Edgar Filing: KRONOS ADVANCED TECHNOLOGIES INC

As filed with the Securities and Exchange Commission on December ___, 2004
Registration No. 333-_____
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------
KRONOS ADVANCED TECHNOLOGIES, INC.
(Name of registrant as specified in its charter)
Nevada 6799 87-0440410
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)

Daniel R. Dwight
464 Common Street 464 Common Street
Suite 301 Suite 301
Belmont, Massachusetts 02478 Belmont, Massachusetts 02478
(617) 993-9965 (617) 993-9965
(Name, address, and telephone (Address and telephone number
of principal executive offices) number of agent for service)

Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard 201 South Biscayne Boulevard
Suite 2000 Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095

Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this registration statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier of the effective registration
statement for the offering. [ ]
If this is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
================================================================================================================
Proposed Maximum Proposed Maximum Amount
Title Of Each Class Amount Offering Price Aggregate Of Registration
Of Securities To Be Registered To Be Registered Per Share(1) Offering Price(1) Fee(2)
----------------------------------------------------------------------------------------------------------------

Common stock, par value $0.001 112,844,493 (2) $0.15 $16,926,673.95 $2,144.61
per share
----------------------------------------------------------------------------------------------------------------
TOTAL 112,844,493 (2) $0.15 $16,926,673.95 $2,144.61
----------------------------------------------------------------------------------------------------------------

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the
purposes of this table, we have used the average of the closing bid and
asked prices as of December 3, 2004.
(2) Of these shares, 102,040,816 shares are being registered under a
Standby Equity Distribution Agreement, 2,941,177 shares were issued as
a commitment fee pursuant to the Standby Equity Distribution Agreement,
62,500 shares were issued as a placement agent fee pursuant to the
Standby Equity Distribution Agreement and 7,800,000 shares were issued
pursuant to a private placement.

The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

Preliminary Prospectus Subject to completion, dated December ___, 2004

PROSPECTUS

KRONOS ADVANCED TECHNOLOGIES INC.
112,844,493 Shares of Common Stock

This prospectus relates to the sale of up to 112,844,493 shares of
Kronos Advanced Technologies, Inc.'s common stock by certain persons who are, or
will become, stockholders of Kronos. The selling stockholders consist of:

o Cornell Capital Partners, which intends to sell up to an aggregate
amount of 109,981,993 shares of common stock, which includes
102,040,816 shares of common stock pursuant to a Standby Equity
Distribution Agreement, 5,000,000 shares of common stock previously
purchased in a private placement and 2,941,177 shares of common stock
issued as a commitment fee pursuant to the Standby Equity Distribution
Agreement.

o Newbridge Securities Corporation, an unaffiliated registered
broker-dealer retained by Kronos in connection with the Standby Equity
Distribution Agreement, which intends to sell 62,500 shares of common
stock issued as a placement agent fee.

o A group of accredited investors, which intends to sell 2,800,000
shares of common stock previously purchased in a private placement.

Please refer to "Selling Stockholders" beginning on page 14.

Kronos is not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. Kronos will,
however, receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement. All costs associated with this registration will be
borne by Kronos.

The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. These prices will fluctuate based on the demand for
the shares of our common stock. On November 26, 2004, the last reported sale
price of our common stock was $0.20 per share.

Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Pursuant to the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay Kronos 98% of the
lowest volume weighted average price of the common stock during the 5
consecutive trading-day period immediately following the notice date. The 2%
discount on the purchase of the common stock to be received by Cornell Capital
Partners and the commitment fee are underwriting discounts. In addition, Cornell
Capital Partners is entitled to retain 5% of the proceeds raised by Kronos under
the Standby Equity Distribution Agreement. In addition, Kronos has agreed to pay
Cornell Capital Partners a one-time commitment fee of 2,941,177 shares of our
common stock.

Kronos engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise us in connection with the Standby Equity
Distribution Agreement. Newbridge Securities Corporation was paid a fee of
$10,000 by the issuance of 62,500 shares of Kronos' common stock.

Kronos' common stock is deemed to be "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Act of 1934.
Brokers/Dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
brokers/dealers are required to determine whether an investment in a penny stock
is suitable investment for a prospective investor.

Our common stock is quoted on the Over-the-Counter- Bulletin Board
under the symbol "KNOS.OB."

These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 6.

With the exception of Cornell Capital Partners, which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate 24 months after the
accompanying registration statement is declared effective by the Securities and
Exchange Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.

The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is December ___, 2004.

TABLE OF CONTENTS

Page

PROSPECTUS SUMMARY...........................................................1
THE OFFERING.................................................................3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION...................................4
RISK FACTORS.................................................................6
FORWARD-LOOKING STATEMENTS..................................................13
SELLING STOCKHOLDERS........................................................14
USE OF PROCEEDS.............................................................16
DILUTION....................................................................17
STANDBY EQUITY DISTRIBUTION AGREEMENT.......................................18
PLAN OF DISTRIBUTION........................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS........................................22
DESCRIPTION OF BUSINESS.....................................................29
MANAGEMENT..................................................................34
DESCRIPTION OF PROPERTY.....................................................40
LEGAL PROCEEDINGS...........................................................40
PRINCIPAL STOCKHOLDERS......................................................41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................42
DESCRIPTION OF SECURITIES...................................................47
EXPERTS.....................................................................52
LEGAL MATTERS...............................................................52
HOW TO GET MORE INFORMATION.................................................52
PART II .................................................................II-1
FINANCIAL STATEMENTS.......................................................F-1

Our audited financial statements for the fiscal year ended June 30,
2004, were contained in our Annual Report on Form 10-KSB.

PROSPECTUS SUMMARY

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.

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

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

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

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

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

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

product. Other potential applications for the Kronos(TM) technology
include closed environments such as aircraft, cruise ships and other
transportation modes that require people to breathe contaminated,
re-circulated air for extended periods. Kronos is building on its
product development effort with its strategic partner in the business
jet market and the U.S. military to serve other closed environment
applications.

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

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.

We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. The sale of shares pursuant
to the Standby Equity Distribution Agreement will have a dilutive impact on our
stockholders. Assuming we issued the number of shares of common stock being
registered in the accompanying registration statement to be available under the
Standby Equity Distribution Agreement, at a recent price of $0.20 per share, we
would issue 102,040,816 shares of common stock to Cornell Capital Partners to
receive a maximum amount of gross proceeds equal to $20,000,000. These shares
would represent approximately 58% of our outstanding common stock upon issuance.
We are registering 102,040,816 shares of common stock to be resold by Cornell
Capital Partners pursuant to Standby Equity Distribution Agreement. We
anticipate that achievement of our business plan will require approximately
$4,000,000 over the next 12 months. We intend to satisfy $2,000,000 of this from
the Equity Backed Promissory Note. We intend to attempt to satisfy the remaining
$2,000,000 from sources other than the Equity Backed Promissory Note and the
Standby Equity Distribution Agreement.

The significant downward pressure on our stock price caused by the sale
of a significant number of shares under the Standby Equity Distribution
Agreement could cause our stock price to decline, thus allowing short sellers of
our stock an opportunity to take advantage of any decrease in the value of our
stock. The presence of short sellers in our common stock may further depress the
price of our common stock.

We are registering 112,844,493 shares of common stock in this offering.
These shares represent approximately 23% of our authorized capital stock and
would upon issuance represent approximately 64% of the then issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. If all or a significant block of these shares are held by one or more
shareholders working together, then such shareholder or shareholders would have
enough shares to exert significant influence on Kronos in an election of
directors.

About Us

Our principal place of business is located at 464 Common Street, Suite
301, Belmont, Massachusetts 02478. Our telephone number is (617)993-9965.

THE OFFERING

This offering relates to the sale of common stock by certain persons
who are, or will become, our stockholders. The selling stockholders consist of:

o Cornell Capital Partners, which intends to sell up to an aggregate
amount of 109,981,993 shares of common stock, which includes
102,040,816 pursuant to a Standby Equity Distribution Agreement, and
2,941,177 shares of common stock issued as a commitment fee pursuant
to the Standby Equity Distribution Agreement and 5,000,000 shares of
common stock previously purchased in a private placement .

o Various accredited investors, which intend to sell up to an aggregate
amount of 2,800,000 shares of common stock pursuant to a private
placement.

o Newbridge Securities Corporation, an unaffiliated broker-dealer
retained by Kronos in connection with the Standby Equity Distribution
Agreement, which intends to sell up to 62,500 shares of common stock
issued as a placement agent fee.

Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
our common stock for a total purchase price of $20 million. Cornell Capital
Partners will purchase the shares of common stock for 98% of the lowest volume
weighted average price of our common stock during the 5 trading days immediately
following notice of our intent to make a draw down under the Standby Equity
Distribution Agreement. Cornell Capital Partners intends to sell any shares
purchased under the Standby Equity Distribution Agreement at the then prevailing
market price.

Based on our recent stock price of $0.20, we would have to issue to
Cornell Capital Partners 102,040,816 shares of our common stock in order to draw
down the entire $20 million available to us under the Standby Equity
Distribution Agreement. As of November 26, 2004, we had 74,127,522 shares of
common stock issued and outstanding.

Common Stock Offered 112,844,493 shares by selling
stockholders

Offering Price Market price

Common Stock Outstanding Before the Offering 74,127,522 shares

Use of Proceeds We will not receive any
proceeds from the shares
offered by the selling
stockholders. Any proceeds we
receive from the sale of
common stock under the Standby
Equity Distribution Agreement
will be used for general
corporate and working capital
purposes. See "Use of
Proceeds."

Risk Factors The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution. See "Risk Factors"
and "Dilution."

Over-the-Counter Bulletin Board Symbol KNOS.OB

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following is a summary of our Financial Statements, which are
included elsewhere in this prospectus. You should read the following data
together with the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of this prospectus as well as with our
Financial Statements and the notes therewith.

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTER FOR THE QUARTER
ENDED ENDED FOR THE YEAR FOR THE YEAR
SEPTEMBER 30, SEPTEMBER 30, ENDED ENDED
2004 2003 June 30, 2004 June 30, 2003
STATEMENT OF OPERATION DATA: (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
-------------------------------------------- -------------- -------------- -------------- -------------

Sales $ 241,533 $ 130,017 $ 533,220 $ 558,590
Cost of sales 217,920 82,753 379,331 314,496
-------------- -------------- -------------- -------------
Gross Profit 23,613 47,264 153,889 244,094
-------------- -------------- -------------- -------------
Selling, General and Administrative expense:
Compensation and benefits 222,870 202,823 840,205 1,031,375
Professional services 52,339 43,638 60,517 116,251
Research and development 17,989 19,828 355,454 1,156,903
Depreciation and amortization 99,834 70,579 360,955 284,647
Facilities 18,887 18,873 88,914 96,579
Other selling general and administrative
expenses 91,875 73,752 382,909 226,716
-------------- -------------- -------------- -------------
Selling, General and Administrative expenses 503,794 429,493 2,088,954 2,912,471
-------------- -------------- -------------- -------------
Net Operating Loss (480,181) (382,229) (1,935,065) (2,668,377)
Other Income - - 56,000 83,380
Interest Expense (141,609) (168,270) (615,831) (184,845)
-------------- -------------- -------------- -------------
Net Loss $ (621,790) $ (550,499) $ (2,494,896) $ (2,769,842)
-------------- -------------- -------------- -------------
Basic Loss Per Share $ (0.01) (0.01) $ (0.4) $ (0.6)
============== ============== ============== =============
Diluted Loss Per Share $ (0.01) (0.01) $ (0.4) $ (0.6)
============== ============== ============== =============
Weighted average shares outstanding 61,323,845 53,973,647 57,760,785 48,258,340
============== ============== ============== =============

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

FOR THE YEAR
ENDED FOR THE YEAR ENDED
SEPTEMBER 30, JUNE 30, JUNE 30,
2004 2004 2003
BALANCE SHEET DATA: (UNAUDITED) (AUDITED) (AUDITED)
----------------------------------------- -------------- --------------- ------------------
Assets
Current Assets

Cash $ 40,933 $ 69,063 $ 641,178
Accounts receivable, net 123,544 97,544 48,766
Prepaids 17,827 71,050 34,135
-------------- --------------- ------------------
Total Current Assets 182,304 237,657 724,079
-------------- --------------- ------------------
Net Property and Equipment 4,823 6,292 28,042

Other Assets
Intangibles 2,208,798 2,253,029 2,487,473
-------------- --------------- ------------------
Total Other Assets 2,208,798 2,253,029 2,487,473
-------------- --------------- ------------------
Total Assets $ 2,395,925 $ 2,496,978 $ 3,239,594
============== =============== ==================
Liabilities and Shareholders' Deficit

Current Liabilities
Accrued expenses and payables
to directors and officers $ 249,378 $ 36,258 $ 1,172,015
Accounts payable 345,885 272,544 218,338
Accrued expenses 405,621 312,347 174,677
Deferred revenue 3,218 3,218 133,751
Notes payable, current portion 870,593 798,926 185,670
-------------- --------------- ------------------
Total Current Liabilities 1,874,695 1,423,293 1,884,451
-------------- --------------- ------------------
Redeemable Warrants - - 805,300

Long Term Liabilities
Notes payable to directors & officers 1,063,266 1,063,266 -
Notes payable 1,978,052 1,983,038 2,676,479
Discounts on notes payable (514,940) (589,260) (893,046)
-------------- --------------- ------------------
Total Long Term Liabilities 2,526,378 2,457,044 1,783,433
-------------- --------------- ------------------
Total Liabilities 4,401,073 3,880,337 3,667,884
-------------- --------------- ------------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $0.001 par value, 61,323,845
shares outstanding at September 30, and
June 30, 2004 and 53,836,907 outstanding
at June 30, 2003 61,323 61,323 53,837
Capital in excess of par value 18,578,019 18,578,018 16,240,378
Accumulated deficit (20,644,490) (20,022,700) (17,527,805)
-------------- --------------- ------------------
Total Shareholders' Deficit (2,005,148) (1,383,359) (1,233,590)
-------------- --------------- ------------------
Total Liabilities and Shareholders'
Deficit $ 2,395,925 $ 2,496,978 $ 3,239,594
============== =============== ==================

RISK FACTORS

WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

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 an operating loss of $480,181 for the three
months ended September 30, 2004. We incurred a net loss of $2.5 million for the
fiscal year ended June 30, 2004. As a result, at September 30, 2004 and June 30,
2004, we had an accumulated deficit of $20.6 million and $20.0 million,
respectively. Our revenues and cash flows from operations have not been
sufficient to sustain our operations. We have sustained our operations through
the issuance of our common stock and the incurrence of debt. We expect that our
revenues and cash flows from operations may not be sufficient to sustain our
operations for the foreseeable future. Our profitability will require the
successful commercialization of our Kronos(TM) technologies. No assurances can
be given that we will be able to successfully commercialize our Kronos(TM)
technologies or that we will ever be profitable.

Our ability to continue as a going concern will be dependent upon our
ability to draw down on the Standby Equity Distribution Agreement which we have
entered into with Cornell Capital Partners. If we incur any problems in drawing
down the Standby Equity Distribution Agreement, we may experience significant
liquidity and cash flow problems. If we are not successful in reaching and
maintaining profitable operations we may not be able to attract sufficient
capital to continue our operations. Our inability to obtain adequate financing
will result in the need to curtail business operations and will likely result in
a lower stock price.

There Is Substantial Doubt About Our Ability To Continue As A Going Concern Due
To Insufficient Revenues To Cover Our Operating Costs, Which Means That We May
Not Be Able To Continue Operations Unless We Obtain Additional Funding

Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the financial statements for the years
ended June 30, 2004 and June 30, 2003, relative to our ability to continue as a
going concern. There is substantial doubt about our ability to continue as a
going concern due to our Company's losses from operations and current
liabilities exceed current assets. We anticipate that we will incur net losses
for the immediate future. We expect our operating expenses to increase
significantly, and, as a result, we will need to generate monthly revenue if we
are to continue as a going concern. To the extent that we do not generate
revenue at anticipated rates, we do not obtain additional funding, or that
increases in our operating expenses precede or are not subsequently followed by
commensurate increases in revenue, or that we are unable to adjust operating
expense levels accordingly, we may not have the ability to continue on as a
going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

We Will Require Significant Additional Financing To Sustain Our Operations And
Without It We Will Not Be Able To Continue Operations

At September 30, 2004 and June 30, 2004, we had a working capital
deficit of $1.7 million and $1.2 million, respectively. The Report of
Independent Registered Public Accounting Firm for the year ended June 30, 2004,
includes an explanatory paragraph to their audit opinion stating that our
recurring losses from operations and working capital deficiency raise
substantial doubt about our ability to continue as a going concern. For the
three months ended September 30, 2004 and September 30, 2003, we had an
operating cash flow deficit of $41,000 and $441,000, respectively. We currently
do not have sufficient financial resources to fund our operations or pay certain
existing obligations or those of our subsidiary. Therefore, we need substantial
additional funds to continue these operations and pay certain existing
obligations.

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

Existing Shareholders will Experience Significant Dilution from Our Sale of
Shares under the Cornell Capital Equity Investment Agreement and Standby Equity
Distribution Agreement and Any Other Equity Financing.

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

Competition In The Market For Air Movement And Purification Devices May Result
In The Failure Of The Kronos(TM) Products To Achieve Market Acceptance.

