Edgar Filing: KRONOS ADVANCED TECHNOLOGIES INC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from __________ to __________

COMMISSION FILE NO. 000-30191

KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

NEVADA 87-0440410
-------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

464 Common Street, Suite 301, Belmont, MA 02478
---------------------------------------------- --------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 993-9965
-------------------------------------------------- -------------------

(1) Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and

(2) has been subject to such filing requirements for the past 90 days. /X/ Yes
// No

As of November 12, 2004, there were 71,265,022 shares outstanding of the
issuer's common stock.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The following comprise our condensed (unaudited) consolidated financial
statements for the three months ended September 30, 2004.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

September 30,
2004 June 30,
Assets (Unaudited) 2004
----------------- ----------------
Current Assets
Cash $ 40,933 $ 69,063
Accounts receivable, net 123,544 97,544
Prepaids 17,827 71,050
----------------- ----------------
Total Current Assets 182,304 237,657
----------------- ----------------
Net Property and Equipment 4,823 6,292

Other Assets
Intangibles 2,208,798 2,253,029
----------------- ----------------
Total Other Assets 2,208,798 2,253,029
----------------- ----------------
Total Assets $ 2,395,925 $ 2,496,978
================= ================

Liabilities and Shareholders' Deficit

Current Liabilities
Accrued expenses and payables
to directors and officers $ 249,378 $ 36,258
Accounts payable 345,885 272,544
Accrued expenses 405,621 312,346
Deferred revenue 3,218 3,218
Notes payable, current portion 870,593 798,926
----------------- ----------------
Total Current Liabilities 1,874,695 1,423,292
----------------- ----------------
Long Term Liabilities
Notes payable to directors &
Officers 1,063,266 1,063,266
Notes payable 1,978,052 1,983,038
Discounts on notes payable (514,940) (589,261)
----------------- -----------------
Total Long Term Liabilities 2,526,378 2,457,044
----------------- -----------------

Total Liabilities 4,401,073 3,880,336
----------------- -----------------

Shareholders' Deficit Common stock,
authorized 500,000,000 shares of
$0.001 par value, 61,323,845 shares
outstanding at September 30,
and June 30, 2004 61,323 61,323
Capital in excess of par value 18,578,019 18,578,018
Accumulated deficit (20,644,490) (20,022,700)
------------------ ----------------
Total Shareholders' Deficit (2,005,148) (1,383,359)
------------------ ----------------
Total Liabilities and
Shareholders' Deficit $ 2,395,925 2,496,978
================== ================

The accompanying notes are an integral part of these financial statements.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended September 30,
-------------------------------------
2004 2003
(Unaudited) (Unaudited)
-------------- -----------------

Sales $ 241,533 $ 130,017
Cost of sales 217,920 82,753
-------------- ------------------
Gross Profit 23,613 47,264
-------------- ------------------
Selling, General and Administrative expenses:
Compensation and benefits 222,870 202,823
Professional services 52,339 43,638
Research and development 17,989 19,828
Depreciation and amortization 99,834 70,579
Facilities 18,887 18,873
Other selling general and
administrative expenses 91,875 73,752
-------------- ------------------
Selling, General and Administrative expenses 503,794 429,493
-------------- ------------------
Net Operating Loss (480,181) (382,229)

Interest Expense (141,609) (168,270)
-------------- ------------------
Net Loss Before Taxes (621,790) (550,449)
-------------- ------------------
Net Loss $ (621,790) (550,499)
============== ==================
Basic Loss Per Share $ (0.01) (0.01)
============== ==================
Diluted Loss Per Share $ (0.01) (0.01)
============== ==================

Weighted average shares outstanding 61,323,845 53,973,647

The accompanying notes are an integral part of these financial statements.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended September 30,
------------------------------------------------
2004 2003
(Unaudited) (Unaudited)
---------------------- ----------------------

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss from continuing operations $ (621,790) $ (550,499)
Adjustments to reconcile net loss to net cash
used in operating activities

Depreciation and amortization 99,834 70,579
Accretion of note discount 74,321 80,064
Change In
Accounts receivable (26,000) (69,128)
Prepaid expenses and other assets 53,222 (28,924)
Deferred revenue - (12,122)
Accounts Payable (2,886) 60,562
Accrued Expenses and other liabilities 382,622 8,188
---------------------- ----------------------
Net cash used in Operating Activities (40,677) (441,281)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent protection (54,134) (41,738)
---------------------- ----------------------
Net cash used in Investing Activities (54,134) (41,738)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 525,000
Proceeds from short term borrowings 100,000 -
Repayments of short-term borrowings (33,319) (144,704)
---------------------- ----------------------
Net cash provided by Financing Activities 66,681 380,296
---------------------- ----------------------
NET DECREASE IN CASH (28,130) (102,723)

CASH
Beginning of period 69,063 641,178
---------------------- ----------------------

End of period $ 40,933 $ 538,455
====================== ======================

The accompanying notes are an integral part of these financial statements.

KRONOS ADVANCED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Kronos Advanced
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. Operating results for the
three months ended September 30, 2004 and are not necessarily indicative of the
results that may be experienced for the fiscal year ending June 30, 2005.

These consolidated financial statements are those of the Company and its
wholly-owned subsidiary. All significant inter-company accounts and transactions
have been eliminated in the preparation of the consolidated financial
statements.

The accompanying consolidated financial statements should be read in conjunction
with the Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year
ended June 30, 2004 filed on October 15, 2004.

NOTE 2 - REALIZATION OF ASSETS AND GOING CONCERN

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the quarter ended September 30, 2004. In addition, the
Company has used, rather than provided, cash in its operations. The Company is
currently using its resources in its efforts to raise capital necessary to
complete research and development work, and to provide for its working capital
needs.

In view of the matters described in the preceding paragraph, recoverability of a
major portion of the asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financing requirements on a continuing
basis, to maintain present financing and to succeed in its future operations.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence:

HoMedics Licensing Agreement. In October 2002, Kronos Air Technologies, Inc.,
and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing
Agreement to bring Kronos(TM) proprietary technology to the consumer. The
agreement provides for exclusive North American, Australian and New Zealand
retail distribution rights for next generation consumer air movement and
purification products based on the patented Kronos(TM) technology. In August
2004, the Company and HoMedics, Inc. began preparing the Kronos-based consumer
standalone product line for mass production. The initial term of the agreement
is three and one half years from the initial sale of consumer air purification
products by HoMedics, which shall be no later than December 31, 2006, with the
option to extend the agreement for six additional years. Kronos will be
compensated through an initial royalty payment and ongoing quarterly royalty
payments based on a percentage of sales. HoMedics will pay minimum royalty
payments of at least $2.0 million during the initial term and on-going royalty
payments to extend the agreement. Kronos will retain full rights to all of its
intellectual property.

US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a Small
Business Innovation Research Phase II contract worth $580,000, plus an option of
$145,000. The Phase II contract (commercialization phase) is an extension of the
Phase I and the Phase I Option work that began in 2001. It is intended that the
Kronos(TM) devices being developed under this contract will be embedded in
existing HVAC systems in order to move air more efficiently than traditional,
fan-based technology. During Phase II, Kronos shall develop, produce and install
a set of fully controlled devices that represent a "cell" of an advanced
distributive air management system with medium capacity airflow in a U.S. Navy
unique environment. The "cell" has been designed to be easily adjustable to a
variety of parameters such as duct size, airflow requirements, and air quality.
As of September 30, 2004, U. S. Navy had provided Kronos with $567,000 in
funding for this effort under the Phase II contract.

US Army SBIR Option. In August 2003, Kronos was awarded the option on its U. S.
Army Small Business Innovation Research Phase I contract bringing the value of
the Phase I contract award to $120,000. On October 21, 2003, the U.S. Army
awarded Kronos the Small Business Innovation Research Phase II contract. The
first year of the contract is worth $369,000 with an Army option on the second
year worth $360,000. The contract is to develop Kronos' proprietary
Electrostatic Dehumidification Technology ("EDT"). Kronos initiated work under
the Phase II contract in December 2003. As of September 30, 2004, U. S. Army had
provided Kronos with $151,000 in funding for this effort under the Phase II
contract.

