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 March 31, 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 May 12, 2004, there were 61,323,845 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 and nine months ended March 31, 2004.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

March 31, 2004
(Unaudited) June 30, 2003
----------------- ---------------
Assets
Current Assets
Cash $ 274,671 $ 641,178
Accounts receivable, net 31,831 48,766
Prepaids 53,712 34,135
----------------- ---------------
Total Current Assets 360,214 724,078
----------------- ---------------
Net Property and Equipment 18,476 28,042
----------------- ---------------
Other Assets
Intangibles 2,388,710 2,487,473
----------------- ---------------
Total Other Assets 2,388,710 2,487,473
----------------- ---------------
Total Assets $ 2,767,400 $ 3,239,594
================= ===============
Liabilities and Shareholders' Deficit
Current Liabilities
Accrued expenses and payables
to directors and officers $ - $ 1,172,015
Accounts payable 154,067 218,338
Accrued expenses 267,333 174,677
Deferred revenue 3,218 133,751
Notes payable, current portion 657,960 185,670
----------------- ---------------
Total Current Liabilities 1,082,578 1,884,451
----------------- ---------------
Long Term Liabilities
Notes payable to officers and employees 1,063,266 -
Other notes payable 1,961,081 2,676,479
Discount on notes payable (701,608) (893,046)
----------------- ---------------
Total Long Term Liabilities 2,322,739 1,783,433
----------------- ---------------
Total Liabilities 3,405,317 3,667,884
----------------- ---------------
Redeemable Warrants - 805,300
----------------- ---------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $0.001 par value -
61,189,560 and 53,836,524 shares
outstanding on March 31, 2004 and
June 30, 2003, respectively 61,189 53,837

Capital in excess of par value 18,563,617 16,240,378

Accumulated deficit (19,262,723) (17,527,805)
----------------- ---------------
Total Shareholders' Deficit (637,917) (1,233,590)
----------------- ---------------
Total Liabilities and
Shareholders' Deficit $ 2,767,400 $ 3,239,594
================= ===============

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

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended March 31, For the nine months ended March 31,
----------------------------------------- -----------------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------- ------------------ -------------------

Sales $ 100,108 $ 139,737 $ 341,653 $ 457,899

Cost of sales 71,745 100,719 227,550 226,022

------------------ ------------------- ------------------ -------------------

Gross Profit 28,363 39,018 114,103 231,876
------------------ ------------------- ------------------ -------------------

Selling, General and
Administrative expenses

Compensation and benefits 213,805 143,642 626,352 409,376

Research and development 26,877 23,655 65,728 102,337

Professional services 85,755 351,511 203,039 1,038,439
Depreciation and
amortization 72,046 70,318 213,090 213,746

Facilities 23,897 25,065 68,607 70,278

Insurance 36,938 6,691 110,813 35,245

Other 58,873 61,966 162,372 110,471

------------------ ------------------- ------------------ -------------------
Selling, General and
Administrative expenses 518,191 682,848 1,450,001 1,979,891
------------------ ------------------- ------------------ -------------------

Net Operating Loss (489,828) (643,830) (1,335,898) (1,748,015)

Other Income / (expense) - 4 22,000 108,380

Interest Expense (124,598) (46,183) (421,020) (114,317)
------------------ ------------------- ------------------ -------------------

Net Loss Before Taxes (614,426) (690,008) (1,734,918) (1,753,952)

Provision for Taxes - - - -
------------------ ------------------- ------------------ -------------------

Net Loss $ (614,426) $ (690,008) $ (1,734,918) $ (1,753,952)
================== =================== ================== ===================

Basic Loss Per Share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
================== =================== ================== ===================

Diluted Loss Per Share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
================== =================== ================== ===================

Weighted average shares
outstanding 58,988,534 49,132,902 56,627,368 46,877,432
================== =================== ================== ===================

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

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended March 31,
-----------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) (Unaudited)
---------------- -----------------
Net loss from operations $ (1,734,918) $ (1,753,952)

Adjustments to reconcile net loss to net
cash (used in) provided by operations

Depreciation and amortization 213,090 213,746

Common stock issued for
compensation/services 148,430 112,281

Change In

Accounts receivable 16,935 200

Prepaid expenses and other assets (19,577) 64,576

Deferred revenue (130,533) 148,876

Accounts Payable (16,437) 583,376

Accrued Expenses and other liabilities 12,710 184,643
---------------- -----------------
Net cash used in Operations (1,510,300) (446,254)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment - (1,300)

Investment in patent protection (104,760) (1,500)
---------------- -----------------

