UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-KSB




(Mark
One)




[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
fiscal year ended June 30, 2008




[
 ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934




For the
transition period from ___________ to ____________




Commission
file number ______________________________




KRONOS ADVANCED TECHNOLOGIES, INC.


(Name of
small business issuer in its charter)




NEVADA
                  87-0440410(State
      or Other Jurisdiction
                  (I.R.S.
      Employerof
      Incorporation or Organization)
                  Identification
      Number)




464 COMMON STREET, SUITE 301, BELMONT,
MASSACHUSETTS 02478


(Address
of Principal Executive Offices)




Issuer's
telephone number (617) 364-5089




Securities
registered under Section 12(b) of the Exchange Act:


Title of each
      class
              Name of each
      exchange on which registered


Securities
registered under Section 12(g) of the Exchange Act:




Common
Stock, Par Value $0.001


Traded
Pink Sheets










(Title of
class)





1




Check
whether the Issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act [  ]




Note:
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past twelve months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for in the past ninety days.  Yes [X]
No [  ]




Check if
there is no disclosure of delinquent files in response to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [  ]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [  ] No [X]




State
issuer's revenues for its most recent fiscal
year:  $3,665,977.




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past sixty days (see definition of affiliate in Rule
12b-2 of the Exchange Act.)$97,525 on an average bid price of
$.0002.




Note:  If
determining whether a person if an affiliate will involve an unreasonable effort
and expense, the issuer may calculate the aggregate market value of the common
equity held by non-affiliates on the basis of reasonable assumptions, if the
assumptions are stated.






(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)




Check
whether the issuer has filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by court. Yes [  ] No [X]






(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)




State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.  The Registrant had 487,626,691 shares
of Common Stock, par value $0.001 per share, outstanding on January 9,
2009.






DOCUMENTS
INCORPORATED BY REFERENCE




If the
following documents are incorporated by reference, briefly describe them and
identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
the document is incorporated:  (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").  The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24,
1990).




Transitional
Small Business Disclosure Format (Check one): Yes [  ]  No
[X]







2




PART I




ITEM 1. BUSINESS




GENERAL
DESCRIPTION OF BUSINESS




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




OUR
COMPANY




We are a
Nevada corporation.  Our principal executive offices are located at 464
Common Street, Suite 301, Belmont, Massachusetts, 02478. Our telephone
number is (617) 364-5089.  The address of our website is
www.kronosati.com.  Information on our website is not part of this
filing.




CORPORATE
HISTORY




Kronos
Advanced Technologies, Inc. (”Kronos” or the “Company”) was originally
incorporated under the laws of the State of Utah on September 17, 1980, as
Penguin Petroleum, Inc.  Penguin Petroleum Inc.'s stockholders approved a
name change on October 6, 1982, to Petroleum Corporation of America, Inc. On
December 29, 1996, stockholders approved a reorganization whereby they exchanged
their stock on a one-for-one basis with Technology Selection, Inc., a Nevada
corporation.  Technology Selection, Inc.'s shares began trading on the
Over-the-Counter Bulletin Board on August 28, 1996, under the symbol
"TSET“.  On November 19, 1998, Technology Selection, Inc. changed its
name to TSET, Inc.  Effective January 12, 2001, we began doing business as
Kronos Advanced Technologies, Inc.; and, as of January 18, 2002, we changed our
ticker symbol to "KNOS“.  Our recent activities have been focused on
capitalizing on our investment in Kronos Air Technologies, Inc., a wholly owned
subsidiary of Kronos, and we have not, to date, generated significant operating
revenues.  We have never been party to any bankruptcy, receivership, or
similar proceedings and, other than noted above, have not been party to any
material reclassification, merger, or consolidation not in the ordinary course
of our business.




RECENT
DEVELOPMENTS REGARDING KRONOS’ SECURED LENDERS




On
September 29, 2008, Kronos received a notice of event of default from AirWorks
Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory
Note (the “Promissory Note”) due June 19, 2010, issued by the Company to
AirWorks.  The notice stated that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the principal amount of $3,551,735 plus
interest.  The Company requested funding from the senior lenders but
was declined.  The Company is evaluating the status of the alleged
default.




As
previously disclosed, in June 2007, the Company entered into a Funding Agreement
with a group of lenders providing for a secured loan, at the discretion of the
lenders, in the aggregate amount of up to $18,159,000.  At the initial
closing, the Company received an initial advance of $4,259,000 from AirWorks, RS
Properties I LLC (“RS Properties”) and various other lenders (the “Other
Lenders”).  RS Properties assigned to Hilltop Holding Company, LP, a
Delaware limited partnership, (“Hilltop”) its promissory note together with
certain other rights and agreements relating thereto, including, without
limitation, its rights and obligations under the Funding
Agreement.  Following the initial closing, the Company received an
additional $2,533,000 in funding from AirWorks and Hilltop under the terms of
the Funding Agreement and related notes, including the Promissory Note.Interest on the AirWorks and Hilltop notes became
payable quarterly starting January 1, 2008. See “Secured Convertible Debt
Transaction” below.




3


On
December 31, 2007, AirWorks and Hilltop converted $731,440 of their promissory
notes into shares of the Company’s common stock.  On April 1, 2008,
the Company repaid (1) an aggregate of $628,000 of the principal of the AirWorks
and Hilltop promissory notes and (2) the entire principal amount ($859,000) of
the promissory notes issued to the Other Lenders.  As a result of the
foregoing, as of December 1, 2008, (a) the outstanding principal amount of the
AirWorks Promissory Note was $3,426,135 and there was $567,035 of accrued
interest and (b) the outstanding principal amount of the Hilltop promissory
note was $1,147,425 and there was $60,022 of accrued interest.  The
Company has not received a notice of event of default with respect to the
Hilltop promissory note.




The
Company has been, and continues to be, in discussions with its secured lenders
regarding the outstanding obligations under the AirWorks and Hilltop promissory
notes, the alleged occurrence of an event of default, and the future operational
plan of the Company.  In connection with the foregoing and in light of
the Company’s financial condition (including with respect to certain other
obligations of the Company), the Board of Directors has appointed an independent
committee, consisting of James P. McDermott and M. J. Segal, to investigate the
alleged event of default, analyze the current status of the Company, and review
alternatives for maximizing the value of the Company’s assets including the sale
or license of such assets or the liquidation of the Company. The Company has a
limited time to authorize a sale, as the period for forbearance by the secured
lenders is under discussion. If a sale is not authorized and the secured lenders
exercise their rights under their promissory notes, the secured lenders would
receive the assets of the Company.  Further, if the Company is able to
consummate a strategic transaction or if the secured lenders foreclose on the
Company’s assets, there can be no assurance that there will be any assets or
proceeds remaining after repayment of all amounts due to the secured
lenders.  The terms of the promissory notes to the secured lenders do
not allow the Company to raise new funding to cure the alleged occurrence of an
event of default without the consent of the secured lenders.





The
Company received notification from James P. McDermott and M.J. Segal on the
dates of December 22, 2008 and December 23, 2008 respectively, that Mr.
McDermott and Mr. Segal have resigned from the Kronos Board of
Directors.




In
addition, the Company received correspondence from Frederic R. Gumbinner and
Richard A. Sun, as second secured lien holders, concerning claims for late
payments and subsequent related penalties with respect to outstanding loans by
Mr. Gumbinner and Mr. Sun.  The Company has responded that the
obligation to its senior secured lien holders supercedes and takes priority to
the claims of the second secured lien holders and the existing intercreditor
agreements among the secured lenders sets for the applicable rights, obligations
and responsibilities between the lenders.




BUSINESS
STRATEGY




Kronos
Advanced Technologies, Inc. was a product development and production company
that attempted to develop and patent technology that among other things
fundamentally change the way air is moved, filtered and
sterilized.  Fourteen of the Company's U.S. patent applications and
three international patent applications have been allowed for
issuance.  To date, our ability to execute our strategy has been
restricted by our limited amount of capital.




The
Kronos technology has numerous valuable characteristics for applications in the
indoor air quality market, including moving air and gases at high velocities
while filtering odors, smoke and particulates and sterilizing air from bacteria
and virus contamination.  A number of the scientific claims of the
Kronos technology have been tested by the U. S. and foreign governments,
multi-national companies and independent testing facilities (see “Independent
Testing – Product Claims Platform”).




Effective
June 20, 2008, the Employment Agreement of Daniel R. Dwight, the Company’s
former President and Chief Executive officer, was terminated pursuant to terms
of the Severance Agreement and Advisory Agreement, dated May 16,
2008.  Richard F. Tusing, the Company’s Chief Operating Officer, was
appointed acting president, Chief Financial Officer, Treasurer and Secretary of
the Company.




On
October 24, 2008, the Company terminated the employment of all of its employees
except for Mr. Tusing and Igor Krichtafovitch, its Chief Technology
Officer.  As a result of the Company’s financial condition, it has
temporarily ceased substantially all of its operating
activities.  Kronos is focused on prioritizing its limited resources
on either selling or licensing the Company’s technology or liquidating the
assets of the Company.




The
Company did not file the Form 10-KSB within required deadlines, has filed a Form
12b-25 extension and is currently listed with trading on the Pink
Sheets.






4


Technology
Description and Benefits




The
proprietary Kronos technology involves the management of corona discharge by
applying high voltage management across paired electrical grids to create an ion
exchange.  Applications for efficient high voltage management,
efficient corona discharge and ion exchange include but are not limited
to:




·
            air
      movement, including dielectric fluid movement and
    propulsion;




·
            air
      purification, including particulate removal, bacteria and viral removal,
      biohazard destruction, and odor
removal;




·
            temperature
      and environmental management, including space heating and
      cooling;




·
            microchip,
      MEMS and other electronics devices and components
  cooling;




·
            air
      management, including sorting and separation of air streams by particle
      content;




·
            sound
      generation, including high fidelity sound recreation and active noise
      cancellation;




·
            high
      voltage management, including development of high voltage power supplies
      and control of energy surges and electrical
  discharges;




·
            control
      of water and moisture content in air streams, including dehumidification
      and humidification; and




·
            water
      treatment, including water purification, ionization and water
      desalination.




Independent
Testing - Product Claims Platform




A number
of the scientific claims of the Kronos technology have been tested by the U. S.
and foreign governments, multi-national companies and independent testing
facilities.  To date, independent laboratory testing has verified the
filtration and sterilization capability of the Kronos
technology.  Summary results from select independent testing
facilities are provided below.  The tests were conducted in the U.S.
unless otherwise indicated.




Filtration
Testing Results:




·
            Environmental
      Health and Engineering - reduced particle matter by up to 47% compared to
      days when the Kronos air purifiers were not operating in the waiting room
      of a pediatric office while patients were
  present.




·
            Aerosol
      and Air Quality Research Laboratory - up to 99.8% filtration of 0.02 to
      0.20 micron (20 to 200 nanometers) size
  particles;




·
            LMS
      Industries - removal of over 99.97% of 0.10 micron (100 nanometers) and
      above size particles using HVAC industry's ASHRAE 52.2 testing standard
      for filtration;




·
            MicroTest
      Laboratories - HEPA Clean Room Class 1000 quality particulate reduction;
      and




·
            Intertek
      - 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," which demonstrated a Clean Air Delivery Rate ("CADR") for the
      Kronos air purifier of over 300 for the larger size Kronos air purifier
      and 80 for the smaller size using consumer filtration testing standards
      for the Association of Home Appliance Manufacturers
    ("AHAM").




5


Sterilization
Testing Results:




·
            Environmental
      Health and Engineering (viral analysis by the University of Wisconsin
      Department of Pediatrics and Medicine):-
            collection
      and removal of a wide range of respiratory viruses, including influenza A,
      influenza B, human rhinoviruses, human coronavirus, respiratory syncytial
      virus, adenovirus, and bocavirus, from the waiting room of a pediatric
      office while patients were present.




·
            Scientific
      Institution of Health Care, Central Clinical Hospital #2 in Moscow
      (clinical trial):-
            100%
      decontamination of bacteria (Staphylococcus aureus) in under one hour and
      80% decontamination of general bacteria in under 24 hours from a 48m(3)
      hospital room while people were
present.




·
            Pulmonary
      Department of Municipal Hospital #2 in Moscow (clinical
      trial):-
            100%
      decontamination of bacteria (Staphylococcus aureus) in under five hours
      from a 66m(3) hospital room while four patients were present;
      and


-
            100%
      decontamination of mildew fungi in under two hours from a 113.2m(3)
      hospital room.




·
            Disinfection
      Research Institute Sterilization Laboratory in Moscow:-
            disinfected
      a room completely contaminated with
  Bacteriophage


-
            a
      microorganism which lives in the E. Coli bacteria. (Bacteriophage is
      widely used in virus testing because the microorganism's biological
      structure and size share many functional similarities with a wide range of
      viruses); and-
            100%
      decontamination of room infected with bacteria (Staphylococcus aureus
      strain 906 (S. aureus) and Bacillus cereus strain 96 (B.
      cereus)


-
            S.
      aureus is a known cause of hospital-acquired infections, including skin
      lesions such as boils and furunculosis and more serious infections such as
      pneumonia and meningitis.




·
            Institute
      for Veterinary Medicine in the Ukraine - destroy and sterilize air which
      had been inseminated with Anthrax and E.coli
  spores;




·
            New
      Hampshire Materials Laboratory - up to 95% reduction of hazardous gases,
      including numerous carcinogens found in cigarette
  smoke;




·
            Battelle
      PNNL - 95% destruction of Bg (anthrax simulant);
  and




·
            Dr.
      Sergey Stoylar, a bacteriologist from the American Bacteriological Society
      - 100% destruction of Bacillus subtilis 168 (bacteria
      simulant).




Medical
Product Approval




In
September 2006, the Russian Research Institute of Medical Equipment approved
EOL's Kronos-based Tree air purification device for use in hospitals and other
healthcare facilities.  The device received Category I approval, which
means the product has met the strictest regulations required for a device to be
used in operating rooms and other areas that require a sterile
environment.  In November 2006, following the Russian Research
Institute approval, the Ministry of Health Care and Social Development of the
Russian Federation issued a Registration Certificate that designates the
Kronos-based Tree air purification device for medical use.




Market
Segmentation




Kronos
had an initial business development strategy to attempt to develop and produce
products based on the Kronos technology to six distinct air quality market
segments: (1) air movement and purification (residential, health care,
hospitality, and commercial facilities); (2) embedded cooling and cleaning
(electronic devices and medical equipment); (3) air purification for unique
spaces (clean rooms, airplanes, automotive, and cruise ships); (4) specialized
military (naval vessels, closed vehicles and mobile facilities); (5) industrial
scrubbing (produce storage and diesel and other emissions); and (6) hazardous
gas destruction (incineration and chemical facilities).




Kronos
has granted an exclusive license to Tessera for ionic micro-cooling of
integrated circuit devices or discrete electrical components. These contracts
are described in more detail in the “Technology Application and Product
Development” below.




Technology
Application and Product Development




To best
serve Kronos' targeted market segments, the Company was developing specific
product applications across two distinct product application
platforms.  A Kronos 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 device into a wall outlet to obtain air
movement and filtration for their home, office or hotel
room.  Embedded applications of the Kronos 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 or heat
sink.




6


Standalone
Platform




Residential
Products.  In October 2007, Kronos executed a Letter of Intent
for the development, manufacture and sale of air purification devices based upon
Kronos' proprietary air movement and purification technology with a leading
national retailer.  Under the terms of the Letter of Intent, the
retailer has paid Kronos $250,000 towards the development costs of the new
products and would contribute marketing resources to assist in the product
development process.  In December 2007, Kronos completed design and
developed an Alpha Prototype for the customer.  In January 2008, the
parties initiated negotiations of a definitive Product Development and Purchase
Agreement.  In February 2008, the retailer filed for
bankruptcy.  In March 2008, Kronos’ contract manufacturing partner
completed development of a Beta Prototype.  During the fiscal year
ended June 30, 2008, Kronos earned $250,000 in product development
fees.




