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 December 31, 2003

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 February 5, 2004, there were 58,354,217 shares outstanding of the issuer's
common stock.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The following comprise our condensed (unaudited) consolidated financial
statements for the three months and six months ended December 31, 2003.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

December 31, 2003
(Unaudited) June 30, 2003
----------------- ---------------
Assets
Current Assets

Cash $ 177,831 $ 641,178
Accounts receivable, net 22,505 48,766
Prepaids 113,399 34,135
----------------- ---------------
Total Current Assets 313,735 724,078
----------------- ---------------
Net Property and Equipment 22,681 28,042
----------------- ---------------
Other Assets
Intangibles 2,415,330 2,487,473
----------------- ---------------

Total Other Assets 2,415,330 2,487,473
----------------- ---------------
Total Assets $ 2,751,746 $ 3,239,594
================= ===============

Liabilities and Shareholders' Deficit
Current Liabilities

Accrued expenses and payables
to directors and officers $ 1,206,528 $ 1,172,015

Accounts payable 84,796 218,338

Accrued expenses 175,675 174,677

Deferred revenue 64,069 133,751

Notes payable, current portion 587,863 185,670
----------------- ---------------

Total Current Liabilities 2,118,931 1,884,451
----------------- ---------------

Long Term Liabilities

Notes payable 2,057,288 2,676,479
Discount on notes
payable (760,742) (893,046)
----------------- ---------------

Total Long Term Liabilities 1,296,546 1,783,433
----------------- ---------------

Total Liabilities 3,415,477 3,667,884
----------------- ---------------

Redeemable Warrants - 805,300
----------------- ---------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $0.001 par value -
57,956,182 and 53,836,524 shares
outstanding on December 31 and
June 30, 2003, respectively 57,956 53,837

Capital in excess of par value 17,926,610 16,240,378

Accumulated deficit (18,648,297) (17,527,805)
----------------- ---------------

Total Shareholders' Deficit (663,731) (1,233,590)
----------------- ---------------

Total Liabilities and
Shareholders' Deficit $ 2,751,746 $ 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 For the six months ended
December 31, December 31,
------------------------------- -----------------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- --------------- --------------- ----------------

Sales $ 111,528 $ 209,545 $ 241,545 $ 318,162

Cost of sales 73,052 33,179 155,805 125,304
------------- --------------- --------------- ----------------
Gross Profit 38,476 176,366 85,740 192,858
------------- --------------- --------------- ----------------

Selling, General and Administrative
expenses
Compensation and benefits 209,724 130,944 412,547 265,733
Research and development 19,023 48,407 38,851 78,682
Professional services 73,646 402,852 117,284 686,928
Depreciation and amortization 70,465 70,793 141,044 143,429
Facilities 25,837 26,009 44,710 45,213
Other selling general & administrative
expenses 103,622 44,189 177,374 77,059
-------------- --------------- ---------------- ----------------
Selling, General and Administrative
expenses 502,317 723,194 931,810 1,297,044
-------------- --------------- ---------------- ----------------

Net Operating Loss (463,841) (546,828) (846,070) (1,104,185)

Other Income 22,000 108,376 22,000 108,376

Interest Expense (128,152) (34,361) (296,422) (68,134)

-------------- --------------- ---------------- ----------------
Net Loss Before Taxes (569,993) (472,814) (1,120,492) (1,063,944)

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

Net Loss $ (569,993) (472,814) $ (1,120,492) (1,063,944)
============== =============== ================ ================

Basic Loss Per Share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============== =============== ================ ================

Diluted Loss Per Share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============== =============== ================= ================

Weighted average shares outstanding 56,945,587 47,021,691 55,459,617 45,774,213

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

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended December 31,
----------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) (Unaudited)
---------------- -----------------

Net loss from operations $ (1,120,492) $ (1,063,944)
Adjustments to reconcile net loss to net cash
provided by operations:

Depreciation and amortization 141,044 143,429

Accretion of note discount 132,304 -

Common stock issued for compensation/services 79,200 101,859

Change In:

Accounts receivable 26,261 (26,920)

Prepaid expenses and other assets (79,264) 51,205

Deferred revenue (69,682) 166,734

Accounts payable (93,620) 353,583

Accrued expenses and other liabilities (4,410) 143,800
------------------- -----------------
Net cash used in operations (988,660) (130,255)
------------------- -----------------

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in patent protection (63,539) -
------------------- -----------------
Net cash used in investing
activities (63,539) -
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES

Issuance of common stock 805,851 418,000

Proceeds from short-term borrowings - 165,889

Repayments of short-term borrowings (216,999) (311,700)
------------------- -----------------
Net cash provided by financing
activities 588,852 272,189
------------------- -----------------
NET (DECREASE) INCREASE IN CASH
(463,347) 141,934
CASH

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

End of period $ 177,831 $ 163,444
================== =================

Supplemental schedule of non-cash investing
and financing activities:

Interest paid in cash $ 6,006 $ 866

Debt satisfied with stock $ - $ 206,000

Reclassification of liability to
equity for warrants issued $ 805,300 $ -

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

KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
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 six-month periods ended December 31, 2003 and 2002 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 Form 10-QSB for the quarter ended
September 30, 2003 filed on November 14, 2003.

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
Shareholders' Deficit 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 December
31, 2003 and June 30, 2003 are as follows:

December 31, 2003
(Unaudited) June 30, 2003
----------------- --------------
Benefit from carryforward of capital and $ 4,402,119 $ 4,034,973
net operating losses

Other temporary differences 156,740 188,206
Less:
Valuation allowance (4,558,859) (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:

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

Benefit for income tax at federal statutory rate $ 380,967 34.0% $ 941,746 34.0%
Benefit for income tax at state statutory rate 22,334 2.0% 55,208 2.0%
Non-deductible expenses (48,836) (4.4)% 319,977 11.7%
Increase in valuation allowance (354,465) (31.6)% (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 December 31, 2003, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $9.7 million of unused Federal
net operating losses, $2.3 million of capital losses and $8.6 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 six months ended December 31, 2003, 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 56,945,587 and 47,021,691 for the three months ended December 31, 2003 and
2002, respectively, and 55,459,617 and 45,774,213 for the six months ended
December 31, 2003 and 2002, respectively.

As of December 31, 2003, there were outstanding options to purchase 11,040,260
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 December 31, 2002, there were outstanding options and
warrants to purchase 7,818,675 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 December 31, and June
30, 2003:

December 31, 2003
(Unaudited) June 30, 2003
------------------- -----------------

Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Obligations for purchase of intellectual property (2) 115,000 270,000
Obligations under capital leases (3) 62,720 72,424
Obligation to former director (4) 62,430 84,725
Obligations to others (5) 5,000 35,000
------------------- -----------------
Total Notes Payable $ 2,645,150 $ 2,862,149

Current portions:
Obligation to HoMedics $ 404,501 $ -
Obligations for purchase of intellectual property 115,000 90,000
Obligation to former director 40,000 40,000
Obligations under capital leases 23,362 20,670
Obligations to others 5,000 35,000
------------------- -----------------
Total current portion $ 587,863 $ 185,670
------------------- -----------------
Total long term obligations net of current portion $ 2,057,287 $ 2,676,479
=================== =================

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

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

(3) See Note 6 - Capital Leases.

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

(5) This is a non-interest bearing obligation with monthly payments of
$5,000 until 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 full fill its terms of the
lease obligations. The leases are for 36 months and contain bargain purchase
provisions so that the Company can purchase the equipment at the end of each
lease. The following sets forth the minimum future lease payments and present
values of the net minimum lease payments under these capital leases:

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

Period ended December 31,
2004 $ 36,337
2005 36,337
2006 9,943
---------------
Total minimum lease payments 82,617
Less: Executory costs -
---------------
Net minimum lease payments 82,617
Less: Imputed interest 19,897
---------------
Present value of net minimum lease payments $ 62,720
===============

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 six months ended December 31,
2003, the Company paid $5,000 and $9,703, respectively, in principal and $4,085
and $8,466, 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 was amortized to Professional Fee Expense ratably
over the 15-month term of the contract. During the three and six month periods
ending December 31, 2002, the Company recognized professional services expenses
of $20,000 and $40,000, respectively under this agreement. There were no
expenses recorded under this agreement in the six months ended December 31,
2003.

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 is October 22,
2002 as the warrants became fully vested and non-forfeitable on the 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 is
March 1, 2002 as the warrants are 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 a 12 month period. The $62,500 was expensed ratably over
the term of the consulting contract. Under this contract, expenses of $15,625
and $88,050 were recorded for the three and six months ended December 31, 2002,
respectively. There were no expenses recorded under this contract in the six
months ended December 31, 2003.

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 10-month term of the contract. Under this contract, expenses of
$15,840 and $15,840 were recorded for the three and six months ended December
31, 2003.