Cornell Equity and Equity Backed Financing. In October 2004, Kronos entered into
agreements for up to $20.5 million in equity and equity backed debt financing
from Cornell Capital Partners. Kronos executed an Equity Investment Agreement to
secure $500,000 through the sale of 5 million unregistered shares of Kronos
common stock. Cornell Capital Partners committed to provide $4 million pursuant
to two Equity Backed Promissory Notes, which will be funded as follows: $2
million upon filing a Registration Statement and $2 million upon the SEC
declaring the Registration Statement effective. Kronos executed a Standby Equity
Distribution Agreement for $20 million of funding which Kronos has the option to
drawdown against in increments as large as $1.5 million over the next
twenty-four months.

HoMedics provided debt financing. In October 2004, HoMedics has agreed to extend
repayment of Kronos debt and to provide an additional $1 million in funding.
HoMedics has agreed to provide Kronos with an additional $1 million in financing
(refer to Note 10 - Commitments and Contingencies below).

Fusion Capital. During our year ended June 30, 2004, we sold 6,505,576 shares of
our common stock to Fusion Capital for $1,353,718 under the terms of our Common
Stock Purchase Agreements dated August 12, 2002. On November 4, 2004, Kronos and
Fusion mutually agreed to terminate this common stock purchase agreement.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Method. The Company's financial statements are prepared using the
accrual method of accounting. The Company has elected a June 30 fiscal year end.

Reclassifications. Certain reclassifications have been made to the 2003
financial statements in order to conform to the 2004 presentation. None of these
reclassifications affected previously reported financial position, results of
operations or cash flows of the Company.

Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and of each of its subsidiaries for the
periods in which the subsidiaries were owned/held by the Company. All
significant intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements. At June 30, 2004, we had
only one subsidiary, Kronos Air Technologies, Inc.

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from those
estimates.

Concentrations of Credit Risk. Financial instruments which can potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company manages its exposure to risk through ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains an allowance for doubtful accounts for potential losses
and does not believe it is exposed to concentrations of credit risk that are
likely to have a material adverse impact on the Company's financial position or
results of operations.

Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with a remaining maturity of three months or less when purchased,
to be cash equivalents.

Accounts Receivable. The Company provides an allowance for losses on trade
receivables based on a review of the current status of existing receivables and
management's evaluation of periodic aging of accounts. Accounts receivable are
shown net of allowances for doubtful accounts of $0 at September 30, 2004 and
June 30, 2004. The Company charges off accounts receivable against the allowance
for losses when an account is deemed to be uncollectable.

Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.

Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of our long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in our business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on our estimate of the period
that the assets will generate revenues or otherwise be used by Kronos. Factors
that would influence the likelihood of a material change in our reported results
include significant changes in the asset's ability to generate positive cash
flow, loss of legal ownership or title to the asset, a significant decline in
the economic and competitive environment on which the asset depends, significant
changes in our strategic business objectives, and utilization of the asset.

Income Taxes. Income taxes are accounted for in accordance with the provisions
of SFAS No. 109. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized, but no less than quarterly.

Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.

Earnings (Loss) Per Share. Basic earnings (loss) per share is computed using the
weighted average number of shares outstanding. Diluted earnings (loss) per share
is computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options and warrants to
purchase common stock, when their effect is dilutive.

Revenue Recognition. The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) 101, which requires evidence of an agreement, delivery
of the product or services at a fixed or determinable price, and assurance of
collection within a reasonable period of time. Further, Kronos Air Technologies
recognizes revenue on the sale of the custom-designed contract sales under the
percentage-of-completion method of accounting in the ratio that costs incurred
to date bear to estimated total costs. For uncompleted contracts where costs and
estimated profits exceed billings, the net amount is included as an asset in the
balance sheet. For uncompleted contracts where billings exceed costs and
estimated profits, the net amount is included as a liability in the balance
sheet. Sales are reported net of applicable cash discounts and allowances for
returns. Revenue from government grants for research and development purposes is
recognized as revenue as long as the Company determines that the government will
not be the sole or principal expected ultimate customer for the research and
development activity or the products resulting from the research and development
activity. Otherwise, such revenue is recorded as an offset to research and
development expenses in accordance with the Audit and Accounting Guide, Audits
of Federal Government Contractors. In either case, the revenue or expense offset
is not recognized until the grant funding is invoiced and any customer
acceptance provisions are met or lapse.

Stock, Options and Warrants Issued for Services. Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.

Stock Options. Statement of Financial Accounting Standards No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123," amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.

The Company accounts for stock-based compensation to employees and directors
using the intrinsic value method of accounting as prescribed under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. Under the intrinsic value method,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized in the Company's Consolidated Statements of Operations.

RECENT ACCOUNTING PRONOUNCEMENTS - Management does not believe that recently
issued, but not yet effective accounting pronouncements if currently adopted
would have a material effect on the accompanying consolidated financial
statements.

NOTE 4 -- INCOME TAXES

The composition of deferred tax assets and the related tax effects at September
30, 2004 and June 30, 2004 are as follows:

September 30, 2004
(Unaudited) June 30, 2004
------------- -------------
Benefit from carryforward of capital and
net operating losses $ 4,932,460 $ 4,841,083
Other temporary differences 220,796 156,740
Less:
Valuation allowance (5,153,256) (4,997,823)
------------- -------------
Net deferred tax asset $ - $ -
============= =============

The other temporary differences shown above relate primarily to impairment
reserves for intangible assets, and accrued and deferred compensation. The
difference between the income tax benefit in the accompanying statements of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows:

September 30, 2004
(Unaudited) June 30,2004
--------------------------- ----------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------

Benefit for income tax at federal statutory rate $ 211,409 34.0% $ 848,265 34.0%
Benefit for income tax at state statutory rate 12,394 2.0% 49,728 2.0%
Non-deductible expenses (68,369) (11.0)% (123,348) (4.9)%
Increase in valuation allowance (155,434 (25.0)% (774,645) (31.0)%
------------- ------------ -------------- ------------
$ - 0.0% $ - 0.0%
============= ============ ============== ============

The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.

At September 30, 2004, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $11.3 million of unused
Federal net operating losses, $2.3 million of capital losses and $9.7 million of
unused State net operating losses available for carryforward to future years.
The benefit from carryforward of such losses will expire in various years
between 2006 and 2025 and could be subject to limitations if significant
ownership changes occur in the Company.

NOTE 5 - SEGMENTS OF BUSINESS

The Company operates principally in one segment of business: The Company
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos(TM) technology. For the three months ended September 30,
2004 and the fiscal year ended June 30, 2004, the Company operated only in the
U.S.

NOTE 6 - EARNINGS PER SHARE

Weighted average shares outstanding used in the earnings per share calculation
were 61,323,845 and 53,973,647 for the three months ended September 30, 2004 and
2003, respectively.

As of September 30, 2004, there were outstanding options to purchase 12,813,812
shares of the Company's common stock and outstanding warrants to purchase
15,792,342 shares of the Company's common stock. These options and warrants have
been excluded from the earnings per share calculation as their effect is
anti-dilutive. As of September 30, 2003, there were outstanding options and
warrants to purchase 10,601,675 and 15,792,342 shares, respectively, of the
Company's common stock. These options have been excluded from the earnings per
share calculation as their effect is anti-dilutive.

NOTE 7 - NOTES PAYABLE

The Company had the following obligations as of September 30, 2004 and June 30,
2004,

September 30, 2004 June 30, 2004
(Unaudited)
--------------- ---------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Discount on obligation to HoMedics (514,940) (589,261)
Obligation to current employees (2) 1,139,903 1,139,903
Obligation to Fusion Capital (3) 200,000 200,000
Obligation for finance leases (4) 47,009 50,327
Obligations to others (5) 125,000 55,000
--------------- ---------------
3,396,972 3,255,971
Less:
Current portion 870,593 798,926
--------------- ---------------
Total long term obligations net of
current portion $ 2,526,378 $ 2,457,044
=============== ===============

(1) This note has a 5 year term and bears interest at 6%. In October 2004,
HoMedics agreed to extend repayment of this note (refer to Note 11 - Subsequent
Events). This note was issued along with warrants for the purchase of 13.4
million shares of the Company's common stock. As a result, the note was recorded
with a discount of $893,000 that is being amortized against earnings using the
interest rate method of amortization.