Medical
Products.In December 2005, the Company executed a
non-exclusive license agreement with EOL LLC, a Russian Federation company
("EOL"), for manufacturing and distributing Kronos-based commercial standalone
products in Russia and other select Commonwealth of Independent
States.  The initial medical products are currently being marketed in
Russia and Ukraine and marketing plans are being implanted in Kazakhstan,
Moldova and Byelorussia.  In November 2006, the Ministry of Health
Care and Social Development of the Russian Federation issued a Registration
Certificate for the product that designates the product for medical
use.  During the fiscal year ended June 30, 2007, Kronos earned
$104,000 in revenue from the sale of power supplies, other electrical components
and engineering services and from the royalty from the sale of finished products
by EOL.  During the fiscal year ended June 30, 2008, Kronos earned
$55,000 in revenue from licensing fees.




In August
2006, the Russian Research Institute of Medical Equipment began the process for
product certification of the EOL's Kronos-based Tree air purification device for
use in medical facilities, including a successful clinical trial of EOL products
in the Pulmonary Department of Municipal Hospital #2 in Moscow.  In
October 2006, Scientific Institution of Health Care, Central Clinical Hospital
#2 in Moscow completed a second clinical trial.  As a result of these
clinical trials, the Russian Research Institute approved the Kronos-based Tree
air purification device for use in hospitals and other healthcare
facilities.  The device received Category I approval, which means the
product has met the strictest regulations required for a device to be used in
operating rooms and other areas that require a sterile
environment.  In November 2006, following the Russian Research
Institute approval, the Ministry of Health Care and Social Development of the
Russian Federation issued a Registration Certificate that designates the
Kronos-based Tree air purification device for medical use.





Commercial and Other Standalone
Products.Utilizing our expanded product development
resources, Kronos completed the initial design, development and production of a
series of small multifunctional devices that can be used as space heaters,
vaporizers, disinfectors, deodorizers and/or fans.




Embedded
Platform




Microelectronics Cooling
Products.  In December 2004, Kronos and the University of
Washington were awarded a Phase I grant for a research and technology
development project entitled "Heat Transfer Technology for Microelectronics and
MEMS" by the Washington Technology Center (the "WTC").  The objective
of the project was to develop a novel energy-efficient heat transfer technology
for cooling microelectronics.  In January 2006, Kronos and the
University of Washington conducted a successful bench scale demonstration of
micron cooling of a MEMS chip.  In June 2006, the Company and the
University of Washington were awarded a Phase II grant for continued funding in
its novel cooling system for microelectronics and computer chips.  The
WTC contributed $100,000 as a Phase II grant for the project. Kronos provided
$35,000 in funding and $38,000 in in-kind services, including use of the Kronos
Research and Product Development Facility. In June 2007, the Company and the
University of Washington were awarded a Phase III grant for continued
funding.  This additional funding was utilized to support the
development of prototype products and all Phase III deliverables were
completed.




In March
2008, Kronos executed an Intellectual Property Transfer and License Agreement
with Tessera Technologies, Inc. (“Tessera”) for the transfer and license of
certain intellectual property (IP) rights related to Kronos proprietary
technologies to Tessera.  Kronos initially received $3.5 million from
Tessera in exchange for the transfer of select Kronos patents covering
micro-cooling applications and for an exclusive license to the Kronos technology
for the field of ionic micro-cooling of integrated circuit devices or discrete
electrical components.  Kronos retained the rights to use these
patents for applications outside of the field of
micro-cooling.  Tessera has exercised its further right to acquire
additional Kronos IP relating to micro-cooling applications for four quarterly
payments of $0.5 million each beginning in July 1, 2008. Kronos received a
payment of $0.5 million on July 1, 2008, a payment of $0.5 million on October 1,
2008, and an accelerated payment of $1.0 million on November 21, 2008, for the
remaining payments due on January 1, 2009 and April 1, 2009.  The
receipt of this $2.0 million constitutes payment in full for the remaining
micro-cooling related patents subject to the agreement with
Tessera.  The Company and Tessera have the option to continue to
jointly develop new technologies in this field.




7


Residential
Products.In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product.  This next generation range hood
device represented the culmination of more than twelve months of product design
and development effort by Kronos to apply our technology to this unique embedded
residential application.  The product was shipped to the customer in
October 2006.  In January 2007, the prototype design was modified
based on customer input and a revised unit was shipped to the
customer.  In addition to financial support, the customer has also
provided Kronos with product components for Kronos testing and
evaluation.  In February 2007, a second global appliance manufacturer
committed to purchase additional prototypes from Kronos.  During the
year ended June 30, 2007, Kronos earned $37,000 in revenue from the development
of prototype devices for the residential range hood market place.  In
October 2007, Kronos shipped the additional prototypes to the customer for
testing and evaluation.  During the year ended June 30, 2008, Kronos
earned $34,000 in product development fees.  Due to a lack of funding,
Kronos is no longer working on this project.




Commercial Products.In June
2006, the Company executed its first license for embedded applications of Kronos
technology with DESA LLC ("DESA").  The agreement provides DESA the
opportunity to embed the Kronos electrostatic air movement technology within
fireplaces, hearth systems, zone heaters and mounted electric fans and
heaters.  In October 2006, DESA approved Kronos' designs for the first
Kronos-based product and committed to the funding of the product development by
Kronos.  In January 2007, DESA committed additional funds for Kronos
exploration of a second Kronos-based product application.  By May
2007, various prototype configurations for each of the two product applications
were under test and evaluation by Kronos and DESA. During the year ended June
30, 2008, Kronos and DESA developed a plan for product
commercialization.  Due to a lack of funding, Kronos is no longer
working on this project.




In
addition, Kronos has developed an air filtration and purification mechanism
capable of performing to HEPA quality standards, while eliminating bacteria and
viruses.  The Company believes that Kronos devices could replace
current HEPA filters with a permanent, easily cleaned, low-cost
solution.  Among the technical advantages of the Kronos technology
over HEPA filters is the ability of the Kronos-based devices to eliminate the
energy burden on air handling systems, which must generate high levels of
backpressure necessary to move air through HEPA-based
systems.  Kronos-based devices enhance the air flow, while providing
better than HEPA level filtration and purification.  Kronos was
seeking one or more strategic partners to commercialize, market and distribute
Kronos based commercial embedded air filtration and purification devices;
however, due to a lack of funding, the Company is no longer working on this
project.




Market
Segmentation




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




Patents
and Intellectual Property




Kronos has received notification that
fourteen of its patent applications have been allowed for issuance by the United
States Patent and Trademark Office and six of its international patent
applications have been allowed for issuance by the Canadian Intellectual
Property Office, the Commonwealth of Australia Patent Office and the Mexican
Institute of Industrial Property.  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.







8




U.S.
Patents


Date
                                              U.S.
      Patent #
                                              Patent
      Title
                                              Description
                                              ProtectionAugust
                                              7,410,531
                                              Method
      of Controlling
                                              an
      electrode array corona
                                              20252008
                                              
                                              Fluid
      Flow
                                              including
      an array of coronaelectrodes
      discharge electrodesand
      an array of acceleration flowAugust
                                              7,262,564
                                              Alternative
                                              geometry,
      voltage ratios
                                              20242007
                                              
                                              Geometries
      and
                                              and
      power requirementsVoltage
      Supply
                                              for
      improved operationalManagement
                                              performanceJuly
                                              7,248,003
                                              Electric
      Field
                                              effective
      electric field
                                              20252007
                                              
                                              Management
                                              management
      for reducedsparkingOctober
                                              7,122,070
                                              Method
      of and
                                              inertialess
      power supply for
                                              20252006
                                              
                                              Apparatus
      for
                                              safe
      operation and sparkElectrostatic
      Fluid
                                              preventionAccelerationAugust
                                              7,157,704
                                              Corona
      Discharge
                                              method
      of generating air
                                              20232006
                                              
                                              Electrode
      and Method
                                              flow
      and air cleaning withof
      Operating
                                              reduced
      amount of ozone by-product
      and with extendedlife-span
      of the electrodesJuly
                                              7,150,780
                                              Electrostatic
      Air
                                              method
      for improving the
                                              20242006
                                              
                                              Cleaning
      Device
                                              efficiency
      of electrodes forfiltering
      micron and sub-micron
      size particlesMay
                                              7,053,565
                                              Electrostatic
      Fluid
                                              effective
      powering of the
                                              20242006
                                              
                                              Accelerator
      - Power
                                              electrodes
      for high level ofManagement
                                              air
      velocityNovember
                                              6,963,479
                                              Electrostatic
      Fluid
                                              advanced
      voltage management
                                              20232005
                                              
                                              Accelerator
      -
                                              impacts
      air filtration andAdvanced
      Geometries
                                              sterilization,
      air flow andozone
      as well as safe operationand
      spark preventionAugust
                                              6,937,455
                                              Spark
      Management
                                              analysis,
      detection and
                                              20222005
                                              
                                              Method
      and Device
                                              prevention
      of sparks in ahigh
      voltage field -creating
      safe, effectiveelectrostatic
      technologyproductsJuly
                                              6,919,698
                                              Voltage
      Management
                                              materials
      and geometry
                                              20232005
                                              
                                              for
      Electrostatic
                                              allowing
      for spark freeFluid
      Accelerator
                                              operation
      and use of lightweight,
      inexpensivematerials
      as the electrodesMay
                                              6,888,314
                                              Electrostatic
      Fluid
                                              electrode
      design geometries
                                              20222005
                                              
                                              Accelerator
      -
                                              and
      attributes includingElectrode
      Design
                                              micro
      channeling to achieveGeometries
                                              unique
      air movement andpurification
      performanceApril
                                              6,727,657
                                              Electrostatic
      Fluid
                                              synchronization
      of multiple
                                              20222004
                                              
                                              Accelerator
      for and
                                              stages
      of arrays -a
      Method of
                                              increasing
      air flow and airControlling
      Fluid
                                              flow
      efficiencyDecember
                                              6,664,741
                                              Method
      of and
                                              ratio
      of voltage for
                                              20222003
                                              
                                              Apparatus
      for
                                              producing
      ion discharge toElectrostatic
      Fluid
                                              create
      air movement andAcceleration
      Control
                                              base
      level filtrationof
      a Fluid FlowJanuary
                                              6,504,308
                                              Electrostatic
      Fluid
                                              electrode
      density core for
                                              20192003
                                              
                                              Accelerator
                                              producing
      ion discharge tocreate
      air movement andbase
      level filtration
  9


International
Patents




Kronos
has received formal notification from the Canadian Intellectual Property Office,
the Mexican Institute of Industrial Property, Commonwealth of Australia Patent
Office, the Intellectual Property Office of New Zealand and the Ukrainian Patent
Office indicating that six patents have been examined and allowed for issuance
as patents.  There are a number of other patent applications
corresponding to Kronos' fourteen U.S. Patents that have been filed and are
pending outside of the United States.




Kronos
intends to continue to aggressively file patent applications in the U.S. and
internationally.  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.




Intellectual
Property Transfer




In March
2008, Kronos transferred U.S. Patents 6,919,698 and 7,157,704 and related
foreign patents and patent applications to Tessera in conjunction with the
execution of the Intellectual Property Transfer and License Agreement and the
receipt of $3.5 million from Tessera.  The Agreement provided Tessera
the additional right to acquire U.S. Patents 6,504,308 and 6,888,314 and related
foreign and patent applications upon the payment of an additional $2.0 million,
which purchase was completed on November 21, 2008.




MILESTONES




Our
primary business objectives have been to secure the funding to support the
Company’s effort to commercialize its proprietary technology while continuing to
expand its research into new product applications.  In the fiscal year
ended June 30, 2008, the Company received $2.6 million in funding and bridge
loan financing from investors with an investor option to fund an additional
$14.0 million. .  On April 1,2008 the Company repaid $0.6 million of
the bridge loan from funds received from the initial Tessera purchase
transaction to Airworks and Hilltop. Also on April 1, 2008 the Company repaid
$0.9 million of principle and interest to Sands Brothers Venture Funds, all of
which are affiliates of Laidlaw and Co. (UK) Ltd. (collectively “Critical
Capital”)See “Recent Development Regarding Kronos’ Secured Lenders” for a
discussion of additional developments regarding the financial condition of the
Company and its secured financing arrangements.




Our
second objective was to launch Kronos-based standalone consumer
products.  During the fiscal year ended June 30, 2008, despite the
success of the Company in developing and testing a viable consumer product, the
Company was not able to achieve its objective of having its residential, retail
consumer products partner bring that product to market. The identified
partner was unable to perform its obligation under the terms of the
agreement.




Our third
objective was to continue on our agreements with EOL.  The Company
provided technical services and electronics to EOL as EOL completed development
of a medical air purifier and began selling the product into the hospital
marketplace.  The Company generated $55,000 in revenue during the
fiscal year ended June 30, 2008, through the sale of Kronos proprietary
electronics and from royalties from EOL sale of Kronos-based air purification
devices in Russia and other select Commonwealth of Independent
States.  The Company provided technical support for embedded
applications of Kronos technology with DESA by designing and building
prototype devices for DESA in the embedded residential fireplace market.




In
addition, during the year the Company:




(i)
            executed
      in March 2008, an Intellectual Property Transfer and License Agreement
      with Tessera Technologies, Inc. (“Tessera”) for the transfer and license
      of certain intellectual property (IP) rights related to Kronos proprietary
      technologies to Tessera.  Kronos initially received $3.5 million
      from Tessera in exchange for the transfer of select Kronos patents
      covering micro-cooling applications and for an exclusive license to the
      Kronos technology for the field of ionic micro-cooling of integrated
      circuit devices or discrete electrical components.  Kronos
      retained the rights to use these patents for applications outside of the
      field of micro-cooling.  Tessera has exercised its further right
      to acquire additional Kronos IP relating to micro-cooling applications for
      four quarterly payments of $0.5 million each beginning in July 1, 2008.
      Kronos received a payment of $0.5 million on July 1, 2008, a payment of
      $0.5 million on October 1, 2008, and an accelerated payment of $1.0
      million on November 21, 2008, for the remaining payments due on January 1,
      2009 and April 1, 2009.  The receipt of this $2.0 million
      constitutes payment in full for the remaining micro-cooling related
      patents subject to the agreement with Tessera.  The Company and
      Tessera have the option to continue to jointly develop new technologies in
      this field;






10


(ii)
            executed
      on a Phase II award and a Phase III award from the Washington Technology
      Center in conjunction with the University of Washington and Intel
      Corporation for a research and development project based on a novel
      cooling system for microelectronics and computer
  chips;




(iii)
            continued
      to serve as a member and an industrial partner in the Federal Aviation
      Administration's (FAA) Air Transportation Airliner Cabin Environment
      Research Center of Excellence (ACER CoE);
and




(iv)
            pursued
      new opportunities initiated by several leading global home appliance
      manufacturers for the development of select residential applications of
      our technology, including silent kitchen range hoods.  These
      opportunities generated $37,000 in revenue during the fiscal year
      ended June 30, 2007, and an additional $34,000 in revenue in fiscal
      2008.




The
Company on June 20, 2008, terminated the Employment Agreement for Daniel R.
Dwight, its former President and Chief Executive officer, pursuant to terms of
the Severance Agreement, as attached.  Additionally Kronos terminated
all employees as of October 24, 2008, except for R. Tusing, its acting
president, and Igor Krichtafovitch, the Company’s Chief Technology
Officer.




On
September 29, 2008, Kronos received a notice of event of default from AirWorks
Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory
Note (the “Promissory Note”) due June 19, 2010, issued by the Company to
AirWorks.  The notice stated that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the principal amount of $3,551,735 plus
interest.  The Company requested funding from the senior lenders but
was declined.  The Company is evaluating the status of the alleged
default.




SECURED CONVERTIBLE DEBT TRANSACTION





In June
2007, Kronos entered into a Funding Agreement with a group of lenders providing
for a loan, at the discretion of the lenders, in the aggregate amount of up to
$18,159,000.  At the initial closing, the Company received an initial
advance of $4,259,000.  After payment in full of the amounts due under
an outstanding convertible debenture issued to Cornell Capital Partners and
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.