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

Our Failure To Enforce Protection Of Our Intellectual Property Would Have A
Material Adverse Effect On Our Business

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

In November 2004, Kronos received a Notice of Allowance from the United
States Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" - Electrode Design Geometries has been
examined and allowed for issuance as a U. S. patent. Kronos expects that the U.
S. Patent will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021. Also in November 2004, Kronos
received formal notification from the Australian Patent Office indicating that
its application entitled "Electrostatic Fluid Accelerator" has been examined and
allowed for issuance as an Australian patent (#773626). In October 2004, Kronos
received a Notice of Allowance from the United States Patent and Trademark
Office indicating that its application entitled "Electrostatic Fluid
Accelerator" - Power Supply Management and Control has been examined and allowed
for issuance as a U. S. patent. Kronos expects that the U. S. Patent will issue
in due course. The patent provides protection for key aspects of Kronos'
technology until late in 2021. In April 2004, Kronos received formal
notification from the United States Patent and Trademark Office indicating that
its application entitled "Electrostatic Fluid Accelerator for and a Method of
Controlling Fluid" has been examined and allowed for issuance as a U. S. patent
(#6,727,657). The patent provides protection for key aspects of Kronos'
technology until late in 2021. In December 2003, Kronos received formal
notification from the United States Patent and Trademark Office indicating that
its application entitled "Method of and Apparatus for Electrostatic Fluid
Acceleration Control of a Fluid Flow" has been examined and allowed for issuance
as a U. S. patent (#6,664,741). The patent provides protection for key aspects

of Kronos' technology until late in 2020. In January 2003, Kronos received
formal notification from the United States Patent and Trademark Office
indicating that its application entitled "Electrostatic Fluid Accelerator" had
been examined and allowed for issuance as a U. S. patent (#6,504,308). The
patent will provide protection for key aspects of Kronos' technology until late
in 2019. We have additional U. S. and foreign patent applications pending. The
validity and breadth of our intellectual property claims in ion wind generation
and electrostatic fluid acceleration and control technology involve complex
legal and factual questions and, therefore, may be highly uncertain. Despite our
efforts to protect our intellectual proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.

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

Possible Future Impairment Of Intangible Assets Would Have A Material Adverse
Effect On Our Financial Condition

Our net intangible assets of approximately $2.2 million as of September
30, 2004 consist principally of purchased patent technology and marketing
intangibles, which relate to the acquisition of Kronos Air Technologies, Inc. in
March 2000 and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos(TM) technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 92% of our total assets as of September 30, 2004. Intangible
assets are subject to periodic review and consideration for potential impairment
of value. Among the factors that could give rise to impairment include a
significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss
of key personnel, and projections or forecasts that demonstrate continuing
losses associated with these assets. In the case of our intangible assets,
specific factors that could give rise to impairment would be, but are not
limited to, an inability to obtain patents, the untimely death or other loss of
Dr. Igor Krichtafovitch, the lead inventor of the Kronos(TM) technology and
Kronos Air Technologies Chief Technology Officer, or the ability to create a
customer base for the sale or licensing of the Kronos(TM) technology. Should an
impairment occur, we would be required to recognize it in our financial
statements. A write-down of these intangible assets could have a material
adverse impact on our total assets, net worth and results of operations.

Our Common Stock Is Deemed To Be "Penny Stock," Subject To Special Requirement
And Conditions And May Not Be A Suitable Investment

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

o With a price of less than $5.00 per share;

o That are not traded on a "recognized" national exchange;

o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or

o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.

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

We Rely On Management And Research Personnel, The Loss Of Whose Services Could
Have A Material Adverse Effect Upon Our Business

We rely principally upon the services of our senior executive
management, and certain key employees, including the Kronos research team, the
loss of whose services could have a material adverse effect upon our business
and prospects. Competition for appropriately qualified personnel is intense. Our
ability to attract and retain highly qualified senior management and technical
research and development personnel are believed to be an important element of
our future success. Our failure to attract and retain such personnel may, among
other things, limit the rate at which we can expand operations and achieve
profitability. There can be no assurance that we will be able to attract and
retain senior management and key employees having competency in those
substantive areas deemed important to the successful implementation of our plans

to fully capitalize on our investment in the Kronos(TM) technology, and the
inability to do so or any difficulties encountered by management in establishing
effective working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
executive management, or key employees.

We May Not Be Able To Access Sufficient Funds When Needed Under The Standby
Equity Distribution Agreement And The Price Of Our Common Stock Will Affect Our
Ability To Draw Down On The Standby Equity Distribution Agreement

Currently, we are dependent upon external financing to fund our
operations. Our financing needs are expected to be provided, in large part, by
our Standby Equity Distribution Agreement. The amount of each advance under the
Standby Equity Distribution Agreement is subject to a maximum amount equal to
$1,500,000. Because of this maximum advance restriction, we may not be able to
access sufficient funds when needed. If the market price of our shares of common
stock declines, we would be required to issue more shares of common stock in
order to draw down the same dollar amount of an advance than if our stock price
were higher. Our Articles of Incorporation currently authorize Kronos to issue
500 million shares. In the event that we do not obtain shareholder approval to
amend our Articles of Incorporation and increase our authorized common stock, we
will obtain lower net proceeds from the Standby Equity Distribution if the price
of our common stock declines.

In addition, there is an inverse relationship between the price of our
common stock and the number of shares of common stock, which will be issued
under the Standby Equity Distribution Agreement. Based on our recent stock price
of $0.20, we would have to issue to Cornell Capital Partners 120,048,109 shares
of our common stock in order to draw down the entire $20 million available to us
under the Standby Equity Distribution Agreement. We are registering 102,040,816
shares of our common stock under the Standby Equity Distribution Agreement in
the accompanying registration statement. Our Articles of Incorporation currently
authorize Kronos to issue 500 million shares and, as of November 26, 2004, we
had 74,127,522 shares of common stock issued and outstanding. In the event we
desire to draw down any available amounts remaining under the Standby Equity
Distribution Agreement after we have issued the 102,040,816 shares being
registered in the accompanying registration statement, we will have to file a
new registration statement to cover such additional shares that we would issue
for additional draw downs on the Standby Equity Distribution Agreement. Unless
we obtain profitable operations, it is unlikely that we will be able to secure
additional financing from external sources other than our Standby Equity
Distribution Agreement. Therefore, if we are unable to draw down on our Standby
Equity Distribution Agreement, we may be forced to curtail or cease our business
operations.

In addition, pursuant to the terms of the Standby Equity Distribution
Agreement, Cornell Capital Partners may not own more than 9.9% of our
outstanding shares of common stock. In the event Cornell Capital Partners is
unable to sell the shares of our common stock that are issued after we receive
an advance in order to keep them below 9.9% beneficial ownership, we might not
be able to draw down additional funds when needed under the Standby Equity
Distribution Agreement. Therefore, if we are unable to draw down on our Standby
Equity Distribution Agreement, we may be forced to curtail or cease our business
operations.

Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly

Our common stock is currently traded on the Over-the-Counter Bulletin
Board. During most of 2003, our common stock was traded on the "Pink Sheets".
Prior to this offering, there has been a limited public market for our common
stock and there can be no assurance that an active trading market for our common
stock will develop. As a result, this could adversely affect our shareholders'
ability to sell our common stock in short time periods, or possibly at all. Our
common stock is thinly traded compared to larger, more widely known companies in
our industry. Thinly traded common stock can be more volatile than common stock
traded in an active public market. The average daily trading volume of our
common stock in November 2004 was 188,500 shares. The high and low bid price of
our common stock for the last two years has been $0.450 and $0.085,
respectively. Our common stock has experienced, and is likely to experience in
the future, significant price and volume fluctuations, which could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.

We May Be Unable To Manage Growth

Successful implementation of our business strategy requires us to
manage our growth. Growth could place an increasing strain on our management and
financial resources. To manage growth effectively, we will need to:

o Establish definitive business strategies, goals and objectives.

o Maintain a system of management controls.

o Attract and retain qualified personnel, as well as, develop, train and
manage management-level and other employees.

If we fail to manage our growth effectively, our business, financial
condition or operating results could be materially harmed, and our stock price
may decline.

RISKS RELATED TO THIS OFFERING

Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings

Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Some
of our shareholders, including officers and directors are the holders of
"restricted securities". These restricted securities may be resold in the public
market only if registered or pursuant to an exemption from registration. Some of
these shares may be resold under Rule 144. As of November 26, 2004,
approximately 18,848,310 shares of our common stock are deemed restricted.

Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
112,844,493 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.

Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement And The Conversion Of
Convertible Debentures

The sale of shares pursuant to the Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. At a recent stock
price of $0.20, we would have to issue 102,040,816 shares of common stock to
draw down the entire $20 million available to us under the Standby Equity
Distribution Agreement. We are registering 102,040,816 shares of our common
stock under the Standby Equity Distribution Agreement in the accompanying
registration statement. These shares would represent approximately 58% of our
outstanding common stock upon issuance.

The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline

The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
112,844,493 shares of common stock, the number of shares being registered in
this offering may be sold. Such sales may cause our stock price to decline.

Cornell Capital Partners Will Pay Less Than The Then-Prevailing Market Price And
Will Have An Incentive To Sell Its Shares

Cornell Capital Partners will purchase shares of our common stock
pursuant to the Standby Equity Distribution Agreement at a purchase price that
is less than the then-prevailing market price of our common stock. Cornell
Capital Partners will have an incentive to immediately sell any shares of Kronos
common stock that it purchases pursuant to the Standby Equity Distribution
Agreement to realize a gain on the difference between the purchase price and the
then-prevailing market price of our common stock. To the extent Cornell Capital
Partners sells its common stock, the common stock price may decrease due to the
additional shares in the market. This could allow Cornell Capital Partners to
sell greater amounts of common stock, the sales of which would further depress
the stock price.

In addition, pursuant to the Standby Equity Distribution Agreement,
Cornell Capital Partners has the ability to sell shares of Kronos common stock
corresponding to a particular advance notice by Kronos even if such shares of
common stock have not yet been delivered to Cornell Capital partners. Such sales
may cause our stock price to decline.

The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties

The Price You Pay In This Offering Will Fluctuate

The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.

The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control

We are registering 112,844,493 shares of common stock in this offering.
These shares represent approximately 24% of our authorized capital stock and
would upon issuance represent approximately 64% of the then issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. If all or a significant block of these shares are held by one or more
shareholders working together, then such shareholder or shareholders would have
enough shares to exert significant influence on Kronos in an election of
directors.

FORWARD-LOOKING STATEMENTS

Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.

This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.

SELLING STOCKHOLDERS

The following table presents information regarding the selling
stockholders. A description of each selling stockholder's relationship to Kronos
and how each selling stockholder acquired or will acquire the shares to be sold
in this offering is detailed in the information immediately following this
table.

Percentage of Shares to be
Outstanding Acquired under Percentage of
Shares Shares the Standby Shares
Beneficially Beneficially Equity Shares to be Beneficially
Owned Before Owned Before Distribution Sold in the Owned After
Selling Stockholder Offering Offering (1) Agreement Offering Offering(1)
------------------------- ------------- -------------- ---------------- -------------- --------------

Cornell Capital Partners,
L.P. 7,941,177(2) 10.72% 102,040,816(3) 109,981,993(3) 0%
Richard Sun 1,425,000 1.93% -- 1,425,000 0%
Fred Gumbinner 400,000 * -- 400,000 0%
James Hunt 237,500 * -- 237,500 0%
Walter Mazan 190,000 * -- 190,000 0%
Sheldon Katz 142,500 * -- 142,500 0%
James Cheng 142,500 * -- 142,500 0%
Robert Balcerak 142,500 * -- 142,500 0%
New Vantage Group 120,000 * -- 120,000 0%
Newbridge Securities
Corporation 62,500 * -- 62,500 0%
------------- -------------- ---------------- -------------- --------------
Total 10,803,677 14.59% 102,040,816 112,844,493 0%
============= ============== ================ ============== ==============

-----------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 74,127,522 shares of
common stock outstanding as of November 26, 2004, together with
securities exercisable or convertible into shares of common stock
within 60 days of November 26, 2004. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to
securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable
or exercisable within 60 days of November 26, 2004 are deemed to be
beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) The 7,941,177 shares of common stock represent: (a) 5,000,000 shares of
common stock purchased in a private placement and (b) 2,941,177 shares
of common stock issued as a commitment fee in connection with the
Standby Equity Distribution Agreement.
(3) We are registering 102,040,816 shares of common stock to be resold by
Cornell Capital Partners under the Standby Equity Distribution
Agreement. In the event we desire to draw down any available amounts
remaining under the Standby Equity Distribution Agreement after we have
issued the 102,040,816 shares being registered in the accompanying
registration statement, we will have to file a new registration
statement to cover such additional shares that we would issue for
additional draw downs under the Standby Equity Distribution Agreement.

The following information contains a description of the selling
stockholder's relationship to Kronos and how the selling stockholder acquired
the shares to be sold in this offering. The selling stockholders have not held a
position or office, or had any other material relationship, with Kronos, except
as follows:

Shares Acquired In Financing Transaction With Kronos

o Cornell Capital Partners, L.P. Cornell Capital Partners is the
investor under an equity investment agreement, Equity-Backed
Promissory Notes and the Standby Equity Distribution Agreement and the
holder of convertible debentures. All investment decisions of Cornell
Capital Partners are made by its general partner, Yorkville Advisors,
LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the
investment decisions on behalf of Yorkville Advisors. Cornell Capital
Partners acquired all shares being registered in this offering in
financing transactions with Kronos. That transaction is explained
below:

o Standby Equity Distribution Agreement. On October 15, 2004, we entered
into a Standby Equity Distribution Agreement with Cornell Capital
Partners. Pursuant to the Standby Equity Distribution Agreement, we
may, at our discretion, periodically sell to Cornell Capital Partners
shares of our common stock for a total purchase price of up to $20
million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay
Kronos 98% of the lowest volume weighted average price of our common
stock on the Over-the-Counter Bulletin Board or other principal market
on which our common stock is traded for the 5 trading days immediately
following the notice date. Further, Cornell Capital Partners will
retain a fee of 5% of each advance under the Standby Equity
Distribution Agreement. In connection with the Standby Equity
Distribution Agreement, Cornell Capital Partners received a commitment
fee in the form of 2,941,177 shares of our common stock.

We are registering 109,981,993 shares in this offering that may be
resold by Cornell Capital Partners pursuant to the Standby Equity
Distribution Agreement in addition to the shares registered in this
offering in connection with the commitment fee under the Standby
Equity Distribution Agreement.

o $500,000 Equity Investment. On October 15, 2004, Kronos entered into a
Securities Purchase Agreement with Cornell Capital Partners. Pursuant
to the Securities Purchase Agreement, Kronos sold 5,000,000 shares of
Kronos' restricted common stock to Cornell Capital Partners. In
connection with the sale of shares of common stock to Cornell Capital
Partners, LP, Kronos and Cornell Capital Partners entered into an
Investor Registration Rights Agreement, dated October 15, 2004,
whereby Kronos is obligated to file a registration statement with the
United States Securities and Exchange Commission covering such shares
of common stock sold to Cornell Capital Partners.

o $280,000 Equity Investment. On November 16, 2004, Kronos entered into
a Securities Purchase Agreement with a group of accredited investors.
Pursuant to the Securities Purchase Agreement, Kronos sold 2,800,000
shares of Kronos' restricted common stock to these accredited
investors. In connection with the sale of shares of common stock to
accredited investors, Kronos and the investors entered into an
Investor Registration Rights Agreements, dated November 16, 2004.

There Are Certain Risks Related To Sales By Cornell Capital Partners

There are certain risks related to sales by Cornell Capital Partners,
including:

o The outstanding shares are issued based on discount to the market
rate. As a result, the lower the stock price around the time Cornell
Capital Partners is issued shares, the greater chance that Cornell
Capital Partners gets more shares. This could result in substantial
dilution to the interests of other holders of common stock.

o To the extent Cornell Capital Partners sells its common stock, the
common stock price may decrease due to the additional shares in the
market. This could allow Cornell Capital Partners to sell greater
amounts of common stock, the sales of which would further depress the
stock price.

o The significant downward pressure on the price of the common stock as
Cornell Capital Partners sells material amounts of common stock could
encourage short sales by third parties. This could place further
downward pressure on the price of the common stock.

o Newbridge Securities Corporation is a registered broker-dealer that we
engaged to advise us in connection with the Standby Equity
Distribution Agreement. Guy Amico makes the investment decisions on
behalf of Newbridge Securities Corporation. We paid Newbridge
Securities Corporation a fee of $10,000 payable in 62,500 shares of
our common stock. Kronos is registering these shares in this offering.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be
offered and resold from time to time by the selling stockholders. There will be
no proceeds to us from the resale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 98% of the lowest volume weighted average price of
our common stock on the Over-the-Counter Bulletin Board for the 5 days
immediately following the notice date. Kronos will pay Cornell Capital Partners
5% of each advance as an additional fee.

Kronos is registering 102,040,816 shares of common stock for issuance
under the Standby Equity Distribution Agreement. At a recent price of $0.20 per
share, Kronos would receive gross proceeds of $20 million.

For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $85,000 plus 5% retainage payable to Cornell Capital Partners.