(2) These notes bear interest at the rates between 12% and 17%. One note
($76,637) is due upon the Company securing $2 million in funding and the balance
of the notes are due December 31, 2006.

(3) This is a non-interest bearing demand obligation and was only outstanding
until Fusion Capital purchased enough stock from the Company to eliminate the
advance position. In November 2004, Fusion Capital purchased two million shares
of the Company's Common Stock to eliminate the advance position.

(4) See Note 8 below.

(5) There were two obligation to others at September 30, 2004: (i) $100,000
short-term loan at 12% interest to be repaid upon the Company securing more than
$1 million in new financing; and (i) $25,000 balance on a non-interest bearing
loan ($55,000 balance at June 30, 2004) that was originally incurred for the
acquisition of license rights of the Kronos(TM) technology with a value of
$270,000. This note is non-interest bearing with quarterly payments of $30,000
until paid in full. On July 3, 2004 the Company made the required payment for
this note and on October 5, 2004 the Company paid the note in full.

NOTE 8 - CAPITAL LEASES

The Company entered into a capital lease for the purpose of purchasing equipment
used in the research and product development center. Certain Officers of the
Company personally guaranteed the capital lease if the Company does not fulfill
its terms of the lease obligations. The leases are for 36 months and contain
bargain purchase provisions so that the Company can purchase the equipment at
the end of each lease. The following sets forth the minimum future lease
payments and present values of the net minimum lease payments under these
capital leases:

Minimum Future Lease Payments and Present Values of the Net Minimum Lease
Payments

Period ended September 30,
-----------------------------------
2005 $ 36,336
2006 21,227
---------
Total minimum lease payments 57,564
Less: Executory costs -
---------
Net minimum lease payments 57,564
Less: Imputed interest 10,555
---------
Present value of net minimum lease payments $ 47,009
=========

Of the equipment that was purchased using capital leases, $10,650 was
capitalized and the remaining $65,782 was expensed through research and
development and cost of sales. In the three ended September 30, 2004, the
Company paid $5,968 in principal and $3,077 in interest on capital leases. In
the three months ended September 30, 2003, the Company paid $4,703 in principal
and $4,381 in interest on capital leases.

NOTE 9 - CONSULTING AGREEMENTS

On October 31, 2003, the Company entered into a 10-month consulting agreement
with Joshua B. Scheinfeld and Steven G. Martin, principals of Fusion Capital,
for consulting services with respect to operations, executive employment issues,
employee staffing, strategy, capital structure and other matters as specified
from time to time. As consideration for their services, the Company issued
360,000 shares of its common stock. In accordance with EITF 96-18, the
measurement date was established as the contract date of October 31, 2003 as the
share grant was non-forfeitable and fully vested on that date. The stock was
valued on that date at $0.22 a share (the closing price for the Company's common
stock on the measurement date). The stock issuance has been recorded as a
prepaid consulting fee and was amortized to Professional Fee Expense ratably
over the ten month term of the contract. Under this contract, expenses of
$12,586 were recorded for the three months ended September 30, 2004.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

In October 2004, HoMedics has agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional 26,507,628 ten year
warrants exercisable at $0.10 per share. The $925,000 will be paid to Kronos
upon Kronos achieving three milestones: (i) $175,000 shall be funded upon
delivery and successful testing of electronic boards and power supplies from
Kronos' contract manufacturing partner, (ii) $250,000 shall be funded upon
obtaining tooling of the current prototype configuration and device testing and
performing to HoMedics' specifications, and (iii) $500,000 shall be funded upon
the initial sale of Kronos-based air purifiers by HoMedics. In addition,
quarterly debt payments and the maturity date for existing debt have been
extended. Quarterly payments due on the outstanding $2.4 million in secured debt
financing, which had been scheduled to begin in August 2004, will be due the
earlier of Kronos receipt of royalty payments from HoMedics sale of Kronos-based
air purification products or two years. The maturity date of the $2.4 million in
debt has been extended from May 2008 to October of 2009; the maturity date on
the $925,000 will also be October 2009. The interest rate will remain at 6% for
the $2.4 million in debt; the rate will also be 6% on the additional debt.
HoMedics increased their potential equity position in Kronos to 30% of Kronos
common stock on a fully diluted basis. Kronos has issued HoMedics a warrant to
buy 26.5 million shares of Kronos common stock.

Employment Agreements

The Company entered into an Employment Agreement with its President and Chief
Executive Officer, Daniel Dwight, effective as of November 15, 2001. The initial
term of the Employment Agreement was for two years and the agreement will
automatically renew for successive one year terms unless written notice within
three months of the end of the renewal term is received by either party. The
Board of Directors renewed the Employment Agreement on August 13, 2003 and again
on August 15, 2004. The Employment Agreement provides for base cash compensation
of $180,000 per year and eligibility for annual incentive bonus compensation in
an amount equal to annual salary based on the achievement of certain bonus
objectives.

The Company entered into an Employment Agreement with its Chief Operating
Officer, Richard Tusing, effective as of January 1, 2003. The initial term of
the Employment Agreement is for two years and will automatically renew for
successive one year terms unless written notice within three months of the end
of the initial term or any subsequent renewal term is received by either party.
The Board of Directors renewed the Employment Agreement on October 1, 2004. The
Employment Agreement provides for base cash compensation of $160,000 per year.

NOTE 11 - SUBSEQUENT EVENTS

In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement to secure $500,000 through the sale of 5
million unregistered shares of Kronos common stock. Cornell Capital Partners
committed to provide $4 million pursuant to two Equity Backed Promissory Notes,
which will be funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty four months.

In October 2004, Kronos and Richard A. Papworth agreed to postpone under the
terms of a Promissory Note repayment of the Note for $76,637 until Kronos
obtains proceeds from Cornell Capital Partners under the terms of our Promissory
Note.

been extended. Quarterly payments due on the outstanding $2.4 million in secured
debt financing, which had been scheduled to begin in August 2004, will be due
the earlier of Kronos receipt of royalty payments from HoMedics sale of
Kronos-based air purification products or two years. The maturity date of the
$2.4 million in debt has been extended from May 2008 to October of 2009; the
maturity date on the $925,000 will also be October 2009. The interest rate will
remain at 6% for the $2.4 million in debt; the rate will also be 6% on the
additional debt. HoMedics increased their potential equity position in Kronos to
30% of Kronos common stock on a fully diluted basis. Kronos has issued HoMedics
a warrant to buy 26.5 million shares of Kronos common stock.

In October 2004, Kronos received a Notice of Allowance from the United States
Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" - Power Supply Management and Control has been
examined and allowed for issuance as a U. S. patent. Kronos expects that the U.
S. Patent will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.

In November 2004, Kronos received formal notification from the Commonwealth of
Australian Patent Office indicating that its application entitled "Electrostatic
Fluid Accelerator" has been examined and allowed for issuance as an Australian
patent (#773626).

In November 2004, Kronos and Fusion Capital Fund II, LLC mutually agreed to
terminate their existing common stock purchase agreement dated August 12, 2002.

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

INTRODUCTORY STATEMENTS

FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.

GENERAL

Kronos Advanced Technologies, Inc. is a high technology industrial company
focused on developing, marketing and selling products using the Company's
proprietary air movement and purification technology. Kronos is pursuing
commercialization of its patented technology in a limited number of markets; and
if we are successful, we intend to enter additional markets in the future. To
date, our ability to execute our strategy has been restricted by our limited
amount of capital.