Net cash used in Investing Activities (104,760) (2,800)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES

Issuance of common stock 1,376,861 668,500

Proceeds from short-term borrowings - 218,889

Repayments of short-term borrowings (319,746) (446,290)

Accretion of note discount 191,438
---------------- -----------------

Net cash provided by Financing
Activities 1,248,553 441,099
---------------- -----------------
NET DECREASE IN CASH
(366,507) (7,955)
CASH

Beginning of period 641,178 21,510
---------------- -----------------

End of period $ 274,671 $ 13,555
================ =================

Supplemental schedule of non-cash investing
and financing activities:

Interest paid in cash $ 9,430 $ 866
================ =================
Debt satisfied with stock $ - $ 206,000
================ =================
Accounts payable/accrued expense converted
to notes payable $ 1,139,903 $ -
================ =================

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

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

NOTE 1 - ACCOUNTING MATTERS

The accompanying unaudited financial statements 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 and nine month periods ended March 31, 2004 and are not necessarily
indicative of the results that may be experienced for the fiscal year ending
June 30, 2004.

These 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 financial statements should be read in conjunction with the
Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year ended June
30, 2003 filed on September 28, 2003 and Forms 10-QSB filed on November 14, 2003
and February 14, 2004.

RECENT ACCOUNTING PRONOUNCEMENTS. In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and, otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The effect of adopting SFAS No. 150 has been to reclassify
approximately $805,300 in Redeemable Warrants from a quasi-liability to the
equity section of the balance sheet.

In December 2003, the Financial Accounting Standards Board revised SFAS No. 132,
"Employers Disclosures about Pension and Other Postretirement Benefits." This
statement revises employer's disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans as required by SFAS Nos. 87, 88 or 106. The revision of SFAS No.
132 is effective for financial statements with fiscal years ending after
December 15, 2003. The Company believes that the adoption of the revised SFAS
No. 132 will have no significant impact on its financial statements.

NOTE 2 -- INCOME TAXES

The composition of deferred tax assets and the related tax effects at March 31,
2004 and June 30, 2003 are as follows:

March 31, 2004
(Unaudited) June 30, 2003
------------- -------------
Benefit from carryforward of capital and
net operating losses $ 4,598,857 $ 4,034,973

Other temporary differences 156,740 188,206
Less:
Valuation allowance (4,755,597) (4,223,179)
------------- -------------
Net deferred tax asset $ - $ -
============= =============

The other temporary differences shown above relate primarily to 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:

March 31, 2004
(Unaudited) June 30,2003
--------------------------- ----------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------

Benefit for income tax at federal statutory rate $ 589,872 34.0% $ 941,746 34.0%
Benefit for income tax at state statutory rate 34,580 2.0% 55,208 2.0%
Non-deductible expenses (91,034) (5.3)% 319,977 11.7%
Increase in valuation allowance (533,418) (30.7)% (1,316,931) (47.7)%
------------- ------------ -------------- ------------
$ - 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 March 31, 2004, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $10.3 million of unused Federal net
operating losses, $2.3 million of capital losses and $9.1 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 2023 and could be subject to limitations if significant ownership
changes occur in the Company.

NOTE 3 - 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. All other segments have been disposed of or
discontinued. For the nine months ended March 31, 2004, the Company operated
only in the U.S.

NOTE 4 - EARNINGS PER SHARE

Weighted average shares outstanding used in the earnings per share calculation
were 58,998,534 and 49,132,902 for the three months ended March 31, 2004 and
2003, respectively, and 56,627,368 and 46,877,432 for the nine months ended
March 31, 2004 and 2003, respectively.

As of March 31, 2004, there were outstanding options to purchase 13,216,782
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 March 31, 2003, there were outstanding options and warrants
to purchase 10,187,775 and 2,300,000 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 5 - NOTES PAYABLE

The Company had the following notes payable obligations at March 31, 2004 and
June 30, 2003:

March 31, 2004 June 30, 2003
-------------- -------------

Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Obligations to officers and employees (2) 1,139,903 -
Obligations for purchase of intellectual property (3) 85,000 270,00
Obligations under capital leases (4) 57,404 72,424
Obligation to former director (5) - 84,275
Obligations to others (6) - 35,000
-------------- -------------
Total Notes Payable $ 3,682,307 $ 2,862,149

Current portions:
Obligation to HoMedics 471,487 -
Obligations for purchase of intellectual property 85,000 90,000
Obligations to officers and employees 76,637 -
Obligations under capital leases 24,836 20,670
Obligations to others - 35,000
Obligation to former director - 40,000
-------------- -------------
Total current portion $ 657,960 185,670
-------------- -------------
Total long term obligations net of
current portion $ 3,024,347 $ 2,676,479
============== =============

(1) This is a 5 year note bearing interest at 6%. No payments due until
three months after the first anniversary date. Quarterly payments of
principal and interest due thereafter.