Gross Proceeds $ 4,000,000 $ 10,000,000 $ 15,000,000 $ 20,000,000
5% Retainage 200,000 500,000 750,000 1,000,000
Offering Expenses 85,000 85,000 85,000 85,000
Net Proceeds $ 3,715,000 $ 9,415,000 $ 14,165,000 $ 18,915,000

Use of Proceeds:
Corporate and Working Capital 3,715,000 9,415,000 14,165,000 18,915,000

Total $ 3,715,000 $ 9,415,000 $ 14,165,000 $ 18,915,000

Kronos has represented to Cornell Capital Partners that the net
proceeds we receive under the Standby Equity Distribution Agreement will be used
for general corporate purposes. In no event will the net proceeds we receive
under the Standby Equity Distribution Agreement be used by Kronos for the
payment (or loaned to any such person for the payment) of any judgment, or other
liability, incurred by any executive officer, officer, director or employee of
Kronos, except for any liability owed to such person for services rendered, or
if any judgment or other liability is incurred by such person originating from
services rendered to Kronos or Kronos has indemnified such person from
liability.

DILUTION

The net tangible book value of our Company as of September 30, 2004 was
($4,213,946) or ($0.0687) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of our Company (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to our Company, our net
tangible book value will be unaffected by this offering. Our net tangible book
value, however, will be impacted by the common stock to be issued under the
standby equity distribution agreement. The amount of dilution will depend on the
offering price and number of shares to be issued under the standby equity
distribution agreement. The following example shows the dilution to new
investors at an offering price of $0.1960 per share, which is 98% of a recent
share price of $0.20.

If we assume that our Company had issued 102,040,816 shares of common
stock under the Standby Equity Distribution Agreement at an assumed offering
price of $0.1960 per share (i.e., the maximum number of shares needed in order
to raise a total of $20 million available under the Standby Equity Distribution
Agreement), less retention fees of $1,000,000 and offering expenses of $85,000,
our net tangible book value as of September 30, 2004 would have been $14,701,054
or $0.0900 per share. Such an offering would represent an immediate increase in
net tangible book value to existing stockholders of $0.1587 per share and an
immediate dilution to new stockholders of $0.1060 per share. The following table
illustrates the per share dilution:

Assumed public offering price per share $0.1960
Net tangible book value per share before this offering ($0.0687)
Increase attributable to new investors $0.1587
---------
Net tangible book value per share after this offering $0.0900
--------
Dilution per share to new stockholders $0.1060
========

The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:

Assumed No. of Shares to be Dilution Per Share to
Offering Price ISSUED (1) New Investors
-------------- ------------------- ---------------------
$0.1960 102,040,816 $0.1060
$0.1470 136,054,422 $0.0585
$0.0980 204,081,632 $0.0322
$0.0490 408,163,265 $0.0118

(1) Kronos is registering 102,040,816 shares of common stock.

STANDBY EQUITY DISTRIBUTION AGREEMENT

Summary. On October 15, 2004, we entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners. Pursuant to the Standby
Equity Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of our common stock for a total purchase price
of up to $20 million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay us 98% of the
lowest volume weighted average price of our common stock on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded for
the 5 days immediately following the notice date. Cornell Capital Partners is a
private limited partnership whose business operations are conducted through its
general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will
retain a fee of 5% of each advance under the Standby Equity Distribution
Agreement. In addition, we paid Cornell Capital Partners a commitment fee under
the Standby Equity Distribution Agreement in the form of 2,941,177 shares of our
common stock. In the event the Standby Equity Distribution Agreement is
terminated in accordance with the terms of the agreement, or Kronos does not
forward any advance notices during the term of the agreement, Cornell Capital
Partners will return 2,000,000 shares of common stock issued previously as a
commitment fee. We also paid Cornell Capital Partners a non-refundable
due-diligence fee equal to $2,500 to defray the costs of performing due
diligence on us. In addition, we engaged Newbridge Securities Corporation, a
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. For its services, Newbridge Securities Corporation
received a fee of $10,000 paid in 62,500 shares of our common stock. We paid
counsel to Cornell Capital Partners $15,000 for their legal, administrative and
escrow fees. In addition, on each advance date, we will pay counsel to Cornell
Capital Partners the sum of $500 for additional legal, administrative and escrow
fees. Kronos is registering 102,040,816 shares of common stock for the Standby
Equity Distribution Agreement pursuant to the accompanying registration
statement. The costs associated with this registration will be borne by us.
There are no other significant closing conditions to draws under the Standby
Equity Distribution Agreement.

Standby Equity Distribution Agreement Explained. Pursuant to the
Standby Equity Distribution Agreement, we may periodically sell shares of common
stock to Cornell Capital Partners to raise capital to fund our working capital
needs. The periodic sale of shares is known as an advance. We may request an
advance every 7 trading days with a maximum of $1,500,000 per advance. A closing
will be held 6 trading days after such written notice at which time we will
deliver shares of common stock and Cornell Capital Partners will pay the advance
amount.

We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $20 million or 24 months after the effective date
of the accompanying registration statement, whichever occurs first.

The amount of each advance is limited to a maximum draw down of
$1,500,000 every 7 trading days. At a recent stock price of $0.20, we would have
to issue 9,003,601 shares of common stock to Cornell Capital Partners to draw
down the maximum advance amount of $1,500,000. The amount available under the
Standby Equity Distribution Agreement is not dependent on the price or volume of
our common stock. Our ability to request advances are conditioned upon us
registering the shares of common stock with the Securities and Exchange
Commission. In addition, we may not request advances if the shares to be issued
in connection with such advances would result in Cornell Capital Partners owning
more than 9.9% of our outstanding common stock. We do not have any agreements
with Cornell Capital Partners regarding the distribution of such stock, although
Cornell Capital Partners has indicated that it intends to promptly sell any
stock received under the Standby Equity Distribution Agreement.

You should be aware that there is an inverse relationship between our
stock price and the number of shares to be issued under the Standby Equity
Distribution Agreement. That is, as our stock price declines, we would be
required to issue a greater number of shares under the Standby Equity

Distribution Agreement for a Given Advance. The issuance of a larger number of
shares under the Standby Equity Distribution Agreement may result in a change of
control. That is, if all or a significant block of such shares are held by one
or more shareholders working together, then such shareholder or shareholders
would have enough shares to assume control of Kronos by electing its or their
own directors.

You should also be aware that in order for us to utilize the full $20
million available under the Standby Equity Distribution Agreement, it may be
necessary for our shareholders to approve an increase in our authorized common
stock and for us to register additional shares of common stock. This is
currently the case based on the stock price of $0.20 as of November 26, 2004.
Kronos is authorized in its Articles of Incorporation to issue up to 500,000,000
shares of common stock. As of November 26, 2004, Kronos had 74,127,522 shares of
common stock outstanding. Kronos is registering 102,040,816 shares of common
stock hereunder to be issued under the Standby Equity Distribution Agreement.

Proceeds used under the Standby Equity Distribution Agreement will be
used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to draw.

We expect to incur expenses of approximately $85,000 in connection with
this registration, consisting primarily of professional fees. In connection with
the Standby Equity Distribution Agreement, we paid Cornell Capital Partners a
one-time commitment fee of in the form of 2,941,177 shares of Kronos common
stock. In addition, we issued 62,500 shares of common stock to Newbridge
Securities Corporation, a registered broker-dealer, as a placement agent fee.

PLAN OF DISTRIBUTION

The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders, and with the exception of Cornell
Capital Partners as principal or through one or more underwriters, brokers,
dealers or agents from time to time in one or more transactions (which may
involve crosses or block transactions) (i) on the over-the-counter market or in
any other market on which the price of our shares of common stock are quoted or
(ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of common
stock to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of common stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The selling stockholders and any brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.

Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay us 98%
of the lowest volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the 5 days immediately following the advance date. In
addition, Cornell Capital Partners will retain 5% of each advance under the
Standby Equity Distribution Agreement. The 2% discount, the 5% retention and the
one-time commitment fee are underwriting discounts. We engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the Standby Equity Distribution Agreement. For its services, Newbridge
Securities Corporation received $10,000, which was paid by the issuance of
62,500 shares of our common stock. Pursuant to a Placement Agent Agreement,
Newbridge Securities Corporation provided services consisting of reviewing the
terms of the Standby Equity Distribution Agreement and advising us with respect
to those terms. The Placement Agent Agreement is co-terminus with and will
terminate upon the same terms as the Standby Equity Distribution Agreement.

Cornell Capital Partners was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.

In consideration of Cornell Capital Partners' execution and delivery of
the Standby Equity Distribution Agreement, Kronos will indemnify Cornell Capital
Partners, and all of its officers, directors, partners, employees and agents,
from and against any and all actions, causes of actions, suits, claims, losses,
costs, penalties, fees, liabilities and damages incurred by the indemnified
party as a result of, or relating to: (i) any misrepresentation or breach of any
representation or warranty made by Kronos in the Standby Equity Distribution
Agreement or Registration Rights Agreement in connection therewith or any other
document contemplated thereby; (ii) any breach of any covenant, agreement or
obligation of Kronos contained in the Standby Equity Distribution or the
Registration Rights Agreement in connection therewith or any other document
contemplated thereby; or (iii) any cause of action, suit or claim brought
against such indemnified party and arising out of or resulting from the
execution, delivery, performance or enforcement of the Standby Equity
Distribution Agreement or any document in connection therewith.

Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.

We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000. The offering expenses consist of: a SEC registration fee
of $2,150, printing expenses of $2,500, accounting fees of $20,000, legal fees
of $50,000 and miscellaneous expenses of $10,350. We will not receive any
proceeds from the sale of any of the shares of common stock by the selling
stockholders. We will, however, receive proceeds from the sale of common stock
under the Standby Equity Distribution Agreement.

The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. The selling stockholders are
advised that if a particular offer of common stock is to be made on terms
constituting a material change from the information set forth above with respect
to the Plan of Distribution, then, to the extent required, a post-effective
amendment to the accompanying registration statement must be filed with the
Securities and Exchange Commission.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following information should be read in conjunction with the
consolidated financial statements of Kronos and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis and elsewhere in this prospectus that are not statements of historical
or current fact constitute "forward-looking statements." For an overview of
Kronos please see the section entitled Description of the Business which follows
this section.

General

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

Market Segmentation

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

Technology Application and Product Development

Critical Accounting Policies

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

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

Valuation of Goodwill, Intangible and Other Long Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's ability to generate positive income
from operations and positive cash flow in future periods compared to the
carrying value of the asset, the strategic significance of any identifiable
intangible asset in our business objectives, as well as the market
capitalization of Kronos. We have used certain key assumptions in building the
cash flow projections required for evaluating the recoverability of our
intangible assets. We have assumed revenues from the following applications of
the Kronos technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications

resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.

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

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

Results Of Operations

Consolidated Statement of Operations for the Quarter Ended September 30, 2004

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

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

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

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

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

Interest Expense. Interest expenses for the three months ended
September 30, 2004 decreased to $142,000 compared to $168,000 for the
corresponding period of the prior year. The $26,000 decrease was primarily the
result of the decrease in the Company's debt to former directors and officers of
the Company.

Consolidated Balance Sheet As Of September 30, 2004

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

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

Consolidated Statement of Operations For the Year Ended June 30, 2004.

Our net losses for each of the years ended June 30, 2004 and June 30,
2003 were $2.5 million and $2.8 million, respectively. The decrease in the net
loss for the year ended June 30, 2004, as compared to the prior year, was
principally the result of a $0.8 million or 28% reduction in operating costs to
$2.1 million, partially offset by a $0.4 million or 233% increase in interest
expense to $0.6 million.

Revenue. Revenues are generated through sales of services for design
and development of Kronos(TM) devices at Kronos Air Technologies, Inc. Revenues
for the year ended June 30, 2004 were $533,000 compared with $559,000 in the
prior year. Current year revenues were primarily from our HoMedics development
agreement, U.S. Navy Small Business Innovative Research Phase II contract, U.S.
Army Small Business Innovative Research Phase I and Phase II contracts and our
contract with a business jet manufacturer.

Cost of Sales. Cost of sales for the year ended June 30, 2004 was
$379,000 compared with $314,000 for the prior year. Cost of sales is primarily
research and development costs and material and labor associated with our
HoMedics development agreement, U.S. Navy Small Business Innovative Research
Phase II contract, U.S. Army Small Business Innovative Research Phase I and
Phase II contracts and contract with a business jet manufacturer.

Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2004 decreased $0.8 million
from the prior year to $2.1 million. The decrease was principally the result of
a $801,000 reduction in professional services, and a $191,000 reduction in
compensation and benefits expenses offset by a $156,000 increase in other
selling, general and administrative expense. The reduction in professional
services was primarily the result of (i) a reduction in legal costs as a result
of the completion of the restructuring of the Company in 2003; (ii) a reduction
in accounting and auditing expenses as a result of the change in public
accountants in August 2003; and a reduction in consulting expenses as a result
of Richard F. Tusing, our Chief Operating Officer, as a result of terminating
his consulting agreements and entering into a new employment agreement with
Kronos in January 2003 and (iii) the completion of a twelve month consulting
agreement with the Eagle Rock Group, LLC in March 2003. The increase in other
selling, general and administrative expense was primarily the result of an
increase in Directors and Officers, general liability and product liability
insurance.

Consolidated Balance Sheet as of June 30, 2004

Our total assets at June 30, 2004 were $2.5 million compared with $3.2
million at June 30, 2003. Total assets at June 30, 2004 and June 30, 2003 were
comprised primarily of $2.3 million and $2.5 million, respectively, of
patents/intellectual property. Total current assets at June 30, 2004 and 2002
were $238,000 and $724,000, respectively, while total current liabilities for
those same periods were $1.4 million and $1.9 million, respectively, creating a
working capital deficit of $1.2 million at each respective period end. This
working capital deficit is primarily due to the current portion of notes payable
due to HoMedics.

Shareholders' deficit as of June 30, 2004 and 2003 was ($1.4 million)
and ($1.2 million), respectively. The $2.5 million loss from operations for the
twelve months ended June 30, 2004 was offset by the sale and issuance, net of
offering costs, of $1.4 million of common stock and by the transfer $0.8 million
of warrants from liabilities to shareholders' deficit.

Consolidated Statement of Operations For the Year Ended June 30, 2003.

Our net losses for each of the fiscal years ended June 30, 2003 and
June 30, 2002 were $2.8 million. Our net loss from continuing operations for the
fiscal year ended June 30, 2003 was $2.8 million compared with a net loss of
$3.5 million for the prior year. The decrease in the net loss from continuing
operations for the year ended June 30, 2003, as compared to the prior year, was
principally the result of a 503% increase in revenue to $559,000 and a 14%
reduction in operating costs to $2.9 million.

Revenue. Revenues are generated through sales of services for design
and development of Kronos(TM) devices at Kronos Air Technologies, Inc. Revenues
for the year ended June 30, 2003 were $559,000 compared with $93,000 in the
prior year. June 30, 2003 revenues were primarily from our HoMedics development
agreement, U.S. Navy Small Business Innovative Research Phase II contract, U.S.
Army Small Business Innovative Research Phase I contract and our contract with a
business jet manufacturer.

Cost of Sales. Cost of sales for the year ended June 30, 2003 was
$314,000 compared with $78,000 for the prior year. Cost of sales is primarily
research and development costs and material and labor associated with our
HoMedics development agreement, U.S. Navy Small Business Innovative Research
Phase II contract, U.S. Army Small Business Innovative Research Phase I contract
and contract with a business jet manufacturer.

Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2003 decreased $469,000 from
the prior year to $2.9 million. The decrease was principally the result of an
$856,000 reduction in professional services, $108,000 reduction in general
research and development expenses and $27,000 reduction in other selling,
general and administrative expenses off set by a $511,000 increase in
compensation and benefits. The reduction in professional services was primarily
the result of Daniel R. Dwight, our President and Chief Operating Officer, and
Richard F. Tusing, our Chief Operating Officer, terminating their consulting
agreements with Kronos in November 2001 and January 2003, respectively, and the
completion of a 12 month consulting agreement with the Eagle Rock Group, LLC in
March 2003. The increase in compensation and benefits was primarily the result
of Messrs. Dwight and Tusing entering into employment contracts with Kronos in
November 2001 and January 2003, respectively.

Consolidated Balance Sheet as of June 30, 2003

Our total assets at June 30, 2003 were $3.2 million compared with $2.4
million at June 30, 2002. Total assets at June 30, 2003 and June 30, 2002 were
comprised primarily of $2.5 million and $2.2 million, respectively, of
patents/intellectual property. Total current assets at June 30, 2003 and 2002
were $724,000 and $123,000, respectively, while total current liabilities for
those same periods were $1.9 million and $1.8 million, respectively, creating a
working capital deficit of $1.2 million and $1.7 million at each respective
period end. This working capital deficit is primarily due to accrued expenses
and payables to directors and officers.

Shareholders' deficit as of June 30, 2003 and 2002 was ($1.2 million)
and ($385,000), respectively, representing a decrease of $849,000. The decrease
in shareholders' equity is primarily the result of incurring a $2.8 million loss
from continuing operations for the twelve months ended June 30, 2003, offset by
the sale and issuance, net of offering costs, of $986,000 of common stock and
the sale of $893,000 of unexercised warrants.

Liquidity And Capital Resources

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

On October 15, 2004, Kronos entered into a Securities Purchase
Agreement with Cornell Capital Partners. Pursuant to the Securities Purchase
Agreement, Kronos sold 5,000,000 shares of Kronos' restricted common stock to
Cornell Capital Partners. In connection with the sale of shares of common stock
to Cornell Capital Partners, LP, Kronos and Cornell Capital Partners entered
into an Investor Registration Rights Agreement, dated October 15, 2004, whereby
Kronos is obligated to file a registration statement with the United States
Securities and Exchange Commission no later than thirty days from October 15,
2004 covering such shares of common stock sold to Cornell Capital Partners.