Technology Description and Benefits

The Kronos(TM) technology combines high voltage electronics and electrodes. By
combining these technologies, a Kronos(TM)-based device can both move and clean
air without any moving parts. Kronos(TM) devices are versatile, energy- and
cost-efficient and capable of multiple design forms. As a result, Kronos(TM)
devices have the immediate potential to be used as a standalone product or to
replace a range of heating, ventilation and air conditioning products for
residential usage to high efficiency particulate air filtration systems for
operating and manufacturing clean rooms.

The proprietary Kronos(TM) technology involves the application of high voltage
management across paired electrical grids to create an ion exchange that moves
and purifies air. Kronos(TM) technology has numerous valuable characteristics.
It moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria and mold. The technology
is cost-effective and is more energy efficient than current alternative fan and
filter (including HEPA filter and ultraviolet light based) technologies.
Although no commercial products using the Kronos(TM) technology have been sold
to date, in August 2004, the Company and its strategic consumer products
partner, HoMedics, initiated the transition to mass production of the
Kronos-based consumer standalone product line.

A number of the scientific claims of the Kronos(TM) technology have been tested
by the U. S. government and a few multi-national companies, including the U. S.
Department of Energy, the U. S. Department of Defense, General Dynamics,
Underwriters Laboratory, and Intel. Independent laboratory testing has verified
the purification capability of the Kronos(TM) technology. Tests conducted at
MicroTest Laboratories, LMS Industries and New Hampshire Materials Laboratory
demonstrated HEPA Clean Room Class 1000 quality particulate reduction, removal
of over 99.97% of 0.1 micron and above size particles, and up to 95% reduction
of hazardous gases, including numerous contaminants found in cigarette smoke.
Intertek, one of the global leaders for testing electrical and electronic
products, performed tobacco smoke elimination tests in accordance with ANSI/AHAM
AC-1-1988 standard entitled "American National Standard Method for Measuring
Performance of Portable Household Electric Cord-Connected Room Air Cleaners."
The test demonstrated a Clean Air Delivery Rate (CADR) for the Kronos air
purifier of over 300. These results place the Kronos(TM) device in one of the
highest categories of particulate cleaning for standalone devices.

Market Segmentation

Kronos' business development strategy is to sell and license the Kronos(TM)
technology to six distinct market segments: (1) air movement and purification
(residential, health care, hospitality, and commercial facilities); (2) air
purification for unique spaces (cleanrooms, airplanes, automotive, and cruise
ships); (3) specialized military (naval vessels, closed vehicles and mobile
facilities); (4) embedded cooling and cleaning (electronic devices and medical
equipment); (5) industrial scrubbing (produce storage and diesel and other
emissions); and (6) hazardous gas destruction (incineration and chemical
facilities).

Kronos' initial focus is on the first three of these market segments which are
described in more detail below. Kronos is currently developing products for the
air movement and purification, air purification for unique spaces, and
specialized military through specific customer contracts. These contracts are
described in more detail in the Technology Application and Product Development
section of this filing.

o Air Movement and Purification. Indoor air pollution, including "sick
building syndrome" and "building related illness," is primarily caused
by inadequate ventilation, chemical contaminants from indoor and
outdoor sources and biological contaminants. The addressable air
movement and purification segment is made up of four principal
applications: (1) residential, (2) health care, (3) hospitality and (4)
commercial. Kronos is seeking to leverage the product development,
production and funding resources of HoMedics, Inc., Kronos' strategic
partner for consumer-based residential applications, to develop and
manufacturer standalone products for other air movement and
purification applications.

o Air Purification for Unique Spaces. Electronics, semiconductor,
pharmaceutical, aerospace, medical and many other producers depend on
cleanroom technology. As products such as electronic devices become
smaller, the chance of contamination in manufacturing becomes higher.
For pharmaceutical companies, clean, safe and contaminant-free products
are imperative to manufacturing and distributing a viable product.
Other potential applications for the Kronos(TM) technology include
closed environments such as aircraft, cruise ships and other
transportation modes that require people to breathe contaminated,
re-circulated air for extended periods. Kronos is building on its
product development effort with its strategic partner in the business
jet market and the U.S. military to serve other closed environment
applications.

o Specialized Military. Military personnel face the worst of all possible
worlds: indoor air pollution, often in very confined spaces for
extended periods, combined with the threat of biological warfare,
nuclear fallout, and other foreign elements. We believe that the
military market segment offers Kronos a unique opportunity to leverage
the technical and funding resources of the U. S. military to expand
Kronos' ability to develop and produce Kronos(TM)-based air movers and
purifiers for applications that require these products to be embedded
into ventilation systems to address the needs of military personnel.

Technology Application and Product Development

To best serve Kronos' targeted market segments, our Company is developing
specific product applications across two distinct product application platforms.
A Kronos(TM) device can be either used as a standalone product or can be
embedded. Standalone products are self-contained and only require the user to
plug the Kronos(TM) device into a wall outlet to obtain air filtration for their
home, office or hotel room. Embedded applications of the Kronos(TM) technology
require the technology be added into another system such as a building
ventilation system for more efficient air movement and filtration or into an
electrical device such as computer or medical equipment to replace the cooling
fan.

Standalone Platform

o Consumer Products. In October 2002, Kronos Air Technologies, Inc., and
HoMedics USA, Inc. executed a Licensing Agreement granting HoMedics
certain rights with respect to the distribution of the Kronos(TM)
proprietary technology to the consumer. The agreement provides for
exclusive North American, Australian and New Zealand retail
distribution rights for next generation consumer air movement and
purification products based on the patented Kronos(TM) technology. In
August 2004, the Company and HoMedics initiated the transition to mass
production of the Kronos-based consumer standalone product line.
Preparing to meet these goals entails the use of Kronos' technical
resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this
process. While HoMedics is managing production of the finished product,
Kronos is managing the production of our proprietary power supply and
related circuitry.

Kronos' focus is twofold: First, Kronos is working with Flextronics
International USA, Inc. to preparing for mass production the technical
hardware and related power supplies for each of the products in the air
purification product line. Second, Kronos is finalizing and testing
with HoMedics component and materials selection for the finished
products. This process combines HoMedics vendor selection process and
international production expertise with Kronos' technical expertise. We
believe the Company has successfully completed the development of a
Kronos-based consumer standalone air purifier that is an efficient,
high quality product which is cost effective and easy to operate. In
August 2004, the Company and HoMedics initiated the transition to mass
production of the Kronos-based consumer standalone product line.

The initial term of the agreement is three and one half years from the
initial sale of consumer air purification products by HoMedics, which
shall be no later than December 31, 2006, with the option to extend the
Licensing Agreement for six additional years. Kronos was compensated
through an initial royalty payment and will receive ongoing quarterly
royalty payments based on a percentage of sales. HoMedics will pay
minimum royalty payments of at least $2 million during the initial
three and a half year term and on-going royalty payments to extend the
agreement. Kronos will retain the rights to all of its intellectual
property.

HoMedics commitment includes funding a marketing and advertising
campaign to promote the Kronos(TM)-based product line. The products
will be distributed by HoMedics. HoMedics currently distributes their
products through major domestic retailers, including Wal-Mart, Home
Depot, Sears, Bed Bath & Beyond, and Linens 'N Things.

|X| Commercial Products. Kronos is seeking to leverage its consumer product
development work with HoMedics to market and sell our own commercial
line of standalone air purifiers. This commercial line of
Kronos(TM)-based air purifiers would attempt to address the specific
air quality issues, including odors, bacteria and viruses, found in
most nursing home and assisted living, healthcare and other commercial
facilities. Kronos expects to secure production of its own commercial
line of standalone air purifiers from HoMedics. By securing products
from HoMedics, Kronos believes it will provide the Company with a
higher quality and more cost effective air purification product line.

Embedded Platform

o Military Products. The U. S. Department of Defense and Department of
Energy have provided Kronos with various grants and contracts to
develop, test and evaluate the Kronos(TM) technology for embedded
applications. Kronos has developed several commercial and industrial
applications, including the retrofit of berthing fan systems and
embedded air movement systems for U. S. Navy Aegis Class destroyers.