(2) This represents notes to Daniel Dwight, Richard Tusing, Igor
Krichtafovitch, J. Alexander Chriss and Richard Papworth. The notes
bear interest at rates of 0% or 12%. One note, for $76,637, is due in
full on June 30, 2004. The remaining notes call for aggregate monthly
principal and interest payments for all notes of $20,000 for each month
in which the Company's beginning cash balance equals or exceeds
$200,000. Subject to certain conditions, including default, these notes
become payable in full. In the event of a debt or equity financing
other than from Fusion Capital, 20% of the proceeds derived from the
financing will be used to pay down the outstanding interest and
principal obligations. Any amounts remaining outstanding are due and
payable on December 31, 2006.

(3) This is a non-interest bearing obligation with quarterly payments of
$30,000 until paid in full.

(4) See Note 6 - Capital Leases

(5) This note was to a former officer and director and bears interest at
12%. The note called for quarterly payments of at least $10,000 with
the remaining amount, if any, due on March 31, 2004. The note was paid
in full on March 31, 2004.

(6) This was a non-interest bearing obligation with monthly payments of
$5,000 until it was paid in full in January 2004.

NOTE 6 - CAPITAL LEASES

The Company entered into a capital lease for the purpose of purchasing equipment
used in the research 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

Year ended March 31,
-----------------------------------
2005 36,337
2006 36,337
2007 859
---------
Total minimum lease payments 73,533
Less: Executory costs -
---------
Net minimum lease payments 73,533
Less: Imputed interest 16,129
---------
Present value of net minimum lease payments $ 57,404
=========

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 and nine months ended March 31,
2004, the Company paid $5,316 and $15,018, respectively, in principal and $3,769
and $12,234, respectively, in interest on capital leases.

NOTE 7 - CONSULTING AGREEMENTS

In October 2001, the Company entered into a 15-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 1, 2001 as the
share grant was non-forfeitable and fully vested on that date. The stock was
valued on that date at $0.28 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 is being amortized to Professional Fee Expense
ratably over the 15-month term of the contract. During the three and nine month
periods ending March 31, 2003, the Company recognized professional services
expenses of $7,000 and $47,000, respectively under this agreement. No expenses
were recorded under this agreement in the nine months ended March 31, 2004.

Effective March 11, 2002, the Company entered into a new agreement with the
Eagle Rock Group for a nearly one year period ending March 1, 2003. Pursuant to
the agreement, the Company issued a note for the outstanding balance of $120,000
due to The Eagle Rock Group, which has been paid in full. The Company granted
Eagle Rock a ten-year warrant granting them the right to purchase 900,000 shares
of our common stock. Two hundred and fifty thousand (250,000) warrant shares at
an exercise price of $0.42 and two hundred and fifty thousand (250,000) warrant
shares at an exercise price of $0. 205 (the closing price of the Company's
common stock on March 1, 2002) were earned over a 12-month period and four
hundred thousand (400,000) warrant shares at an exercise price of $0.145 were
earned upon securing of our Licensing Agreement with HoMedics. These warrants
are irrevocable and are fully vested. For the 400,000 warrants earned upon
securing the HoMedics License Agreement, the measurement date was October 22,
2002 as the warrants became fully vested and non-forfeitable on that date. The
value assigned to these 400,000 warrants is $56,800 and was determined using the
Black-Scholes option valuation model. The $56,800 was expensed in the period of
the measurement date. For the other 500,000 warrants, the measurement date was
March 1, 2002 as the warrants became fully vested and non-forfeitable on that
date. The value assigned to these warrants is $62,500 and was determined using
the Black-Scholes option valuation model. The 500,000 warrants were for general
consulting services for the twelve month period ending February 28, 2003. The
$62,500 was expensed ratably over the term of the consulting contract. Under
this contract, expenses of $10,417 and $98,464 were recorded for the three and
nine months ended March 31, 2003, respectively. No expenses were recorded under
this contract in the nine months ended March 31, 2004.

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 is being amortized to Professional Fee Expense
ratably over the ten month term of the contract. Under this contract, expenses
of $23,760 and $47,520 were recorded for the three and nine months ended March
31, 2004.