On October 15, 2004 Kronos entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, Kronos may, at its discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $20 million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay Kronos 98% of,
or a 2% discount to, the lowest volume weighted average price of Kronos' common
stock on the Over-the-Counter Bulletin Board or other principal market on which

Kronos' common stock is traded for the five days immediately following the
notice date. Cornell Capital Partners, LP will also retain 5% of each advance
under the Standby Equity Distribution Agreement. Cornell Capital Partner's
obligation to purchase shares of Kronos' common stock under the Standby Equity
Distribution Agreement is subject to certain conditions, including Kronos
obtaining an effective registration statement for shares of common stock sold
under the Standby Equity Distribution Agreement and is limited to $1,500,000 per
advance. This must be a minimum of seven (7) trading days between each requested
advance. Cornell Capital Partners, LP received a one-time commitment fee in the
form of 2,941,177 restricted shares of Kronos' common stock under the Standby
Equity Distribution Agreement.

Kronos engaged Newbridge Securities Corporation, a registered
broker-dealer, to advise it in connection with the Standby Equity Distribution
Agreement. For its services, Kronos agreed to issue Newbridge Securities
Corporation shares of our common stock in an amount equal to $10,000 divided by
the volume weighted average price of Kronos' common stock, as quoted on
Bloomberg LP, on October 15, 2004.

In addition, Kronos and Cornell Capital Partners agreed that Cornell
Capital Partners, shall lend Kronos an aggregate of $4,000,000 pursuant to two
(2) Equity-Backed Promissory Notes, each in the principal amount of $2,000,000.
Cornell Capital Partners shall lend $2,000,000 upon the filing by Kronos with
the United States Securities and Exchange Commission (the "SEC") of a
registration statement pursuant to the Investor Registration Rights Agreement.
Cornell Capital Partners, LP is obligated to lend the remaining $2,000,000 upon
such registration statement being declared effective by the SEC. We have not
determined whether we will utilize the additional $2,000,000 Promissory Note.
The principal amount of each note is payable in equal weekly installments of
$50,000 plus twelve percent (12%) interest on the outstanding principal balance
starting on the earlier to occur of: (i) the registration statement being
declared by the SEC; or (ii) twelve (12) weeks from the date such note is
executed.

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

In addition, in connection with the First Amendment to Master Loan and
Investment Agreement, Kronos issued to HoMedics a warrant to purchase 26,507,658
shares of Kronos' common stock. The warrant is exercisable for a period of ten
(10) years from the date of issuance. The exercise price is $0.10 per share. In
consideration for the warrant, HoMedics delivered to Kronos $75,000 by funding
the closing fees owed by Kronos and HoMedics agreed to amend two (2) warrants
previously issued by Kronos by removing the anti-dilution protection previously
granted to HoMedics. Kronos agreed to include new anti-dilution protection in
the new warrant. HoMedics is entitled, under certain circumstances, to
anti-dilution protection in order to maintain beneficial ownership of Kronos
equal to 30%. In addition, Kronos agreed to grant HoMedics piggy-back
registration rights and one (1) demand registration right with respect to any
shares of common stock of Kronos that HoMedics may acquire pursuant to the two
(2) previously issued warrants and the warrant issued on October 25, 2004 in
connection with the First Amendment to Master Loan and Investment Agreement.
HoMedics also agreed not to exercise any warrants until one year after the
effective date of the registration statement to be filed pursuant to the
Investor Registration Rights Agreement.

Kronos SBIR contracts with the U. S. Military, including the U. S. Army
Phase I Option and Phase II and the U. S. Navy Phase II contracts, are
potentially worth up to $1.5 million in product development and testing support
for Kronos Air Technologies. In November 2002, Kronos Air Technologies was
awarded by the U. S. Navy for a Small Business Innovation Research Phase II
contract worth $580,000, plus an option of $150,000. As of September 30, 2004,
the U. S. Navy had provided Kronos with $567,000 in funding for this effort
under the Phase II contract. In October 2003, Kronos Air Technologies obtained
award notice from the U. S. Army for a SBIR II contract. The first year of the
contract is worth $369,000 with an Army option on the second year worth
$360,000. The contract is to develop Kronos' proprietary Electrostatic
Dehumidification Technology ("EDT"). As of September 30, 2004, the U. S. Army
had provided Kronos with $151,000 in funding for this effort under the Phase II
contract.
27

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

In June 2001, we entered into a common stock purchase agreement with
Fusion Capital. Pursuant to this agreement, we have sold approximately 6 million
shares of our common stock and have received $1.3 million. In August 2002, we
terminated our common stock purchase agreement dated June 19, 2001 and entered
into a new common stock purchase agreement with Fusion Capital. Pursuant to this
second common stock purchase agreement, we sold approximately 12.1 million
shares of our common stock and have received $1.9 million. On November 2, 2004,
Kronos and Fusion Capital mutually agreed to terminate their existing common
stock purchase agreement dated August 12, 2002.

We estimate that achievement of our business plan will require
substantial additional funding including approximately $4,000,000 over the next
12 months. We anticipate that the source of funding will be obtained pursuant to
senior debt funding from the HoMedics Secured Promissory Notes; the
Equity-Backed Promissory Notes and the Standby Equity Distribution Agreement;
and/or the sale of additional equity in our Company, cash flow generated from
government grants and contracts, which includes funding from the Small Business
Innovation Research contracts sponsored by the United States Navy and Army
awarded to Kronos Air Technologies, and cash flow generated from customer
revenue. There are no assurances that these sources of funding will be adequate
to meet our cash flow needs.

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

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

DESCRIPTION OF BUSINESS

General

Technology Description and Benefits

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

Market Segmentation

applications: (1) residential, (2) health care, (3) hospitality and
(4) commercial. Kronos is seeking to leverage the product development,
production and funding resources of HoMedics, Kronos' strategic
partner for consumer-based residential applications, to develop and
manufacturer standalone products for other air movement and
purification applications.

Technology Application and Product Development

Standalone Platform

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

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

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

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

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

Embedded Platform

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

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

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

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

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

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

U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the
option on its U. S. Army Small Business Innovation Research Phase I
contract bringing the value of the Phase I contract award to $120,000.
In October 2003, the U.S. Army awarded Kronos the Small Business
Innovation Research Phase II contract. The first year of the contract

is worth $369,000 with an Army option on the second year worth
$360,000. The contract is to develop Kronos' proprietary Electrostatic
Dehumidification Technology ("EDT"). Kronos initiated work under the
Phase II contract in December 2003. As of September 30, 2004, the U.
S. Army had provided Kronos with $151,000 in funding for this effort
under the Phase II contract.

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

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

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

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

Patents and Intellectual Property

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

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

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

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

o 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.

o 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.

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

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

Employees

On November 26, 2004, Kronos and its subsidiaries had ten full-time
employees. Of the total number of full-time employees, one works in general
management, eight in research and product development, one in marketing and
sales and operations, and none are employed in administrative and other support
positions. None of the employees are represented by unions. There has been no
disruption of operations due to a labor dispute. We consider our relations with
our employees to be good.

MANAGEMENT

Our directors and executive officers and their ages as of November 26,
2004, are as follows:

NAME AGE POSITION
------------------ --- -----------------------------------------------
Daniel R. Dwight 44 Director; President and Chief Executive Officer
Richard F. Tusing 46 Director; Chief Operating Officer
Spencer I. Browne 53 Director
James P. McDermott 42 Director
Milton. J. Segal 60 Director

Daniel R Dwight, 44, has served as a Director of Kronos since November
2000, and as a Director and Chief Executive Officer of Kronos Air Technologies
since January 2001. Effective October 16, 2001, Mr. Dwight was appointed
President and Chief Executive Officer of Kronos. Effective January 1, 2004, Mr.
Dwight was appointed Acting Chief Financial Officer of Kronos. He has extensive
experience in private equity and operations in a wide variety of high growth and
core industrial businesses. Mr. Dwight spent 17 years with General Electric
including 10 years of operations, manufacturing, and business development
experience with GE's industrial businesses, and seven years of international
investment and private equity experience with GE Capital. He has had
responsibility for over a $1 billion in merger and acquisition and private
equity transactions at GE. Mr. Dwight initiated GE Capital's entry in the Asia
private equity market. Between 1995 and 1999, the Asian equity portfolio grew to
include consolidations, leveraged buyouts, growth capital and minority
investments in diverse industries, including information technology,
telecommunications services, consumer products, services and distribution, and
contract manufacturing. Since 1982, Mr. Dwight has held other leadership
positions domestically and internationally with GE Capital, as well as senior
positions with GE Corporate Business Development (1989-1992) and GE Corporate
Audit Staff (1984-1987). Mr. Dwight holds an MBA in Finance and Marketing with
Honors from The University of Chicago Graduate School of Business and a B.S. in
Accounting with Honors from the University of Vermont.

Richard F. Tusing, 46, has served as a Director of Kronos since October
2000 and as a Director of Kronos Air Technologies since January 2001 and was
appointed Chief Operating Officer on January 1, 2002. Mr. Tusing has had
extensive experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
Prior to his services to Kronos, Mr. Tusing spent four years in executive
management with several emerging technology companies, 14 years in various
managerial and executive positions with MCI Communications Corporation, and
three additional years in managerial consulting. From 1982-1996, Mr. Tusing held
multiple managerial and executive positions with MCI Communications Corporation.
From 1994-1996, he served as MCI's Director of Strategy and Technology, managing
MCI's emerging technologies division (having primary responsibility for
evaluating, licensing, investing in, and acquiring third-party technologies
deemed of strategic importance to MCI), and also oversaw the development of
several early-stage and venture-backed software and hardware companies; in this
capacity, Mr. Tusing managed more than 100 scientists and engineers developing
state-of-the-art technologies. From 1992-1994, Mr. Tusing founded MCI Metro,
MCI's entree into the local telephone services business and, as MCI Metro's
Managing Director, managed telecommunications operations, developed financial
and ordering systems, and led efforts in designing its marketing campaigns. From
1990-1992, he served as Director of Finance and Business Development for MCI's
western region. From 1982-1990, Mr. Tusing held other management and leadership
positions within MCI, including service as MCI's Pacific Division's Regional
Financial Controller, Manager of MCI's Western Region's Information Technology
Division, and led MCI's National Corporate Financial Systems Development
Organization. Mr. Tusing received B.S. degrees in business management and
psychology from the University of Maryland in 1979.

Spencer I. Browne, 53, became a Director of Kronos in August 2003. Mr.
Browne has over 30 years of corporate governance, operations and entrepreneurial
expertise. He has held various executive and management positions with several
New York Stock Exchange and NASDAQ listed companies. Since 1996, Mr. Browne has
been a principal of Strategic Asset Management, LLC, a privately owned
investment firm, which he founded in 1996. He also currently serves as a
director and chairmen of Internet Commerce Corporation (NASDAQ: ICCA), a
director of Annaly Mortgage Management (NYSE: NLY) and a director of Delta
Financial Corporation (AMEX: DFC). From 1988 until 1996, Mr. Browne served as
President, Chief Executive Officer and a director of Asset Investors Corporation
(AIC), a New York Stock Exchange company (NYSE: ANL) he co-founded in 1986. He
also served as President, Chief Executive Officer and a director of Commercial
Assets, Inc., an affiliate of AIC, from its formation in 1993 until 1996. In
addition, from 1990 until 1996, Mr. Browne served as President and a director of
M.D.C. Holdings, Inc. (NYSE: MDC), the parent company of a major homebuilder in

Colorado. Originally from Philadelphia, Mr. Browne graduated from the Wharton
School of the University of Pennsylvania and Villanova University School of Law.

James P. McDermott, 42 became a Director of Kronos in July 2001. Mr.
McDermott has over 20 years of financial and operational problem-solving
experience. Mr. McDermott is a co-founder and is currently a Managing Director
of Eagle Rock Advisors, LLC, the Manager for The Eagle Rock Group, LLC. From
1992 through 2000, Mr. McDermott held various managerial and executive positions
with PennCorp Financial Group, Inc. and its affiliates. From 1998 through 2000,
Mr. McDermott was Executive Vice-President and Chief Financial Officer of
PennCorp Financial Group. While serving in this position, Mr. McDermott was
one-third of the executive management team that was responsible for developing
and implementing operational stabilization, debt reduction and recapitalization
plans for the company. From 1995 through 1998, Mr. McDermott served as Senior
Vice-President of PennCorp Financial Group. Mr. McDermott worked closely with
the Audit Committee of the Board of Directors on evaluating the PennCorp's
accounting and actuarial practices. In addition, Mr. McDermott was responsible
for developing a corporate-wide technology management program resulting in
technology convergence and cost savings to the company's technology budget. From
1994 through 1998, Mr. McDermott was a principal in Knightsbridge Capital Fund
I, LP, a $92 million investment fund specializing in leverage-equity
acquisitions of insurance and insurance-related businesses. Mr. McDermott was
also the founding Chairman of the e-business Internet service provider,
Kivex.com, and a senior manager of one of the world's leading public accounting
firms, KPMG. Mr. McDermott received a B.S. Degree in Business Administration
from the University of Wisconsin, Madison.

Milton. J. Segal, 60, became a Director of Kronos in September 2003.
Mr. Mr. Segal has over 35 years of corporate governance, entrepreneurial and
investment banking expertise. Mr. Segal founded the investment banking firm of
M.J. Segal Associates in 1987. Since 1992, the firm has specialized in
researching private equity opportunities in both private and emerging growth
public companies. The Segal group caters primarily to institutional clients,
private investment partnerships and professional money managers. After starting
his career as a stockbroker and financial planner in 1966 with Philadelphia
based New York Stock Exchange firm, Robinson & Company, Mr. Segal joined
Josephthal & Co. Inc., a leading full-service investment banking and brokerage
firm in New York. Mr. Segal has served as senior vice president of the
congressionally charted National Corporation for Housing Partnerships in
Washington, D. C. and president of its investment banking subsidiary and has
qualified as a NASD broker/dealer financial principal. Originally from
Philadelphia, Mr. Segal attended the Wharton School of the University of
Pennsylvania and is a graduate of The New York Institute of Finance.

Directors

Our Board of Directors consists of eight seats. Directors serve for a
term of one year and stand for election at our annual meeting of stockholders.
Three of our current directors were elected at our annual meeting of
stockholders held on December 30, 2002, and two additional directors were
appointed in August and September 2003, respectively. Three vacancies currently
exists on the Board of Directors as of the date of this filing. Pursuant to our
Bylaws, a majority of directors may appoint a successor to fill any vacancy on
the Board of Directors.

Advisory Board

We established an Advisory Board in July 2001 to assist management in
the development of long-range business plans for our Company. Currently, William
Poster and Charles Strang are the only Advisory Board Members.

Mr. Poster is a seasoned entrepreneur with a successful track record as
a founder of several businesses spanning five continents. Mr. Poster has
experience in developing business opportunities in the United States, Europe,
Asia and the Middle East. Mr. Poster recently stepped down as President of
Computer Systems & Communications Corporation, a wholly-owned subsidiary of
General Dynamics. Computer Systems & Communications Corporation is a
cutting-edge communications and technology company that Mr. Poster founded and
later sold to General Dynamics. Mr. Poster is currently a principal with Eagle
Rock Advisors, LLC.

Mr. Strang is a former Kronos Director from January 2001 through
December 2002. Mr. Strang was named National Commissioner of NASCAR (National
Association for Stock Car Racing) in 1998 and continues to serve in that
capacity. In 1989 Mr. Strang received President Bush's American Vocation Success
Award; in 1992 was elected to the Hall of Fame of the National Marine
Manufacturers Association; in 1990 was awarded the Medal of Honor of the Union
for International Motorboating; and is a life member of the Society of
Automotive Engineers. He also currently serves as a Director of the American
Power Boat Association (the U.S. governing body for powerboat racing) and Senior
Vice-President of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations).

We will continue to evaluate additional potential candidates for our
Advisory Board.

Committees

On September 11, 2001, the Board of Directors established a
Compensation Committee consisting of at least two independent members of the
Board of Directors. The Compensation Committee is charged with reviewing and
making recommendations concerning Kronos' general compensation strategy,
reviewing salaries for officers, reviewing employee benefit plans, and
administering Kronos' stock incentive plan, once adopted and implemented.
Messrs. Browne, McDermott and Segal are the current members of the Compensation
Committee. During the year the Compensation Committee held three meetings. Each
member attended at least 75% of the meetings.

On September 4, 2003, the Board of Directors established an Executive
Committee. The purpose of the Executive Committee is to exercise all the powers
and authority of the Board of Directors in the management of the property,
affairs and business of the Company. The Committee shall consist of no fewer
than three members, including the Chief Executive Officer of the Company.
Messrs. Browne, Dwight, McDermott, Segal and Tusing are the current members of
the Executive Committee. During the year the Executive Committee held five
meetings. Each member attended at least 75% of the meetings.

On September 10, 2003, the Board of Directors established an Audit
Committee consisting of at least two independent members of the Board of
Directors. The Audit Committee is charged with providing independent and
objective oversight of the accounting functions and internal controls of the
Company and its subsidiaries to ensure the objectivity of the Company's
financial statements. Messrs. Browne, McDermott and Segal are the current
members of the Audit Committee. During the year the Audit Committee held three
meetings. Each member attended at least 75% of the meetings.