U.S. Navy SBIR Contracts. In November 2002, the U. S. Navy awarded
Kronos a Small Business Innovation Research Phase II contract worth
$580,000, plus an option of $145,000. The Phase II contract
(commercialization phase) is an extension of the Phase I and the Phase
I Option work that began in 2001. It is intended that the Kronos(TM)
devices being developed under this contract will be embedded in
existing HVAC systems in order to move air more efficiently than
traditional, fan-based technology.

During Phase II, Kronos will attempt to develop, produce and install a
set of fully controlled devices that represent a "cell" of an advanced
distributive air management system with medium capacity airflow in a U.
S. Navy unique environment. The "cell" has been designed to be easily
adjustable to a variety of parameters such as duct size, airflow
requirements, and air quality. The goal of this development work is to
significantly reduce or replace altogether the current HVAC air
handling systems on naval ships. During the first eighteen months of
the contract, Kronos has designed a new generation power supply,
improved the efficiency of the core technology to allow for increased
air movement and filtration, and initiated selection with the U. S.
Navy of the specifications for the commercial products, which are
currently being built under the Phase II contract. As of September 30,
2004, the U. S. Navy had provided Kronos with $567,000 in funding for
this effort.

As part of its air management system, Kronos intends to develop and
test an air filtration mechanism capable of performing to HEPA quality
standards. We believe that Kronos(TM) devices could replace current
HEPA filters with a permanent, easily cleaned, low-cost solution. The
U. S. Navy unique environment includes shock exposure, vibration,
Electromagnetic Interference/Compatibility (EMI/EMC), and salt spray.
Kronos(TM) devices will be built and tested to meet specific Navy
standards. Testing shall include assessments for system performance,
including control techniques, noise levels, and acquisition and
lifecycle costs.

We believe that during the option portion of the contract, Kronos(TM)
technology's ability to kill bacteria and other pathogens will be
confirmed and expanded to a wide range of pathogens for space
disinfection and bio-terrorist attacks. We believe the Kronos(TM)
technology can kill all or most airborne pathogens regardless of their
nature, genetic structure, robustness, or method of delivery. Kronos
intends to deliver its advanced distributive air management system
built under the U.S. Navy SBIR Phase II contract to Northrop Grumman
for testing and evaluation.

Kronos has begun the process for obtaining Phase III (production phase)
support for the Kronos(TM)-based advanced distributive air management
system being developed under Phase II. Kronos is working directly with
Dawnbreaker, a U. S. Government entity established for the purpose of
supporting companies seeking Phase III contracts, and Northrop Grumman.

U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the option
on its U. S. Army Small Business Innovation Research Phase I contract
bringing the value of the Phase I contract award to $120,000. In
October 2003, the U.S. Army awarded Kronos the Small Business
Innovation Research Phase II contract. The first year of the contract
is worth $369,000 with an Army option on the second year worth
$360,000. The contract is to develop Kronos' proprietary Electrostatic
Dehumidification Technology ("EDT"). Kronos initiated work under the
Phase II contract in December 2003. As of September 30, 2004, the U. S.
Army had provided Kronos with $151,000 in funding for this effort under
the Phase II contract.

The objective of the Phase II effort is to implement and optimize
dehumidification via Kronos electrostatic field technology. The
objective is to be accomplished by: (1) prototype design and
manufacturing, (2) prototype testing in the laboratory environment and
field demonstration, (3) analytical and numerical modeling of Kronos'
EDT process, and (4) project documentation and reporting including
interim and final reports. We anticipate the Kronos(TM) devices
manufactured under this contract will further demonstrate the
versatility of the Kronos(TM) technology to meet airflow, system
pressure and reduced humidity requirements for HVAC systems.
Dehumidification is essential to making HVAC systems more energy
efficient.

Kronos is seeking to leverage its military application development work
with the U. S. Navy and U. S. Army to develop and produce air handlers
and purifiers for commercial and industrial facilities. A future
potential commercial line of Kronos(TM)-based air handlers and
purifiers would attempt to address the specific air quality issues,
including bacteria and other germs, found in large enclosed spaces such
as office buildings and multi-dwelling residential complexes, while
providing more efficient air movement.

o Transportation Products. In January 2003, Kronos extended its work into
the transportation industry by signing a Development and Acquisition
Agreement with a premier business jet manufacturer. The Agreement was
the direct result of initial prototype development work performed by
the Kronos Research Team with input from the customer in 2002. The
Kronos(TM) devices being designed and manufactured under this contract
will need to meet all FAA safety standards, including environmental,
flammability and electromagnetic interference (EMI). The Company is
working on completing product design and development based on the
customer's specific product application requirements and expects to
deliver finished products by December 2004.

Kronos is seeking to leverage its business jet application development
work to develop and produce air handlers and purifiers for the
commercial aviation and automotive markets. A future potential
commercial line of Kronos(TM)-based air handlers and purifiers would
attempt to address the specific air quality issues, including exhaust
and viruses, found in enclosed spaces occupied by multiple people for
extended periods of time, while providing more efficient air movement
within unique space constraints.

Patents and Intellectual Property

|X| Five U.S. Patents Allowed for Issuance. Kronos has received
notification that five of its patents have been allowed for issuance
by the United States Patent and Trademark Office. These patents are
considered utility patents which describe fundamental innovations in
the generation, management and control of Electrostatic Fluids,
including air movement, filtration and purification. Each of the
patents contain multiple part claims for both general principles as
well as specific designs for incorporating the Kronos technology into
air movement, filtration and purification products. The patents
provide protection for both specific product implementations of the
Kronos technology, as well as more general processes for applying the
unique attributes and performance characteristics of the technology.

- In November 2004, Kronos received a Notice of Allowance from the
United States Patent and Trademark Office indicating that its
application entitled "Electrostatic Fluid Accelerator" -
Electrode Design Geometries has been examined and allowed for
issuance as a U. S. patent. Kronos expects that the U. S. Patent
will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.

- In October 2004, Kronos received a Notice of Allowance from the
United States Patent and Trademark Office indicating that its
application entitled "Electrostatic Fluid Accelerator" - Power
Supply Management and Control has been examined and allowed for
issuance as a U. S. patent. Kronos expects that the U. S. Patent
will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.

- In April 2004, Kronos received formal notification from the
United States Patent and Trademark Office indicating that its
application entitled "Electrostatic Fluid Accelerator for and a
Method of Controlling Fluid" has been examined and allowed for
issuance as a U. S. patent (#6,727,657). The patent provides
protection for key aspects of Kronos' technology until late in
2021.

- In December 2003, Kronos received formal notification from the
United States Patent and Trademark Office indicating that its
application entitled "Method of and Apparatus for Electrostatic
Fluid Acceleration Control of a Fluid Flow" has been examined
and allowed for issuance as a U. S. patent (#6,664,741). The
patent provides protection for key aspects of Kronos' technology
until late in 2020.

- In January 2003, Kronos received formal notification from the
United States Patent and Trademark Office indicating that its
application entitled "Electrostatic Fluid Accelerator" has been
examined and allowed for issuance as a U. S. patent
(#6,504,308). The patent provides protection for key aspects of
Kronos' technology until late in 2019.

|X| First International Patent Allowed for Issuance. In November 2004,
Kronos received formal notification from the Commonwealth of
Australian Patent Office indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for
issuance as an Australian patent (#773626). There are a number of
other patent applications corresponding to Kronos' five U.S. Patents
that have been filed and are pending outside of the United States.

|X| Additional Patent Applications. In addition to the "Electrostatic
Fluid Accelerator," "Method of and Apparatus for Electrostatic Fluid
Acceleration Control of a Fluid Flow," "Electrostatic Fluid
Accelerator for and a Method of Controlling Fluid," "Electrostatic
Fluid Accelerator" - Power Supply Management and Control, and
"Electrostatic Fluid Accelerator" - Electrode Design Geometries
patents, a number of additional patent applications have been filed
for, among other things, the control and management of electrostatic
fluid acceleration. These additional patent applications are either
being examined or are awaiting examination by the Patent Office.