The
lenders are:  (i) AirWorks Funding LLLP, a newly-formed limited
partnership (“AirWorks”); (ii) Critical Capital Growth Fund, L.P. and various
Sands Brothers Venture Funds, all of which are affiliates of Laidlaw and Co.
(UK) Ltd. (collectively “Critical Capital”) and (iii) Hilltop Holding Company,
LP, a Delaware limited partnership, (‘Hilltop”).




The loan
is secured by all of the Company's assets and is convertible into shares of the
Company's common stock at a conversion price of $0.003 per share, subject to
adjustment under certain circumstances.  Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company.  Under the Funding
Agreement and related notes, the Company pays interest at the rate of 12% per
annum.  On March 13, 2008, Critical Capital agreed to extend the
maturity date of their note until April 30, 2008 and on April 1, 2008, the
Company repaid Critical Capital the full principal amount and interest on the
note.  With respect to all other loan amounts, interest is payable
quarterly starting January 1, 2008, and outstanding principal is due and payable
June 19, 2010, unless earlier converted at the option of the
lenders.  Airworks, effective as of January 1, 2008, in agreement with
the Company, agreed to defer payment of quarterly interest expenses for an
unspecified period, until the Company received of Notice of Default by Airworks
on September 29, 2008.




Also in
connection with the Funding Agreement, several Kronos option and warrant holders
delivered standstill agreements pursuant to which such holders agreed not to
exercise their options or warrants before December 31, 2007.  Several
stockholders also entered into Voting Agreements with the lenders pursuant to
which they agreed to vote, if and when proposed to shareholders, in favor of
certain corporate governance and other matters specified therein.




On
December 31, 2007, the Company issued 243,813,400 shares of Kronos Common Stock
to Airworks and Hilltop following conversion of $731,440 of debt pursuant to
terms of the Funding Agreements.




In
accordance with the Funding Agreement, on April 14, 2008, the lenders exercised
their right to designate a majority of the members of the Company's Board of
Directors and five new additional Board members were appointed to the Kronos
Board of Directors:  Richard Perlman, Jack Silver, James Price, Marc
Kloner and Barry Salzman.  The Funding Agreement contains usual and
customary representations and warranties and also contains certain covenants
that prohibit the Company from undertaking certain actions without the consent
of AirWorks, including additional funding.




11


On
September 29, 2008, Kronos received a notice of event of default from AirWorks
Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory
Note (the “Promissory Note”) due June 19, 2010, issued to by the Company to
AirWorks.  The notice states that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the amount of $3,551,735 plus
interest.




The
Kronos Board of Directors appointed an Independent Board Committee to address
the Notice of Default.  The Independent Board Committee, whose members
are James McDermott and M. J. Segal continues to work with the lenders to
determine an appropriate course of action in response to the receipt of the
Notice of Default.




The
Company received correspondence from Frederic R. Gumbinner and Richard A. Sun,
as second secured lien holders, concerning claims for late payments and
subsequent related penalties with respect to outstanding loans by Mr. Gumbinner
and Mr. Sun.  The Company has responded that the obligation to its
senior secured lien holders supercedes and takes priority to the claims of the
second secured lien holders and the existing intercreditor agreements among the
secured lenders sets for the applicable rights, obligations and responsibilities
between the lenders.




EMPLOYEES




As
of October 24, 2008, Kronos and its subsidiaries had reduced it’s staffing
from fourteen to two full-time employees.  Of the two full-time employees,
one works in general management, and one in product development and
research.  None of the employees are represented by
unions.  There has been no disruption of operations due to a labor
dispute.




FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS




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




We
do not have sufficient cash to continue operations and require significant
additional financing to sustain our operations, and are exploring alternatives
to sell, license or liquidate the assets of the Company.




At June
30 2008, and June 30, 2007, we had a working capital deficit of $2.1 million and
$1.2 million, respectively. The Report of Independent Registered Public
Accounting Firm for the year ended June 30, 2008, includes an explanatory
paragraph stating that our recurring losses from operations and working capital
deficiency raise doubt about our ability to continue as a going
concern.  For the fiscal years ended June 30, 2008, and 2007, we had
an operating cash flow deficit of $0.2 million and $3.0 million and a cash
balance of $872,000 and $364,000, respectively.  Kronos is seeking
alternatives to sell, license or liquidate partial or all of the Company’s
assets to satisfy secured lenders’ obligations.




We
do not have funds to satisfy secured loans and if the alleged event of default
is enforced, the Company will have all assets foreclosed.




On
September 29, 2008, Kronos received a notice of event of default from AirWorks
Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory
Note (the “Promissory Note”) due June 19, 2010, issued by the Company to
AirWorks.  The notice stated that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the principal amount of $3,551,735 plus
interest.  The Company requested funding from the senior lenders but
was declined.  The Company is evaluating the status of the alleged
default.




The
Funding Agreement with the Company’s secured lenders provides that in the event
of default, the lenders have the right to seek foreclosure of all of the assets
of the Company, including all intellectual property and patent rights, all
physical goods and equipment and all contractual rights including license
Agreements.  In light of the Company’s financial condition, if the
Company is unable to negotiate an agreement with its secured lenders or is
unable to consummate a strategic transaction, the secured lenders may enforce
their rights under the Funding Agreement and all of the Company’s remaining
assets will be foreclosed and transferred to AirWorks and Hilltop.




12


We
have a limited operating history with significant losses and have terminated our
operations.




We have a
limited operating history and have not been able to establish any history of
profitable operations.  We incurred a net loss of $4.4 million for the
fiscal year ended June 30, 2008, and a net loss of $2.35 million for the fiscal
year ended June 30, 2007. As a result, at June 30, 2008, and June 30, 2007, we
had an accumulated deficit of $37.8 million and $33.5 million,
respectively.  Our revenues and cash flows from operations have not
been sufficient to sustain our operations.  On October 24, 2008, the
Company terminated all but two of its employees and ceased substantially all of
its operating activities.




Existing
stockholders will experience significant dilution from the issuance of shares
under our secured financing or any equity financing.




The
issuance of shares pursuant to the conversion of the AirWorks and Hilltop
Secured Convertible Promissory Note, the exercise of stock options and 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.




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.  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.  We do not have sufficient funds to enforce protection of our
intellectual property.




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




Our net
intangible assets of approximately $1.5 million as of June 30, 2008, 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 technology not included in the original acquisition
of Kronos Air Technologies, Inc. in May 2003 and capitalized legal costs for
securing patents.  Intangible assets comprise 58% of our total assets
as of June 30, 2008.  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 technology and Kronos Air Technologies Chief
Technology Officer, or the ability to create a customer base for the sale
Kronos-based products.  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 requirements 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:




-
            with
      a price of less than $5.00 per
share;




-
            that
      are not traded on a national stock
exchange;




-
            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.






13


ITEM
2. PROPERTIES




Our
principal executive office is located at 464 Common Street, Suite 301, Belmont,
Massachusetts.  The Company’s Research and Product Development
facility is located at 15241 NE 90th Street, Redmond,
Washington.  Kronos is committed through September 30, 2009, to annual
lease payments on operating leases for 6,000 square feet of office/research and
product development premises.




ITEM
3. LEGAL PROCEEDINGS




From time to time the Company may be subject to lawsuits
in the normal course of business.




Thompson
E. Fehr has filed a complaint in the state of Utah, in the Second Judicial
District Court in Weber County, against Kronos with respect to prior services
rendered to High Voltage Integrated, Inc. (HVI), based on unpaid patent counsel
services totaling $47,130 by Fehr to HVI.  Fehr has filed total
damages claims of $444,900.00.  The Company believes this complaint is
without merit and is vigorously defending itself.




Daniel R.
Dwight filed a lawsuit on October 17, 2008, in the state of Massachusetts, in
Suffolk County Superior Court, against Kronos for lack of payments pursuant to
the Severance Agreement dated May 16, 2008 for claims of $187, 437 plus interest
and attorney fees.. The Company believes its obligations to its Secured Lenders
supercede the payment obligations to Mr. Dwight and will vigorously defend
itself.




Allstate
Insurance Company, as subrogee of David Buell, filed a complaint in the state of
Michigan against HoMedics, Inc. and Kronos with respect to damages related to a
fire in the home of Mr. Buell, which resulted in $244,155 in
damages.  Under the terms of the Company’s general liability insurance
policy, this matter was addressed by the Company's insurance carrier, Argonaut
Group, and settled during the year. Kronos executed a full release of this
matter on December 12, 2007.




In
addition, the Company received correspondence from Frederic R. Gumbinner and
Richard A. Sun, as second secured lien holders, concerning claims for late
payments and subsequent related penalties with respect to outstanding loans by
Mr. Gumbinner and Mr. Sun.  The Company has responded that the
obligation to its senior secured lien holders supercedes and takes priority to
the claims of the second secured lien holders and the existing intercreditor
agreements among the secured lenders sets for the applicable rights, obligations
and responsibilities between the lenders.




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




None.




14




PART II






ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
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 2008
and 2007 are presented as follows:




FISCAL
      YEAR 2008HIGH
                                      LOWFirst
      Quarter (July 2007 to September 2007)
                                      $0.0195
                                      $0.012Second
      Quarter (October 2007 to December 2007)
                                      $0.020
                                      $0.013Third
      Quarter (January 2008 to March 2008)
                                      $0.019
                                      $0.012Fourth
      Quarter (April 2008 to June 2008)
                                      $0.0145
                                      $0.005FISCAL
      YEAR 2007HIGH
                                      LOWFirst
      Quarter (July 2006 to September 2006)
                                      $0.048
                                      $0.019Second
      Quarter (October 2006 to December 2006)
                                      $0.024
                                      $0.012Third
      Quarter (January 2007 to March 2007)
                                      $0.021
                                      $0.006Fourth
      Quarter (April 2007 to June 2007)
                                      $0.028
                                      $0.008




On
January 9, 2008, the closing price of our common stock as reported on the Pink
Sheets was $0.0002 per share. On January 9, 2008, we had approximately 2,500
beneficial stockholders of our common stock and 487,626,791 shares of our common
stock were issued and outstanding.




DIVIDENDS




We have
not declared or paid dividends on our common stock during fiscal 2008 or 2007
and do not plan to declare or pay dividends on our common stock during fiscal
2009.  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“. 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
officers and directors.  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.




On April
27, 2007, we issued three year Convertible Promissory Notes to two accredited
investors for $200,000 convertible into shares of Kronos common stock at $0.003
per share.




On June
18, 2007, we issued 80 million stock options to employees and
directors.  The ten-year options vest two-thirds upon issuance and
one- third over the following twelve months and convert into shares of Kronos
common stock at $0.016 per share.




15


On June
19, 2007, we issued three year Secured Convertible Promissory Notes to a group
of institutional investors for up to $17.3 million convertible into shares of
Kronos common stock at $0.003 per share.  As of June 30, 2007, $3.4
million of the $17.3 million had been funded.  As of December 31,
2007, an additional $1.430 million had been funded. On December 31, 2007, the
Company issued 243,813,400 shares of Kronos Common Stock to Airworks and Hilltop
following conversion of $731,440 of debt pursuant to terms of the Funding
Agreements. As of March 31, 2008, an additional $.475 million had been
funded.  A bridge loan in the amount of $.628 million was issued
between January 31, 2008 and March 31, 2008, which was repaid in full on April
1, 2008.




ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




The
following information should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this
filing.  Certain statements within this Item and throughout this Annual
Report on Form 10-KSB and the documents incorporated herein are "forward-looking
statements“.




GENERAL




On
September 29, 2008, Kronos Advanced Technologies, Inc. (“Kronos” or the
“Company”) received a notice of event of default from AirWorks Funding LLLP
(“AirWorks”) with respect to the Secured Convertible Promissory Note (the
“Promissory Note”) due June 19, 2010, issued by the Company to
AirWorks.  The notice states that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the principal amount of $3,551,735 plus
interest.





The
Company has been, and continues to be, in discussions with its secured lenders
regarding the outstanding obligations under the AirWorks and Hilltop promissory
notes, the alleged occurrence of an event of default, and the future operational
plan of the Company.  In connection with the foregoing and in light of
the Company’s financial condition (including with respect to certain other
obligations of the Company), the Board of Directors has appointed an independent
committee, consisting of James P. McDermott and M. J. Segal, to investigate the
alleged event of default, analyze the current status of the Company, and review
alternatives for maximizing the value of the Company’s assets including the sale
or license of such assets or the liquidation of the Company. If a sale is not
authorized and the secured lenders exercise their rights under their promissory
notes, the secured lenders would have the right to foreclose upon the assets of
the Company.  Further, if the Company is unable to consummate a
strategic transaction or if the secured lenders foreclose upon the Company’s
assets, there can be no assurance that there will be any assets or proceeds
remaining after repayment of all amounts due to the secured
lenders.  The terms of the promissory notes to the secured lenders do
not allow the Company to raise new funding to cure the alleged occurrence of an
event of default without the consent of the secured lenders.





The
Company received notification from James P. McDermott and M.J. Segal on the
dates of December 22, 2008 and December 23, 2008 respectively, that Mr.
McDermott and Mr. Segal have resigned from the Kronos Board of
Directors.




Kronos
Advanced Technologies, Inc. was a product development and production
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized.  Among the achievements of
the Company over the past twelve months included the following:




·
              Business
      Development, Marketing and
Sales:




-
              earned
      $3,326,927 in revenue from Tessera for the transfer and license of certain
      intellectual property (IP) rights related to Kronos proprietary
      technologies to
Tessera;




-
              earned
      $339,000 in revenue from the sale of electronics, royalties from the sale
      of finished products and development contracts for embedded product
      applications;


-
              initiated
      discussions with residential distributors of standalone air purifiers to
      consumers and health care product distributors to medical practitioners as
      the Company’s seeks to secure orders for the sale of Kronos developed and
      produced air purification products;


-
              awarded
      a Washington Technology Center Phase III grant for developing a novel
      approach to cooling micro chips and completed all deliverables pursuant to
      the award.






16




·
              Operations:




-
              expanded
      our product development resources, including the recruitment of a senior
      product development and engineering
leader;




-
              completed
      testing of efficient consumer standalone air purification
      products;




-
              developed
      a viable standalone air purifier for the medical market with the Company’s
      strategic partner, EOL;




-
              developed
      prototype range hoods for two leading global appliance
      manufacturers;




-
              developed
      prototype products with Company’s strategic partner, DESA, for the
      embedded heater market;




-
              completed
      design of a residential air purifier product and  began
      negotiations with manufacturing and product
  distributors.




·
              Technology
      and Intellectual Property:




-
              secured
      additional U.S. and international patents for our proprietary technology
      and made additional patent
filings;




-
              expanded
      our product claims platform to include independent verification of Kronos'
      technology's ability to decontaminate rooms infected with bacteria and
      viruses and sterilize air flows contaminated with anthrax and E.coli
      spores and Staphylococcus aureus and Bacillus cereus
    bacteria.




Recent
Developments




AirWorks and
Hilltop Secured
Financing.  In June 2007, Kronos entered into a Funding
Agreement with AirWorks, RS Properties I LLC and various other lenders providing
for a loan, at the discretion of the lenders, in the aggregate amount of up to
$18,159,000.  At the initial closing, the Company received an initial
advance of $4,259,000.  After the initial closing RS Properties
assigned to Hilltop its promissory note together with certain other rights and
agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.  Following the initial
closing, the Company received an additional $2,533,000 in funding from AirWorks
and Hilltop under the terms of the Funding Agreement and related notes,
including the Promissory Note.  Interest on the AirWorks and Hilltop
notes became payable quarterly starting January 1, 2008.




On
December 31, 2007, AirWorks and Hilltop converted $731,440 of their promissory
notes into shares of the Company’s common stock.  On April 1, 2008,
the Company repaid (1) an aggregate of $628,000 of the principal of the AirWorks
and Hilltop promissory notes and (2) the entire principal amount ($859,000) of
the promissory notes issued to the other lenders.  As a result of the
foregoing, as of December 1, 2008, (a) the outstanding principal amount of the
AirWorks Promissory Note was $3,426,135 and there was $567,037 of accrued
interest and (b) the outstanding principal amount of the Hilltop promissory
note was $1,147,425 and there was $60,022 of accrued
interest.




