
      The
      Subscriber understands that the Common Shares are not registered and therefore
      are “restricted securities” under the federal securities laws inasmuch as they
      are being acquired from the Company in a transaction not involving a public
      offering, and that, under such laws and applicable regulations, such securities
      may not be transferred or resold without registration under the Securities
      Act
      or pursuant to an exemption therefrom. In this connection, the Subscriber
      represents that it is familiar with Rule 144 under the Securities Act, as
      presently in effect, and understands the resale limitations imposed thereby
      and
      by the Securities Act.

    

    2.3.4    Disposition.
      Without
      in any way limiting the representations set forth above, the Subscriber further
      agrees not to make any disposition of all or any portion of the Securities
      unless and until:

    

    
      	 	
              (a)

            	
              There
                is then in effect a registration statement under the Securities Act
                covering such proposed disposition and such disposition is made in
                accordance with such Registration Statement;
                or

            

    

    

    
      	 	
              (b)

            	
              The
                Subscriber shall have notified the Company of the proposed disposition
                and
                shall have furnished the Company with a detailed statement of the
                circumstances surrounding the proposed disposition, and (ii) if reasonably
                requested by the Company, the Subscriber shall have furnished the
                Company
                with an opinion of counsel, reasonably satisfactory to the Company,
                that
                such disposition will not require registration of the Common Shares
                under
                the Securities Act.

            

    

    

    2.4    Due
      Authorization.

    

    2.4.1    Authority.
      The
      Subscriber, if executing this Subscription Agreement in a representative or
      fiduciary capacity, has full power and authority to execute and deliver this
      Subscription Agreement and each other document referred to herein for which
      a
      signature is required in such capacity and on behalf of the subscribing
      individual, partnership, trust, estate, corporation or other entity for whom
      or
      which the Subscriber is executing this Subscription Agreement.

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    

    2.4.2    Due
      Authorization.
      The
      Subscriber, if an entity, is duly and validly organized, validly existing and
      in
      good standing as such entity under the laws of the jurisdiction of its
      organization, with full power and authority to purchase the Common Shares
      subscribed for and to execute and deliver this Agreement.

    

    
      	 	
              3.

            	
              Acknowledgments.
                The Subscriber is aware of the
                following:

            

    

    

    3.1    Risks
      of Investment.
      The
      Subscriber recognizes that investment in the Company involves certain risks,
      including the potential loss of the Subscriber’s investment herein. The
      Subscriber recognizes that this Agreement and the exhibits hereto do not purport
      to contain all the information which would be contained in a registration
      statement under the Securities Act;

    

    3.2    No
      Government Approval.
      The
      Subscriber acknowledges that no federal, state or foreign agency has passed
      upon
      or reviewed the terms and conditions of the Offering or made any finding or
      determination as to the fairness of the Offering;

    

    3.3    Restrictions
      on Transfer.
      The
      Subscriber may not sell, transfer, assign, pledge or otherwise dispose of all
      or
      any portion of the Securities in the absence of either an effective registration
      statement or an exemption from the registration requirements of the Securities
      Act and applicable state securities law;

    

    3.4    Exempt
      Transaction.
      The
      Common Shares are being offered and sold in reliance on specific exemptions
      from
      the registration requirements of federal and state law and the Subscriber’s
      representations, warranties, agreements, acknowledgments and applicability
      of
      such exemptions and the suitability of the Subscriber to acquire Common
      Shares.

    

    3.5    Legends.
      It is
      understood that any certificates evidencing the Common Shares shall bear the
      following legend:

    

    “THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, NOR THE SECURITIES
      LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE
      ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THOSE SECURITIES LAWS
      OR AN
      OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT THE SALE OR
      TRANSFER IS PURSUANT TO AN EXEMPTION TO THE REGISTRATION REQUIREMENTS OF THOSE
      SECURITIES LAWS.”