CRITICAL ACCOUNTING POLICIES

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Allowance for Doubtful Accounts. We provide a reserve against our receivables
for estimated losses that may result from our customers' inability to pay. These
reserves are based on potential uncollectible accounts, aged receivables,
historical losses and our customers' credit-worthiness. Should a customer's
account become past due, we generally will place a hold on the account and
discontinue further shipments and/or services provided to that customer,
minimizing further risk of loss.

Valuation of Goodwill, Intangible and Other Long Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's ability to generate positive income
from operations and positive cash flow in future periods compared to the
carrying value of the asset, the strategic significance of any identifiable
intangible asset in our business objectives, as well as the market
capitalization of Kronos. We have used certain key assumptions in building the
cash flow projections required for evaluating the recoverability of our
intangible assets. We have assumed revenues from the following applications of
the Kronos technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.

Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.

Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 101 ("SAB 101"). Further, Kronos Air
Technologies recognizes revenue on the sale of custom-designed contract sales
under the percentage-of-completion method of accounting in the ratio that costs
incurred to date bear to estimated total costs. For uncompleted contracts where
costs and estimated profits exceed billings, the net amount is included as an
asset in the consolidated balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the consolidated balance sheet. Sales are reported net of
applicable cash discounts and allowances for returns.

RESULTS OF OPERATIONS

The Company's net loss from continuing operations for the three months ended
September 30, 2004 was $622,000, an increase of $71,000 or 13% as compared with
a net loss of $550,000 for the corresponding period of the prior year. The
increase in the net loss was primarily the result of an increase in selling,
general and administrative expenses ($75,000) and a decrease in gross profit
($24,000), partially offset by a decrease ($27,000) in interest expense.

REVENUE. Revenues are generated through sales of Kronos(TM) devices, and fees
earned from licensing the Kronos(TM) technology and providing technical services
to our customers at Kronos Air Technologies, Inc. Revenue for the three months
ended September 30, 2004 was $242,000. These revenues were primarily from our U.
S. Navy SBIR Phase II and U. S. Army SBIR Phase II contracts. Revenue of
$130,000 recorded during the corresponding period of the prior year was
primarily from our HoMedics and U. S. Navy SBIR Phase II contract. The $112,000
increase in revenue for the three months ended September 30, 2004 compared with
the corresponding prior period was the result of the Company's increased work
performed during the past three months on the Company's U.S. Military contracts.

COST OF SALES. Cost of sales for the three months ended September 30, 2004 was
$218,000, an increase of $135,000 as compared to $83,000 for the corresponding
period of the prior year, respectively. Cost of sales in the current year was
primarily development costs associated with our U. S. Navy SBIR and U. S. Army
SBIR contracts. Prior year cost of sales related to revenue from HoMedics and U.
S. Navy SBIR Phase II contracts.

GROSS PROFIT. Gross profit for the three months ended September 30, 2004 was
$24,000, compared to $47,000 for the corresponding period of the prior year,
respectively. The decrease was primarily the result of an increase in third
party development costs to design and build products for the U.S. Navy and U.S.
Army.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 30, 2004 increased
17% to $504,000 compared to $429,000 for the corresponding period of the prior
year. This $75,000 increase was primarily the result of an increase depreciation
and amortization ($29,000), compensation and benefits ($20,000) and other
expenses ($18,000). The increase in depreciation and amortization was the result
of the amortization of intellectual property acquired by Kronos in May 2003. The
increase in compensation and benefits was primarily the result of an increase in
new hires and the cost of employee benefits. The increase in other expenses was
primarily the result of an increase in directors and officers and product
liability insurance.

INTEREST EXPENSE. Interest expenses for the three months ended September 30,
2004 decreased to $142,000 compared to $168,000 for the corresponding period of
the prior year. The $27,000 decrease was primarily the result of the decrease in
the Company's debt to former directors and officers of the Company.

CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2004

Our total assets at September 30, 2004 and June 30, 2004 were $2.4 and $2.5
million, respectively. Total assets at September 30, 2004 were comprised
primarily of $2.2 million of patents/intellectual property. Total assets at June
30, 2004 were comprised primarily of $2.3 million of patents/intellectual
property. Total current assets at September 30, 2004 and June 30, 2004 were
$182,000 and $238,000, respectively, while total current liabilities for those
same periods were $1.9 million and $1.4 million, respectively, creating a
working capital deficit of $1.7 million and $1.2 million at each respective
period end. This 43% increase in the working capital deficit was primarily the
result of increases in accrued expenses and payables to directors and officers
($213,000), accrued expenses ($93,000), and accounts payable ($73,000) because
of the Company's decision to accrued expenses and increase payables rather than
spend the Company's limited cash resources or sell equity to raise cash during
the quarter.

Shareholders' deficit as of September 30, 2004 and June 30, 2004 was $(2.0)
million and $(1.4) million, respectively, representing an increase of $0.6
million. The increase in shareholders' deficit was the result of incurring a
$0.6 million loss from continuing operations for the three months ended
September 30, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have relied principally on the sale of common stock and secured
debt to finance our operations.

In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. The $925,000 will
be paid to Kronos upon Kronos achieving three milestones: (i) $175,000 shall be
funded upon delivery and successful testing of electronic boards and power
supplies from Kronos' contract manufacturing partner, (ii) $250,000 shall be
funded upon obtaining tooling of the current prototype configuration and device
testing and performing to HoMedics' specifications, and (iii) $500,000 shall be
funded upon the initial sale of Kronos-based air purifiers by HoMedics. In
addition, quarterly debt payments and the maturity date for existing debt have
been extended. Quarterly payments due on the outstanding $2.4 million in secured
debt financing, which had been scheduled to begin in August 2004, will be due
the earlier of Kronos receipt of royalty payments from HoMedics sale of
Kronos-based air purification products or two years. The maturity date of the
$2.4 million in debt has been extended from May 2008 to October of 2009; the
maturity date on the $925,000 will also be October 2009. The interest rate will
remain at 6% for the $2.4 million in debt; the rate will also be 6% on the
additional debt. HoMedics increased their potential equity position in Kronos to
30% of Kronos common stock on a fully diluted basis. Kronos has issued HoMedics
a warrant to buy 26.5 million shares of Kronos common stock.

Kronos SBIR contracts with the U. S. Military, including the U. S. Army Phase I
Option and Phase II and the U. S. Navy Phase II contracts, are potentially worth
up to $1.5 million in product development and testing support for Kronos Air
Technologies. In November 2002, Kronos Air Technologies was awarded by the U. S.
Navy for a Small Business Innovation Research Phase II contract worth $580,000,
plus an option of $150,000. As of September 30, 2004, the U. S. Navy had
provided Kronos with $567,000 in funding for this effort under the Phase II
contract. In October 2003, Kronos Air Technologies obtained award notice from
the U. S. Army for a SBIR II contract. The first year of the contract is worth
$369,000 with an Army option on the second year worth $360,000. The contract is
to develop Kronos' proprietary Electrostatic Dehumidification Technology
("EDT"). As of September 30, 2004, the U. S. Army had provided Kronos with
$151,000 in funding for this effort under the Phase II contract.

Net cash flow used in operating activities was $41,000 for the three months
ended September 30, 2004. We were able to satisfy most of our cash requirements
for this period from the proceeds of our U.S. Navy and U.S. Army Phase II
contracts.

In June 2001, we entered into a common stock purchase agreement with Fusion
Capital. Pursuant to this agreement, we have sold approximately 6 million shares
of our common stock and have received $1.3 million. In August 2002, we
terminated our common stock purchase agreement dated June 19, 2001 and entered
into a new common stock purchase agreement with Fusion Capital. Pursuant to this
second common stock purchase agreement, we sold approximately 12.1 million
shares of our common stock and have received $1.9 million. In November 2004,
Kronos and Fusion Capital mutually agreed to terminate their existing common
stock purchase agreement dated August 12, 2002.

We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to senior debt funding from the HoMedics Secured Promissory Notes;
equity funding from the Cornell Capital Equity Investment Agreement, Equity
Backed Promissory Note and Standby Equity Distribution Agreement; and/or the
sale of additional equity in our Company, cash flow generated from government
grants and contracts, which includes funding from the Small Business Innovation
Research contracts sponsored by the United States Navy and Army awarded to
Kronos Air Technologies, and cash flow generated from customer revenue. There
are no assurances that these sources of funding will be adequate to meet our
cash flow needs.