Kronos
received notice of alleged event of default by Airworks LLLP on September 29,
2008.  The Company has formed an Independent Board Committee to
address the actions the Company must make in response.  The
Independent Board Committee members are James McDermott and M. J.
Segal.  The Independent Board Committee has engaged the services of
K&L Gates as independent counsel.  See Part 1. Item 1.
Business—Recent Developments Regarding Kronos’ Secured Lenders.




The
Company received notification from James P. McDermott and M.J. Segal on the
dates of December 22, 2008 and December 23, 2008 respectively, that Mr.
McDermott and Mr. Segal have resigned from the Kronos Board of
Directors.




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.






17




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 104 ("SAB 104"). 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.




Share-Based Compensation.We
adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the
Modified Prospective Approach. Under the Modified Prospective Approach, the
amount of compensation cost recognized includes: (i) compensation cost for all
share-based payments granted before but not yet vested based on the grant date
fair value estimated in accordance with the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”) and (ii) compensation
cost for all share-based payments granted or modified based on the estimated
fair value at the date of grant or subsequent modification date in accordance
with the provisions of SFAS No. 123R.





RESULTS
OF OPERATIONS




Consolidated
Statements of Operations For the Years Ended June 30, 2008 and
2007.




Our net
losses for each of the fiscal years ended June 30, 2008, and June 30, 2007, were
$4,357,000 and $2,351,000 respectively.  The increase in the net loss for
the year ended June 30, 2008, as compared to the prior year, was principally the
result of an increase in the accretion of amortization of note discount of
$2,156,000 for the period ended June 30, 2008, compared to $34,000 for the
period ended June 30, 2007, the gain on extinguishment of debt and warrant
cancellation of $2,856,000 in Fiscal Year 2007 and additional interest in Fiscal
Year 2007 of $247,000, is partially offset by the increase in revenues of
$3,666,00, which includes revenues from Tessera of
$3,327,000.




Revenue.  Revenues
were generated through sales of Patents and Patent rights, sales of electronics,
royalties from the sale of finished Kronos-based products and sale of services
for design and development of Kronos devices at Kronos Air Technologies,
Inc.  Revenues for the year ended June 30, 2008, were $3,666,000 compared
with $160,000 in the prior year.  Revenues in the fiscal year ended June
30, 2008, were primarily from our Tessera agreement.




Cost of Sales.Cost of sales for the
year ended June 30, 2008, was $341,000 compared with $93,000 for the prior year.
 Cost of sales in the year ended June 30, 2008, primarily consisted of
costs associated with the sale of intellectual property to
Tessera.






18


Selling, General and Administrative
Expenses.  Selling, General and Administrative expenses for the
year ended June 30, 2008, decreased $30,000 from the prior year to
$4,877,000.  The decrease was principally the result of a $842,000 decrease
in equity compensation as the result of a decrease in non-cash compensation
associated with the expensing of stock options and a decrease of $164,000 in
general expenses, partially offset by a $551,000 increase in compensation
and benefits due to additional staff added during the year. The Company also
incurred $253,000 in restructuring costs during the year for expenses associated
with the severance cost to the Company’s former chief executive officer, and a
research and development increase of $168,000, as the Company prioritized
its limited resources on product development.





Gain on Extinguishment of Debt and
Warrant Cancellation.  The Company did not record a gain on
extinguishment of debt and warrants during the year ended June 30,
2008.  The non-cash gain on debt and warrant cancellation for the
year ended June 30, 2007, was $2,856,000 and represented the settlement of
the HoMedics debt and cancellation of 26.5 million warrants issued to
HoMedics under the terms of the Settlement Agreement and General Release
(refer to Note 13 to the Consolidated Financial Statements- Commitments and
Contingencies).




Interest expense. Interest expenses
for the year ended June 30, 2008, increased by $281,000 to $649,720 from
$368,000 for the year ended June 30, 2007, as a result of the increase in
principal outstanding to AirWorks and Hilltop.




Consolidated
Balance Sheets as of June 30, 2008




Our total
assets at June 30, 2008, were $2,580,000 compared with $2,111,000 at June 30,
2007.  Total assets at June 30, 2008, and June 30, 2007, were comprised
primarily of $1,547,000 and $1,723,000, respectively, of patents/intellectual
property and $872,000 and $364,000, respectively, of cash.  Total current
assets at June 30, 2008, and 2007 were $1,023,000 and $381,000, respectively,
while total current liabilities for those same periods were $3,080,000 and
$1,589,000, respectively, creating a working capital deficit of $2,058,000 and
$1,208,000 at each respective period end.  Liabilities were
reclassified from long term to short term debt as a result of the receipt of the
notice of default. The working capital deficit at June 30, 2008, was primarily
due to notes payable and accrued interest and at June 30, 2007, due to short
term borrowings from Sands Brothers, accounts payable and notes payable to
employees.  Due to the alleged default of the Company’s Note Payable,
all related debt has been reclassified to current liabilities.




Stockholders'
deficit as of June 30, 2008, was $500,000.  The beneficial conversion
feature associated with the issuance of convertible debt ($2,105,000), the sale
and issuance of common stock for repayment of debt and services ($755,000) and
the issuance of common options for compensation and services ($710,000) was
partially offset by the $4,357,000 net loss for the twelve months ended June 30,
2008.




LIQUIDITY
AND CAPITAL RESOURCES




Historically,
we have relied principally on the sale of common stock and secured debt and
customer contracts for research and product development to finance our
operations.




Net cash
flow used in operating activities was $0.17 million for the year ended June 30,
2008.  We were able to satisfy most of our cash requirements for this
period from the proceeds of the convertible secured promissory notes with
AirWorks, Hilltop and other lenders and the proceeds from the sale of
intellectual property assets and patents to Tessera, Inc.




In June
2007, Kronos entered into a Funding Agreement with a group of lenders providing
for a loan, at the discretion of the lenders, in the aggregate amount of up to
$18,159,000.  At the initial closing, the Company received an initial
advance of $4,259,000.  After payment in full of the amounts due under
an outstanding convertible debenture issued to Cornell Capital Partners and
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.




The
lenders are:  (i) AirWorks Funding LLLP, a newly-formed limited
partnership (“AirWorks”); (ii) Critical Capital Growth Fund, L.P. and various
Sands Brothers Venture Funds, all of which are affiliates of Laidlaw and Co.
(UK) Ltd. (collectively “Sands”) and (iii) RS Properties I LLC, a New York-based
private investment company (“RS Properties”).  Subsequently, RS
Properties assigned to Hilltop Holding Company, LP, a Delaware limited
partnership, (‘Hilltop”) its promissory note together with certain other rights
and agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.




The loan
is secured by all of the Company's assets and is convertible into shares of the
Company's common stock at a conversion price of $0.003 per share, subject to
adjustment under certain circumstances. Future installments under the Funding
Agreement, up to $13,900,000, may be advanced at the discretion of the lenders,
even if not requested by the Company.  Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per
annum.  Of the total amount of the initial advance, interest is paid
monthly starting July 1, 2007, on $859,000, which principal amount is due and
payable December 31, 2007.  Such amount may be converted into Kronos
common stock at the option of the holder at the $0.003 conversion price only if
not paid in full by December 31, 2007.  On March 13, 2008, Critical
Capital and Sands Brothers agreed to extend the maturity date of their note
until April 30, 2008.  On April 1, 2008, the Company repaid Critical
Capital and Sands Brothers the full principal amount and interest on the
note.  With respect to all other loan amounts, interest is paid
quarterly starting January 1, 2008, and outstanding principal is due and payable
June 19, 2010, unless earlier converted at the option of the
lenders.  Assuming that the maximum loan amount is advanced under the
Funding Agreement and related notes and that the lenders convert the entire
amount of the loan into Kronos common stock at the noted conversion price, the
lenders would own approximately 93.3% of the Company's total equity on a fully
diluted, as converted basis.






19


Also in
connection with the Funding Agreement, several Kronos option and warrant holders
delivered standstill agreements pursuant to which such holders agreed not to
exercise their options or warrants before December 31, 2007.  Several
stockholders also entered into Voting Agreements with the lenders pursuant to
which they agreed to vote, if and when proposed to shareholders, in favor
of:  (i) a slate of directors of the Company's board of directors as
proposed by AirWorks; (ii) adjusting the size of the Company's board of
directors such that upon the election of the slate of directors proposed by
AirWorks, such directors hold a majority of the seats on the Company's board of
directors; (iii) approving an amendment to the Company's articles of
incorporation to increase the Company's authorized common stock to a number of
shares necessary to allow the lenders to convert the entire amount of the
financing into shares of common stock of the Company as provided in the Notes
and the Funding Agreement; (iv) reincorporating the Company in Delaware; (v) a
reverse stock split proposed by AirWorks or the Company's board of directors;
and (vi) against any action or transaction that may reasonably be expected to
impede, interfere with, delay, postpone or attempt to discourage the
consummation of any of the foregoing.  Such standstill and voting
agreements, combined with the conversion into Kronos common stock of a
sufficient amount of the initial advance under the Funding Agreement, would give
the lenders voting control of the Company.




The
Funding Agreement also gives the lenders the right to designate a majority of
the members of the Company's Board of Directors. The Funding Agreement also
contains usual and customary representations and warranties and covenants that
prohibit the Company from undertaking certain actions without the consent of
AirWorks.




On
September 29, 2008, the Company received a notice of event of default from
AirWorks with respect to the Secured Convertible Promissory Note due June 19,
2010 (the “Promissory Note”), issued to by the Company to
AirWorks.  The notice states that (1) an Event of Default under
Section 2.1(a) of the Promissory Note has occurred due to the failure of the
Company to make interest payments on the Promissory Note, and (2) the entire
principal amount of, and the interest on, the Promissory Note is declared
immediately due and payable in the amount of $3,551,735 plus
interest.




The
Company has been, and continues to be, in discussions with its secured lenders
regarding the outstanding obligations under the AirWorks and Hilltop promissory
notes, the alleged occurrence of an event of default, and the future operational
plan of the Company.  In connection with the foregoing and in light of
the Company’s financial condition (including with respect to certain other
obligations of the Company), the Board of Directors has appointed an independent
committee, consisting of James P. McDermott and M. J. Segal, to investigate the
alleged event of default, analyze the current status of the Company, and review
alternatives for maximizing the value of the Company’s assets including the sale
or license of such assets or the liquidation of the Company. The Company has a
limited time to authorize a sale, as the period for forbearance by the secured
lenders is under discussion. If a sale is not authorized and the secured lenders
exercise their rights under their promissory notes, the secured lenders would
receive the assets of the Company.  Further, if the Company is able to
consummate a strategic transaction or if the secured lenders foreclose on the
Company’s assets, there can be no assurance that there will be any assets or
proceeds remaining after repayment of all amounts due to the secured
lenders.  The terms of the promissory notes to the secured lenders do
not allow the Company to raise new funding to cure the alleged occurrence of an
event of default without the consent of the secured lenders.




GOING
CONCERN OPINION




The
Report of Independent Registered Public Accounting Firm includes an explanatory
paragraph to their audit opinions issued in connection with our 2008 and 2007
financial statements that states that we do not have significant cash or other
material assets to cover our operating costs and debt obligations.  Our
receipt of the notice of event of default from Airworks and our inability 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.




As a
result of the Company’s financial condition, it has discontinued substantially
all of its operating activities.  Kronos is focused on prioritizing
its limited resources on either selling or licensing the Company’s technology or
liquidating the assets of the Company.




ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




Our
consolidated financial statements appear beginning at page F-1.




20





KRONOS
ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED
FINANCIAL STATEMENTS






Report
      of Independent Registered Public Accounting Firm
                      F-2Consolidated
      Balance Sheets as of June 30, 2008 and June 30, 2007
                      F-3Consolidated
      Statements of Operations for the years ended June 30, 2008 and
      2007
                      F-4Consolidated
      Statement of Changes of Stockholders' Deficit for years ended June
      30, 2008 and 2007
                      F-5Consolidated
      Statements of Cash Flows for the years ended June 30, 2008 and
      2007
                      F-6Notes
      to Consolidated Financial Statements
                      F-7
      to
F-18






F-1


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 sheets of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2008, and 2007 and the related
consolidated statements of operations, stockholders' equity/(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.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting.  Accordingly we express no such opinion.  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, 2008, and 2007 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles.




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






New
York, New York


December
15, 2008





F-2


KRONOS ADVANCED TECHNOLOGIES,
INC.


CONSOLIDATED
BALANCE SHEETS




June
      30,
                                                                  
                                                                  
                                                                  June
      30,2008
                                                                  
                                                                  
                                                                  2007AssetsCurrent
      AssetsCash
                                                                  
                                                                  $
                                                                  871,970
                                                                  
                                                                  
                                                                  $
                                                                  363,955Accounts
      receivable, net of allowance of $20,000 at June 30, 2008
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  5,027Other
      Current Assets
                                                                  
                                                                  
                                                                  151,044
                                                                  
                                                                  
                                                                  
                                                                  12,138Total
      Current Assets
                                                                  
                                                                  
                                                                  1,023,014
                                                                  
                                                                  
                                                                  
                                                                  381,120Property
      and Equipment
                                                                  
                                                                  
                                                                  63,793
                                                                  
                                                                  
                                                                  
                                                                  53,949Less:
      Accumulated Depreciation
                                                                  
                                                                  
                                                                  (52,550
                                                                  )
                                                                  
                                                                  
                                                                  (47,401
                                                                  )Net
      Property and Equipment
                                                                  
                                                                  
                                                                  11,243
                                                                  
                                                                  
                                                                  
                                                                  6,548Other
      AssetsIntangibles,
      net
                                                                  
                                                                  
                                                                  1,546,493
                                                                  
                                                                  
                                                                  
                                                                  1,723,150Total
      Other Assets
                                                                  
                                                                  
                                                                  1,557,736
                                                                  
                                                                  
                                                                  
                                                                  1,723,150Total
      Assets
                                                                  
                                                                  $
                                                                  2,580,750
                                                                  
                                                                  
                                                                  $
                                                                  2,110,818Liabilities
      and Stockholders' Equity (Deficit)Current
      LiabilitiesAccounts
      payable
                                                                  
                                                                  $
                                                                  577,028
                                                                  
                                                                  
                                                                  $
                                                                  359,019Accrued
      expenses
                                                                  
                                                                  
                                                                  323,751
                                                                  
                                                                  
                                                                  
                                                                  125,000Accrued
      expenses and payables to officers
                                                                  
                                                                  
                                                                  6,303
                                                                  
                                                                  
                                                                  
                                                                  22,699Accrued
      interest expense
                                                                  
                                                                  
                                                                  431,300
                                                                  
                                                                  
                                                                  
                                                                  21,303Notes
      payable, current portion
                                                                  
                                                                  
                                                                  4,773,559
                                                                  
                                                                  
                                                                  
                                                                  859,000Notes
      payable to officers
                                                                  
                                                                  
                                                                  110,484
                                                                  
                                                                  
                                                                  
                                                                  202,307Discount
      for Beneficial Conversion Feature
                                                                  
                                                                  
                                                                  (3,314,620
                                                                  )
                                                                  
                                                                  
                                                                  -Deferred
      revenue
                                                                  
                                                                  
                                                                  173,074
                                                                  
                                                                  
                                                                  
                                                                  -Total
      Current Liabilities
                                                                  
                                                                  
                                                                  3,080,879
                                                                  
                                                                  
                                                                  
                                                                  1,589,328Long
      Term LiabilitiesNotes
      payable
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  3,600,000Discount
      for Beneficial Conversion Feature
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (3,365,845
                                                                  )Total
      Long Term Liabilities
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  234,155Total
      Liabilities
                                                                  
                                                                  
                                                                  3,080,879
                                                                  
                                                                  
                                                                  