NOTE 8 - REALIZATION OF ASSETS

The accompanying 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 March 31, 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 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:

HoMedics Licensing Agreement. 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 November 2002, Kronos and HoMedics executed a Development Agreement to
provide Kronos with the financial resources believed necessary to complete
commercialization of the initial Kronos(TM)-based consumer product line. Kronos
is working with HoMedics' technicians, manufacturers, and marketing and sales
personnel to finalize the initial product line for sales and distribution.
HoMedics is focused on completion of manufacturing tooling and assembly line
processes, and product packaging, including prominent display of the "Kronos"
brand.

The initial term of the agreement is three and one half years 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.

US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a Small
Business Innovation Research Phase II contract for $580,000. 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" will be designed to be easily adjustable to a variety of
parameters such as duct size, airflow requirements, and air quality. As of March
31, 2004, the U. S. Navy had provided Kronos with $276,000 in funding for this
effort under the Phase II contract.

HoMedics provided debt financing. In May 2003, Kronos entered into an agreement
with HoMedics, Inc. for $3.5 million in financing, including $3.4 million in
secured debt financing and $100,000 for the purchase of warrants. $2.5 million
was paid to Kronos upon execution of the agreement and $1.0 million will be paid
upon the start of production as defined in the Licensing Agreement for the
Kronos(TM)-based air purification product line to be marketed and distributed by
HoMedics. In conjunction with securing this financing, Kronos and HoMedics
agreed to negotiate the expansion of our relationship into additional
Kronos(TM)-based stand-alone consumer products, including fans, heaters,
humidifiers and dehumidifiers, as well as geographic expansion into Europe and
Asia.

US Army SBIR. On October 21, 2003, Kronos obtained an Award notice from the U.S.
Army for a Small Business Innovation Research Phase II contract. This is a
one-year, $369,000 contract to produce a prototype dehumidification device
utilizing Kronos (TM) technology. As of March 31, 2004 the Company has incurred
$10,000 of development costs relating to this contract. If the Company is
successful in producing a working prototype, an additional one-year contract
will be awarded for further development work.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

In May 2003, Kronos entered into an agreement with a strategic customer,
HoMedics, Inc., for $3.5 million in financing, including $3.4 million in secured
debt financing and $100,000 for the purchase of warrants. $2.5 million was paid
to Kronos upon execution of the agreement and $1.0 million will be paid upon
achieving production effectiveness as defined in the Licensing Agreement for the
Kronos-based air purification product line to be marketed and distributed by
HoMedics. There is a risk that we will not be successful in achieving production
effectiveness as defined in the Licensing Agreement. In exchange for providing
$3.4 million in debt financing and $100,000, Kronos provided HoMedics with two
warrants: (i) 6.7 million warrants (which equated to 10% of the then fully
diluted shares) fully vested at the time of funding and (ii) 6.7 million
warrants (which equated to 10% of the then fully diluted shares) which will vest
only if (1) Kronos does not prepay the entire amount of principal and interest
due under the Notes by November 8, 2005; (2) Kronos defaults under any of the
Investment Documents, or (3) Kronos does not earn, at any time after the date of
this Agreement but prior to November 8, 2005, revenues in an aggregate amount
equal to or greater than $3.5 million. The exercise price was set at the market
price at the time of closing ($0.10). HoMedics may not be diluted below 7.5% for
the first warrant (15% for both warrants) for any funds raised at less than
$0.20 per share, excluding options or shares issued to management, directors,
and consultants in the normal course of business. There are no anti-dilution
measures for funds raised at greater than $0.20 per share.

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. 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 Employment Agreement provides for base cash compensation of $160,000 per
year.

NOTE 10 - SHAREHOLDERS' EQUITY

During the nine month period ending March 31, 2004 Fusion Capital purchased
approximately 6,554,453 shares for $1,376,861. In addition two current and one
former members of the Board of Directors received 438,493 shares valued at
$69,230 for past Board services rendered. As referenced in Note 7 above, 360,000
shares were issued to consultants for services valued at $79,200.

NOTE 11 - SUBSEQUENT EVENTS

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

INTRODUCTORY STATEMENTS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This filing contains forward-looking statements, including statements regarding,
among other things: (a) the growth strategies of Kronos Advanced Technologies
(the "Company" or "Kronos"); (b) anticipated trends in our Company's industry;
(c) our Company's future financing plans; and (d) our Company's ability to
obtain financing and continue operations. In addition, when used in this filing,
the words "believes," "anticipates," "intends," "in anticipation of," and
similar words are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on our Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond our
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
our Company's industry, reductions in the availability of financing and other
factors. 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.
Our Company does not undertake any obligation to publicly release the results of
any revision 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 ("HVAC") products
for residential usage to high efficiency particulate air ("HEPA") 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. To
date, no commercial products using the Kronos(TM) technology have been sold.