GOING CONCERN OPINION

Our Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2004
and 2003 consolidated financial statements that states that we do not have
significant cash or other material assets to cover our operating costs. Our
ability to obtain additional funding will largely determine our ability to
continue in business. Accordingly, there is substantial doubt about our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

We can make no assurance that we will be able to successfully develop,
manufacturer and sell commercial products on a broad basis. While attempting to
make this transition, we will be subject to all the risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force.

FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS

We are subject to various risks which may have a material adverse effect on our
business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:

We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.

We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net operating loss of $480,000 for the three months
ended September 30, 2004. We incurred a net loss from continuing operations of
$2.5 million for the fiscal year ended June 30, 2004. As a result, at September
30, 2004 and June 30, 2004, we had an accumulated deficit of $20.6 million and
$20.0 million, respectively. Our revenues and cash flows from operations have
not been sufficient to sustain our operations. We have sustained our operations
through the issuance of our common stock and the incurrence of debt. We expect
that our revenues and cash flows from operations may not be sufficient to
sustain our operations for the foreseeable future. Our profitability will
require the successful commercialization of our Kronos(TM) technologies. No
assurances can be given that we will be able to successfully commercialize our
Kronos(TM) technologies or that we will ever be profitable.

We will require significant additional financing to sustain our operations and
without it we will not be able to continue operations.

At September 30, 2004 and June 30, 2004, we had a working capital deficit of
$1.7 million and $1.4 million, respectively. The Report of Independent
Registered Public Accounting Firm for the year ended June 30, 2004, includes an
explanatory paragraph to their audit opinion stating that our recurring losses
from operations and working capital deficiency raise substantial doubt about our
ability to continue as a going concern. For the three months ended September 30,
2004 and September 30, 2003, we had an operating cash flow deficit of $41,000
and $441,000, respectively. We currently do not have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need substantial additional funds to continue
these operations and pay certain existing obligations.

If obtaining sufficient financing from the U. S. Navy, U. S. Army, HoMedics and
/or Cornell Capital Partners were to be unavailable and if we are unable to
commercialize and sell our products or technologies, we will need to secure
another source of funding in order to satisfy our working capital needs. Even if
we are able to access the funds available under the, U. S. Navy and U.S. Army
SBIR contracts, HoMedics senior debt agreement and / or the Cornell Capital
Equity Investment Agreement, Equity Backed Promissory Notes and Standby Equity
Distribution Agreement, we may still need additional capital to fully implement
our business, operating and development plans. At September 30, 2004 and June
30, 2004, we had a cash balance of current portion of notes payable $41,000 and
$69,000, respectively. Should the financing we require to sustain our working
capital needs be unavailable, or prohibitively expensive when we require it, we
would be forced to curtail our business operations.

Existing shareholders will experience significant dilution from our sale of
shares under the Cornell Capital Equity Investment Agreement and Standby Equity
Distribution Agreement and any other equity financing.

The sale of shares pursuant to our agreement with Cornell Capital Partners, the
exercise of HoMedics stock warrants or any other future equity financing
transaction will have a dilutive impact on our stockholders. As a result, our
net income per share could decrease in future periods, and the market price of
our common stock could decline. In addition, the lower our stock price is, the
more shares of common stock we will have to issue under the Equity Investment
Agreement and Standby Equity Distribution Agreement with Cornell Capital. If our
stock price is lower, then our existing stockholders would experience greater
dilution. We cannot predict the actual number of shares of common stock that
will be issued pursuant to the Standby Equity Distribution Agreement with
Cornell Capital or any other future equity financing transaction, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we do not know the exact amount of funds we will need.

Competition in the market for air movement and purification devices may result
in the failure of the Kronos(TM) products to achieve market acceptance.

Kronos presently faces competition from other companies that are developing or
that currently sell air movement and purification devices. Many of these
competitors have substantially greater financial, research and development,
manufacturing, and sales and marketing resources than we do. Many of the
products sold by Kronos' competitors already have brand recognition and
established positions in the markets that we have targeted for penetration. In
the event that the Kronos(TM) products do not favorably compete with the
products sold by our competitors, we would be forced to curtail our business
operations.

Our failure to enforce protection of our intellectual property would have a
material adverse effect on our business.

A significant part of our success depends in part on our ability to obtain and
defend our intellectual property, including patent protection for our products
and processes, preserve our trade secrets, defend and enforce our rights against
infringement and operate without infringing the proprietary rights of third
parties, both in the United States and in other countries. Our limited amount of
capital impedes our current ability to protect and defend our intellectual
property.

In November 2004, Kronos received a Notice of Allowance from the United States
Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" - Electrode Design Geometries has been
examined and allowed for issuance as a U. S. patent. Kronos expects that the U.
S. Patent will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.
Also in November 2004, Kronos received formal notification from the Australian
Patent Office indicating that its application entitled "Electrostatic Fluid
Accelerator" has been examined and allowed for issuance as an Australian patent
(#773626). In October 2004, Kronos received a Notice of Allowance from the
United States Patent and Trademark Office indicating that its application
entitled "Electrostatic Fluid Accelerator" - Power Supply Management and Control
has been examined and allowed for issuance as a U. S. patent. Kronos expects
that the U. S. Patent will issue in due course. The patent provides protection
for key aspects of Kronos' technology until late in 2021. In April 2004, Kronos
received formal notification from the United States Patent and Trademark Office
indicating that its application entitled "Electrostatic Fluid Accelerator for
and a Method of Controlling Fluid" has been examined and allowed for issuance as
a U. S. patent (#6,727,657). The patent provides protection for key aspects of
Kronos' technology until late in 2021. In December 2003, Kronos received formal
notification from the United States Patent and Trademark Office indicating that
its application entitled "Method of and Apparatus for Electrostatic Fluid
Acceleration Control of a Fluid Flow" has been examined and allowed for issuance
as a U. S. patent (#6,664,741). The patent provides protection for key aspects
of Kronos' technology until late in 2020. In January 2003, Kronos received
formal notification from the United States Patent and Trademark Office
indicating that its application entitled "Electrostatic Fluid Accelerator" had
been examined and allowed for issuance as a U. S. patent (#6,504,308). The
patent will provide protection for key aspects of Kronos' technology until late
in 2019. We have additional U. S. and foreign patent applications pending. The
validity and breadth of our intellectual property claims in ion wind generation
and electrostatic fluid acceleration and control technology involve complex
legal and factual questions and, therefore, may be highly uncertain. Despite our
efforts to protect our intellectual proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.

Our industry is characterized by frequent intellectual property litigation based
on allegations of infringement of intellectual property rights. Although we are
not aware of any intellectual property claims against us, we may be a party to
litigation in the future.

Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.

Our net intangible assets of approximately $2.2 million as of September 30, 2004
consist principally of purchased patent technology and marketing intangibles,
which relate to the acquisition of Kronos Air Technologies, Inc. in March 2000
and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos(TM) technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 92% of our total assets as of September 30, 2004. Intangible
assets are subject to periodic review and consideration for potential impairment
of value. Among the factors that could give rise to impairment include a
significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss
of key personnel, and projections or forecasts that demonstrate continuing
losses associated with these assets. In the case of our intangible assets,
specific factors that could give rise to impairment would be, but are not
limited to, an inability to obtain patents, the untimely death or other loss of

Dr. Igor Krichtafovitch, the lead inventor of the Kronos(TM) technology and
Kronos Air Technologies Chief Technology Officer, or the ability to create a
customer base for the sale or licensing of the Kronos(TM) technology. Should an
impairment occur, we would be required to recognize it in our financial
statements. A write-down of these intangible assets could have a material
adverse impact on our total assets, net worth and results of operations.

Our common stock is deemed to be "Penny Stock," subject to special requirement
and conditions and may not be a suitable investment.

Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stocks:

o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00 per
share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years), or
with average revenues of less than $6.0 million for the last three
years.

Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.