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 December 31, 2003. In addition, the Company has used,
rather than provided cash in its operations. The Company is currently using its
resources 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, which it believes are sufficient to provide the Company
with the ability to continue in existence:

HoMedics Licensing Agreement. In October 2002, Kronos Air Technologies, Inc.,
and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing
Agreement to bring Kronos(TM) proprietary technology to the consumer. The
agreement provides for exclusive North American, Australian and New Zealand
retail distribution rights for next generation consumer air movement and
purification products based on the patented Kronos(TM) technology. In November
2002, Kronos and HoMedics executed a Development Agreement to provide Kronos
with the financial resources necessary to complete commercialization of the
initial Kronos(TM)-based consumer product line. Kronos is working with HoMedics'
engineers, designers, manufacturers, and marketing and sales personnel to
complete the initial product line for sales and distribution. HoMedics is
focused on product design and features, completion of manufacturing tooling and
assembly line processes, and product packaging. Kronos is focused on completion
of the technical hardware and related power supplies for each of the products in
the air purification product line, as well as on developing product features and
benefits unique to this initial consumer product line. Together Kronos and
HoMedics are focused on finalizing the technology and the production process to
allow for cost effective mass production. While HoMedics is managing production
of the finished product, Kronos is managing the production of our proprietary
power supply and related circuitry.

The initial term of the agreement is three and one half years with the option to
extend the agreement for six additional years. Kronos will be compensated
through an initial royalty payment and ongoing quarterly royalty payments based
on a percentage of sales. HoMedics will pay minimum royalty payments of at least
$2 million during the initial term and on-going royalty payments to extend the
agreement. Kronos will retain full rights to all of its intellectual property.

US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a Small
Business Innovation Research Phase II contract. 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 December 31, 2003, U.
S. Navy had provided Kronos with $246,000 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 November 1, 2003, Kronos was awarded by the U.S. Army a Small
Business Innovation Research Phase II contract. This is a one-year contract to
produce a prototype dehumidification device utilizing Kronos (TM) technology. If
the Company is successful in producing a working prototype, an additional
one-year contract will be awarded for further development work. The initial
contract is for $369,000. The proceeds from this contract will be used to pay
the Company's expenses associated with the project.

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 the
start of production 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 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 is in default 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 Daniel Dwight, our
President and Chief Executive Officer, effective as of November 15, 2001. The
initial term of the Employment Agreement is for 2 years and will automatically
renew for successive 1 year terms unless written notice within 3 months of the
end of the initial term or any subsequent renewal term is received by either
party. The Board of Directors renewed the Employment Agreement on 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 Richard Tusing, our Chief
Operating Officer, effective as of January 1, 2003. The initial term of the
Employment Agreement is for 2 years and will automatically renew for successive
1 year terms unless written notice within 3 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 - SUBSEQUENT EVENTS

None

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 and at the New Hampshire Materials Laboratory
demonstrated HEPA Clean Room Class 1000 quality particulate reduction and up to
95% reduction of hazardous gases (in one air pass through the Kronos(TM)
system), 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. 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' engineers, designers,
manufacturers, and marketing and sales personnel to complete an initial
product line for sales and distribution. HoMedics is focused on product
design and features, completion of manufacturing tooling and assembly
line processes, and product packaging, including prominent display of
the "Kronos" brand. Kronos is focused on completion of the technical
hardware and related power supplies for each of the products in the air
purification product line, as well as developing product features and
benefits unique to this initial consumer product line. Together Kronos
and HoMedics are focused on finalizing the technology and the
production process to allow for cost effective mass production,
including testing and evaluating pre-production devices that will be
placed in commercial production. While HoMedics is managing production
of the finished product, Kronos is managing the production of our
proprietary power supply and related circuitry.

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.

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. A provision of the agreement gives
HoMedics a security interest in the assets of Kronos, including its
technology. 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.

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 December 31, 2003, the U. S. Navy
had provided Kronos with $246,000 in funding for this effort under the
Phase II.

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 November 7, 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 I option and the Phase II contracts in October and December 2003,
respectively.