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, including numerous contaminants found in cigarette smoke.

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
(health care, hospitality, residential and commercial facilities); (2) air
purification for unique spaces (cleanrooms, automotive, cruise ships and
airplanes); (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 customer contracts which were executed over the
past twelve months. 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) health care, (2) hospitality, (3)
commercial and (4) residential. Kronos is seeking to leverage the
product development and funding resources of HoMedics, Inc.,
Kronos' strategic partner for consumer-based residential
applications, to develop 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 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 HoMedics Contract. 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 November 2002, Kronos and
HoMedics executed a Development Agreement to provide Kronos with
the financial resources believed necessary to complete
commercialization of the initial Kronos(TM)-based consumer product
line.

Kronos is working with HoMedics' technicians, manufacturers, and
marketing and sales personnel to finalize the initial product line
for sales and distribution. HoMedics is focused on completion of
manufacturing tooling and assembly line processes, and product
packaging, including prominent display of the "Kronos" brand.

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 to complete the technical hardware and related power
supplies for each of the products in the air purification product
line. Kronos has teamed with Flextronics to prepare the power
supply for cost effective mass production. Second, Kronos is
finalizing with HoMedics component and materials selection for the
finished products. This process combines HoMedics vendor selection
process with Kronos' technical expertise. We believe the Company
has successfully completed the development of a Kronos-based
consumer standalone air purifier that will be an efficient, high
quality product which is cost effective and easy to operate. As a
result of this effort, The Company believes that we will obtain
production effectiveness as defined in the License Agreement with
HoMedics within six months.

The initial term of the agreement is three and one half years 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.

Kronos is seeking to leverage its consumer product development
work with HoMedics to develop and produce 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.

Embedded Platform

o U.S. Navy SBIR Contracts. 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.

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"
will be 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 initial twelve 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 to be built
under the Phase II contract. As of March 31, 2004, the U. S. Navy
had provided Kronos with $276,000 in funding for this effort under
the Phase II contract. The Company believes the remaining $304,000
will be realized by November 30, 2004.

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 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. Phase III
contracts may be awarded prior to completion of Phase II contract
work. Kronos is working directly with Dawnbreaker, a U. S.
Government entity established for the purpose of supporting
companies seeking Phase III contracts.

o 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. 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. The U.S. Army will provide Kronos with funding under the
terms of this contract and the Company believes the full value of
this contract will be realized by October 21, 2004.

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 Business Jet Manufacturer. 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.

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

Kronos has received notification that three 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 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.

In addition to the "Electrostatic Fluid Accelerator," "Method of and Apparatus
for Electrostatic Fluid Acceleration Control of a Fluid Flow" and "Electrostatic
Fluid Accelerator for and a Method of Controlling Fluid" 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. There are a number of corresponding patent applications, which
have been filed and are pending outside of the United States.

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
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 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.

RESULTS OF OPERATIONS

The Company's net loss from continuing operations for the three months ended
March 31, 2004 decreased by 11% to $614,000, compared with a net loss of
$690,000 for the corresponding period of the prior year. The decrease in the net
loss was primarily the result of a decrease in selling, general and
administrative expenses ($221,000), offset by an increase in interest expense
($94,000). The Company's net loss from continuing operations for the nine months
ended March 31, 2004 decreased by 1% to $1,735,000, compared with a net loss of
$1,754,000 for the corresponding period of the prior year. The decrease in the
net loss was primarily the result of a decrease in selling, general and
administrative expenses ($530,000), offset by an increase in interest expense
($307,000) and a decrease in gross profit ($117,000) and other income ($86,000).

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 March 31, 2004 was $100,000. These revenues were primarily from our
HoMedics, U. S. Navy SBIR Phase II and U. S. Army SBIR Phase I Option and Phase
II contracts. Revenue of $140,000 recorded during the corresponding period of
the prior year was primarily from a licensing fee earned from our HoMedics
contract, as well as revenue earned from our U. S. Army and U. S. Navy SBIR
Phase I contracts. Revenue for the nine months ended March 31, 2004 was
$342,000. These revenues were primarily from our HoMedics, U. S. Navy SBIR Phase
II and U. S. Army SBIR Phase I and Phase I Option contracts. Revenue of $458,000
recorded during the corresponding period of the prior year was primarily from
our HoMedics, U. S. Navy and U. S. Army SBIR contracts.