                                                                  1,823,483Stockholders'
      Equity(Deficit)Common
      stock, authorized 500,000,000 shares of $.001 par value Issued and
      outstanding – 487,626,691 and 242,342,803, respectively
                                                                  
                                                                  
                                                                  487,627
                                                                  
                                                                  
                                                                  
                                                                  242,343Capital
      in excess of par value
                                                                  
                                                                  
                                                                  36,837,962
                                                                  
                                                                  
                                                                  
                                                                  33,513,598Accumulated
      deficit
                                                                  
                                                                  
                                                                  (37,825,718
                                                                  )
                                                                  
                                                                  
                                                                  (33,468,606
                                                                  )Total
      Stockholders' Equity(Deficit)
                                                                  
                                                                  
                                                                  (500,129
                                                                  )
                                                                  
                                                                  
                                                                  287,335Total
      Liabilities and Stockholders' Equity(Deficit)
                                                                  
                                                                  $
                                                                  2,580,750
                                                                  
                                                                  
                                                                  $
                                                                  2,110,818




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




F-3




KRONOS ADVANCED TECHNOLOGIES,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS




For
      the years ended June 30,2008
                                                                          
                                                                          
                                                                          2007Sales
                                                                          
                                                                          $
                                                                          3,665,977
                                                                          
                                                                          
                                                                          $
                                                                          160,478Cost
      of sales
                                                                          
                                                                          
                                                                          340,994
                                                                          
                                                                          
                                                                          
                                                                          93,373Gross
      Profit
                                                                          
                                                                          
                                                                          3,324,983
                                                                          
                                                                          
                                                                          
                                                                          67,105Selling,
      General and Administrative expensesCompensation
      and benefits (includes $688,514and $1,530,764 of equity
      compensation)
                                                                          
                                                                          
                                                                          2,220,575
                                                                          
                                                                          
                                                                          
                                                                          2,512,365Restructuring
                                                                          
                                                                          
                                                                          253,262
                                                                          
                                                                          
                                                                          
                                                                          -Professional
      services
                                                                          
                                                                          
                                                                          958,851
                                                                          
                                                                          
                                                                          
                                                                          948,212Depreciation
      and amortization
                                                                          
                                                                          
                                                                          448,257
                                                                          
                                                                          
                                                                          
                                                                          479,282Research
      and development
                                                                          
                                                                          
                                                                          356,827
                                                                          
                                                                          
                                                                          
                                                                          188,101Insurance
                                                                          
                                                                          
                                                                          113,456
                                                                          
                                                                          
                                                                          
                                                                          112,819Facilities
                                                                          
                                                                          
                                                                          125,385
                                                                          
                                                                          
                                                                          
                                                                          100,538Other
      selling general and administrative expenses
                                                                          
                                                                          
                                                                          400,537
                                                                          
                                                                          
                                                                          
                                                                          565,485Total
      Selling, General and Administrative expenses
                                                                          
                                                                          
                                                                          4,877,150
                                                                          
                                                                          
                                                                          
                                                                          4,906,802Net
      Operating Loss
                                                                          
                                                                          
                                                                          (1,552,167
                                                                          )
                                                                          
                                                                          
                                                                          (4,839,697
                                                                          )Other
      Income (Expense)Gain
      on Extinguishment of Debt and Warrant Cancellation
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          2,856,194Accretion
      of Note Discount
                                                                          
                                                                          
                                                                          (2,156,225
                                                                          )
                                                                          
                                                                          
                                                                          -Other
      Income
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Interest
      Expense
                                                                          
                                                                          
                                                                          (648,720
                                                                          )
                                                                          
                                                                          
                                                                          (367,944
                                                                          )Net
      Loss
                                                                          
                                                                          $
                                                                          (4,357,112
                                                                          )
                                                                          
                                                                          $
                                                                          (2,351,447
                                                                          )Basic
      and Diluted Loss Per Share:Net
      Loss
                                                                          
                                                                          $
                                                                          (0.01
                                                                          )
                                                                          
                                                                          $
                                                                          (0.01
                                                                          )Weighted
      Average Shares Outstanding - Basic and Diluted
                                                                          
                                                                          
                                                                          366,819,276
                                                                          
                                                                          
                                                                          
                                                                          200,022,410




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







F-4





KRONOS ADVANCED TECHNOLOGIES,
INC.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)






Capital
      in
                                              
                                              
                                              
                                              
                                              
                                              TotalCommon
      Stock
                                              
                                              
                                              Excess of
      Par
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Stockholders'Shares
                                              
                                              
                                              Amount
                                              
                                              
                                              Value
                                              
                                              
                                              Deficit
                                              
                                              
                                              Equity/(Deficit)Balance
      at June 30, 2006
                                              
                                              
                                              144,499,657
                                              
                                              
                                              $
                                              144,500
                                              
                                              
                                              $
                                              27,828,241
                                              
                                              
                                              $
                                              (31,117,159
                                              )
                                              
                                              $
                                              (3,144,418
                                              )Shares
      issued for cash
                                              
                                              
                                              97,843,146
                                              
                                              
                                              
                                              97,843
                                              
                                              
                                              
                                              1,282,094
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,379,937Stock
      options issued for employee services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,268,600
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,268,600Stock
      options issued for Board Service
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              22,137
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              22,137Stock
      options issued for consulting services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              240,027
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              240,027Value
      of warrants issued during debt restructuring
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (527,501
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (527,501
                                              )Value
      of discount on beneficial conversion feature
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,400,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,400,000Net
      loss for the year ended June 30, 2007
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (2,351,447
                                              )
                                              
                                              
                                              (2,351,447
                                              )BALANCE
      at June 30, 2007
                                              
                                              
                                              242,342,803
                                              
                                              
                                              
                                              242,343
                                              
                                              
                                              
                                              33,513,598
                                              
                                              
                                              
                                              (33,468,606
                                              )
                                              
                                              
                                              287,335Shares
      issued for repayment of debt
                                              
                                              
                                              243,813,000
                                              
                                              
                                              
                                              243,813
                                              
                                              
                                              
                                              487,628
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              731,441Shares
      issued for services
                                              
                                              
                                              1,470,888
                                              
                                              
                                              
                                              1,471
                                              
                                              
                                              
                                              22,056
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              23,527Stock
      options issued for employee services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              688,514
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              688,514Stock
      options issued for Board Service
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4,500Stock
      options issued for consulting services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              16,666
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              16,666Value
      of discount on beneficial conversion feature
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,105,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,105,000Net
      loss for the year ended June 30, 2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (4,357,112
                                              )
                                              
                                              
                                              (4,357,112
                                              )BALANCE
      at June 30, 2008
                                              
                                              
                                              487,626,691
                                              
                                              
                                              $
                                              487,627
                                              
                                              
                                              $
                                              36,837,962
                                              
                                              
                                              $
                                              (37,825,718
                                              )
                                              
                                              $
                                              (500,129
                                              )






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





F-5





KRONOS ADVANCED TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS




For
      the years ended June 30,2008
                                                        
                                                        
                                                        2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                                        
                                                        $
                                                        (4,357,112
                                                        )
                                                        
                                                        $
                                                        (2,351,446
                                                        )Adjustments
      to reconcile net loss to net cash used in operations:Depreciation
      and amortization
                                                        
                                                        
                                                        448,257
                                                        
                                                        
                                                        
                                                        479,282Gain
      on debt restructuring
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,856,222
                                                        )Accretion
      of Note Discount
                                                        
                                                        
                                                        2,156,225
                                                        
                                                        
                                                        
                                                        -Stock
      based compensation
                                                        
                                                        
                                                        709,681
                                                        
                                                        
                                                        
                                                        1,530,765Provision
      for Doubtful Accounts
                                                        
                                                        
                                                        20,000
                                                        
                                                        
                                                        
                                                        -Change
      In:Accounts
      receivable
                                                        
                                                        
                                                        (14,973
                                                        )
                                                        
                                                        
                                                        4,973Prepaid
      expenses and other assets
                                                        
                                                        
                                                        (138,906
                                                        )
                                                        
                                                        
                                                        35,890Deferred
      revenue
                                                        
                                                        
                                                        173,074
                                                        
                                                        
                                                        
                                                        (20,000
                                                        )Accounts
      payable
                                                        
                                                        
                                                        241,536
                                                        
                                                        
                                                        
                                                        252,132Accrued
      expenses and other liabilities
                                                        
                                                        
                                                        592,352
                                                        
                                                        
                                                        
                                                        (104,121
                                                        )Net
      cash used in Operating Activities
                                                        
                                                        
                                                        (169,866
                                                        )
                                                        
                                                        
                                                        (3,028,747
                                                        )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                                                        
                                                        
                                                        (9,844
                                                        )
                                                        
                                                        
                                                        (2,194
                                                        )Disposition
      of Patents
                                                        
                                                        
                                                        197,322
                                                        
                                                        
                                                        
                                                        -Investment
      in patent protection
                                                        
                                                        
                                                        (463,774
                                                        )
                                                        
                                                        
                                                        (173,127
                                                        )Net
      cash used in Investing Activities
                                                        
                                                        
                                                        (276,296
                                                        )
                                                        
                                                        
                                                        (175,321
                                                        )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock for cash
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,379,937Proceeds
      from short-term borrowings
                                                        
                                                        
                                                        628,000
                                                        
                                                        
                                                        
                                                        989,476Repayments
      of short-term borrowings
                                                        
                                                        
                                                        (1,578,823
                                                        )
                                                        
                                                        
                                                        (1,999,713
                                                        )Proceeds
      from long-term borrowings
                                                        
                                                        
                                                        1,905,000
                                                        
                                                        
                                                        
                                                        3,600,000Retirement
      and repayment of long-term debt
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,000,000
                                                        )Net
      cash provided by Financing Activities
                                                        
                                                        
                                                        954,177
                                                        
                                                        
                                                        
                                                        2,969,700NET
      (DECREASE) INCREASE IN CASH
                                                        
                                                        
                                                        508,015
                                                        
                                                        
                                                        
                                                        (234,368
                                                        )CASHBeginning
      of year
                                                        
                                                        
                                                        363,955
                                                        
                                                        
                                                        
                                                        598,323End
      of year
                                                        
                                                        $
                                                        871,970
                                                        
                                                        
                                                        $
                                                        363,955Supplemental
      schedule:Interest
      paid in cash
                                                        
                                                        $
                                                        262,342
                                                        
                                                        
                                                        $
                                                        289,140Taxes
      paid in cash
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -




Supplemental
      schedule of non-cash investing and financing activities:Notes
      convertible into common stock
                                
                                $
                                731,440
                                
                                
                                $
                                384,000Discount
      related to notes payable –Beneficial
      Conversion Feature
                                
                                $
                                2,105,000
                                
                                
                                $
                                3,400,000Accounts
      payable converted to common stock
                                
                                $
                                23,527
                                
                                
                                $
                                -





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




F-6




KRONOS ADVANCED TECHNOLOGIES, INC. AND
SUBSIDIARY


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, it changed the Company ticker symbol to "KNOS“ and
is currently trading on the Pink Sheets.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




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




Principles of
Consolidation.The consolidated
financial statements of the Company include those of the Company and its
subsidiary for the periods in which the subsidiary was 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, 2008, the Company had only one subsidiary, Kronos Air Technologies,
Inc.




Use of Estimates.The preparation of
consolidated 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.




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.
 The Company maintains cash and cash equivalents with high-credit, quality
financial institutions. At June 30, 2008, the cash balances held at financial
institutions were in excess of federally insured limits.




Accounts Receivable.The Company provides an
allowance for potential losses, if necessary, on trade accounts 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 $20,000 and $0 at June 30, 2008, and
June 30, 2007, respectively.  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.




Fair Value of Financial Instruments.Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of information about
the fair value of certain financial instruments for which it is practicable to
estimate the value.  For purpose of this disclosure, the fair value of
a financial instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale or
liquidation.





The
carrying amounts of the Company’s short-term financial instruments, including
cash, other current assets, accounts payable, accrued expenses and notes payable
approximate fair value at June 30, 2008 due to the relatively short period to
maturity for these instruments.






F-7


Intangibles.The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of the Company’s long-lived assets and goodwill.  The
criteria used for these evaluations include management's estimate of the assets’
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 its 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 the Company’s 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 the Company’s reported results include significant changes in the
assets’ 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 the Company’s strategic
business objectives, and utilization of the asset.




Income
Taxes.  Income taxes are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards ("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.




Net Loss Per
Share. Basic loss per share is computed using the weighted average
number of shares outstanding.  Diluted 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) 104, 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.In December 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R").  This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance.  SFAS No. 123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based payment
transactions.  The Statement requires entities to recognize stock
compensation expense for awards of equity instruments to employees based on the
grant-date fair value of those awards (with limited exceptions).  Kronos
elected to implement the provisions of SFAS No. 123R in the fiscal year ended
June 30, 2005.




RECENT
ACCOUNTING PRONOUNCEMENTS




In
September 2006, the FASB issued FASB Statement No. 157 “Fair Value
Measurements”.  This Statement defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles (“GAAP”), and expands disclosures about fair value
measurements.  This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute.  Accordingly, this statement does not
require any new fair value measurements; however, for some entities, the
application of this statement will change current practices.  This
statement is effective for financial statements for fiscal years beginning after
November 15, 2007.  Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal
year.  Management believes this statement will have no impact on the
financial statements of the Company once adopted.






F-8


In
February 2007, the FASB issued FASB Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115”.  This statement permits entities to choose to
measure many financial instruments and certain other items at fair
value.  The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This statement is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments.  This
statement applies to all entities, including not-for-profit
organizations.  Most of the provisions of this statement apply only to
entities that elect the fair value option.  However, the amendment to
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities.  Some requirements apply differently to entities that do
not report net income. We do not expect the adoption of SFAS No. 159 to have a
material impact on our consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”), and SFAS No. 160, “Accounting and Reporting
of Noncontrolling Interests in Consolidated Financial Statements, an amendment
of ARB No. 51” (“SFAS 160”).  These new standards will significantly
change the financial accounting and reporting of business combination
transactions and noncontrolling (or minority) interests in consolidated
financial statements.  SFAS 141(R) is required to be adopted
concurrently with SFAS 160 and is effective for business combination
transactions for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Early adoption is prohibited.  The Company is currently
assessing the impact that SFAS 141(R) will have on its results of
operations and financial position.




In March
2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133“, which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for the Company beginning January 1,
2009.  The Company believes that, for the foreseeable future, this
statement will have no impact on its financial statements once
adopted.





In May
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” The new standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for non-governmental entities. We are currently evaluating the
effects, if any, that SFAS No. 162 may have on our financial
reporting.





NOTE
3 - 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 current year ended June 30, 2008.  In addition,
the Company has used, rather than provided, cash in its operations.  The
Company has attempted during the period to use its resources 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 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:




Tessera. In March 2008,
Kronos executed an Intellectual Property Transfer and License Agreement with
Tessera Technologies, Inc. (“Tessera”) for the transfer and license of certain
intellectual property (IP) rights related to Kronos proprietary technologies to
Tessera.  Kronos initially received $3.5 million from Tessera in
exchange for the transfer of select Kronos patents covering micro-cooling
applications and for an exclusive license to the Kronos technology for the field
of ionic micro-cooling of integrated circuit devices or discrete electrical
components.  Kronos retained the rights to use these patents for
applications outside of the field of micro-cooling.  Tessera has
exercised its further right to acquire additional Kronos IP relating to
micro-cooling applications for four quarterly payments of $0.5 million each
beginning in July 1, 2008. Kronos received a payment of $0.5 million on July 1,
2008, a payment of $0.5 million on October 1, 2008, and an accelerated payment
of $1.0 million on November 21, 2008, for the remaining payments due on January
1, 2009 and April 1, 2009.  The receipt of this $2.0 million
constitutes payment in full for the remaining micro-cooling related patents
subject to the agreement with Tessera.  The Company and Tessera have
the option to continue to jointly develop new technologies in this
field.