Compensation Of Directors

Cash Compensation. Our Bylaws provide that, by resolution of the Board
of Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. As of the date of this filing, no
director receives any salary or other form of cash compensation for such
service. No director is precluded from serving our Company in any other capacity
and receiving compensation from us in connection therewith.

Share Based Compensation. Each non-executive director is entitled to
receive annually 70,000 fully-vested stock option grants, 7,000 stock option
grants per meeting attended via conference call, 14,000 option grants per
meeting attended in person, 3,500 option grants per meeting for participation on
a committee or 5,000 stock option grants per meeting for chairing a committee,
as compensation for their services as members of our Board of Directors.

For the twelve month period ending June 30, 2004, Messrs. McDermott,
Brown and Segal have earned 243,000, 213,000, and 199,000 stock options,
respectively as compensation for their services as members of our Board of
Directors. Messrs. Tusing and Dwight have each been granted 5,068 shares of our
common stock as compensation for their services as members of our Board of
Directors during fiscal 2004. Effective August 6, 2003, non-executive directors,
including Messrs. Dwight and Tusing will not be compensated separately for their
services as members of our Board of Directors.

Compliance With Section 16(a) Of The Securities Act Of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange commission initial reports of ownership and reports of changes in
ownership of Common Stock and other of our equity securities. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish us copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required during the fiscal year ended June 30, 2004, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth compensation for the fiscal year ended
June 30, 2004 for our executive officers:

SUMMARY COMPENSATION TABLE

Annual Compensation Long-Term Compensation
--------------------------------------- ---------------------------------------------------------------------
Restricted Securities
Securities
Other Restricted Underlying All Other
Salary Bonus Compensation Stock Awards Options/SARs LTIP Payouts Compensation
------------ ------------ ------------- ------------ ------------ ------------ -------------
Name and
Principal
Fiscal
Position Year $ $ $ $ # $ $
-------------- ----------- ------------ ------------ ------------- ------------ ------------ ------------ -------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------- ----------- ------------ ------------ ------------- ------------ ------------ ------------ -------------

Daniel R. 2004 180,000 -- 14,292 -- 726,206 -- --
Dwight, 2003 180,000 118,800(4) 12,288 -- 660,000 -- --
President and 2002 112,500 -- 7,620 -- 2,600,000 -- --
Chief
Executive
Officer(1)

Richard F. 2004 160,000 -- -- -- 971,756 -- --
Tusing, Chief 2003 80,000 -- -- -- -- -- --
Operating 2002 -- -- -- -- -- -- --
Officer(2)

Richard A. 2004 120,000 -- -- -- -- -- --
Papworth
Former Chief 2003 120,000 21,000(4) -- -- 300,000 -- --
Financial 2002 120,000 -- -- -- 300,000 -- --
Officer(3)

(1) Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001. He executed a two year employment contract
on November 15, 2001. His contract was renewed on August 13, 2003 and
again on August 15, 2004 by the Board of Directors. His annual salary
is $180,000.
(2) Mr. Tusing became Chief Operating Officer of Kronos effective January
1, 2002. Mr. Tusing executed an employment contract effective January
1, 2003. Prior to this date, Mr. Tusing was compensated as a consultant
to the Company. His annual salary is $160,000.
(3) Mr. Papworth was the Company's Chief Financial Officer from May
19, 2000 until January 1, 2004. His annual salary was $120,000. On
June 30, 2004 Mr. Papworth ended his employment with Kronos.
(4) Cash Bonuses earned but not paid and have been included in accrued
expenses.

AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)

VALUE OF
UNEXERCISED
NUMER OF SECURITIES UNDERLYING IN-THE-MONEY
SHARES ACQUIRED UNEXERCISED OPTIONS/SARs AT FISACL OPTIONS/SARs AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
----------------- ---------------- -------------- ------------------------------------ -------------------

Daniel R. Dwight, -0- -0- Exercisable: 4,129,806 -0-
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)

Richard F. -0- -0- Exercisable: 2,344,956 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(4)

Richard A. -0- -0- Exercisable: 1,048,475 -0-
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(5)

(1) These grants represent options to purchase common stock. No SARs have
been granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common
stock underlying the options and the exercise price of the options as
of June 30, 2004.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001. (4) Mr. Tusing became Chief Operating
Officer of Kronos effective January 1, 2002.
(5) Mr. Papworth was the Company's Chief Financial Officer from May
19, 2000 until January 1, 2004. On June 30, 2004 Mr. Papworth ended
his employment with Kronos.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

NO. OF SECURITIES % TOTAL OPTIONS/SARs
UNDERLYING GRANTD TO EXERCISE OF
OPTIONS/SARs GRANTED EMPLOYEE IN FISCAL YEAR BASE PRICE
NAME (#) (%) ($ PER SHARE) EXPIRATION DATE

Daniel R. Dwight 726,206 22.4% $ 0.180 March 22, 2014
President and
Chief Executive

Richard F. Tusing 971,756 30.0% $ 0.180 March 22, 2014
Chief Operating Officer

Stock Option Plan

On February 12, 2002, the Board of Directors approved the TSET, Inc.
Stock Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. It is presently administered by Kronos' Board
of Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.

Employment Agreements

Daniel R. Dwight, our President and Chief Executive Officer, and our
Company entered into an Employment agreement effective as of November 15, 2001.
The initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004.
Mr. Dwight's Employment Agreement provides for base cash compensation of
$180,000 per year. Mr. Dwight is eligible for annual incentive bonus
compensation in an amount equal to Mr. Dwight's annual salary based on the
achievement of certain bonus objectives. In addition, Kronos granted Mr. Dwight
1,000,000 immediately vested and exercisable, ten-year stock options at various
exercise prices. Mr. Dwight will be entitled to fully participate in any and all
401(k), stock option, stock bonus, savings, profit-sharing, insurance, and other
similar plans and benefits of employment.

Richard F. Tusing, our Chief Operating Officer, and our Company entered
into an Employment agreement effective as of January 1, 2003. The initial term
of Mr. Tusing's Employment Agreement is for 2 years and will automatically renew
for successive 1 year terms unless Kronos or Mr. Tusing provide the other party
with written notice within 3 months of the end of the initial term or any
subsequent renewal term. Mr. Tusing's Employment Agreement provides for base
cash compensation of $160,000 per year. Mr. Tusing will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.

Executive Severance Agreements

The Employment Agreement of Daniel R. Dwight, our Chief Executive
Officer, provides that, upon the occurrence of any transaction as defined as a
"change of control" of Kronos, Mr. Dwight shall receive his salary and benefits
for a period of time that is the greater of (i) one year or (ii) the remainder
of Mr. Dwight's employment term.

The Employment Agreement of Richard F. Tusing, our Chief Operating
Officer, provides that, upon the occurrence of any transaction as defined as a
"change of control" of Kronos that is not approved by the Board of Directors,
Mr. Tusing shall receive his salary, pro-rata bonus and benefits for a period of
time that is the greater of (i) one year or (ii) the remainder of Mr. Tusing's
employment term.

As of the date of this filing, we have not adopted any separate
executive severance agreements.

DESCRIPTION OF PROPERTY

Our principal executive office is located at 464 Common Street, Suite
301, Belmont, Massachusetts. The offices of the Kronos Research Center are
located at 8549/8551 154th Avenue NE, Redmond, Washington. Kronos is committed
through June 30, 2005 to annual lease payments on operating leases for 4,000
square feet of office/research lab premises of $61,836 per year. We consider our
existing facilities to be adequate for our foreseeable needs.

LEGAL PROCEEDINGS

None.

PRINCIPAL STOCKHOLDERS

The following table presents certain information regarding the
beneficial ownership of all shares of common stock at November 26, 2004 for each
executive officer and director of our Company and for each person known to us
who owns beneficially more than 5% of the outstanding shares of our common
stock. The percentage ownership shown in such table is based upon the 74,127,522
common shares issued and outstanding at November 26, 2004 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully diluted basis showing all
authorized, but unissued, shares of our common stock at November 26, 2004 as
issued and outstanding. Unless otherwise indicated, each person has sole voting
and investment power over such shares.

COMMON STOCK
BENEFICIALLY OWNED
NAME AND ADDRESS NUMBER PERCENT

Daniel R. Dwight 4,388,132(1) 5.9%
464 Common Street
Suite 301
Belmont, MA 02478

Richard F. Tusing 2,780,718(2) 3.8%
464 Common Street
Suite 301
Belmont, MA 02478

James P. McDermott 606,173(3) *
464 Common Street
Suite 301
Belmont, MA 02478

Spencer I. Browne 211,096(4) *
464 Common Street
Suite 301
Belmont, MA 02478

Milton M. Segal 191,726(5) *
464 Common Street
Suite 301
Belmont, MA 02478

All Officers and Directors of Kronos 8,177,845(6) 11.0%

* Represents less than 1%.

(1) Includes options to purchase 4,036,206 shares of common stock that can be
acquired within sixty days of November 26, 2004.
(2) Includes options to purchase 2,344,956 hares of common stock that can be
acquired within sixty days of November 26, 2004.
(3) Includes options to purchase 312,055 hares of common stock that can be
acquired within sixty days of November 26, 2004.
(4) Includes options to purchase 211,096 hares of common stock that can be
acquired within sixty days of November 26, 2004.
(5) Includes options to purchase 191,726 hares of common stock that can be
acquired within sixty days of November 26, 2004.
(6) Includes options to purchase 7,096,042 shares of common stock that can be
acquired within sixty days of November 26, 2004.

We are unaware of any arrangement or understanding that may, at a
subsequent date, result in a change of control of our Company.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We believe that all prior related party transactions have been entered
into upon terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.

On August 11, 2000, we entered into a Consulting Agreement with Richard
F. Tusing, pursuant to which Mr. Tusing would provide management, financial,
strategic, and other consulting services to us in exchange for consulting fees
payable in cash and options of our common stock. Out-of-pocket expenses incurred
by Mr. Tusing in connection with provision of their services under the
Consulting Agreement would also be reimbursed by us. The Consulting Agreement
was entered into prior to Mr. Tusing's appointment as members of our Board of
Directors in October 2000 and was negotiated at arm's length. We believe that
the compensation and other provisions of the Consulting Agreement were fair,
reasonable, customary, and favorable to us. The Consulting Agreement was renewed
with Mr. Tusing on similar terms and conditions with a rate adjustment as of
January 1, 2001, and was amended on April 12, 2001 to decrease the strike price
of the options granted as partial compensation thereunder. Pursuant to Kronos
and Mr. Tusing entering into his Employment Agreement, effective January 1,
2003, Mr. Tusing's Consulting Agreement is no longer in effect. Pursuant to his
Consulting Agreement, Mr. Tusing earned $207,400 and $377,750, respectively, in
the years ended June 30, 2001 and 2002 and $190,050 through December 31, 2002.
Of the aggregate amount of $775,200 we have paid $349,100 to Mr. Tusing and the
balance of $426,100 remains payable under the terms of a Promissory Note issued
to Mr. Tusing on March 31, 2004.

On March 31, 2004, we entered into Promissory Notes with Daniel R.
Dwight and Richard F. Tusing in exchange for past due compensation, expenses and
interest do and payable for $363,139 and $485,883. The Notes bear a simple
interest rate 1% per month and call for aggregate monthly principal and interest
payments $6,718 and $8,989, respectively, for each month in which the Company's
beginning cash balance equals or exceeds $200,000. Subject to certain
conditions, including default, these notes become payable in full. In the event
of a debt or equity financing other than from Fusion Capital, 20% of the
proceeds derived from the financing will be used to pay down the outstanding
interest and principal obligations. Any amounts remaining outstanding are due
and payable on December 31, 2006. As of June 30, 2004, no amounts had been paid
under the terms of the Notes.

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS

Our common stock trades on the Over-the-Counter Bulletin Board under
the trading symbol "KNOS." Our high and low bid prices by quarter during fiscal
2004 and 2003 are presented as follows:

FISCAL YEAR 2005
HIGH LOW

First Quarter (July 2004 to September 2004) 0.175 $0.125
Second Quarter (October 2004 to November 26, 2004) 0.200 $0.125

FISCAL YEAR 2004
HIGH LOW
First Quarter (July 2003 to September 2003) $0.450 $0.220
Second Quarter (October 2003 to December 2003) $0.370 $0.230
Third Quarter (January 2004 to March 2004) $0.330 $0.180
Fourth Quarter (April 2004 to June 2004) $0.255 $0.155

FISCAL YEAR 2003
HIGH LOW
First Quarter (July 2002 to September 2002) $0.200 $0.140
Second Quarter (October 2002 to December 2002) $0.200 $0.110
Third Quarter (January 2003 to March 2003) $0.129 $0.087
Fourth Quarter (April 2003 to June 2003) $0.290 $0.085

On November 26, 2004, the closing price of our common stock as reported
on the Over-the-Counter Bulletin Board was $0.200 per share. On November 26,
2004, we had approximately 2,000 beneficial stockholders of our common stock and
74,127,522 shares of our common stock were issued and outstanding.

Dividends

We have not declared or paid dividends on our common stock during
fiscal 2003 or 2004 and do not plan to declare or pay dividends on our common
stock during fiscal 2005. Our dividend practices are determined by our Board of
Directors and may be changed from time to time. We will base any issuance of
dividends upon our earnings (if any), financial condition, capital requirements,
acquisition strategies, and other factors considered important by our Board of
Directors. Nevada law and our Articles of Incorporation do not require our Board
of Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.

Recent Sales Of Unregistered Securities

Except as otherwise noted, all of the following shares were issued and
options and warrants granted pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering." No commissions were paid, and no underwriter
participated, in connection with any of these transactions. Each such issuance
was made pursuant to individual contracts which are discrete from one another
and are made only with persons who were sophisticated in such transactions and
who had knowledge of and access to sufficient information about Kronos to make
an informed investment decision. Among this information was the fact that the
securities were restricted securities.

All investors participating in private placements for cash were
"accredited investors" within the meaning of Regulation D. In addition, we note
that there are several categories of recipients of these shares. These include
investors for cash, officers, directors, consultants, litigants and former
shareholders of private companies acquired by Kronos. Kronos does not believe
that these categories of recipients should be integrated with each other under
the concept of integration. Under Securities Act Release Nos. 4552 and 4434,
these categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.

In July 2001, we issued 238,806 shares of our common stock, valued at
$0.33 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $80,000 in cash.

In July 2001, we issued 375,000 shares of our common stock, valued at
$0.57 per share (the fair market value of our shares as of such date), at an
aggregate value of $213,750, to one person in settlement of litigation pursuant
to a Mutual Release and Settlement Agreement dated as of July 7, 2001. These
shares were delivered to the escrow agent on May 31, 2002.

In July 2001, we issued 250 shares of our common stock, valued at $0.45
per share (the fair market value of our shares as of such date), at an aggregate
value of $113, to one person, an employee of Kronos Air Technologies, as
compensation.

In August 2001, we granted a ten-year warrant to acquire 1,400,000
shares of our common stock, at an exercise price of $0.68 per share (the fair
market value for our shares as of the date of grant), at an aggregate value of
$686,000, to Eagle Rock Group as compensation pursuant to a warrant agreement
dated August 7, 2001, for services provided in connection with a consulting
agreement dated July 2, 2001. Pursuant to such consulting agreement, a principal
of the recipient of the warrant currently serves as a director of Kronos. Such
warrant vested immediately.

On October 1, 2001, we authorized the issuance of 360,000 shares of our
common stock pursuant to a consulting agreement, valued at $0.28 per share (the
fair-market value of our shares as of such date), at an aggregate value of
$100,800, to Fusion Capital, LLC, in exchange for consulting services.

On October 1, 2001, we authorized the issuance of 1,000,000 shares of
our common stock pursuant to a pledge, valued at $0.448 per share, at an
aggregate value of $447,982, to Fusion Capital, LLC, in exchange for $447,982 in
cash.

On October 1, 2001, we issued 2,250 shares of our common stock, valued
at $0.452 per share (the fair-market value of our shares on April 9, 2001 and
1,250 of our shares on September 7, 2001), at an aggregate value of $4,147.50,
to an employee of Kronos, as compensation.

On November 15, 2001, we granted options to acquire 1,000,000 shares of
our common stock at an exercise price of $0.66 for 250,000 of these options,
$0.56 for 250,000 of these options and $0.42 for 500,000 of these options to
Daniel R. Dwight, a senior executive office of the Company, as part of his
employment agreement entitling him to acquire these options at a aggregate value
of $515,000.

In February 2002, we granted options to acquire 4,580,000 shares of our
common stock at an exercise price of $0.68 for 2,650,000 of these options and an
exercise price of $0.25 on the remaining 1,930,000. Of the total amount,
2,850,000 options were granted to Daniel R. Dwight, Richard A. Papworth and
Richard F. Tusing, all of whom are or were directors and officers of Kronos. The
exercise price for 1,700,000 of these options is $0.68 and the exercise price
for 1,150,000 of these options is $0.25.

On May 7, 2002, we completed a private placement of our common stock
pursuant to which we sold 1,971,976 shares of our common stock at $0.20 per
share to seven accredited investors for consideration of $335,100 cash and
1,429,695 shares of our common stock at $0.20 per share to six members or former
members of our management team and / or directors, including Daniel R. Dwight,
Richard A. Papworth, Richard F. Tusing, Erik W. Black, and James P. McDermott,
for consideration of $39,987 cash and commitments to convert $203,061 of debt.