    

    4.    Representations
      and Warranties of the Company.
      The
      Company hereby makes the following representations and warranties to the
      Subscriber, except as disclosed in the Disclosure Documents or otherwise
      disclosed to Subscriber, which representations and warranties shall be true
      as
      of the date of acceptance of this Agreement by the Company and as of
      Closing:

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    

    4.1    Organization,
      Good Standing, and Qualification.
      The
      Company is a corporation duly organized, validly existing and in good standing
      under the laws of the State of Texas and has all requisite corporate power
      and
      authority to carry on its business as now conducted and as currently proposed
      to
      be conducted. The Company is duly qualified to transact business and is in
      good
      standing in each jurisdiction in which the failure to so qualify would have
      a
      material adverse effect on the business or properties of the Company and its
      subsidiaries taken as a whole. The Company is not the subject of any pending
      or,
      to its knowledge, threatened or contemplated investigation or administrative
      or
      legal proceeding by the Internal Revenue Service, the taxing authorities of
      any
      state or local jurisdiction, or the Securities and Exchange Commission, or
      any
      state securities commission, or any other governmental entity, which are
      required to be disclosed in the Disclosure Documents and have not been
      disclosed.

    

    4.2    Corporate
      Condition.
      The
      Company has timely filed all forms, and reports and documents with the
      Securities and Exchange Commission required to be filed by it under the
      Securities Exchange Act 1934, as amended (the “Exchange Act”) through the date
      hereof (collectively, the “SEC Reports”). Each of the SEC Reports, at the time
      filed, complied in all material respects with the requirements of the Exchange
      Act. The Company has made available to the Subscriber a copy of the Company’s
      Form 10-K for the fiscal year ended December 31, 2004, and a copy of the
      Company’s Forms 10-Q, 8-K and S-2 filed by the Company since January 1, 2005
      (the “Most Recent Filings Report”). Other than as set forth in Schedule
      4.2
      attached
      hereto and made a part hereof, there have been no material adverse changes
      in
      the Company’s business, prospects, operations or financial condition since the
      date of the Most Recent Filings Report. The SEC Reports, together with Schedule
      4.2 and any other documents listed on Schedule 4.2(a) attached hereto and made
      a
      part hereof and furnished herewith by the Company to the Subscriber are referred
      to collectively as the “Disclosure Documents.” The financial statements
      contained in the Disclosure Documents have been prepared in accordance with
      generally accepted accounting principles, consistently applied, and fairly
      present in all material respects the consolidated financial condition of the
      Company as of the dates of the balance sheets included therein and the
      consolidated results of its operations and cash flows for the periods then
      ended. Without limiting the foregoing, there are no material liabilities,
      contingent or actual that are not disclosed in the Disclosure Documents (other
      than liabilities incurred by the Company in the ordinary course of its business,
      consistent with its past practice, after the periods covered by the Disclosure
      Documents). The Company has paid all material taxes which are due, except for
      taxes which it reasonably disputes. There is no material claim, litigation,
      or
      administrative proceeding pending, or, to the best of the Company’s knowledge,
      threatened or contemplated against the Company, except as disclosed in the
      Disclosure Documents. This Agreement and the Disclosure Documents do not contain
      any untrue statement of material fact and do not omit to state any material
      fact
      required to be stated therein or herein necessary to make the statements
      contained therein or herein not misleading in the light of the circumstances
      under which they were made.

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    

    4.3    Authorization.
      All
      corporate action on the part of the Company by its officers, directors and
      shareholders necessary for the authorization, execution and delivery of this
      Agreement, the performance of all obligations of the Company hereunder and
      the
      authorization, issuance and delivery of the Common Shares have been taken,
      and
      this Agreement constitutes valid and legally binding obligations of the Company,
      enforceable in accordance with their terms; provided, however that
      enforceability is subject to: (i) applicable bankruptcy, reorganization,
      insolvency, moratorium, fraudulent conveyance, and similar federal and state
      laws affecting the rights and remedies of creditors generally, and (ii) general
      principles of equity limiting the availability of equitable remedies (including
      but not limited to the remedy of specific performance), whether considered
      in a
      proceeding at law or in equity. The Company has obtained all consents and
      approvals required for it to execute, deliver and perform this
      Agreement.