F-9


EOL.  In December
2005, Kronos executed a non-exclusive License Agreement with EOL LLC, a Russian
Federation corporation ("EOL"). Based in Korolev, Moscow Region,
Russia.  EOL is leveraging the Kronos technology to produce, market,
and distribute Kronos commercial air purification products, bacteriological and
virus destruction devices in select Commonwealth of Independent
States.  The agreement comes after successful completion of multiple
tests in Eastern Europe, which found the Kronos technology capable of
decontaminating rooms infected with airborne viruses and
bacteria.  Under the terms of the five-year agreement, EOL is
providing Kronos a fixed percentage royalty on every product sold, as well as
upfront licensing and quarterly maintenance fees.  The initial medical
products are currently being marketed in Russia and marketing plans are being
implanted in Ukraine, Kazakhstan, Moldova and Byelorussia.  During the
fiscal year ended June 30, 2008, Kronos earned $55,000 in revenue from the sale
of power supplies, other electrical components and engineering services and from
the royalty from the sale of finished products by EOL.




Global Appliance
Manufacturers. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product.  This next generation range hood
device represented the culmination of more than twelve months of product design
and development efforts by Kronos to apply our technology to this unique
embedded residential application. The product was shipped to the customer in
October 2006.  In January 2007, the prototype design was modified
based on customer input and a revised unit was shipped to the
customer.  In addition to financial support, the customer has also
provided Kronos with product components for Kronos testing and
evaluation.  In February 2007, a second global appliance manufacturer
committed to purchase additional prototypes from Kronos for testing and
evaluation.  During the years ended June 30, 2008, Kronos earned
$34,055 in revenue from the development of prototype devices for the residential
range hood market place.




DESA.  In June
2006, the Company executed its first license for embedded applications of Kronos
technology with DESA LLC ("DESA").  The agreement provided DESA the
opportunity to embed the Kronos electrostatic air movement technology within
fireplaces, hearth systems, zone heaters and mounted electric fans and heaters
for minimum license payments.  In October 2006, DESA approved Kronos'
designs for the first Kronos-based product and committed to the funding of the
product development by Kronos.  In January 2007, DESA committed
additional funds for Kronos exploration of a second Kronos-based product
application.  By May 2007, various prototype configurations for each
of the two product applications were under test and evaluation by Kronos and
DESA.  Kronos does not have the funds to continue to pursue DESA
applications.




Washington Technology
Center.  In June 2007, the Washington Technology Center awarded
the Company in conjunction with the University of Washington and Intel
Corporation continued funding for a research and development project based on a
novel cooling system for microelectronics and computer chips.  This
Phase III award follows the Company’s Phase 1 and Phase II awards in December
2005 and June 2006, respectively.





NOTE
4 - OTHER CURRENT ASSETS





Other
current assets consisted of the following at June 30,




2008
                                
                                
                                2007Lease
      deposits
                                
                                $
                                7,138
                                
                                
                                $
                                7,138Prepaid
      insurance
                                
                                
                                138,906
                                
                                
                                
                                -Prepaid
      Other
                                
                                
                                5,000
                                
                                
                                
                                5,000Prepaid
      and other current assets
                                
                                $
                                151,044
                                
                                
                                $
                                12,138




NOTE
5 - PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following at June 30,




2008
                                  
                                  
                                  2007Office
      furniture and fixtures
                                  
                                  $
                                  55,537
                                  
                                  
                                  $
                                  45,694Machinery
      and equipment
                                  
                                  
                                  8,255
                                  
                                  
                                  
                                  8,25563,793
                                  
                                  
                                  
                                  53,949Less
      accumulated depreciation
                                  
                                  
                                  (52,549
                                  )
                                  
                                  
                                  (47,401
                                  )Net
      property and equipment
                                  
                                  $
                                  11,243
                                  
                                  
                                  $
                                  6,548




Depreciation
expense for the years ended June 30, 2008, and 2007 was $5,148 and $1,273
respectively.






F-10


NOTE 6 - INTANGIBLES





Intangible
assets consisted of the following at June 30,




2008
                                    
                                    
                                    2007Marketing
      intangibles
                                    
                                    $
                                    587,711
                                    
                                    
                                    $
                                    587,711Purchased
      patent technology
                                    
                                    
                                    2,669,355
                                    
                                    
                                    
                                    2,669,355Developed
      patent technology
                                    
                                    
                                    1,205,980
                                    
                                    
                                    
                                    939,5284,463,046
                                    
                                    
                                    
                                    4,196,594Less
      accumulated amortization
                                    
                                    
                                    (2,916,553
                                    )
                                    
                                    
                                    (2,473,444
                                    )Net
      intangible assets
                                    
                                    $
                                    1,546,493
                                    
                                    
                                    $
                                    1,723,150




Purchased
patent technology includes property that was acquired in the Kronos
acquisition.




Intangible
assets are being amortized on a straight line basis over 10 years.
 Amortization expense for the years ended June 30, 2008, and 2007 was
$443,109 and $433,885, respectively.




Amortization
of the Company's Intangible Assets shown above for the fiscal years ended June
30,




2009
                              
                              
                              2010
                              
                              
                              2011
                              
                              
                              2012
                              
                              
                              2013Marketing
      intangibles
                              
                              $
                              587,711
                              
                              
                              $
                              587,711
                              
                              
                              $
                              587,711
                              
                              
                              $
                              587,711
                              
                              
                              $
                              587,711Purchased
      patent technology
                              
                              
                              2,669,355
                              
                              
                              
                              2,669,355
                              
                              
                              
                              2,669,355
                              
                              
                              
                              2,669,355
                              
                              
                              
                              2,669,355Developed
      patent technology
                              
                              
                              1,205,980
                              
                              
                              
                              1,205,980
                              
                              
                              
                              1,205,980
                              
                              
                              
                              1,205,980
                              
                              
                              
                              1,205,9804,463,046
                              
                              
                              
                              4,463,046
                              
                              
                              
                              4,463,046
                              
                              
                              
                              4,463,046
                              
                              
                              
                              4,463,046Less
      accumulated amortization
                              
                              
                              (3,362,856
                              )
                              
                              
                              (3,720,212
                              )
                              
                              
                              (3,899,581
                              )
                              
                              
                              (4,078,950
                              )
                              
                              
                              (4,236,142
                              )Net
      intangible assets
                              
                              $
                              1,100,190
                              
                              
                              $
                              742,843
                              
                              
                              $
                              563,465
                              
                              
                              $
                              384,096
                              
                              
                              $
                              226,904





NOTE
7 - ACCRUED EXPENSES





Accrued
expenses consisted of the following at June 30,




2008
                                      
                                      
                                      2007Accrued
      professional services
                                      
                                      $
                                      35,000
                                      
                                      
                                      $
                                      75,390Accrued
      compensation and other (1)
                                      
                                      
                                      288,751
                                      
                                      
                                      
                                      49,610$
                                      323,751
                                      
                                      
                                      $
                                      125,000Accrued
      interest on notesand
      to officers
                                      
                                      
                                      437,603
                                      
                                      
                                      
                                      44,002$
                                      761,354
                                      
                                      
                                      $
                                      169,002




(1)
            Includes
      $243,750 of restructuring costs expensed in the fourth quarter 2008 for
      severance to Mr. Dwight under terms of the agreement with the Company, see
      Note 14 Legal Proceedings.








F-11


NOTE
8 – CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE




The
Company had the following obligations as of June 30,




2008
                                  
                                  
                                  2007Obligations
      to AirWorks Funding LLLP (1)
                                  
                                  $
                                  3,426,135
                                  
                                  
                                  $
                                  2,480,000Obligations
      to Hilltop LLP/RS Properties LP(1)
                                  
                                  
                                  1,147,425
                                  
                                  
                                  
                                  920,000Discount
      for Beneficial Conversion Feature (2)
                                  
                                  
                                  (3,314,620
                                  )
                                  
                                  
                                  (3,365,845
                                  )Obligations
      to Sands Brothers (3)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  859,000Obligations
      to Gumbinner and Sun (1)
                                  
                                  
                                  200,000
                                  
                                  
                                  
                                  200,000Obligation
      to current employees (4)
                                  
                                  
                                  110,484
                                  
                                  
                                  
                                  202,3071,569,424
                                  
                                  
                                  
                                  1,295,462Less:Current
      portion
                                  
                                  
                                  1,569,424
                                  
                                  
                                  
                                  1,061,307Total
      long term obligations net ofcurrent
      portion
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  234,155




(1)  These
notes bear interest at the rate of 12% are secured by the assets of the Company
and convertible into shares of Kronos Common Stock at $0.0028 or are payable in
full on June 19, 2010. On September 29, 2008, Kronos Advanced Technologies, Inc.
(the “Company”) received a notice of event of default from AirWorks Funding LLLP
(“AirWorks”) with respect to the Secured Convertible Promissory Note due June
19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks, see Note
20 Subsequent Events.




(2)  Under
Generally Accepted Accounting Principles, the Company recorded a discount for
the Beneficial Conversion Feature (“BCF”) on the convertible debt issued to
AirWorks and Hilltop LLP/RS Properties.  The amount of the BCF
discount was calculated using the Black-Scholes model.  Because the
maximum value of the BCF discount can not exceed the full value of the issued
debt, the Company recorded the discount at the full value of the debt of
$3,400,000 in 2007 and an additional BCF of $2,105,000 in 2008.  The
BCF recognized  during 2008 was calculated for additional amounts of
the notes received from Airworks and Hilltop, $1,905,000,  along with
the note to Gumbinner and Sun, $200,000. The Company is amortizing the BCF
discount over the three year life of the debt.  For the fiscal
years ended June 30, 2008, and June 30 2007, the Company recorded a discount
amortization of $2,156,225 and $34,155 respectively.




(3)  These
notes bear interest at the rate of 12% are secured by the assets of the Company
and were paid in full on April 1, 2008.




(4) 
These notes bear interest at the rate of 12%. They represent obligation to
current employees of the Company, which are due in full.




Payout of
the Company's Notes Payable obligations listed above consisted of the
following for the fiscal years ended June 30,




2009Obligations
      to AirWorks Funding LLLP
                                
                                $
                                3,426,135Obligations
      to Hilltop LLP
                                
                                
                                1,147,425Obligation
      to current employees
                                
                                
                                110,484Obligations
      to Gumbinner and Sun
                                
                                
                                200,000$
                                4,884,044







F-12


NOTE 9 - LEASES




The
Company has entered into a non-cancelable operating lease for facilities. 
Rental expense was approximately $83,400 and $73,128 for years ended June 30,
2008, and 2007 respectively.  Effective October 1, 2005, Kronos is
committed through September 30, 2009, to annual lease payments on operating
leases for 6,000 square feet of office/research and product development
premises.




2009Lease
      payments
                              
                              $
                              83,400




NOTE
10 - NET LOSS PER SHARE




As of
June 30, 2008, there were outstanding options to purchase 90,259,775 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 loss per share calculation, as their effect is
anti-dilutive.  As of June 30, 2007, there were outstanding options to
purchase 89,065,771 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 loss per share calculation, as their effect
is anti-dilutive.




NOTE
11 - INCOME TAXES




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




2008
                              
                              
                              2007Benefit
      from carryforward of capitaland
      net operating losses
                              
                              $
                              (8,138,840
                              )
                              
                              $
                              (7,698,000
                              )Other
      temporary differences
                              
                              
                              (157,000
                              )
                              
                              
                              (157,000
                              )Options
      issued for services
                              
                              
                              (806,000
                              )
                              
                              
                              (551,000
                              )Less:Valuation
      allowance
                              
                              
                              9,101,840
                              
                              
                              
                              8,406,000Net
      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:




June
      30,2008
                                                            
                                                            
                                                            2007Amount
                                                            
                                                            
                                                            %
      of pre-tax Loss
                                                            
                                                            
                                                            Amount
                                                            
                                                            
                                                            %
      of pre-tax LossBenefit
      for income tax at:Federal
      statutory rate
                                                            
                                                            $
                                                            (1,481,000
                                                            )
                                                            
                                                            
                                                            (34.0
                                                            )%
                                                            
                                                            $
                                                            (1,360,000
                                                            )
                                                            
                                                            
                                                            (34.0
                                                            )%State
      statutory rate
                                                            
                                                            
                                                            (87,000
                                                            )
                                                            
                                                            
                                                            (2.0
                                                            )%
                                                            
                                                            
                                                            (80,000
                                                            )
                                                            
                                                            
                                                            (2.0
                                                            )%Non-deductible
      expenses
                                                            
                                                            
                                                            872,160
                                                            
                                                            
                                                            
                                                            1.4
                                                            %
                                                            
                                                            
                                                            105,000
                                                            
                                                            
                                                            
                                                            1.46
                                                            %Increase
      in valuation allowance
                                                            
                                                            
                                                            695,840
                                                            
                                                            
                                                            
                                                            34.6
                                                            %
                                                            
                                                            
                                                            1,335,000
                                                            
                                                            
                                                            
                                                            34.64
                                                            %$
                                                            -
                                                            
                                                            
                                                            
                                                            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, 2008, the Company has approximately $19.4 million of unused Federal net
operating losses, $2.3 million capital losses and $15.2 million state net
operating losses available for carryforward to future years.  The benefit
from carryforward of such losses will expire in various years through 2026 and
could be subject to limitations if significant ownership changes occur in the
Company.




F-13


NOTE
12 - 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.




As of
July 1, 2004, the Company elected to follow Statement of Financial Accounting
Standards No. 123R, Share-Based Payment ("SFAS No. 123R") to recognize stock
compensation expense for awards of equity instruments to employees based on the
grant-date fair value of those awards (with limited exceptions).




On June
15, 2007, the Board of Directors approved the Kronos Advanced Technologies 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 100,000,000 shares of
common stock under the Stock Option Plan.  The options generally have terms
of up to ten years.




The
Company granted non-qualified stock options totaling 1,383,333 and 85,426,320
shares in the years ended June 30, 2008, and 2007, respectively.  As
of June 30, 2008 the Company currently had 88,462,000 stock options
exercisable.  The Company does not have sufficient authorized shares
currently available to fulfill the exercise of these non-qualified stock
options.




The
Company has obtained Standstill Letter Agreements from most of the option and
warrant holders.  These agreements prevent the holders from exercising
their right to convert said options or warrants until such time that the Company
increases its number of authorized shares in order to be able to fulfill the
exercise of these options or warrants.  The balance of the options and
warrants the Company cannot control the exercise of are subject to a derivative
liability at the fair market value of these instruments.  However, the fair
market value of the said instruments was not material to the Company’s financial
statements at December 31, 2007, March 31, 2008 and June 30, 2008. As a result,
no such derivative liability was recorded.