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. In
December 2001, Kronos was awarded the Phase I contract. Phase I of the
contract was worth $70,000 in funding to investigate and analyze the
feasibility of the Kronos(TM) technology to reduce humidity in 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

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" and "Method of and
Apparatus for Electrostatic Fluid Acceleration Control of a Fluid Flow" 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 recoverablility 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
December 31, 2003 increased by 21% to $570,000, compared with a net loss of
$473,000 for the corresponding period of the prior year. The increase in the net
loss was primarily the result of an decrease in gross profit ($138,000) and
other income ($86,000) and an increase in interest expense ($94,000), offset by
a decrease in selling, general and administrative expenses ($221,000). The
Company's net loss from continuing operations for the six months ended December
31, 2003 increased by 5% to $1,120,000, compared with a net loss of $1,064,000
for the corresponding period of the prior year. The increase in the net loss was
primarily the result of an increase in interest expense ($228,000) and a
decrease in gross profit ($107,000) and other income ($86,000), offset by a
decrease in selling, general and administrative expenses ($366,000).

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 December 31, 2003 was $112,000. These revenues were primarily from our
HoMedics, U. S. Navy SBIR Phase II and U. S. Army SBIR Phase I Option contracts.
Revenue of $210,000 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 six months ended December 31, 2003 was $242,000. 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 $318,000 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 six months ended December 31,
2003 were $73,000 and $156,000, compared to $33,000 and $125,000 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 six months ended December 31, 2003
was $38,000 and $86,000, compared to $176,000 and $193,000 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 December 31, 2003 decreased
31% to $502,000 compared to $723,000 for the corresponding period of the prior
year. This $221,000 decrease was primarily the result of a decrease in
professional services ($329,000) offset by an increase in compensation and
benefits ($79,000). The decrease in professional services was the result of a
reduction in business consulting ($193,000), and legal and auditing ($137,000)
expenses. The reduction in business consulting included the benefit to the
Company from converting our Chief Operating Officer from a consulting agreement
to a full time employment contract. Selling, general and administrative expenses
for the six months ended December 31, 2003 decreased 28% to $932,000 compared to
$1,297,000 for the corresponding period of the prior year. This $365,000
decrease was primarily the result of a decrease in professional services
($570,000) offset by an increase in compensation and benefits ($147,000). The
decrease in professional services was the result of a reduction in business
consulting ($346,000), and legal and auditing ($224,000) expenses.

OTHER INCOME. Other income for the three and six months ended December 31, 2003
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 three and six
months ended December 31, 2002 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 six months ended December
31, 2003 increased to $128,000 and $296,000 compared to $34,000 and $68,000 for
the corresponding periods of the prior year. The $94,000 and $228,000 increases,
respectively, were primarily the result of the increase in accrued interest
expenses from Company's debt financing obligation to HoMedics and from the
Company's accounts payable obligation to Kronos' directors and officers.

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003

Our total assets at December 31, 2003 and June 30, 2003 were $2.8 million and
$3.2 million, respectively. Total assets at December 31, 2003 were comprised
primarily of $2.4 million of patents/intellectual property and $0.2 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
December 31, 2003 and June 30, 2003 were $0.3 million and $0.7 million,
respectively, while total current liabilities for those same periods were $2.1
million and $1.9 million, respectively, creating a working capital deficit of
$1.8 million and $1.2 million at each respective period end. This working
capital deficit is primarily due to accrued expenses for compensation,
management consulting and other professional services and the current portion of
notes payable. Shareholders' deficit as of December 31, 2003 and June 30, 2003
were $(0.7) million and $(1.2) million, respectively, representing a decrease of
$0.5 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 $0.8 million of common stock, partially offset
through incurring a $1.1 million loss from continuing operations for the six
months ended December 31, 2003.
16

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow used on operating activities was $1.0 million for the six month
period ended December 31, 2003. 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.

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
December 31, 2003, Kronos has received $246,000 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. In August 2003, Kronos Air Technologies obtained notice from the U. S.
Army for the option of the SBIR Phase I contract worth $50,000. 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 9 million shares of our common
stock and have received $1.3 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 $1.1 million for the six months
ended December 31, 2003. We have incurred net losses from continuing operations
of $2.8 million for the fiscal years ended June 30, 2003. As a result, at
December 31, 2003 and June 30, 2003, we had an accumulated deficit of $18.6
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
with it we will not be able to continue operations.

At December 31, 2003 and June 30, 2003, we had a working capital deficit of $1.8
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 six months ended December 31, 2003 and for the fiscal year
ended June 30, 2003, we had an operating cash flow deficit of $1.0 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 December 31 and June 30, 2003, we had a cash
balance of $178,000 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 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 December 31, 2003
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 88% of our total assets as of December 31, 2003. 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

There were no sales of unregistered securities of the Company.

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 Provided herewith
October 31, 2003, by and among Kronos
Advanced Technologies Inc.,
Steven G. Martin and Joshua B.
Scheinfeld

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: February 16, 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