    

    4.4    Valid
      Issuance of Common Shares.
      The
      Common Shares, when issued, sold and delivered in accordance with the terms
      hereof, for the consideration expressed herein, will be validly issued, fully
      paid and nonassessable and, based in part upon the representations of the
      Subscriber in this Agreement, will be issued in compliance with all applicable
      federal and state securities laws. The Common Shares will be issued free of
      any
      preemptive rights.

    

    4.5    Compliance
      with Other Instruments.
      The
      Company is not in violation or default of any provisions of its Restated
      Articles of Incorporation or Bylaws as amended and in effect on and as of the
      date of this Agreement or of any material provision of any material instrument
      or contract to which it is a party or by which it is bound or, to its knowledge,
      of any provision of any federal or state judgment, writ, decree, order, statute,
      rule or governmental regulation applicable to the Company, which would have
      a
      material adverse effect on the Company’s business or prospects, except as
      described in the Disclosure Documents. The execution, delivery and performance
      of this Agreement and the consummation of the transactions contemplated hereby
      will not result in any such violation or be in conflict with or constitute,
      with
      or without the passage of time and giving of notice, either a default under
      any
      such provision, instrument or contract or an event which results in the creation
      of any lien, charge or encumbrance upon any assets of the Company.

    

    4.6    Reporting
      Company.
      The
      Company is subject to the reporting requirements of the Exchange Act, and has
      a
      class of securities registered under Section 12 or Section 15 of the Exchange
      Act. When requested by the Subscriber, the Company shall furnish copies of
      reports filed by the Company with the Securities and Exchange
      Commission.

    

    4.7    Authorized
      and Issued Shares.
      The
      authorized and issued shares of the Company preferred stock, Common Stock and
      warrants, options, and instruments convertible into Common Stock as of September
      30, 2005 are as set forth on Exhibit
      A.

    

    4.8    Use
      of
      Proceeds.
      As of
      the date hereof, the Company expects to use the proceeds from the Offering
      (less
      fees and expenses) for the purposes set forth on Exhibit
      B
      hereto.
      These purposes are estimates and are subject to change, but represent the
      Company’s good faith best estimate of anticipated uses.

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    

    4.9    Compliance
      with Laws.
      As of
      the date hereof, the conduct of the business of the Company complies in all
      material respects with all material statutes, laws, regulations, ordinances,
      rules, judgments, orders or decrees applicable thereto. The Company has not
      received notice of any alleged violation of any statute, law, regulations,
      ordinance, rule, judgment, order or decree from any governmental authority.
      The
      Company shall comply with all applicable securities laws with respect to the
      Offering.

    

    4.10    No
      Rights of Participation.
      No
      person or entity, including, but not limited to, current or former shareholders
      of the Company, underwriters, brokers, agents or other third parties, has any
      right of first refusal, preemptive right, right of participation, or any similar
      right to participate in the Offering which has not been waived.

    

    4.11    Disclosures.
      There
      is no fact known to the Company (other than general economic conditions known
      to
      the public generally) that has not been disclosed in the Disclosure Documents
      that (a) could reasonably be expected to have a material adverse effect on
      the
      business, financial condition or results of operations of the Company, or which
      could reasonably be expected to materially and adversely affect the properties
      or assets of the Company or (b) could reasonably be expected to materially
      and
      adversely affect the ability of the Company to perform its obligations pursuant
      to this Agreement and the issuance of the Securities.

    

    4.12    Representations
      True and Correct.
      The
      foregoing representations, warranties and agreements are true, correct and
      complete in all material respects, and shall survive the Closing and the
      issuance of the Common Shares.

    

    4.13    Underwriter’s
      Fees and Rights of First Refusal.
      The
      Company is not obligated to pay any compensation or other fees, costs or related
      expenditures in cash or securities to any underwriter, broker, agent or other
      representative in connection with the Offering.

    

    5.    Covenants
      of the Company

    

    5.1    Independent
      Auditors.
      The
      Company shall, until at least two (2) years after the date of the Closing,
      maintain as its independent auditors an accounting firm authorized to practice
      before the Securities and Exchange Commission.