F-14




A summary
of the Company's stock option activity and related information for the years
ended June 30, 2008 and 2007 is as follows (in thousands, except per share
amounts):




WeightedAverageShares
                                  
                                  
                                  Exercise
      PriceOutstanding
      at June 30, 2006
                                  
                                  
                                  22,783
                                  
                                  
                                  
                                  0.240Granted
                                  
                                  
                                  85,426
                                  
                                  
                                  
                                  0.018Exercised
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Cancelled
                                  
                                  
                                  (19,144
                                  )
                                  
                                  
                                  0.073Outstanding
      as June 30, 2007
                                  
                                  
                                  89,065
                                  
                                  
                                  $
                                  0.063Granted
                                  
                                  
                                  1,384
                                  
                                  
                                  
                                  0.021Exercised
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Cancelled
                                  
                                  
                                  (189
                                  )
                                  
                                  
                                  0.255Outstanding
      as June 30, 2008
                                  
                                  
                                  90,260
                                  
                                  
                                  $
                                  0.063




A summary
of options outstanding and exercisable at June 30, 2008 and 2007 is follows (in
thousands, except per share amounts and years):




Options
      Outstanding
                                                      
                                                      
                                                      Options
      ExercisableWeightedAverageRemaining
                                                      
                                                      
                                                      WeightedRange
      of
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Life
      (in
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      Range
      ofExercise
      Prices
                                                      
                                                      
                                                      Options
                                                      
                                                      
                                                      years)
                                                      
                                                      
                                                      Exercise
      Price
                                                      
                                                      
                                                      Exercise
      Prices
                                                      
                                                      
                                                      OptionsJune
      30, 2008$0.71-$1.12
                                                      
                                                      
                                                      
                                                      648
                                                      
                                                      
                                                      
                                                      
                                                      2.8
                                                      
                                                      
                                                      
                                                      $0.82
                                                      
                                                      
                                                      
                                                      $0.71-$1.12
                                                      
                                                      
                                                      
                                                      648$0.21-$0.70
                                                      
                                                      
                                                      
                                                      1,030
                                                      
                                                      
                                                      
                                                      
                                                      3.4
                                                      
                                                      
                                                      
                                                      $0.43
                                                      
                                                      
                                                      
                                                      $0.21-$0.70
                                                      
                                                      
                                                      
                                                      1,030$0.00-$0.20
                                                      
                                                      
                                                      
                                                      88,581
                                                      
                                                      
                                                      
                                                      
                                                      8.4
                                                      
                                                      
                                                      
                                                      $0.02
                                                      
                                                      
                                                      
                                                      $0.00-$0.20
                                                      
                                                      
                                                      
                                                      86,784June
      30, 2007$0.71-$1.12
                                                      
                                                      
                                                      
                                                      648
                                                      
                                                      
                                                      
                                                      
                                                      3.8
                                                      
                                                      
                                                      
                                                      $0.82
                                                      
                                                      
                                                      
                                                      $0.71-$1.12
                                                      
                                                      
                                                      
                                                      648$0.21-$0.70
                                                      
                                                      
                                                      
                                                      1,157
                                                      
                                                      
                                                      
                                                      
                                                      4.0
                                                      
                                                      
                                                      
                                                      $0.43
                                                      
                                                      
                                                      
                                                      $0.21-$0.70
                                                      
                                                      
                                                      
                                                      1,157$0.00-$0.20
                                                      
                                                      
                                                      
                                                      87,260
                                                      
                                                      
                                                      
                                                      
                                                      9.4
                                                      
                                                      
                                                      
                                                      $0.02
                                                      
                                                      
                                                      
                                                      $0.00-$0.20
                                                      
                                                      
                                                      
                                                      20,845




A summary
of the Company's stock warrant activity and related information for the years
ended June 30, 2008, and 2007 is as follows (in thousands, except per share
amounts):




Weighted
      AverageWarrants
                                    
                                    
                                    Exercise
      PriceOutstanding
      at June 30, 2006
                                    
                                    
                                    42,300
                                    
                                    
                                    $
                                    0.12Granted
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cancelled
                                    
                                    
                                    (26,508
                                    )
                                    
                                    $
                                    0.10Outstanding
      as June 30, 2007
                                    
                                    
                                    15,792
                                    
                                    
                                    $
                                    0.15Granted
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cancelled
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Outstanding
      as June 30, 2008
                                    
                                    
                                    15,792
                                    
                                    
                                    $
                                    0.15






F-15


NOTE
13 - COMMITMENTS AND CONTINGENCIES





In June
2007, Kronos entered into a Funding Agreement with a group of lenders providing
for a loan, at the discretion of the lenders, in the aggregate amount of up to
$18,159,000. At the initial closing, the Company received an initial advance of
$4,259,000.  After payment in full of the amounts due under an
outstanding convertible debenture issued to Cornell Capital Partners and
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.




The new
lenders are:  (i) AirWorks Funding LLLP, a newly-formed limited
partnership (“AirWorks”); (ii) Critical Capital Growth Fund, L.P. and various
Sands Brothers Venture Funds, all of which are affiliates of Laidlaw and Co.
(UK) Ltd. (collectively “Sands”) and (iii) RS Properties I LLC, a New York-based
private investment company (“RS Properties”).  Subsequently, RS
Properties assigned to Hilltop Holding Company, LP, a Delaware limited
partnership, (‘Hilltop”) its promissory note together with certain other rights
and agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.




The loan
is secured by all of the Company's assets and is convertible into shares of the
Company's common stock at a conversion price of $0.003 per share, subject to
adjustment under certain circumstances.  Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company.  Under the Funding
Agreement and related notes, the Company pays interest at the rate of 12% per
annum.  Of the total amount of the initial advance, interest is paid
monthly starting July 1, 2007, on $859,000, which principal amount is due and
payable December 31, 2007.  Such amount may be converted into Kronos
common stock at the option of the holder at the $0.003 conversion price only if
not paid in full by December 31, 2007.  On March 13, 2008, Critical
Capital and Sands Brothers agreed to extend the maturity date of their note
until April 30, 2008.  On April 1, 2008, the Company repaid Critical
Capital and Sands Brothers the full principal amount and interest on the
note.  With respect to all other loan amounts, interest is paid
quarterly starting January 1, 2008, and outstanding principal is due and payable
June 19, 2010, unless earlier converted at the option of the lenders. Assuming
that the maximum loan amount is advanced under the Funding Agreement and related
notes and that the lenders convert the entire amount of the loan into Kronos
common stock at the noted conversion price, the lenders would own approximately
93.3% of the Company's total equity on a fully diluted, as converted
basis.




Also in
connection with the Funding Agreement, several Kronos option and warrant holders
delivered standstill agreements pursuant to which such holders agreed not to
exercise their options or warrants before December 31, 2007.  Several
stockholders also entered into Voting Agreements with the lenders pursuant to
which they agreed to vote, if and when proposed to shareholders, in favor
of:  (i) a slate of directors of the Company's board of directors as
proposed by AirWorks; (ii) adjusting the size of the Company's board of
directors such that upon the election of the slate of directors proposed by
AirWorks, such directors hold a majority of the seats on the Company's board of
directors; (iii) approving an amendment to the Company's articles of
incorporation to increase the Company's authorized common stock to a number of
shares necessary to allow the lenders to convert the entire amount of the
financing into shares of common stock of the Company as provided in the Notes
and the Funding Agreement; (iv) reincorporating the Company in Delaware; (v) a
reverse stock split proposed by AirWorks or the Company's board of directors;
and (vi) against any action or transaction that may reasonably be expected to
impede, interfere with, delay, postpone or attempt to discourage the
consummation of any of the foregoing.  Such standstill and voting
agreements, combined with the conversion into Kronos common stock of a
sufficient amount of the initial advance under the Funding Agreement, would give
the lenders voting control of the Company.




The
Funding Agreement also gives the lenders the right to designate a majority of
the members of the Company's Board of Directors In accordance with the Funding
Agreement, on April 14, 2008, the lenders exercised their right to designate a
majority of the members of the Company's Board of Directors and five new
additional Board members were appointed to the Kronos Board of
Directors:  Richard Perlman, Jack Silver, James Price, Marc Kloner and
Barry Salzman.  The Funding Agreement also contains usual and
customary representations and warranties and covenants that prohibit the Company
from undertaking certain actions without the consent of AirWorks.




Airworks,
effective as of January 1, 2008, in agreement with the Company, agreed to defer
payment of quarterly interest expenses for an unspecified period, until the
Company received a Notice of Default by Airworks on September 29,
2008.




On
September 29, 2008, Kronos received a notice of event of default from AirWorks
with respect to the Secured Convertible Promissory Note due June 19, 2010 (the
“Promissory Note”), issued to by the Company to AirWorks.  The notice
states that (1) an Event of Default under Section 2.1(a) of the Promissory Note
has occurred due to the failure of the Company to make interest payments on the
Promissory Note and (2) the entire principal amount of, and the interest on, the
Promissory Note is declared immediately due and payable in the amount of
$3,551,735 plus interest.




F-16


Daniel R.
Dwight, former President and Chief Executive Officer, and the Company entered
into an employment agreement effective as of November 15, 2001, and was
terminated June 20, 2008. The Company and Mr. Dwight entered into a Severance
Agreement dated May 16, 2008, in which the Company recorded $243,750 as a
restructuring cost in the results for the year ended June 30,
2008.  Richard F. Tusing, as of June 20, 2008, was appointed Acting
President, Acting Chief Executive Officer, Chief Operating Officer, Secretary,
Treasurer and Chief Financial Officer.  The Company entered into an
employment agreement with Mr. Tusing effective as of January 1, 2003.  The
initial term of Mr. Tusing's employment agreement is for two years and will
automatically renew for successive one year terms unless Kronos or Mr. Tusing
provide the other party with written notice within three months of the end of
the initial term or any subsequent renewal term.  The Board of Directors
renewed Mr. Tusing's employment agreement on October 1, 2004, October 1, 2005,
October 1, 2006, October 1, 2007, and October 1, 2008.  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.




NOTE
14 – LEGAL PROCEEDINGS




Thompson
E. Fehr has filed a complaint in the state of Utah, in the Second Judicial
District Court in Weber County, against Kronos with respect to prior services
rendered to High Voltage Integrated, Inc. (HVI), based on unpaid patent counsel
services totaling $47,130 by Fehr to HVI.  Fehr has filed total
damages claims of $444,900.  The Company believes this complaint is
without merit and has completed actions to defend itself.




Daniel R.
Dwight filed a lawsuit on October 17, 2008, in the state of Massachusetts, in
Suffolk County Superior Court, against Kronos for lack of payments pursuant to
the Severance Agreement dated May 16, 2008 for claims of $187, 437 plus interest
and attorney fees. As of June 30, 2008, the Company has accrued $243,750 related
to the severance payments due Mr. Dwight in accordance with the May 16, 2008
Severance Agreement.  The Company believes its obligations to its
Secured Lenders supercede the payment obligations to Mr. Dwight.




Allstate
Insurance Company, as subrogee of David Buell, filed a complaint in the state of
Michigan against HoMedics, Inc. and Kronos with respect to damages related to a
fire in the home of Mr. Buell, which resulted in $244,155 in
damages.  Under the terms of the Company’s general liability insurance
policy, this matter was addressed by the Company's insurance carrier, Argonaut
Group, and settled during the year. Kronos executed a full release of this
matter on December 12, 2007.




In
addition, the Company received correspondence from Frederic R. Gumbinner and
Richard A. Sun, as second secured lien holders, concerning claims for late
payments and subsequent related penalties with respect to outstanding loans by
Mr. Gumbinner and Mr. Sun.  The Company has responded that the
obligation to its senior secured lien holders supercedes and takes priority to
the claims of the second secured lien holders and the existing intercreditor
agreements among the secured lenders sets for the applicable rights, obligations
and responsibilities between the lenders.




NOTE
15 - MAJOR CUSTOMERS




As of
June 30, 2008, the Company had four major customers:  Tessera, EOL,
Bosch, and Sharper Image.  Of the $3,665, 997 in revenue recorded in
the year ended June 30, 2008, $3,326,922 or 91% was derived from
Tessera.




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 Kronos technology. In the year ended June 30, 2008,
the Company operated only in the United States of America.




NOTE
17 - RELATED PARTIES




As of
June 30, 2008, the Company has outstanding obligations for past compensation to
management of $110,484. These unpaid amounts currently accrue interest at the
rate of 12% per annum.




NOTE
18 - STOCKHOLDERS' EQUITY/(DEFICIT)




During the fiscal year ended June 30, 2008, we issued
243,813,400 shares of Kronos Common Stock to Airworks and Hilltop following
conversion of a portion of the promissory notes issued in connection with the
related Funding Agreements and 1,470,488 shares of common stock to another party
for services.




During
the year ended June 30, 2008, we recorded the remaining one-third expense
associated with the 80 million stock options issued to employees and directors
on June 18, 2007.  The ten year options vested two thirds upon
issuance on June 18, 2007 and one third during the following twelve month
period. Options convert into shares of Kronos common stock at $0.016 per
share.




F-17


During
the year ended June 30, 2008, we issued 1.3 million stock options to employees
and directors and others.  Of these ten year options, 550,000 options
are fully vested and convert into shares of Kronos common stock at $0.016 per
share.  The remaining options, 833,333, vest over three years and
convert into shares of Kronos common stock at $0.016 per share.




During
the year ended June 30, 2008, we incurred $2,105,000 million of additional
convertible debt.  The beneficial conversion feature was valued at the
full face value of the debt and recorded to the Company’s paid in
capital.  The proceeds from this additional debt was used for working
capital purposes.




During
the fiscal ended June 30, 2007, we issued 97,843,146 shares of Kronos common
stock to Cornell Capital Partners under our Standby Equity Distribution
Agreement. The proceeds from the issuance of these shares were used for working
capital purposes ($801,438) and to repay debt ($578,500).




On June
18, 2007, we issued 80 million stock options to employees and
directors.  The ten year options vest two thirds upon issuance and
one- third over the following twelve months and convert into shares of Kronos
common stock at $0.016 per share.




On June
19, 2007, we cancelled 26,508,658 warrants issued to HoMedics.




On June
19, 2007, we issued $3,400,000 million in convertible debt.  The
beneficial conversion feature was valued at the full face value of the debt and
recorded to the Company’s paid in capital.




NOTE
19 - SUBSEQUENT EVENTS (Unaudited)




On
September 29, 2008, Kronos received a notice of event of default from AirWorks
with respect to the Secured Convertible Promissory Note due June 19, 2010 (the
“Promissory Note”), issued to by the Company to AirWorks.  The notice
states that (1) an Event of Default under Section 2.1(a) of the Promissory Note
has occurred due to the failure of the Company to make interest payments on the
Promissory Note and (2) the entire principal amount of, and the interest on, the
Promissory Note is declared immediately due and payable in the amount of
$3,551,735 plus interest.




The
Company has been, and continues to be, in discussions with its secured lenders
regarding the outstanding obligations under the AirWorks and Hilltop promissory
notes, the alleged occurrence of an event of default, and the future operational
plan of the Company.  In connection with the foregoing and in light of
the Company’s financial condition (including with respect to certain other
obligations of the Company), the Board of Directors has appointed an independent
committee, consisting of James P. McDermott and M. J. Segal, to investigate the
alleged event of default, analyze the current status of the Company, and review
alternatives for maximizing the value of the Company’s assets including the
sale, license or liquidation of any or all of the assets of the
Company.





The
Company received notification from James P. McDermott and M.J. Segal on the
dates of December 22, 2008 and December 23, 2008 respectively, that Mr.
McDermott and Mr. Segal have resigned from the Kronos Board of
Directors.




In March
2008, Kronos executed an Intellectual Property Transfer and License Agreement
with Tessera Technologies, Inc. (“Tessera”) for the transfer and license of
certain intellectual property (IP) rights related to Kronos proprietary
technologies to Tessera.  Kronos initially received $3.5 million from
Tessera in exchange for the transfer of select Kronos patents covering
micro-cooling applications and for an exclusive license to the Kronos technology
for the field of ionic micro-cooling of integrated circuit devices or discrete
electrical components.  Kronos retained the rights to use these
patents for applications outside of the field of
micro-cooling.  Tessera has exercised its further right to acquire
additional Kronos IP relating to micro-cooling applications for four quarterly
payments of $0.5 million each beginning in July 1, 2008. Kronos received a
payment of $0.5 million on July 1, 2008, a payment of $0.5 million on October 1,
2008, and an accelerated payment of $1.0 million on November 21, 2008, for the
remaining payments due on January 1, 2009 and April 1, 2009.  The
receipt of this $2.0 million constitutes payment in full for the remaining
micro-cooling related patents subject to the agreement with
Tessera.  The Company and Tessera have the option to continue to
jointly develop new technologies in this field.






F-18


ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.




ITEM 8A(T). CONTROLS AND
PROCEDURES




Evaluation of Disclosure Controls and
Procedures




We are
required to maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Acting Chief Executive Officer and
Chief Financial Officer (one individual) as appropriate, to allow timely
decisions regarding required disclosure.




In
connection with the preparation of this Form 10-KSB for the year ended June
30, 2008 our management, under the supervision of our Acting Chief Executive
Officer and Chief Financial Officer (one individual), conducted an evaluation of
disclosure controls and procedures. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control systems are met. Based on that evaluation,
our Acting Chief Executive Officer and Chief Financial Officer (one individual)
concluded that our disclosure controls and procedures were effective as of the
filing date of this Annual Report.