COST OF SALES. Cost of sales for the three and nine months ended March 31, 2004
were $72,000 and $228,000, compared to $101,000 and $226,000 for the
corresponding periods of the prior year, respectively. Cost of sales in the
current year was primarily development costs associated with our HoMedics, U. S.
Navy SBIR and U. S. Army SBIR contracts. Prior year cost of sales related to
revenue from U. S. Army and U. S. Navy SBIR Phase I contracts. There was no cost
of sales associated with the licensing fees earned from our HoMedics license
agreement during the corresponding periods of the prior year.

GROSS PROFIT. Gross profit for the three and nine months ended March 31, 2004
was $28,000 and $114,000, compared to $39,000 and $231,000 for the corresponding
periods of the prior year, respectively. The decreases were primarily the result
of higher revenue in the corresponding periods of the prior year, including an
initial licensing fee earned from the HoMedics contract.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2004 decreased 24%
to $518,000 compared to $683,000 for the corresponding period of the prior year.
This $165,000 decrease was primarily the result of a decrease in professional
services ($266,000) offset by an increase in compensation and benefits
($70,000). The decrease in professional services was the result of a reduction
in legal and auditing ($216,000) and business consulting ($60,000) expenses.
Selling, general and administrative expenses for the nine months ended March 31,
2004 decreased 27% to $1,450,000 compared to $1,980,000 for the corresponding
period of the prior year. This $530,000 decrease was primarily the result of a
decrease in professional services ($835,000) offset by an increase in
compensation and benefits ($217,000). The decrease in professional services was
the result of a reduction in legal and auditing ($441,000) and business
consulting ($406,000) expenses. The increase in compensation and benefits
resulted from the Company converting our Chief Operating Officer from a
consulting agreement to a full time employment contract and the expansion of our
Research and Product Development team.

OTHER INCOME. Other income for the nine months ended March 31, 2004 was $22,000
and represented consideration earned from the assignment of the Company's stock
repurchase rights to Fusion Capital who made a partial repurchase of the
Company's stock used in May 2003 to acquire the remaining license rights to the
Kronos(TM) technology not included in the original acquisition of Kronos Air
Technologies, Inc. Other income for the nine months ended March 31, 2003 was
$108,000 and represented primarily the gain on the payment of a note payable
balance with stock.

INTEREST EXPENSE. Interest expenses for the three and nine months ended March
31, 2004 increased to $125,000 and $421,000 compared to $46,000 and $114,000 for
the corresponding periods of the prior year. The $79,000 and $307,000 increases,
respectively, were primarily the result of the increase in accrued interest
expenses from Company's debt financing obligation to HoMedics and to Kronos'
directors and officers.

CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004

Our total assets at March 31, 2004 and June 30, 2003 were $2.8 million and $3.2
million, respectively. Total assets at March 31, 2004 were comprised primarily
of $2.4 million of patents/intellectual property and $0.3 million of cash. Total
assets at June 30, 2003 were comprised primarily of $2.5 million of
patents/intellectual property and $0.6 million of cash. Total current assets at
March 31, 2004 and June 30, 2003 were $0.4 million and $0.7 million,
respectively, while total current liabilities for those same periods were $1.1
million and $1.9 million, respectively, creating a working capital deficit of
$0.7 million and $1.1 million at each respective period end. This 38% reduction
in the working capital deficit was primarily due to the conversion of $1.2
million of accrued expenses and payables to Company officers being converted to
long term notes payable, offset by an increase ($0.5 million) in the current
portion of notes payable and a decrease ($0.4 million) in current assets.

Shareholders' deficit as of March 31, 2004 and June 30, 2003 were $(0.6) million
and $(1.2) million, respectively, representing a decrease of $0.6 million. The
decrease in shareholders' deficit is primarily the result of a reclassification
of $0.8 million in redeemable warrants to equity based on FAS 150 and the sale
and issuance of $1.5 million of common stock, partially offset through incurring
a $1.7 million loss from continuing operations for the nine months ended March
31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow used on operating activities was $1.5 million for the nine months
ended March 31, 2004. We were able to satisfy our cash requirements for this
period through funding provided by HoMedics under the terms of our secured
financing from them, under the terms of our common stock purchase agreement with
Fusion pursuant to which the Company may sell shares of its common stock and our
revenue generating customer contracts with HoMedics, U. S. Navy and U. S. Army.
As of May 13, 2004, the Company had a cash balance of $78,000. We will require
additional funding to sustain our operations (see discussion contained within
the FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS entitled "We will require
significant additional financing to sustain our operations and without it we
will not be able to continue operations").