We rely on management and research personnel, the loss of whose services could
have a material adverse effect upon our business.

We rely principally upon the services of our senior executive management, and
certain key employees, including the Kronos research team, the loss of whose
services could have a material adverse effect upon our business and prospects.
Competition for appropriately qualified personnel is intense. Our ability to
attract and retain highly qualified senior management and technical research and
development personnel are believed to be an important element of our future
success. Our failure to attract and retain such personnel may, among other
things, limit the rate at which we can expand operations and achieve
profitability. There can be no assurance that we will be able to attract and
retain senior management and key employees having competency in those
substantive areas deemed important to the successful implementation of our plans
to fully capitalize on our investment in the Kronos(TM) technology, and the
inability to do so or any difficulties encountered by management in establishing
effective working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
executive management, or key employees.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Within 90 days prior to the
filing date of this report, our Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under
the supervision and with the participation of our Company's President and Chief
Financial Officer. Based upon that evaluation, they concluded that our Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy our Company's disclosure obligations
under the Exchange Act.

Changes in Internal Controls. There were no significant changes in our Company's
internal controls or in other factors that could significantly affect those
controls since the most recent evaluation of such controls.

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In October 2004, we issued five million shares of our common stock, valued at
$0.10 per share at an aggregate value of $500,000 to Cornell Capital Partners,
LLC. The proceeds will be used for general working capital. In October 2004, we
issued 2,941,177 shares to Cornell Capital Partners, LLC as a commitment fee
upon Kronos executing the $20 million Standby Equity Distribution Agreement. In
the event this Agreement is terminated in accordance with the terms of this
Agreement, or the Company does not forward any Advance Notices during the term
of this Agreement, the Cornell shall return 2,500,000 shares of the commitment
fee shares to the Company. In November 2004, we issued two million shares of our
common stock valued at $0.10 per share at an aggregate value of $200,000 to
Fusion Capital Partners, LLC. The proceeds were used to eliminate Kronos'
non-interest bearing demand obligation to Fusion Capital (refer to Note 7 -
Notes Payable to the Financial Statements).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. EXHIBITS

EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------

2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")

3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001

3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001

4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to
Registrant's Form
10-Q for the
quarterly period
ended March 31,
2002 filed on May
15, 2002

10.21 Consulting Agreement, dated January 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.21 to the
Dwight, Tusing & Associates Registration Statement on Form
S-1 filed on August 7, 2001

10.22 Letter Agreement, dated April 12, 2001, Incorporated by reference to
by and between TSET, Inc. and Daniel R. Exhibit 10.35 to the
Dwight and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001

10.23 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.37 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001

10.24 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.38 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001

10.25 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.39 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001

10.26 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.40 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001

10.27 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.41 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001

10.28 Indemnification Agreement, dated Incorporated by reference to
May 1 2001, by and between TSET, Exhibit 10.42 to the
Inc. and Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001

10.29 Warrant Agreement, dated July 16, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.49 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001

10.30 Agreement and Release, dated October Incorporated by reference to
10, 2001, by and between TSET, Inc. and Exhibit 10.50 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001

10.31 Promissory Note dated October 10, 2001 Incorporated by reference to
payable to Mr. Jeffrey D. Wilson Exhibit 10.51 to the Registrant's
Form 10-K for the year ended
June 30, 2001 filed on October 15,
2001

10.32 Employment Agreement, effective Incorporated by reference to
November 15, 2001 by and between Exhibit 10.55 to the Registrant's
TSET, Inc. and Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002

10.33 Common Stock Purchase Agreement, Incorporate by reference to Exhibit
dated August 12, 2002 by and between 10.57 to the Registrant's Form S-1
between TSET, Inc. and Fusion filed on August 13, 2002
Capital Fund II, LLC

10.34 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Form S-1
Inc. and Fusion Capital Fund II, LLC filed on August 13, 2002

10.35 Termination Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.59 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on
September 16, 2002

10.36 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")

10.37 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.2 to the Registrant's
amount of $2,400,000 payable to 8-K filed on May 15, 2003
HoMedics

10.38 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.4 to the Registrant's
amount of $1,000,000 payable to 8-K filed on May 15, 2003
HoMedics

10.39 Security Agreement dated May 9, Incorporated by reference to
2003, by and among Kronos Air Exhibit 99.4 to the Registrant's
Technologies, Inc. and HoMedics 8-K filed on May 15, 2003

10.40 Registration Rights Agreement, Incorporated by reference to
dated May 9, 2003, by and between Exhibit 99.5 to the Registrant's
Kronos and HoMedics 8-K filed on May 15, 2003

10.41 Warrant No. 1 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003

10.42 Warrant No. 2 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
2002

10.43 Consulting Agreement effective Incorporated by reference to
October 31, 2003, by and among Kronos Exhibit 10.67 to the Registrant's
Advanced Technologies, Inc., Form 10-Q for the quarterly period
Steven G. Martin and Joshua B. on ended December 31, 2003 filed on
Scheinfeld February 17, 2004

10.44 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard A. Papworth Form 10-Q for the quarterly period
ended September 30, 2004 filed on
May 17, 2004

10.45 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Daniel R. Dwight Form 10-Q for the quarterly period
ended September 30, 2004 filed on
May 17, 2004

10.46 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard F. Tusing Form 10-Q for the quarterly period
ended September 30, 2004 filed on
May 17, 2004

10.47 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Igor Krichtafovitch Form 10-Q for the quarterly period
ended September 30, 2004 filed on
May 17, 2004

10.48 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
J. Alexander Chriss Form 10-Q for the quarterly period
ended September 30, 2004 filed on
May 17, 2004

10.49 Standby Equity Distribution Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.1 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on November 12, 2004
Cornell Capital Partners, LP

10.50 Registration Rights Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.2 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on November 12, 2004
Capital Partners, LP

10.51 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.3 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on November 12, 2004
Partners, LP

10.52 Placement Agent Agreement, dated October Incorporated by reference to
15, 2004, by and between Kronos Advanced Exhibit 99.4 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on November 12, 2004
Partners, LP

10.53 Securities Purchase Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.5 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on November 12, 2004
Capital Partners, LP

10.54 Investor Registration Rights Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.6 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on November 12, 2004
Cornell Capital Partners, LP

10.55 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.7 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on November 12, 2004
Partners, LP

10.56 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 Exhibit 99.8 to the Registrant's
Form 8-K filed on November 12, 2004

10.57 First Amendment to Master Loan and Incorporated by reference to
Investment Agreement, dated October 25, Exhibit 99.9 to the Registrant's
2004, by and among Kronos Advanced Form 8-K filed on November 12, 2004
Technologies, Inc., f/k/a TSET, Inc.,
a Nevada corporation, Kronos Air
Technologies, Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation

10.58 Secured Promissory Note, dated October Incorporated by reference to
25, 2004, payable to FKA Distributing Exhibit 99.10 to the Registrant's
Co., d/b/a HoMedics, Inc., a Michigan Form 8-K filed on November 12, 2004
corporation, in the principal amount of
$925,000

10.59 Amended and Restated Warrant No. 1, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.11 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on November 12, 2004

10.60 Amended and Restated Warrant No. 2, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.12 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on November 12, 2004

10.61 Warrant No. 3, dated October 25, 2004, Incorporated by reference to
issued to FKA Distributing Co. d/b/a Exhibit 99.13 to the Registrant's
HoMedics, Inc. Form 8-K filed on November 12, 2004

10.62 Amended and Restated Registration Rights Incorporated by reference to
Agreement, dated October 25, 2004, by Exhibit 99.14 to the Registrant's
And between Kronos Advanced Form 8-K filed on November 12, 2004
Technologies Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
a Michigan corporation

EXHIBIT NO. DESCRIPTION LOCATION
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31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002

31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

32.1 Certification by Chief Executive Officer Provided herewith
and Principal Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

Signatures

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

DATED: November 15, 2004 KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ DANIEL R. DWIGHT
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Daniel R. Dwight
President and Chief Executive Officer

By: /s/ DANIEL R. DWIGHT
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Daniel R. Dwight
Acting Chief Financial Officer