    

    5.2    Corporate
      Existence and Taxes.
      The
      Company shall, until at least two (2) years after the date of the Closing,
      maintain its corporate existence in good standing (provided, however, that
      the
      foregoing covenant shall not prevent the Company from entering into any merger
      or corporate reorganization so long as the surviving entity in such transaction,
      if not the Company, assumes all of the Company’s obligations with respect to the
      Securities) and shall pay all its taxes when due, except for taxes which the
      Company disputes.

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    

    5.3     Filings
      with Securities and Exchange Commission.
      The
      Company shall, upon request, provide the Subscriber with copies of its annual
      reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
      Form
      8-K for as long as the Common Shares remain outstanding.

    

    5.4    Listing.
      The
      Company shall use its best efforts to maintain the listing of its Common Stock
      on the OTC Bulletin Board or a national securities exchange or national
      quotation system.

    

    6.    Miscellaneous

    

    6.1    Representations
      and Warranties Survive the Closing; Severability.
      The
      Subscriber’s and the Company’s representations and warranties shall survive the
      Closing of the transaction provided for hereby notwithstanding any due diligence
      investigation made by or on behalf of the party seeking to rely thereon. In
      the
      event that any provision of this Agreement becomes or is declared by a court
      of
      competent jurisdiction to be illegal, unenforceable or void, this Agreement
      shall continue in full force and effect without said provision.

    

    6.2    Successors
      and Assigns.
      The
      terms and conditions of this Agreement shall inure to the benefit of and be
      binding upon the respective successors and assigns of the parties. Nothing
      in
      this Agreement, express or implied, is intended to confer upon any party other
      than the parties hereto or their respective successors and assigns any rights,
      remedies, obligations, or liabilities under or by reason of this Agreement,
      except as expressly provided in this Agreement. Neither party may assign its
      rights hereunder without the prior written consent of the other
      parties.

    

    6.3    Governing
      Law.
      This
      Agreement shall be governed by and construed under the laws of the State of
      Texas without respect to conflict of laws.

    

    6.4    Execution
      in Counterparts Permitted.
      This
      Agreement may be executed in any number of counterparts, each of which shall
      be
      enforceable against the parties actually executing such counterparts, and all
      of
      which together shall constitute one (1) instrument.

    

    6.5    Titles
      and Subtitles; Gender.
      The
      titles and subtitles used in this Agreement are used for convenience only and
      are not to be considered in construing or interpreting this Agreement. The
      use
      in this Agreement of a masculine, feminine or neither pronoun shall be deemed
      to
      include a reference to the others.

    

    6.6    Written
      Notices, Etc.
      Any
      notice, demand or request required or permitted to be given by the Company
      or
      the Subscriber pursuant to the terms of this Agreement shall be in writing
      and
      shall be deemed given when delivered personally, or by facsimile (with a hard
      copy to follow by overnight or two (2) day courier), addressed to the parties
      at
      the addresses and/or facsimile telephone number of the parties set forth at
      the
      end of this Agreement or such other address as a party may request by notifying
      the other in writing.

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    

    6.7    Expenses.
      Each of
      the Company and the Subscriber shall pay all costs and expenses that it
      respectively incurs, with respect to the negotiation, execution, delivery and
      performance of this Agreement.

    

    6.8    Entire
      Agreement; Written Amendments Required.
      This
      Agreement, the Common Stock certificates and the other documents delivered
      pursuant hereto constitute the full and entire understanding and agreement
      between the parties with regard to the subjects hereof and thereof, and no
      party
      shall be liable or bound to any other party in any manner by any warranties,
      representations or covenants except as specifically set forth herein. Neither
      this Agreement nor any terms hereof may be amended, waived, discharged or
      terminated other than by a written instrument signed by the party against whom
      enforcement of any such amendment, waiver, discharge or termination is
      sought.

    

    7.    Subscription
      and Wiring Instructions; Irrevocability.

    

    7.1    Subscription

    

    
      	 	 	 	
              (a)

            	
              Wire
                transfer of Subscription Funds.
                Subscriber shall send its subscription funds by wire transfer to
                the
                Company as follows, unless otherwise agreed with the
                Company:

            

    

    

    
      	 	Bank:	
              JP
                Morgan Chase

            

    

    
      	 	Account Name:	
              Nano-Proprietary, Inc.