On June 12, 2002, we issued 500,000 shares of our common stock, valued
at $0.21 per share (the fair-market value of our shares as of such date) at an
aggregate value of $105,000 to two persons pursuant to a Settlement agreement,
dated June 7, 2002, with Aperion Audio.

On December 6, 2002, we issued 100,000 shares of our common stock,
valued at $0.115 per share (the fair-market value of our shares as of such date)
at an aggregate value of $11,500 to Aperion Audio for forbearance on the note
payable to Aperion Audio.

On December 24, 2002, we issued 206,000 shares of our common stock,
valued at $0.11 per share (the fair-market value of our shares as of such date)
at an aggregate value of $22,660 for reduction in debt owed to Jeffery A.
Wilson.

On March 3, 2003, we granted options to acquire 2,165,000 shares of our
common stock at an exercise price of $0.185. Of the 2,165,000 options, 1,560,000
options were granted to Daniel R. Dwight, Richard A. Papworth and Richard F.
Tusing, all of whom are or were directors and officers of Kronos.

On March 31, 2003, we issued 49,811 shares of our common stock, valued
at $0.20 per share (the fair-market value of our shares as of such date) at an
aggregate value of $8,468 for reimbursement of expenses to an employee.

On May 7, 2003, we issued 2,790,000 shares of our common stock, valued
at $.098 per share (the fair-market value of our shares as of such date) at an
aggregate value of $273,420 to acquire certain intellectual property rights
related to "Electron Wind Generation". These shares were issued with certain
rights allowing the Company to buy back all or a portion of the shares at fixed
prices through the year 2006. The Company has the right to buy back shares at
$0.15 per share in 2003, $.017 per share in 2004, $0.19 in 2005 and $0.20 in
2006.

On May 12, 2003. we issued warrants to purchase 13,492,342 shares of
our common stock at an exercise price of $0.10. The warrants were issued as part
of a secured financing with HoMedics.

On June 30, 2003, we issued 207,533 shares of our common stock, valued
at $0.165 per share (the fair-market value of our shares as of such date) at an
aggregate value of $34,489 for services rendered to two outside consultants.

On June 30, 2003, we granted options to acquire 30,000 options of our
common stock at an exercise price of $0.36 and 18,000 options at an exercise
price of $0.10 to two outside consultants, respectively, for services rendered
and 50,000 options at an exercise price of $0.185 to Jeffery A. Wilson, our
former Chairman and Chief Executive Officer, for services rendered.

On October 31, 2003, we authorized the issuance of 360,000 shares of
our common stock pursuant to a consulting agreement, valued at $0.22 per share
(the fair-market value of our shares as of such date), at an aggregate value of
$79,200, to Fusion Capital, LLC, in exchange for consulting services.

In February 2004, we authorized the issuance of 438,493 shares of our
common stock, valued at $0.16 per share, at an aggregate value of $69,230, to
Daniel Dwight, Richard Papworth and Richard Tusing in exchange for Board of
Director services.

In March 2004, we granted options to acquire 2,126,522 options of our
common stock at an exercise price of $0.18 to Alexander Chriss, Daniel Dwight,
Igor Krichtafovitch, and Richard Tusing in exchange for the conversion of
$1,063,261 in past due accounts payable into Promissory Notes due on December
31, 2006.

In October 2004, we issued five million shares of our common stock,
valued at $0.10 per share at an aggregate value of $500,000 to Cornell Capital
Partners, LLC. The proceeds will be used for general working capital. In October
2004, we issued 2,941,177 shares to Cornell Capital Partners, LLC as a
commitment fee upon Kronos executing the $20 million Standby Equity Distribution
Agreement. In the event this Agreement is terminated in accordance with the
terms of this Agreement, or the Company does not forward any Advance Notices
during the term of this Agreement, the Cornell shall return 2,500,000 shares of
the commitment fee shares to the Company.

In October 2004, we issued 62,500 shares of our common stock, valued at
$0.10 per share at an aggregate value of $6,250 to Newbridge Securities
Corporation as a placement agent fee in connection with the Standby Equity
Distribution Agreement.

In October 2004, we issued to HoMedics a warrant to purchase 26,507,658
shares of Kronos common stock. The warrant is exercisable for a period of ten
(10) days from the date of issuance. The exercise price is $0.10 per share.

In November 2004, we issued two million shares of our common stock
valued at $0.10 per share at an aggregate value of $200,000 to Fusion Capital
Partners, LLC. The proceeds were used to eliminate Kronos' non-interest bearing
demand obligation to Fusion Capital.

In November 2004, we issued two million eight hundred thousand shares
of our common stock valued at $0.10 per share at an aggregate value of $280,000
to a group of accredited investors. The proceeds were used for operating working
capital.

DESCRIPTION OF SECURITIES

General

Common Stock

Holders of our common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders, including the election
of directors. Accordingly, holders of a majority of our common stock entitled to
vote in any election of directors may elect all of the directors standing for
election should they choose to do so. Neither our Articles of Incorporation nor
our Bylaws provide for cumulative voting for the election of directors. Holders
of our common stock are entitled to receive their pro rata share of any
dividends declared from time to time by the Board of Directors out of funds
legally available therefor. Holders of our common stock have no preemptive,
subscription, conversion, sinking fund, or redemption rights. All outstanding
shares of our common stock are fully paid and non-assessable. In the event of
liquidation, dissolution, or winding up of Kronos, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock (if any)
then outstanding.

Preferred Stock

Our Articles of Incorporation authorizes 50,000,000 shares of preferred
stock, no par value. No shares of preferred stock are issued and outstanding as
of the date of this prospectus. The Board of Directors is authorized, subject to
any limitations prescribed by the Nevada Revised Statutes, or the rules of any
quotation system or national securities exchange on which our stock may be
quoted or listed, to provide for the issuance of shares of preferred stock in
one or more series; to establish from time to time the number of shares to be
included in each such series; to fix the rights, powers, preferences, and
privileges of the shares of such series, without further vote or action by the
stockholders. Depending upon the terms of the preferred stock established by the
Board of Directors, any or all series of preferred stock could have preference
over the common stock with respect to dividends and other distributions and upon
liquidation of Kronos or could have voting or conversion rights that could
adversely affect the holders of the outstanding common stock. As of the date of
this prospectus, the voting and other rights associated with the preferred stock
have yet to be determined by the Board of Directors. There are no present plans
by the Board of Directors to issue preferred shares or address the rights to be
assigned thereto.

Options

Options to acquire shares in the Company's common stock have been
issued to employees, board members, advisory board members and consultants as
compensation for services provided to the Company. As of November 26, 2004, the
following options had been granted in the amounts and to the individuals shown
below; as of the date hereof, none of such options have been exercised:

Number
of Strike Date of
Name Options Price Grant Expiration

Daniel R. Dwight 50,000 (1) $0.890 4/9/2001 4/9/2006
500,000 (2) $0.420 11/15/2001 11/15/2011
250,000 (2) $0.560 11/15/2001 11/15/2011
250,000 (2) $0.660 11/15/2001 11/15/2011
1,000,000 (3) $0.680 2/12/2002 2/12/2012
600,000 (4) $0.250 12/12/2002 2/12/2012
660,000 (5) $0.185 3/21/2003 3/21/2013
726,206 (6) $0.180 3/22/2004 3/22/2014

Richard F. Tusing 50,000 (1) $0.890 4/9/2001 4/9/2006
600,000 (3) $0.680 2/12/2002 2/12/2012
350,000 (4) $0.250 2/12/2002 2/12/2012
246,500 (7) $0.960 6/30/2002 6/30/2005
126,700 (7) $0.960 6/30/2002 6/30/2006
971,756 (6) $0.180 3/22/2004 3/22/2014

Igor Krichtafovitch 50,000 (1) $0.890 4/9/2001 4/9/2006
600,000 (3) $0.680 2/12/2002 2/12/2012
400,000 (4) $0.250 2/12/2002 2/12/2012
600,000 (5) $0.185 3/21/2003 3/21/2013
500,000 (8) $0.150 5/7/2003 5/7/2013
180,726 (6) $0.180 3/22/2004 3/22/2014

J. Alexander Chriss 50,000 (1) $0.890 4/9/2001 4/9/2006
104,800 (9) $1.120 12/31/2001 12/31/2004
350,000 (3) $0.680 2/12/2002 2/12/2012
300,000 (4) $0.250 2/12/2002 2/12/2012
405,000 (5) $0.185 3/21/2003 3/21/2013
247,834 (6) $0.180 3/22/2004 3/22/2014

Richard A. Papworth 50,000 (1) $0.890 4/9/2001 4/9/2006
398,475(10) $0.890 4/9/2001 4/9/2011
100,000 (3) $0.680 2/12/2002 2/12/2012
200,000 (4) $0.250 2/12/2002 2/12/2012
300,000 (5) $0.185 3/21/2003 3/21/2013

Vladimir Gorobets 30,000 (4) $0.250 2/12/2002 2/12/2012
100,000 (5) $0.185 3/21/2003 3/21/2013

Jacob Oharah 30,000 (4) $0.250 2/12/2002 2/12/2012
50,000 (5) $0.185 3/21/2003 3/21/2013

Sergey Karpov 30,000(11) $0.200 4/7/2004 4/07/2014

Vladimir Bibikov 25,000(11) $0.220 6/30/2003 6/30/2013

Terence Tam 25,000(11) $0.195 4/21/2004 4/21/2014

Maciej R. Ziomkowski 25,000(11) $0.165 11/22/2004 11/22/2014

Christopher A. Martin 25,000(11) $0.165 11/22/2004 11/22/2004

Charles D. Strang 50,000 (1) $0.890 4/9/2001 4/9/2006
50,000(12) $0.710 5/3/2001 5/3/2011
50,000(12) $0.280 8/14/2002 8/14/2007
18,904(12) $0.150 12/30/2002 12/30/2007
21,000(12) $0.150 8/6/2003 8/6/2008
50,000(12) $0.200 8/6/2004 8/6/2009

James P. McDermott 50,000(12) $0.280 7/30/2001 7/30/2006
20,959(12) $0.150 12/30/2002 12/30/2007
30,000(12) $0.150 8/6/2003 8/6/2008
211,096(12) $0.200 7/1/2004 7/1/2009

Spencer I. Browne 211,096(12) $0.200 7/1/2004 7/1/2009

Milton M. Segal 191,726(12) $0.200 7/1/2004 7/1/2009

William Poster 35,000(12) $0.280 7/30/2002 7/30/2007
35,575(12) $0.150 7/30/2003 7/30/2008
50,000(12) $0.200 7/30/2004 7/30/2009

Jeffrey D. Wilson 50,000 (1) $0.890 4/9/2001 4/9/2006
200,000(12) $0.710 5/3/2001 5/3/2011
50,000(14) $0.360 10/10/2001 10/10/2004
23,014(12) $0.590 10/15/2001 10/15/2006
10,000(15) $0.210 3/31/2002 3/31/2007
50,000(12) $0.410 4/30/2002 4/30/2007
10,000(15) $0.190 6/30/2002 6/30/2007
10,000(15) $0.140 9/30/2002 9/30/2007
42,000(13) $0.220 10/15/2002 10/15/2007
33,425(12) $0.180 12/30/2002 12/30/2007
50,000 (1) $0.190 6/30/2003 6/30/2008

Erik W. Black 50,000 (1) $0.890 4/9/2001 4/9/2006
29,041(12) $0.160 6/1/2001 6/1/2006
50,000(12) $0.380 12/30/2002 12/30/2007
30,000(12) $0.150 8/6/2003 8/6/2008
39,667(12) $0.200 10/6/2003 10/6/2008

Charles H. Wellington, Jr. 50,000 (1) $0.890 4/9/2001 4/9/2006

Capitol Partners 30,000(13) $0.360 11/27/2001 11/27/2011

Daniel Gladkowski 18,000(13) $0.100 4/1/2003 4/1/2008

(1) Compensation for services provided to the Company.

(2) Pursuant to an employment agreement dated as of November 15, 2001 and a
corresponding stock option agreement dated as of November 15, 2001.

(3) Compensation bonus for 2000.

(4) Compensation bonus for 2001.

(5) Compensation bonus for 2002.

(6) Compensation for the conversation of accounts payable owed for services
provided to the Company in exchange for long term Promissory Notes dated as
of March 31, 2004.

(7) Pursuant to consulting agreements dated as of August 11, 2000
(individually) and January 1, 2001 (as Dwight Tusing & Associates), as
amended April 12, 2001.

(8) Pursuant to the acquisition of license rights to the Kronos technology
dated as of May 7, 2003.

(9) Pursuant to a consulting agreement dated as of March 18, 2001; option grant
effective as of April 30, 2001.

(10) Pursuant to an employment agreement dated as of May 19, 2000.

(11) Initial compensation for joining the Company.

(12) Compensation for ser vices to the Board of Directors.

(13) Pursuant to consulting services provided to the Company.

(14) Pursuant to an agreement dated October 10, 2001 between TSET and Mr.
Wilson, Mr. Wilson was granted an option to purchase 50,000 shares of
common stock in consideration of Mr. Wilson's service in year 2001, prior
to his resignation, as Chairman of TSET's Board of Directors.

(15) Pursuant to a Promissory Note dated as of October 10, 2001.

Warrants

On May 9, 2003, we entered in a Warrant Agreement with HoMedics, Inc.
pursuant to which HoMedics was granted a ten-year warrant to acquire 13,492,342
shares at an exercise price of $0.10 per share. The warrant shares were issued
in exchange for providing $3.4 million in debt financing and $100,000. On
October 25, 2004, we entered into a Warrant Agreement with HoMedics, pursuant to
which HoMedics was granted a ten-year warrant to acquire 26,507,628 shares at an
exercise price of $0.10 per share. The warrants were issued in exchange for
HoMedics agreeing to extend repayment of Kronos debt and to provide an
additional $1 million in funding - $925,000 in secured debt financing and
$75,000. HoMedics increased their potential equity position in Kronos to 30% of
Kronos common stock on a fully diluted basis.

On August 7, 2001, we entered into a Warrant Agreement with The Eagle
Rock Group, LLC, pursuant to which The Eagle Rock Group was granted a ten-year
warrant to acquire one million four hundred thousand (1,400,000) shares of our
common stock at an exercise price of $0.68 per share (the fair market value on
the date of grant). Effective March 11, 2002, we entered into an agreement with
The Eagle Rock Group extending our relationship with The Eagle Rock Group until
March 1, 2003. Pursuant to the agreement, we agreed to grant to The Eagle Rock
Group a ten-year warrant for the right to purchase nine hundred thousand
(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.

Transfer Agent

The transfer agent for our common stock is American Stock & Transfer
Company, 6201 15th Avenue, Brooklyn, New York 11219 and its telephone number is
(718) 921-8124.

Limitation Of Liability: Indemnification

As permitted by the Nevada Revised Statutes, our Bylaws provide for the
indemnification of our directors, officers, and employees or of any corporation
in which any such person serves as a director, officer, or employee at our
request, to the fullest extent allowed by the Nevada Revised Statutes, against
expenses (including, without limitation, attorney's fees, judgments, awards,
fines, penalties, and amounts paid in satisfaction of judgment or in settlement
of any action, suit, or proceeding) incurred by any such director, officer, or
employee. The Nevada Revised Statutes currently provides that such liability may
be so limited, except for: (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) the payment of
distributions in violation of Nevada Revised Statutes 78.300. As a result of
this provision, our company and our stockholders may be unable to obtain
monetary damages from such persons for breach of their duty of care. Although
stockholders may continue to seek injunctive and other equitable relief for an
alleged breach of fiduciary duty by such persons, stockholders may have no
effective remedy against the challenged conduct if equitable remedies are
unavailable.

We provide director and officer liability insurance and pays all
premiums and other costs associated with maintaining such insurance coverage. We
have also entered into indemnification agreements with each director and
officer.

Anti-Takeover Effects Of Provisions Of Nevada State Law

We may be or in the future we may become subject to Nevada's control
share law. A corporation is subject to Nevada's control share law if it has more
than 200 stockholders, at least 100 of whom are stockholders of record and
residents of Nevada, and it does business in Nevada or through an affiliated
corporation.

The law focuses on the acquisition of a "controlling interest" which
means the ownership of outstanding voting shares sufficient, but for the control
share law, to enable the acquiring person to exercise the following proportions
of the voting power of the corporation in the election of directors: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more. The ability to exercise such voting
power may be direct or indirect, as well as individual or in association with
others.

The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent non-voting
shares. The acquiring person is free to sell its shares to others. If the buyers
of those shares themselves do not acquire a controlling interest, their shares
do not become governed by the control share law.

If control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power,
any stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.

Nevada's control share law may have the effect of discouraging
takeovers of the corporation.

In addition to the control share law, Nevada has a business combination
law which prohibits certain business combinations between Nevada corporations
and "interested stockholders" for three years after the "interested stockholder"
first becomes an "interested stockholder" unless the corporation's board of
directors approves the combination in advance. For purposes of Nevada law, an
"interested stockholder" is any person who is (i) the beneficial owner, directly
or indirectly, of ten percent or more of the voting power of the outstanding
voting shares of the corporation, or (ii) an affiliate or associate of the
corporation and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of the
then outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquiror to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other stockholders.

The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the Company from doing so if
it cannot obtain the approval of our board of directors.