On May 9, 2003, we closed on a $3.5 million secured financing from a strategic
customer, HoMedics, Inc. $2.5 million was advanced to Kronos upon execution of
the agreement and $1.0 million will be advanced upon the start of production for
the Kronos-based air purification product line to be marketed and distributed by
HoMedics.

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, if all options are exercised, 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
March 31, 2004, Kronos has received $276,000 in funding under the U. S. Navy
SBIR Phase II contract. On November 7, 2003, the U. S. Army awarded Kronos a
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. To earn these future amounts, we will have to complete the required
work.

On June 19, 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.

On August 12, 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 the 2002 common stock purchase agreement, Fusion Capital
has agreed to purchase on each trading day during the term of the agreement,
$10,000 of our common stock or an aggregate of $6.0 million. The $6.0 million of
our common stock can be purchased over a 30-month period, subject to a six-month
extension or earlier termination at our sole discretion and subject to certain
events. The purchase price of the shares of common stock will be equal to a
price based upon the future market price of our common stock without any fixed
discount to the then-current market price. Fusion Capital is obligated to
purchase shares under the agreement as long as the share price exceeds a floor
of $0.10. However, there can be no assurance of how much cash we will receive,
if any, under the common stock purchase agreement with Fusion Capital. Pursuant
to this agreement, we have sold approximately 12.1 million shares of our common
stock and have received $1.9 million.

We estimate that achievement of our business plan and the payment of interest
and principal on the Company's debt will require substantial additional funding.
We anticipate that the source of funding will be obtained pursuant to the senior
debt funding from HoMedics, Fusion Capital 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 U. S. Navy and Army awarded to Kronos Air Technologies, and cash flow
generated from customer revenue. Pursuant to discussions with the companies that
we believe will licensing our technology, we anticipate generating cash flow in
our 2004 fiscal year from advance funding from these companies for production
development work. There are no assurances that these sources of funding will be
adequate to meet our cash flow needs.

GOING CONCERN OPINION

Our independent auditors have included an explanatory paragraph to their audit
opinions issued in connection with our 2003 and 2002 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 $1.7 million for the nine months
ended March 31, 2004. We have incurred net losses from continuing operations of
$2.8 million for the fiscal years ended June 30, 2003. As a result, at March 31,
2004 and June 30, 2003, we had an accumulated deficit of $19.3 million and $17.5
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 secured 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 March 31, 2004 and June 30, 2003, we had a working capital deficit of $0.7
million and $1.2 million, respectively. The independent auditor's report for the
year ended June 30, 2003, 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 nine months ended March 31, 2004 and for the fiscal year ended
June 30, 2003, we had an operating cash flow deficit of $0.7 million and $2.0
million, 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 Fusion Capital were to be unavailable and if we are unable to commercialize
and sell the 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 Fusion common stock purchase
agreement, we may still need additional capital to fully implement our business,
operating and development plans. At March 31, 2004 and June 30, 2003, we had a
cash balance of $275,000 and $641,000, 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 common stock purchase agreement with Fusion Capital and any
other equity financing.

The sale of shares pursuant to our agreement with Fusion Capital, 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 common stock purchase agreement
with Fusion Capital in order to draw down the full amount. 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 agreement with Fusion 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 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 $2.4 million as of March 31, 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 86% of our total assets as of March 31, 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 January 2004, we issued 438,493 shares of our common stock, valued at $0.16
per share at an aggregate value of $69,230, to three persons in exchange for
past services rendered as members of the Board of Directors.

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

5.1 Opinion re: Legality Incorporated by reference to
Exhibit 5.1 to Amendment No. 1
to Form S-1 filed on October 19,
2001

10.1 Employment Agreement, dated April 16, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.1 to the Registration
Jeffrey D. Wilson Statement on Form S-1 filed on
August 7, 2001

10.2 Deal Outline, dated December 9, 1999, Incorporated by reference to
by and between TSET, Inc. and Atomic Exhibit 10.2 to the Registration
Soccer, USA, Ltd. Statement on Form S-1 filed on
August 7, 2001

10.3 Letter of Intent, dated December 27, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.3 to the Registration
Electron Wind Technologies, Inc. Statement on Form S-1 filed on
August 7, 2001

10.17 Shareholders Agreement, dated September Incorporated by reference to
12, 2000, by and among TSET, Inc., Exhibit 10.17 to the
Bryan Holbrook and EdgeAudio.com, Inc. Registration Statement on Form
S-1 filed on August 7, 2001

10.18 Amendment to Agreement and Plan of Incorporated by reference to
Reorganization dated September 12, Exhibit 10.18 to the
2000, by and among TSET, Inc., Registration Statement on Form
EdgeAudio.com, Inc., LYNK Enterprises, S-1 filed on August 7, 2001
Inc., Robert Lightman, J. David Hogan,
Eric Alexander and Eterna
Internacional, S.A. de C.V.