            

    

    
      	 	Account
              No.:	
              081-00053751

            

    

    
      	 	ABA 
              Routing No.: 	
              113000609

            

    

     

     

    
      	 	 	 	
              (b)

            	
              Irrevocable
                Subscription.
                The Subscriber hereby acknowledges and agrees, subject to the provisions
                of any applicable laws providing for the refund of subscription amounts
                submitted by the Subscriber, that this Agreement is irrevocable and
                that
                the Subscriber is not entitled to cancel, terminate or revoke this
                Agreement; provided, however, that if the conditions to Closing are
                not
                satisfied or if the Disclosure Documents are discovered prior to
                Closing
                to contain statements which are materially inaccurate, or omit statements
                of material facts, the Subscriber may revoke or cancel this
                Agreement.

            

    

    

    
      	 	
              (c)

            	
              Company’s
                Right to Reject Subscription.
                This Agreement shall be accepted by the Company when the Company
                countersigns this Agreement. The Subscriber hereby confirms that
                the
                Company has full right in its sole discretion to accept or reject
                the
                subscription of the Subscriber, in whole or in part, provided that,
                if the
                Company decides to reject such subscription, the Company must do
                so
                promptly and in writing. In the case of rejection, the Company will
                promptly return any rejected payments and (if rejected in whole)
                copies of
                all executed subscription documents (including without limitation
                this
                Agreement) to Subscriber.

            

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    

    7.2    Acceptance
      of Subscription.
      In the
      case of acceptance of this subscription, ownership of the number of securities
      being purchased hereby will pass to the Subscriber upon the
      Closing.

    

    7.3    Subscriber
      to Forward Original Signed Subscription Agreement to Company.
      The
      Subscriber agrees to courier to the Company its original inked signed
      Subscription Agreement within three (3) days after faxing said signed Agreement
      to the Company.

    

    8.    Number
      of Shares and Purchase Price.
      The
      undersigned Subscriber hereby subscribes for and agrees to purchase 482,393
      shares of Common Stock for a total purchase price (to be paid by wire transfer)
      in the amount of one million dollars ($1,000,000.00) (the “Purchase
      Price”).

    

    9.    Accredited
      Investor.
      The
      Subscriber is (please check applicable box):

    

    
      	 	 	
              (a)

            	
              [x]

            	
              a
                corporation, business trust, limited liability company, or partnership
                not
                formed for the specific purpose of acquiring the securities offered,
                with
                total assets in excess of
                $5,000,000.

            

    

    

    
      	 	 	
              (b)

            	
              [ 
                ]

            	
              any
                trust, with total assets in excess of $5,000,000, not formed for
                the
                specific purpose of acquiring the securities offered, whose purchase
                is
                directed by a sophisticated person who has such knowledge and experience
                in financial and business matters that he is capable of evaluating
                the
                merits and risks of the prospective
                investment.

            

    

    

    
      	 	 	
              (c)

            	
              [ 
                ]

            	
              an
                individual, who

            

    

    

    
      	 	 	 	
              [
                 ]

            	
              is
                a director, executive officer or general partner of the issuer of
                the
                securities being offered or sold or a director, executive officer
                or
                general partner of a general partner of that
                issuer.

            

    

    

    
      	 	 	 	
              [ 
                ]

            	
              has
                an individual net worth, or joint net worth with that person’s spouse, at
                the time of the purchase exceeding
                $1,000,000.

            

    

    

    
      	 	 	 	
              [ 
                ]

            	
              had
                an individual income in excess of $200,000 in each of the two most
                recent
                years or joint income with that person’s spouse in excess of $300,000 in
                each of those years and has a reasonable expectation of reaching
                the same
                income level in the current year.

            

    

    

    
      	 	 	
              (d)

            	
              [ 
                ]

            	
              an
                entity, each owner of which is an entity described in (a) or (b)
                above or
                is an individual described in (c)
                above.

            

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    

    The
      undersigned acknowledges that this Agreement and the subscription represented
      hereby shall not be effective unless accepted by the Company as indicated
      below.

    

    (The
      remainder of this page is intentionally left blank.)