EXPERTS

The consolidated financial statements as of and for the years ended
June 30, 2004 and 2003 included in the Prospectus have been audited by Sherb &
Co. LLP, independent registered public accounting firm, to the extent and for
the periods set forth in their report (which contains an explanatory paragraph
regarding Kronos' ability to continue as a going concern) appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.

LEGAL MATTERS

Burton Bartlett and Glocovac, will pass upon the validity of the shares
of common stock offered hereby for us.

HOW TO GET MORE INFORMATION

We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
securities offered by this prospectus. This prospectus, which forms a part of
the registration statement, does not contain all the information set forth in
the registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.

KRONOS ADVANCED TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE(S)

Financial Statements for September 30, 2004(unaudited)

Consolidated Balance Sheet as of September 30, 2004 (unaudited) F-2

Consolidated Statements of Operations for the Three Months Ended
September 30, 2004 and September 30, 2003 (unaudited) F-3

Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2004 and September 30, 2003 (unaudited) F-4

Notes to Consolidated Interim Financial Statements (unaudited) F-5

Consolidated Financial Statements for June 30, 2004

Report of Independent Registered Public Accounting Firm F-14

Consolidated Balance Sheet as of June 30, 2004 F-15

Consolidated Statements of Operations for the Years Ended
June 30, 2004 and June 30, 2003 F-16

Consolidated Statements of Stockholders' Deficit for the Period from
June 30, 2002 Through June 30, 2004 F-17

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004 and June 30, 2003 F-18

Notes to Consolidated Financial Statements F-19

F-i

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

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

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

Liabilities and Shareholders' Deficit

Current Liabilities
Accrued expenses and payables
to directors and officers $ 249,378 $ 36,258
Accounts payable 345,885 272,544
Accrued expenses 405,621 312,347
Deferred revenue 3,218 3,218
Notes payable, current portion 870,593 798,926
----------------- ----------------
Total Current Liabilities 1,874,695 1,423,293
----------------- ----------------
Long Term Liabilities
Notes payable to directors &
Officers 1,063,266 1,063,266
Notes payable 1,978,052 1,983,038
Discounts on notes payable (514,940) (589,260)
----------------- -----------------
Total Long Term Liabilities 2,526,378 2,457,044
----------------- -----------------

Total Liabilities 4,401,073 3,880,337
----------------- -----------------

Shareholders' Deficit Common stock,
authorized 500,000,000 shares of
$0.001 par value, 61,323,845 shares
outstanding at September 30,
and June 30, 2004 61,323 61,323
Capital in excess of par value 18,578,019 18,578,019
Accumulated deficit (20,644,490) (20,022,701)
------------------ ----------------
Total Shareholders' Deficit (2,005,148) (1,383,359)
------------------ ----------------
Total Liabilities and
Shareholders' Deficit $ 2,395,925 2,496,978
================== ================

F-2

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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

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

F-3

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

CASH FLOWS FROM OPERATING ACTIVITIES

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

Depreciation and amortization 99,834 70,579
Accretion of note discount 74,321 80,064
Change In
Accounts receivable (26,000) (69,128)
Prepaid expenses and other assets 53,222 (28,924)
Deferred revenue - (12,122)
Accounts Payable (2,886) 60,562
Accrued Expenses and other liabilities 382,622 8,188
---------------------- ----------------------
Net cash used in Operating Activities (40,677) (441,281)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent protection (54,134) (41,738)
---------------------- ----------------------
Net cash used in Investing Activities (54,134) (41,738)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 525,000
Proceeds from short term borrowings 100,000 -
Repayments of short-term borrowings (33,319) (144,704)
---------------------- ----------------------
Net cash provided by Financing Activities 66,681 380,296
---------------------- ----------------------
NET DECREASE IN CASH (28,130) (102,723)

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

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

F-4

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

NOTE 1 - BASIS OF PRESENTATION

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

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

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

NOTE 2 - REALIZATION OF ASSETS AND GOING CONCERN

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

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

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

F-5

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

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

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

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

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

F-6

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

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

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

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

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

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

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

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

F-7

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

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

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

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

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

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

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

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

F-8

NOTE 4 -- INCOME TAXES

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

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

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

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

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

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

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

F-9

NOTE 5 - SEGMENTS OF BUSINESS

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

NOTE 6 - EARNINGS PER SHARE

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

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

NOTE 7 - NOTES PAYABLE

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

September 30, 2004 June 30, 2004
(Unaudited)
--------------- ---------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Discount on obligation to HoMedics (514,941) (589,260)
Obligation to current employees (2) 1,139,903 1,139,903
Obligation to Fusion Capital (3) 200,000 200,000
Obligation for finance leases (4) 47,009 50,327
Obligations to others (5) 125,000 55,000
--------------- ---------------
3,396,971 3,255,970
Less:
Current portion 870,593 798,926
--------------- ---------------
Total long term obligations net of
current portion $ 2,526,378 $ 2,457,044
=============== ===============

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

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

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

(4) See Note 8 below.

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

F-10

NOTE 8 - CAPITAL LEASES

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

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

Period ended September 30,
-----------------------------------
2005 $ 36,336
2006 21,227
---------
Total minimum lease payments 57,563
Less: Executory costs -
---------
Net minimum lease payments 57,563
Less: Imputed interest 10,556
---------
Present value of net minimum lease payments $ 47,009
=========

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

NOTE 9 - CONSULTING AGREEMENTS

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES

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

F-11

Employment Agreements

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

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

NOTE 11 - SUBSEQUENT EVENTS

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

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

F-12

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

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

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

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

F-13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Kronos Advanced Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2004 and 2003 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2004 and 2003 and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses and has a working capital deficiency as more fully described
in Note 3. These issues among others raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Sherb & Co., LLP
---------------------------------
Sherb & Co., LLP
Certified Public Accountants

New York, New York
September 27, 2004

F-14

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

June 30, June 30,
2004 2003
-------------------- --------------------
Assets

Current Assets

Cash $ 69,063 $ 641,178
Accounts receivable, net 97,544 48,766
Other Current Assets 71,050 34,135
-------------------- --------------------
Total Current Assets 237,657 724,079
-------------------- --------------------

Property and Equipment 46,011 74,673
Less: Accumulated Depreciation (39,719) (46,631)
-------------------- --------------------
Net Property and Equipment 6,292 28,042
-------------------- --------------------
Other Assets
Intangibles 2,253,029 2,487,473
-------------------- --------------------
Total Other Assets 2,253,029 2,487,473
-------------------- --------------------

Total Assets $ 2,496,978 $ 3,239,594
==================== ====================

Liabilities and Shareholders' Deficit

Current Liabilities

Accrued expenses and payables to
directors and officers $ 36,258 $ 1,172,015
Accounts payable 272,544 218,338
Accrued expenses 312,347 174,677
Deferred revenue 3,218 133,751
Notes payable, current portion 798,926 185,670
-------------------- --------------------
Total Current Liabilities 1,423,293 1,884,451
-------------------- --------------------
Long Term Liabilities
Notes payable
Notes payable to directors &
officers 1,063,266 -
Other notes payable 1,983,038 2,676,479
Discount on notes payable (589,260) (893,046)
-------------------- --------------------
Total Long Term Liabilities 2,457,044 1,783,433
-------------------- --------------------
Total Liabilities 3,880,337 3,667,884
-------------------- --------------------

Redeemable Warrants - 805,300
-------------------- --------------------

Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 61,323,845
and 53,836,907, respectively 61,323 53,837
Capital in excess of par value 18,578,019 16,240,378
Accumulated deficit (20,022,701) (17,527,805)
-------------------- --------------------
Total Shareholders' Deficit (1,383,359) (1,233,590)
-------------------- --------------------

Total Liabilities and Shareholders' Deficit $ 2,496,978 $ 3,239,594
==================== ====================

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

F-15

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

For the year ended June 30,
---------------------------------
2004 2003
---------------- ----------------

Sales $ 533,220 $ 558,590
Cost of sales 379,331 314,496
---------------- ----------------
Gross Profit 153,889 244,094
---------------- ----------------

Selling, General and Administrative expenses

Compensation and benefits 840,205 1,031,375
Research and development 60,517 116,251
Professional services 355,454 1,156,903
Depreciation and amortization 360,955 284,647
Facilities 88,914 96,579
Other selling general and administrative expenses 382,909 226,716
---------------- ----------------
Total Selling, General and Administrative expenses 2,088,954 2,912,471
---------------- ----------------

Operating Loss (1,935,065) (2,668,377)
Other Income 56,000 83,380
Interest Expense (615,831) (184,845)
---------------- ----------------

Net Loss $ (2,494,896) $ (2,769,842)
================ ================

Basic Loss Per Share:
Net Loss $ (0.04) $ (0.06)
================ ================

Diluted Loss Per Share:
Net Loss $ (0.04) $ (0.06)
================ ================

Weighted Average Shares Outstanding 57,760,785 48,258,340
================ ================

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

F-16

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

Common Stock Capital in Deferred Total
--------------------- Excess of Par Accumulated equity Shareholders'
Shares Amount Value Deficit compensation Deficit
----------- ---------- ------------- -------------- ------------ -------------

BALANCE at June 30, 2002 43,937,907 $ 43,938 $ 14,371,113 $ (14,757,963) $ (41,668) $ (384,580)

Shares issued for cash 6,593,084 6,593 724,875 - - 731,468
Shares issued for debt reduction 306,000 306 33,854 - - 34,160
Amortization of deferred equity compensation - 41,668 41,668
Shares issued for acquisition of intellectual
property rights 2,790,000 2,790 270,630 - - 273,420
Warrants issued to HoMedics - - 993,046 - - 993,046
Costs associated with equity financing - - (216,055) - - (216,055)
Shares issued for consulting services 209,533 210 34,489 - - 34,699
Options issued for consulting services - - 28,426 - - 28,426
Net loss for the year ended June 30, 2003 - - - (2,769,842) - (2,769,842)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2003 53,836,524 53,837 16,240,378 (17,527,805) - (1,233,590)
----------- ---------- ------------- -------------- ------------ -------------

Stock options issued for Board Service - - 19,179 - - 19,179
Shares issued for Board services 438,493 438 68,792 - - 69,230
Shares issued for cash 6,705,576 6,705 1,365,513 - - 1,372,218
Reclassification of redeemable warrants - - 805,300 - - 805,300
Shares issued for consulting services 360,000 360 78,840 - - 79,200
Adjustment to stock (16,748) (17) 17 - - -
Net loss for the year ended June 30, 2004 - - - (2,494,896) - (2,494,896)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2004 61,323,845 $ 61,323 $ 18,578,019 $ (20,022,701)$ - $ (1,383,359)
----------- ---------- ------------- -------------- ------------ -------------

The accompanying notes are an integral part of this financial statement

F-17

KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended June 30,
------------------------------------------
2004 2003
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss $ (2,494,896) $ (2,769,842)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 360,955 284,647
Accretion of note discount 303,786 -
Common stock issued for compensation/services 167,609 119,925
Change In:
Accounts receivable (48,778) (48,066)
Prepaid expenses and other assets (36,916) 66,894
Deferred revenue (130,533) 133,751
Accounts payable (596,666) (211,589)
Accrued expenses and other liabilities (347,215) 411,059
-------------------- ------------------
Net cash used in Operating Activities (2,822,654) (2,013,221)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment - (11,950)
Investment in patent protection (104,760) (1,500)
-------------------- ------------------
Net cash used in Investing Activities (104,760) (13,450)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,372,218 723,000
Proceeds from short-term borrowings 200,000 283,889
Repayments of short-term borrowings (355,396) (760,550)
Proceeds from long-term borrowings 1,138,478 2,400,000
-------------------- ------------------
Net cash provided by Financing Activities 2,355,300 2,646,339
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH (572,114) 619,668
CASH
Beginning of year 641,178 21,510
-------------------- ------------------
End of year $ 69,064 $ 641,178
==================== ==================

Supplemental schedule of non-cash investing and financing
activities:
Interest paid in cash $ 15,667 $ -
Non-cash investing and financing activities:
Debt satisfied with stock $ - $ 206,000
Accounts payable/accrued expenses converted to notes payable $ 1,139,903 $ -
Acquisition of intellectual property with stock $ - $ 273,420
Issuance of warrants for secured financing $ - $ 100,000

The accompanying notes are an integral part of this financial statement.

F-18

KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Kronos Advanced Technologies, Inc. ("Kronos") is a Nevada corporation
(the "Company"). The Company's shares began trading on the over-the-counter
bulletin board exchange on August 28, 1996 under the symbol "TSET." Effective
January 12, 2002, the Company began doing business as Kronos Advanced
Technologies, Inc. and, as of January 18, 2002, we changed the Company ticker
symbol to "KNOS." We have confined most of our recent activities to develop the
Kronos (TM) technology.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Accounts Receivable. The Company provides an allowance for losses on trade
receivables based on a review of the current status of existing receivables and
management's evaluation of periodic aging of accounts. Accounts receivable are
shown net of allowances for doubtful accounts of $0 at June 30, 2004 and June
30, 2003. The Company charges off accounts receivable against the allowance for
losses when an account is deemed to be uncollectable.

F-19

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

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

F-20

The Company is required under SFAS 123 to disclose pro forma information
regarding option grants made to its employees based on specified valuation
techniques that produce estimated compensation charges. For the purpose of pro
forma disclosures, the estimated fair value of the options is amortized over the
vesting period. The pro forma information is as follows:

June 30,
-----------------------------------------------------
2004 2003
-------------------------- ------------------------
Reported Pro Forma Reported Pro Forma
Net Loss $ (2,495) $ (2,815) $ (2,737) $ (2,978)
Earnings (loss) per Share:
--------------------------
Basic (0.04) (0.04) (0.06) (0.06)
Diluted (0.04) (0.04) (0.06) (0.06)

The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing method with the following weighted
average assumptions used for grants as of June 30, 2004:

2004 2003

Risk free interest rate 4.0% 4.0%
Expected dividend yield 0% 0%
Expected lives 3 to 10 years 3 to 10 years
Expected volatility 174% 140%

Recent Accounting Pronouncements.

In August 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit, or Disposal Activities." This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities. The adoption of SFAS 146 had no significant impact
on the Company's financial statements. This statement is effective for exit or
disposal activities initiated after December 31, 2002.

In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--An
Amendment of FASB Statement No. 123." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The the adoption of SFAS 148 had no significant impact on the Company's
financial statements. This statement is effective for interim periods beginning
after December 15, 2002 and for fiscal years ending after December 15, 2002.

In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of FASB Statement No. 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company believes the adoption of SFAS
149 will have not significant impact on its financial statements. The statement
is effective for contracts entered into or modified after June 30, 2003.

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 $805,300 in Redeemable Warrants from a
quasi-liability to the equity section of the balance sheet.

F-21

In December 2003, the FASB revised FASB Statement No. 132, Accounting for
Employers' Disclosures about Pensions and Other Post Retirement Benefits.
Statement No. 132(R) revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
This Statement retains the disclosure requirements contained in FASB Statement
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. It requires additional disclosures to those in the
original Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided separately for
pension plans and for other postretirement benefit plans. The Company does not
believe the adoption of SFAS No. 132(R) will have a material impact on the
Company's financial position, results of operations or cash flows.

In December 2003, the FASB revised FASB Interpretation No. 46, Accounting
for Consolidation of Variable Interest Entities. This Interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, which
replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, addresses consolidation by business enterprises of variable interest
entities, which have one or more of the following characteristics:1) The equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support provided by any
parties, including the equity holders. 2) The equity investors lack one or more
of the following essential characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights; b. The obligation to absorb
the expected losses of the entity; c. The right to receive the expected residual
returns of the entity. 3) The equity investors have voting rights that are not
proportionate to their economic interests, and the activities of the entity

involve or are conducted on behalf of an investor with a disproportionately
small voting interest. The Company does not believe the adoption of FIN 46(R)
will have a material impact on the Company's financial position, results of
operations or cash flows.

NOTE 3 - 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 current year ended June 30, 2004. 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 commercialize its technology
and develop viable commercial products, 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.

F-22

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

HoMedics Licensing Agreement. In October 2002, Kronos Air Technologies,
Inc., and HoMedics USA, Inc. executed a multiyear, multi-million-dollar
Licensing Agreement to bring Kronos(TM) proprietary technology to the
consumer. The agreement provides for exclusive North American, Australian
and New Zealand retail distribution rights for next generation consumer air
movement and purification products based on the patented Kronos(TM)
technology. In August 2004, the Company and HoMedics, Inc. began preparing
the Kronos-based consumer standalone product line for mass production.
Preparing to meet the goal of mass production entails the use of Kronos'
technical resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this
process. While HoMedics is managing production of the finished product,
Kronos is managing the production of our proprietary power supply and
related circuitry. Kronos' focus is twofold: First, Kronos is working with
Flextronics International USA, Inc. to preparing for mass production the
technical hardware and related power supplies for each of the products in
the air purification product line. Second, Kronos is finalizing and testing
with HoMedics component and materials selection for the finished products.
This process combines HoMedics vendor selection process and international
production expertise with Kronos' technical expertise. We believe the
Company has successfully completed the development of a Kronos-based
consumer standalone air purifier that is an efficient, high quality product
which is cost effective and easy to operate.

The initial term of the agreement is three and one half years from the
initial sale of consumer air purification products by HoMedics, which shall
be no later than December 31, 2006, with the option to extend the agreement
for six additional years. Kronos will be compensated through an initial
royalty payment and ongoing quarterly royalty payments based on a
percentage of sales. HoMedics will pay minimum royalty payments of at least
$2.0 million during the initial term and on-going royalty payments to
extend the agreement. Kronos will retain full rights to all of its
intellectual property.