10.19 Agreement Regarding Sale of Preferred Incorporated by reference to
Stock, dated November 1, 2000, by and Exhibit 10.19 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001

10.20 Amendment to Subcontract, dated Incorporated by reference to
December 14, 2000, by and between Bath Exhibit 10.20 to the
Iron Works and High Voltage Registration Statement on
Integrated Form S-1 filed on
August 7, 2001

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 Employment Agreement, dated March 18, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.22 to the
Alex Chriss Registration Statement on Form
S-1 filed on August 7, 2001

10.23 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.23 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001

10.24 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.24 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001

10.25 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.25 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001

10.26 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.26 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001

10.27 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.27 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001

10.28 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.28 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001

10.29 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.29 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001

10.30 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.30 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001

10.31 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and J. Exhibit 10.31 to the
Alexander Chriss Registration Statement on Form
S-1 filed on August 7, 2001

10.32 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.32 to the
Charles H. Wellington Registration Statement on Form
S-1 filed on August 7, 2001

10.33 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.33 to the
Igor Krichtafovitch Registration Statement on Form
S-1 filed on August 7, 2001

10.34 Letter Agreement, dated April 10, 2001, Incorporated by reference to
by and between TSET, Inc. and Richard Exhibit 10.34 to the
A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001

10.35 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

10.36 Finders Agreement, dated April 20, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.36 to the
Bernard Aronson, d/b/a Bolivar Registration Statement on Form
International Inc. S-1 filed on August 7, 2001

10.37 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

10.38 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

10.39 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

10.40 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

10.41 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

10.42 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

10.43 Stock Option Agreement, dated May 3, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.43 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001

10.44 Common Stock Purchase Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.44 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001

10.45 Registration Rights Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.45 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001

10.46 Mutual Release and Settlement Incorporated by reference to
Agreement, dated July 7, 2001, by and Exhibit 10.46 to the
between TSET, Inc. and Foster & Price Registration Statement on Form
Ltd. S-1 filed on August 7, 2001

10.47 Letter Agreement, dated July 9, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.47 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001

10.48 Finders Agreement, dated July 17, 2001, Incorporated by reference to
by and between TSET, Inc. and John S. Exhibit 10.48 to the
Bowles Registration Statement on Form
S-1 filed on August 7, 2001

10.49 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

10.50 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

10.51 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

10.52 Consulting Agreement, dated October 10, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.52 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001

10.53 Consulting Agreement effective Incorporated by reference to
October 1, 2001, by and among TSET, Exhibit 10.53 to the Registrant's
Inc., Steven G. Martin and Joshua Form 10-Q for the quarterly
B. Scheinfeld period ended December 31, 2001
filed on November 19, 2001

10.54 Letter Agreement dated November 13, Incorporated by reference to
2001 by and between TSET, Inc. and Exhibit 10.54 to the Registrant's
Fusion Capital Fund II, LLC Form 10-Q for the quarterly
period ended December 31, 2001
filed on November 19, 2001

10.55 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

10.56 Agreement, dated November 13, 2001 Incorporated by reference to Exhibit
by and between TSET, Inc. and Fusion 10.56 to the Registrant's Amendment
Capital Fund II, LLC No. 1 to Form S-1 filed on
August 2, 2002

10.57 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

10.58 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

10.59 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

10.60 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")

10.61 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

10.62 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

10.63 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

10.64 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

10.65 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

10.66 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

10.67 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

10.68 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Richard A. Papworth

10.69 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Daniel R. Dwight

10.70 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Richard F. Tusing

10.71 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Igor Krichtafovitch

10.72 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
J. Alexander Chriss

EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Not applicable

12.1 Statement re: Computation of Ratios Not applicable

15.1 Letter re: Unaudited Interim Financial Not applicable
Information

16.1 Letter re: Change in Certifying Incorporated by
Accountant reference to the
Company's Form 8-K
filed on
August 22, 2003

21.1 Subsidiaries of the Registrant Not applicable

24.1 Power of Attorney Not applicable

27.1 Financial Data Schedule Not applicable

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: May 13, 2004 KRONOS ADVANCED TECHNOLOGIES, INC.

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

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