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the undersigned Subscriber does hereby execute this
Agreement
      effective the 20th
      day of
      October, 2005.

    

    

    SUBSCRIBER

    

    

      
      /s/ Barry M.
      Kitt                                                 
      

    Name:
      Barry M. Kitt

    Sole
      Member, Pinnnacle Fund Mangement, LLC

    The
      General Partner of Pinnacle Advisers, L.P.

    The
      General Partner of the Pinnacle Fund, L.P.

    

    

    

    
      	 	
              DELIVERY
                INSTRUCTIONS:

            
	 	 
	 	
              The
                Pinnacle Fund, L.P.

            
	 	
              c/o
                Banc
                of America Securities

              Attn:
                Brett Speer

              901
                Main Street, Suite 6616

              Dallas,
                TX 75202

            
	 	 

    

    

    

    

    

    ACCEPTANCE
      BY COMPANY:

    

    

    THIS
      SUBSCRIPTION IS ACCEPTED BY THE COMPANY AND THE COMPANY AGREES TO BE BOUND
      BY
      THE TERMS AND CONDITIONS THEREOF THIS 20th
      DAY OF
      OCTOBER, 2005.

    

    

    

    
      	 	
              By: 
                /s/ Douglas P.
                Baker                   
                

            
	 	
              Name:
                Douglas P. Baker

              Title:
                Vice President and Secretary

            

    

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    EXHIBIT
      “A”

    

    

    CAPITALIZATION

    
      	 	 	 	 	
              Number
                of Shares

            	 
	 	 	
            	 	
              of
                Common Stock

            	 
	 	 	
              
                Shares

              

            	 	
              issuable
                upon

            	 
	 	 	
              
                Outstanding
                  on
Sept.
                30, 2005

            	 	
              conversion
                or

              exercise

            	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	
              Shares
                of Common Stock:

            	 	 	
              99,214,047

            	 	 	 	 
	 	 	 	 	 	 	 	 
	
              Common
                Stock Options:

            	 	 	 	 	 	
              4,648,703

            	 
	 	 	 	 	 	 	 	 
	
              Common
                Stock Warrants :

            	 	 	 	 	 	
              95,000

            	 

    

    

    

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    EXHIBIT
      “B”

    

    USE
      OF
      PROCEEDS

    

    Working
      Capital

    

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    Schedule
      1.2

    

    MATERIAL
      ADVERSE CHANGES

    

    None

    
 

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    16Amended and Restated Senior Note due 2010

 Exhibit 4.2 
  

Executable Copy 
  
 THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, AND HAS BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE PLEDGED, OFFERED, SOLD HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.

  
 AMENDED AND RESTATED IDT SPECTRUM, INC. 

 
 7% Senior Note 
  
 Due January 31, 2010 
  
 No.             

  
 Newark, NJ 
  
 August 18, 2005 
  
 FOR VALUE RECEIVED, the undersigned, IDT SPECTRUM, INC., a Delaware corporation (the
“Borrower”), hereby promises to pay to Winstar Holdings LLC, or Winstar Holdings LLC’s registered assigns (the “Lender”), the principal sum of ten million Dollars ($10,000,000), or so much thereof as shall not have been
prepaid, on January 31, 2010 (the “Maturity Date”), with interest (computed on the basis of a 360-day year of twelve 30-day months) on the principal amount hereof from time to time outstanding and unpaid, payable as provided in the
next succeeding paragraph hereof, at the rate of 7% per annum from the date of issuance hereof (being the date first above written), or the most recent date to which interest has been paid hereon, to but excluding, the date on which said
principal amount shall be paid in full. 
  

	 	1.	 Payment of Interest. Borrower shall pay interest (i) on each Quarterly Date (as hereinafter defined) until the date on which the principal of and all
accrued and unpaid interest on this Note shall be paid in full, in cash, commencing on the first such Quarterly Date occurring after the date of issuance hereof, (ii) on the Maturity Date, and (iii) upon the payment or prepayment of any
principal owing under this Note (but only on the principal amount so prepaid or paid). For purposes of this Note, the term “Quarterly Date” shall mean the last day of each March, June, September 

 
and December; provided that if any such day is not a day on which the majority of banks in New Jersey are open for business (a “Business Day”),
then such Quarterly Date shall be the next succeeding Business Day and interest shall accrue by reason of such extension. 
  