US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a
Small Business Innovation Research Phase II contract worth $580,000, plus
an option of $145,000. The Phase II contract (commercialization phase) is
an extension of the Phase I and the Phase I Option work that began in 2001.
It is intended that the Kronos(TM) devices being developed under this
contract will be embedded in existing HVAC systems in order to move air
more efficiently than traditional, fan-based technology. During Phase II,
Kronos shall develop, produce and install a set of fully controlled devices
that represent a "cell" of an advanced distributive air management system
with medium capacity airflow in a U.S. Navy unique environment. The "cell"
will be designed to be easily adjustable to a variety of parameters such as
duct size, airflow requirements, and air quality. As of June 30, 2004, U.
S. Navy had provided Kronos with $355,000 in funding for this effort under
the Phase II contract.

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

U.S. Army will provide Kronos with funding under the terms of this contract
and the full value of this contract will be realized by the Company by
October 21, 2004. As of June 30, 2004 the Company incurred $76,684 in costs
that will be reimbursed by the US Army in a future period.

HoMedics provided debt financing. In May 2003, Kronos entered into an
agreement with a strategic customer, HoMedics, Inc., for $3.4 million in
secured debt financing. $2.4 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.

F-23

NOTE 4 - PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets at June 30, consist of the following:
2004 2003
--------------- ---------------
Lease deposits $ 10,365 $ 6,056
Prepaid Professional Fees 12,587 -
Prepaid insurance 4,104 27,079
Prepaid professional fees - 1,000
Work in Progress 43,994 -
--------------- ---------------
Prepaid and other current assets $ 71,050 $ 34,135
=============== ===============

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment at June 30, consists of the following:
2004 2003
--------------- ---------------
Leasehold improvements $ - $ 5,139
Office furniture and fixtures 37,756 54,061
Machinery and equipment 8,255 15,473
--------------- ---------------
46,011 74,673
Less accumulated depreciation (39,719) (46,631)
--------------- ---------------

Net property and equipment $ 6,292 $ 28,042
=============== ===============

Depreciation expense for the years ended June 30, 2004 and 2003 were
$13,283 and $13,283, respectively.

NOTE 6 - INTANGIBLES

Intangible assets at June 30, consists of the following:
2004 2003
--------------- ---------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 239,715 133,454
--------------- ---------------
3,496,781 2,847,100
Less accumulated amortization (1,243,752) (904,547)
--------------- ---------------
Net intangible assets $ 2,253,029 $ 2,487,473
=============== ===============

Purchased patent technology includes property that was acquired in the
Kronos acquisition and relates to a patent application that was pending at the
acquisition date. In January 2003, Kronos received formal notification from the
US Patent and Trademark Office that this patent had been examined and allowed
for issuance. In addition, it includes licensing rights on the above patent that
was purchased in May 2003. The Company purchased license rights to fuel cell,
computer and microprocessor applications of the Kronos(TM) technology for
$543,420 ($270,000 cash and 2,790,000 restricted common shares valued at
$273,420).

Intangible assets are being amortized on a straight line basis over 10
years. Amortization expense for the years ended June 30, 2004 and 2003 was
$271,364 and $271,364, respectively.

NOTE 7 - ACCRUED EXPENSES

Accrued expenses at June 30, consist of the following:
2004 2003
--------------- ---------------
Accrued compensation $ 55,913 $ 539,656
Accrued interest 166,276 24,467
Accrued professional services 90,157 131,696
--------------- ---------------
$ 312,346 $ 695,819
=============== ===============

Interest on unpaid salaries is accruing at the rate of 12% per annum.

F-24

NOTE 8 - NOTES PAYABLE

The Company had the following obligations as of June 30, 2004 and 2003,

2004 2003
--------------- ---------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Discount on obligation to HoMedics (589,261) (893,046)
Obligation to current Employees (2) 1,139,903 -
Obligation to Fusion Capital (3) 200,000 -
Obligation to former Director (4) - 84,725
Obligation for finance leases (5) 50,327 72,424

Obligations to others (6) 55,000 305,000
--------------- ---------------
3,255,971 1,969,103
Less:
Current portion 798,926 185,670
--------------- ---------------

Total long term obligations net of
current portion $ 2,457,044 $ 1,783,433
=============== ===============

(1) This note has a 5 year term and bears interest at 6% with no payments
required until August 2004. The August payment is accrued and unpaid as
of October 8, 2004. This note was issued along with warrants for the
purchase of 13.4 million shares of the Company's common stock. As a
result, the note was recorded with a discount of $893,000 that is being
amortized against earnings using the interest rate method of
amortization.

(2) These notes bear interest at the rates between 0% and 12%. They
represent obligation to current employees of the Company. At July 1,
2004, the interest rate on one note for $76,637 increased from 0% to
17%.

(3) This is a non-interest bearing demand obligation and is only
outstanding until Fusion Capital purchases enough stock from the
Company to eliminate the advance position.

(4) This note is to a former director of the Company and bears interest at
12%. The note calls for quarterly payments of principal and interest of
$10,000 until the note is paid in full. As of June 30, 2004 this note
has been paid in full.

(5) See Note 9 below.

(6) There was one obligation to others. This obligation was originally
incurred for the acquisition of license rights of the Kronos(TM)
technology (see note 7) with a value of $270,000. This note is
non-interest bearing with quarterly payments of $30,000 until paid in
full. On July 3, 2004 the Company made the required payment for this
note and on October 5, 2004 the Company paid the note in full.

F-25

NOTE 9 - LEASES

The Company has entered into a non-cancelable operating lease for
facilities. Rental expense was approximately $66,500 and $66,500 for years ended
June 30, 2004 and 2003, respectively. Future minimum lease payments under this
operating lease are $61,800 for the year ending June 30, 2005 and $0 thereafter.

The Company has entered into capital leases for equipment. 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:

Year ended June 30,
2005 $ 36,337
2006 25,903
------------

Total minimum lease payments 62,240
Less: Imputed interest (11,912)
------------

Present value of net minimum
lease payments $ 50,328
------------

In the year ended June 30, 2004, the Company paid $22,095 in principal
and $16,449 in interest on capital leases. 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.

NOTE 10 - EARNINGS (LOSS) PER SHARE

As of June 30, 2004, there were outstanding options to purchase
12,813,812 shares of Kronos common stock and outstanding warrants to purchase
15,792,342 shares of Kronos common stock. These options and warrants have been
excluded from the earnings per share calculation as their effect is
anti-dilutive. As of June 30, 2003 there were outstanding options to purchase
10,101,675 shares of Kronos common stock and outstanding warrants to purchase
15,792,342 shares of Kronos common stock. These options and warrants have been
excluded from the earnings per share calculation as their effect is
anti-dilutive.

NOTE 11 - INCOME TAXES

The composition of deferred tax assets and the related tax effects at
June 30, 2004 and 2003 are as follows:
2004 2003
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ 4,841,083 $ 4,034,973

Other temporary differences 156,740 188,206
Less:
Valuation allowance (4,997,823) (4,223,178)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============

F-26

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

June 30,
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:

Federal statutory rate $ 785,606 34.0% $ 941,746 34.0%
State statutory rate 46,055 2.0% 55,208 2.0%
Non-deductible expenses 271,209 11.7% 319,977 11.7%
Acquired NOL and other - 0.0% 0 0.0%
Increase in valuation allowance (1,102,870) (47.7)% (1,316,931) (47.7)%
--------------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
================================================================================

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

At June 30, 2004, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $10.9 million of unused
Federal net operating losses, $2.3 million capital losses and $9.4 million 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 12 - CONSULTING AGREEMENTS

On October 1, 2001, the Company entered into a 15 month consulting
agreement with Joshua B. Scheinfeld and Steven G. Martin 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 is
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, valued at $100,800 was recorded as a
prepaid consulting fee and was amortized to Professional Fee Expense ratably
over the 15 month term of the contract. Under this contract, expenses of $40,320
were recorded for the year ended June 30, 2003.

On October 31, 2003, the Company entered into a 10 month consulting
agreement with Joshua B. Scheinfeld and Steven G. Martin for consulting services
with respect to operations, 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 is 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, valued at $79,200 was
recorded as a prepaid consulting fee and was amortized to Professional Fee
Expense ratably over the 10 month term of the contract. Under this contract,
expenses of $63,360 were recorded for the year ended June 30, 2004.

F-27

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, 2003 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 are 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 $98,467
were recorded for the year ended June 30, 2003.

NOTE 13 - STOCK OPTIONS AND WARRANTS

On February 12, 2002, the Board of Directors approved the TSET, Inc.
Stock Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. Prior to that, the Company had no formal
stock option plan but offered as special compensation to certain officers,
directors and third party consultants the granting of non-qualified options to
purchase Company shares at the market price of such shares as of the option
grant date. The options generally have terms of three to ten years. The Company
granted non-qualified stock options totaling 3,239,782 and 6,084,900 shares in
the years ended June 30, 2004 and 2003, respectively.

The Company has elected to follow APB No. 25; "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized. Pro forma
information regarding net income per share is required by SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the Company's opinion the existing available models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options. Using the Black-Scholes option valuation
model, the weighted average grant date fair value of options granted during the
years ended June 30, 2004 and 2003 was $0.18 and $0.10 per option share,
respectively.

A summary of the Company's stock option activity and related information
for the years ended June 30, 2004 and 2003 is as follows (in thousands, except
per share amounts):

Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2002 7,642 0.61
Granted 2,460 0.22
Exercised - -
Cancelled - -
--------------- ------------
Outstanding at June 30, 2003 10,102 0.52
Granted 3,240 0.19
Exercised - -
Cancelled (529) 0.89
--------------- ------------
Outstanding as June 30, 2004 12,813 $ 0.42
=============== ============

F-28

A summary of options outstanding and exercisable at June 30, 2004 and
2003 is follows (in thousands, except per share amounts and years):

Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
------------------ -------- ---------- -------------- --------------- --------
June 30, 2004

$0.71 - $1.12 1,670 3.5 $0.89 $0.71 - $1.12 1,670
$0.21 - $0.70 5,975 7.3 $0.49 $0.21 - $0.70 5,975
$0.00 - $0.20 5,168 8.8 $0.18 $0.00 - $0.20 5,168
June 30, 2003
$0.71 - $1.12 2,129 3.7 $0.92 $0.71 - $1.12 2,129
$0.21 - $0.70 5,720 8.5 $0.50 $0.21 - $0.70 5,720
$0.00 - $0.20 2,253 9.5 $0.18 $0.00 - $0.20 2,253

A summary of the Company's stock warrant activity and related
information for the years ended June 30, 2004 and 2003 is as follows (in
thousands, except per share amounts):

Weighted Average
Warrants Exercise Price
---------------- -------------
Outstanding at June 30, 2002 1,900 $0.58
Granted 13,892 0.10
Exercised - -
Cancelled - -
--------------- ------------

Outstanding as June 30, 2003 15,792 $ 0.16

Granted - -
Exercised - -
Cancelled -
--------------- ------------
Outstanding as June 30, 2004 15,792 $ 0.16
=============== ============

NOTE 14 - 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. No anti-dilution measures for
funds raised at greater than $0.20 per share.

F-29

NOTE 15 - MAJOR CUSTOMERS

As of June 30, 2004, the Company has two major customers: HoMedics and
the U.S. Navy. Of the $533,220 in revenue recorded in the year ended June 30,
2004, $477,032 or 89% was derived from these two customers. As of June 30,
2003, the Company has two major customers: HoMedics and the U.S. Navy. Of the
$559,000 in revenue recorded in the year ended June 30, 2003, $432,000 or 77%
was derived from these two customers.

NOTE 16 - SEGMENTS OF BUSINESS

The Company operates principally in one segment of business: The Kronos
segment licenses, manufactures and distributes air movement and purification
devices utilizing the KronosTM technology. In the year ended June 30, 2004, the
Company operated only in the United States of America.

NOTE 17 - RELATED PARTIES

As of June 30, 2004, the Company has outstanding obligations for past
compensation to the remaining officers and directors of $1,139,903. These unpaid
amounts currently accrue interest at the rates between 17% and 12% per annum.

F-30

NOTE 18 - STOCKHOLDERS' EQUITY (DEFICIT)

During the year ended June 30, 2004, the Company issued 6,705,576 shares
of its common stock for $1,403,718 in cash. The Company issued 360,000 shares
valued at $79,200 for consulting services and 438,493 shares of its common stock
valued at $69,230 for board service to current members of the Board of
Directors.

During the year ended June 30, 2003, the Company issued 6,593,000 shares
of its common stock for $731,000 in cash. The Company issued 209,500 shares
valued at $34,700 and options to purchase 224,700 shares of its common stock
valued at $28,000 for consulting services.

In May 2003, the Company issued 2,790,000 shares of its common stock to
acquire intellectual property rights related to computers, microprocessors and
fuel cells. These shares were issued with certain rights allowing the Company to
buy back all or a portion of the shares at fixed prices through the year 2006.
The Company has the right to buy back shares $.017 per share in 2004, $0.19 in
2005 and $0.20 in 2006.

In December 2002, the Company issued 206,000 shares in exchange for the
assignment of a $206,000 note payable to Jeff Wilson, a former director. The
Company also issued 100,000 shares to Aperion Audio to modify the payment
schedule on its note payable to Aperion.

NOTE 19 - SUBSEQUENT EVENTS

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

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

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

F-31

We have not authorized any dealer, salesperson or other person to provide any
information or make any representations about Kronos Advanced Technologies, Inc.
except the information or representations contained in this prospectus. You
should not rely on any additional information or representations if made.

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

This prospectus does not constitute an offer to sell, or a ----------------------
solicitation of an offer to buy any securities:
PROSPECTUS
[ ] except the common stock offered by this
prospectus; ----------------------

[ ] in any jurisdiction in which the offer or
solicitation is not authorized;

112,844,493
[ ] in any jurisdiction where the dealer or other Shares of Common Stock
salesperson is not qualified to make the offer or
solicitation;
KRONOS ADVANCED TECHNOLOGIES, INC.
[ ] to any person to whom it is unlawful to make the
offer or solicitation; or

[ ] to any person who is not a United States resident
or who is outside the jurisdiction of the United ______________, 2004
States.

The delivery of this prospectus or any accompanying sale
does not imply that:

[ ] there have been no changes in the affairs of
Kronos Advanced Technologies, Inc. after the date
of this prospectus; or

[ ] the information contained in this prospectus is
correct after the date of this prospectus.

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

Until _________, 2005, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Indemnification Of Directors And Officers

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Kronos pursuant to the foregoing, or otherwise, Kronos has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.

Other Expenses Of Issuance And Distribution

The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. Kronos will pay all expenses in connection with this offering.

Securities and Exchange Commission Registration Fee $ 2,150
Printing and Engraving Expenses $ 2,500
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 10,350
----------------
TOTAL $ 85,000
================

Recent Sales Of Unregistered Securities

II-1

II-2

On May 12, 2003. we issued warrants to purchase 13,492,342 shares of
our common stock at an exercise price of $0.10. The warrants were issued as part
of a secured financing with HoMedics.

Exhibits

EXHIBIT DESCRIPTION LOCATION

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

II-3

3.1 Articles of Incorporation 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 Exhibit 3.2
to the Registration Statement on Form
S-1 filed on August 1, 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,
filed on May 15, 2002

5.1 Opinion re: legality To be provided by amendment

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

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

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

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

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

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

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

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

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

II-4

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

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

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

10.33 Common Stock Purchase Agreement dated Incorporated by reference to Exhibit
August 12, 2002 by the between TSET, 10.57 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on August 13,
2003

10.34 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on August 13,
2002

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

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

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

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

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

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

II-5

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

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

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

10.44 Promissory Note by and among Kronos Incorporated by reference to Exhibit
Advanced Technologies, Inc., and 10.67 to the Registrant's Form 10-Q
Richard A. Papworth for the quarterly period ended
December 31, 2003 filed on
February 17, 2004

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

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

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

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

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

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

II-6

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

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

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

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

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

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

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

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

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

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

II-7

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

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

23.1 Consent of Sherb & Co., LLP Provided herein

23.2 Consent of Burton Bartlett and Glocovac (Included in Exhibit 5.1)

II-8

Undertakings

The undersigned registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by Sections
10(a)(3) of the Securities Act of 1933 (the "Act");

(ii) Reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;

(iii) Include any additional or changed material
information on the plan of distribution;

(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

II-9

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, on December 15, 2004.

Kronos Advanced Technologies, Inc.

/s/Daniel R. Dwight
By: --------------------------------
Name: Daniel R. Dwight
Title: Chief Executive Officer, President,
Acting Chief Financial Officer,
Acting Principal Accounting Officer,
and Director

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.

SIGNATURE TITLE DATE

-----------------
Spencer I. Browne Director December 15, 2004

/s/ Daniel R. Dwight
-----------------
Daniel R. Dwight Director, President, December 15, 2004
Chief Executive
Officer, Acting
Chief Financial
Officer and Acting Principal
Accounting Officer

/s/ James P. McDermott
------------------
James P. McDermott Director December 15, 2004

/s/ M. J. Segal
------------------
M. J. Segal Director December 15, 2004

/s/ Richard F. Tusing
------------------
Richard F. Tusing Director and Chief December 15, 2004
Operating Officer

II-10