	 	2.	Prepayment. The principal of the Note may be prepaid, in whole or in part, at any time upon not less than five (5) days’ prior written notice to the Lender,
together with all interest then accrued and unpaid thereon (or on the portion thereof being so prepaid, as the case may be), but without premium or penalty. 

  

	 	3.	Events of Default. If, while any part of the principal of or interest and expenses on this Note remains unpaid, any one of the following “Events of Default” shall
occur: 

  

	 	a.	the failure by the Borrower to pay the principal of or interest and expenses on this Note when such payment is due, whether on demand or otherwise; 

  

	 	b.	a default by the Borrower with respect to any indebtedness of the Borrower that results in the acceleration of such indebtedness; 

  

	 	c.	the Borrower shall (i) have a receiver, trustee, or liquidator appointed for it or for all or a substantial part of its assets; (ii) from this date forward, admit in
writing to its inability to pay its debts as they mature; (iii) make a general assignment for the benefit of creditors; (iv) be adjudicated bankrupt or insolvent; (v) file a voluntary petition in bankruptcy or a petition or an answer
seeking reorganization or an arrangement with creditors to take advantage of any insolvency law; (vi) file any answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization, or insolvency proceeding
or fail to dismiss such petition within sixty (60) days after the filing thereof; or (vii) take any action for the purpose of effecting any of the foregoing; 

  

	 	d.	an order, judgment, or decree shall be entered by any court of competent jurisdiction, approving a petition seeking reorganization or liquidation of the Borrower, or appointing a
receiver, trustee, or liquidator of the Borrower of all or a substantial part of its assets, which such order, judgment, or decree has not been effectively stayed within fifteen (15) days after entry; 

  

	 	e.	 the Borrower or any of its subsidiaries shall file a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up or shall
commence or have commenced against it any action or proceeding for dissolution, winding-up or liquidation; 

  

 2 

	 	 
then, and upon the occurrence of any such event, the Lender may, with or without notice to the Borrower, declare the entire unpaid principal balance of this
Note and any accrued and unpaid interest and expenses thereon immediately due and payable, whereupon such Note and all amounts owing thereunder shall forthwith become due and payable without presentment, demand, protest, or further notice of any
kind, all of which are expressly waived by the Borrower; provided, however, that upon the happening of any event under subsections c or d of this Section 3, then this Note shall, without the taking of any action by the Lender,
immediately become due and payable. Upon the occurrence of an Event of Default, the Lender shall then, or at any time thereafter, have all of the rights and remedies accorded under applicable law. All such rights and remedies are cumulative and none
is exclusive. In the event that the Lender or any subsequent holder of this Note shall exercise or endeavor to exercise any of its remedies under this Note, the Borrower shall pay on demand all reasonable costs and expenses incurred in connection
therewith including, without limitation, reasonable attorneys’ fees, and the Lender may seek judgment for all such amounts in addition to all other sums due hereunder. The Borrower hereby agrees not to take any action to obstruct, impede, or
infringe upon the Lender’s enforcement of their rights, benefits, and remedies under this Note and to cooperate fully with any and all actions taken by any Lender pursuant to this Note or in the exercise of any rights granted to any Lender
thereunder or under applicable law. 

  

	 	4.	Payment. All payments of principal of and interest on this Note shall be in such coin or currency of the United States of America as at the time of payment shall be legal
tender for payment of public and private debts. 

  

	 	5.	Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New Jersey. 

  

	 	6.	Amendment and Restatement. This Note amends and restates in full the $10,000,000 7% Senior Secured Note made by the Company in favor of Winstar Holdings, LLC, dated as of
January 31, 2005. 

  
 [REMAINDER INTENTIONALLY
BLANK] 
  

 3 

 IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly authorized
representative as of the date first above written. 
  

			
	IDT SPECTRUM, INC.
	 
		
	By:	 	/s/    John C. Petrillo        
	 	 	Name:  John C. Petrillo
	 	 	Title:    Chairman & CEO 

  

 4

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