Management’s
Annual Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control
structure and procedures over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. Our management
conducted an assessment of the effectiveness of our internal control over
financial reporting as of June 30, 2008 based on the framework set forth in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).




Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Based on
that evaluation, our Acting Chief Executive Officer and Chief Financial Officer
(one individual) concluded that our internal control over financial reporting as
of June 30, 2008 were effective.





This
Annual Report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this Annual Report.




Changes
in Internal Control over Financial Reporting




Except as
disclosed above, there were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




21





PART
III






ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT




Our
directors and executive officers and their ages as of January 9, 2008 are as
follows:




NAME
                  AGE
                  POSITIONRichard
      F. Tusing
                  51
                  Director;
      Acting President, Acting Chief Executive Officer, Chief Operating Officer,
      CFO, Secretary, TreasurerRichard
      E. Perlman
                  62
                  DirectorJames
      K. Price
                  50
                  DirectorJack
      Silver
                  65
                  DirectorMarc
      Kloner
                  62
                  DirectorBarry
      Salzman
                  46
                  Director




Richard
F. Tusing, 51, 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 and Secretary on January 1, 2002, and Acting President, Acting
Chief Executive Officer, on June 20, 2008 and  Chief Financial Officer
and Treasurer on January 9, 2009.  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 twenty 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,
fourteen 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.




Richard
E. Perlman, 62, became a Director in Kronos in April 2008.  Mr.
Perlman has been Chairman of the Board of Turbochef, Inc. since October
2003.  He was formerly chairman of PracticeWorks, Inc. from March 2001
until its acquisition by The Eastman Kodak Company in October
2003.  Mr. Perlman served as chairman and treasurer of AMICAS, Inc.
(formerly VitalWorks Inc.) from January 1998 and as a director from March 1997
to March 2001, when he resigned from all positions with that company upon
completion of the spin-off of PracticeWorks, Inc. from
VitalWorks.  From December 1997 until October 1998, Mr. Perlman also
served as VitalWorks’ chief financial officer.  Mr. Perlman is the
founder of Compass Partners, L.L.C., a merchant banking and financial advisory
firm specializing in corporate restructuring and middle market companies, and
has served as its president since its inception in May 1995.  From
1991 to 1995, Mr. Perlman was executive vice president of Matthew Stuart &
Co., Inc., an investment banking firm.  Mr. Perlman received a B.S. in
Economics from the Wharton School of the University of Pennsylvania and a
Masters in Business Administration from the Columbia University Graduate School
of Business.





James K.
Price, 50, became a Director of Kronos in April 2008.  Mr. Price has
been the President and Chief Executive Officer and a director of Turbochef, Inc.
since October 2003.  From March 2001 until its acquisition by The
Eastman Kodak Company in October 2003, Mr. Price was the president and chief
executive officer and a director of PracticeWorks, Inc.  Mr. Price was
a founder of VitalWorks Inc. and served as its executive vice president and
secretary from its inception in November 1996 to March 2001, when he resigned
from all positions with VitalWorks upon completion of the spin-off of
PracticeWorks from VitalWorks.  Mr. Price served as an executive
officer of American Medcare from 1993 and co-founded and served as an executive
officer of International Computer Solutions from 1985, in each instance until
American Medcare and International Computer Solutions merged into VitalWorks in
July 1997.  Mr. Price holds a B.A. in Marketing from the University of
Georgia.





22


Jack
Silver, 65, became a Director of Kronos in April 2008.  Mr. Silver is the
principal investor and manager of SIAR Capital, LLC, an independent investment
fund that invests primarily in undervalued, emerging growth companies, and is
the trustee of Sherleigh.





Marc
Kloner, 62, became a Director of Kronos in April 2008.  Mr. Kloner was an
astronautical engineer with the NASA Jet Propulsion Laboratory prior to starting
KComp, a microcomputer company in 1977.  KComp was one of the founding
companies of Infocure that went public in 1997.  Mr. Kloner was
instrumental in doing many mergers and acquisitions for Infocure and a spin off
public dental computer company, Practiceworks.  Additionally, Mr.
Kloner also had one of the most successful dealerships for EcoQuest selling many
tens of millions of dollars of air purifiers in a nationwide direct response
radio campaign.  Mr. Kloner received a Masters Degree in
Aeronautical-Astronautical Engineering from Ohio State University.




Barry
Salzman, 46, became a Director of Kronos in April 2008.  Mr. Salzman
is a 1987 graduate of Brooklyn Law School and member of the New York State Bar
Association.  From 1987 through 2007, Mr. Salzman worked in various
roles for the Becker-Parkin Dental Supply Company.  He served as
President and CEO of the company from 1996 through 2007.  In July
2007, Mr. Salzman lead the team that sold the company to the Henry Schein
Corporation.  Since 2007, Mr. Salzman has been a consultant on various
projects including Kronos Air Technologies.




The
Company received notification from James P. McDermott and M.J. Segal on the
dates of December 22, 2008 and December 23, 2008 respectively, that Mr.
McDermott and Mr. Segal have resigned from the Kronos Board of Directors, but
served as Directors until these dates.




James P.
McDermott, 46, became a Director of Kronos in July 2001.  Mr. McDermott has
over 25 years of financial and operational problem-solving experience. Mr.
McDermott is a Managing Director at Alvarez & Marsal North American,
LLC.  From 2000 until joining Alvarez & Marsal, Mr. McDermott was
Managing Director of Eagle Rock Group, LLC, a business advisory firm he
co-founded.  Mr. McDermott was also President and CEO of AF&L,
Inc. and its subsidiaries. AF&L is a Senior Markets Insurer.  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. in Business
Administration from the University of Wisconsin, Madison.




M. J.
Segal, 63, became a Director of Kronos in September 2003.  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 members.  Directors serve for a term of
one year and until their successors are elected and
qualified.  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 which span 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.




23


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 Auto Racing, Inc.) 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 sixty member
nations).




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.
McDermott and Segal are the current members of the Compensation Committee. 
During the year the Compensation Committee held two 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. McDermott and Segal are the current members of the
Audit Committee.  During the year the Audit Committee held four meetings.
 Each member attended at least 75% of the meetings.




On  October
3, 2008, the Board of Directors established an independent committee, consisting
of James P. McDermott and M. J. Segal, to investigate the alleged event of the
default claimed by Airworks, analyze the current status of the Company and
propose a strategy for maximizing the value of the Company’s ongoing operations
and assets, including the sale of the Company or its assets.




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 Independent director may be paid a fixed sum or receive a stated
salary as a director.  Independent, non-executive directors are entitled to
receive $4,500 per quarter as compensation for their services as members of our
Board of Directors.  For the twelve month period ending June 30, 2008,
Messrs. McDermott and Segal earned $18,000 each as cash compensation for their
services as members of our Board of Directors.




Share Based Compensation.
 During the fiscal year ended June 30, 2008, Messrs. McDermott and Segal
received no additional stock options as compensation for their services as
members of our Board of Directors.




DIRECTOR
COMPENSATION




Fees
                                    
                                    
                                    Non-Equity
                                    Non-QualifiedEarned
      or
                                    
                                    
                                    Incentive
                                    Deferred
                                    AllPaid
      in
                                    Stock
                                    Option
                                    Plan
                                    Compensation
                                    OtherCash
                                    Awards
                                    Awards
                                    Compensation
                                    Earnings
                                    Compensation
                                    TotalName
                                    ($)
                                    ($)
                                    ($)
                                    ($)
                                    ($)
                                    ($)
                                    ($)(a)
                                    (b)
                                    (c)
                                    (d)
                                    (e)
                                    (f)
                                    (g)
                                    (j)James  P.McDermott (1)
                                    $18,000
                                    --
                                    --
                                    --
                                    --
                                    --
                                    $18,000M.
      J.Segal (2)
                                    $18,000
                                    --
                                    --
                                    --
                                    --
                                    --
                                    $18,000




(1)  For
the twelve months ended June 30, 2008, Mr. McDermott earned $18,000
as cash
compensation.





(2)  For
the twelve months ended June 30, 2008, Mr. Segal earned $18,000 as
cash Compensation.







24




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% stockholders 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, 2008, all Section 16(a) filing requirements
applicable to our officers and directors were complied with, except that due to
administrative errors Mr. Silver, Mr. Perlman and AirWorks each were late in
filing a Form 4.




ITEM 10. EXECUTIVE COMPENSATION




The
following table sets forth compensation for the fiscal year ended June 30, 2008,
and June 30,2007 for our two named executive officers:




SUMMARY
COMPENSATION TABLE




Annual
      Compensation
                                                                                
                                                                                Long-Term
      CompensationNon-EquityName
      and
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Stock
                                                                                
                                                                                Option
                                                                                
                                                                                Deferred
                                                                                
                                                                                All
      Other
                                                                                
                                                                                TotalPrincipal
                                                                                
                                                                                
                                                                                
                                                                                Salary
                                                                                
                                                                                Bonus
                                                                                
                                                                                Awards
                                                                                
                                                                                Awards
                                                                                
                                                                                Compensation
                                                                                
                                                                                Compensation
                                                                                
                                                                                CompensationFiscal
      Position
                                                                                
                                                                                Year
                                                                                
                                                                                $
                                                                                
                                                                                $
                                                                                
                                                                                $
                                                                                
                                                                                $
                                                                                
                                                                                #
                                                                                
                                                                                $
                                                                                
                                                                                $(a)
                                                                                
                                                                                (b)
                                                                                
                                                                                (c)
                                                                                
                                                                                (d)
                                                                                
                                                                                (e)
                                                                                
                                                                                (f)
                                                                                
                                                                                (g)
                                                                                
                                                                                (h)
                                                                                
                                                                                (i)Daniel
      R.
                                                                                
                                                                                2008
                                                                                
                                                                                215,625
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                16,344
                                                                                
                                                                                232,965Dwight,
                                                                                
                                                                                2007
                                                                                
                                                                                225,000
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                520,000
                                                                                
                                                                                --
                                                                                
                                                                                16,344
                                                                                
                                                                                761,344Former
      PresidentAnd
      Former ChiefExecutiveOfficer(1)Richard
      F.
                                                                                
                                                                                2008
                                                                                
                                                                                160,000
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                160,000Tusing,
      Chief
                                                                                
                                                                                2007
                                                                                
                                                                                160,000
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                300,000
                                                                                
                                                                                --
                                                                                
                                                                                --
                                                                                
                                                                                460,000OperatingOfficer,acting
      ChiefExecutive
      Officer,acting
      President,Chief
      FinancialOfficer,
      Treasurer,and
      Secretary (2)




(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, August 15, 2005, August 15, 2006 and August 15, 2007, by the Board of
Directors.  Effective April 15, 2006, his annual salary is
$225,000.  On June 20, 2008, the Company terminated Mr. Dwight’s
employment.




(2) 
Mr. Tusing became Chief Operating Officer and Secretary of Kronos effective
January 1, 2002.  Mr. Tusing executed an employment contract effective
January 1, 2003.  The Board of Directors renewed Mr. Tusing's employment
agreement on October 1, 2004, and again on October 1, 2005, and October 1, 2006,
October 1, 2007 and October 1, 2008.  His annual salary is $160,000.
 On June 20, 2008, Mr. Tusing additionally became the acting President,
acting Chief Executive Officer, and on January 9, 2009 became the Chief
Financial Officer and Treasurer.







25




AGGREGATED OPTIONS/SAR
EXERCISES


IN
LAST FISCAL YEAR AND


FISCAL
YEAR END OPTIONS/SAR VALUES(1)




VALUE
      OFNUMBER
      OF SECURITIES
                                                UNEXERCISEDUNDERLYING
      UNEXERCISED
                                                IN-THE-MONEYSHARES
      ACQUIRED
                                                
                                                OPTIONS/SARS
      AT FISCAL
                                                OPTIONS/SARS
      ATNAME
                                                ON
      EXERCISE
                                                VALUE
      REALIZED
                                                YEAR
      END(1)
                                                FISCAL
      YEAR END(2)Daniel
      R. Dwight, Former
      President and
                                                -0-
                                                -0-
                                                Exercisable:  26,000,000
                                                -0-Chief
      Executive Officer(3)Richard
      F. Tusing,
      Chief
                                                -0-
                                                -0-
                                                Exercisable:  15,000,000
                                                -0-Operating
      Officer
      acting ChiefExecutive
      Officer, acting
      President,Chief
      Financial
      Officer,Treasurer
      and Secretary
      (4)




(1)
 These grants represent options to purchase common stock.  No SAR's
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, 2007.




(3)
 Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001, and was terminated on June 20, 2008.




(4)
 Mr. Tusing became Chief Operating Officer and Secretary of Kronos
effective January 1, 2002, and became acting President and acting Chief
Executive officer on June 20, 2008 and beacame the Chief Financial Officer and
Treasurer on January 9, 2009.




OPTION/SAR GRANTS IN LAST FISCAL YEAR




%
      TOTALNO.
      OF
                                  OPTIONS/SAR'SSECURITIES
                                  GRANTED
      TOUNDERLYING
                                  EMPLOYEES
                                  EXERCISE
      OROPTIONS/SAR'S
                                  IN
      FISCAL
                                  BASE
      PRICE
                                  EXPIRATIONNAME
                                  GRANTED
      (#)
                                  YEAR
      (%)
                                  ($
      PER SHARE)
                                  DATEDaniel
      R. Dwight
                                  26,000,000
                                  34.1%
                                  $    0.016
                                  June
      19, 2017Former
      President and Chief ExecutiveRichard
      F. Tusing
                                  15,000,000
                                  19.7%
                                  $    0.016
                                  June
      19, 2017Chief
      Operating Officer, acting ChiefExecutive
      Officer, acting President,Chief
      Financial OfficerTreasurer,
      and Secretary




26


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.




On June
15, 2007, the Board of Directors approved the Kronos Advanced Technologies 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 100,000,000 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.




Equity
Compensation Plan Information




Number
      of securities remaining available forNumber
      of securities to be issued
                                      Weighted-average
      exercise
                                      future
      issuance under equity compensationupon
      exercise of outstanding
                                      price
      of outstanding
                                      plans
      (excluding securities reflected inPlan
      category
                                      options,
      warrants and rights
                                      options,
      warrants and rights
                                      column
      (a))(a)
                                      (b)
                                      (c)Equity
      compensation plans
                                      --
                                      --
                                      --approved
      by securityholdersEquity
      compensation plans
                                      80,500,000
                                      $0.016
                                      19,800,000not
      approved by securityholdersTotal
                                      80,500,000
                                      
                                      19,800,000




EMPLOYMENT
AGREEMENTS




Richard
F. Tusing, our Acting President and Acting 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 two years and
will automatically renew for successive one year terms unless Kronos or Mr.
Tusing provide the other party with written notice within three months of the
end of the initial term or any subsequent renewal term.  The Board of
Directors renewed Mr. Tusing's Employment Agreement on October 1, 2004, and
again on October 1, 2005, October 1, 2006, October 1, 2007 and October 1, 2008.
 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 Richard F. Tusing, our Chief Operating Officer and
Acting President and Acting Chief Executive Officer, provides that, upon the
occurrence of termination without cause or 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.




The
Company executed a severance agreement and advisory agreement with Mr. Dwight
dated May 16, 2008. Severance Agreement terms include payment of twenty-four
bi-monthly payments of $9,375.00 and reimbursement of health, disability and
life insurance premiums, for a twelve month period, Mr. Dwight provided a full
release of “all known and unknown claims” that Mr. Dwight may have had “against
the Company, all current and former parents, subsidiaries, related companies”.
The Dwight Advisory Agreement enables the Company to engage Mr. Dwight for
services, as may be mutually agreed, at a rate of $300 per hour plus
pre-approved expenses. Mr. Dwight filed a lawsuit on October 17, 2008, in the
state of Massachusetts, in Suffolk County Superior Court, against Kronos for
lack of payments pursuant to the Severance Agreement dated May 16, 2008. The
Company believes its obligations to its Secured Lenders supercede the payment
obligations to Mr. Dwight.






27


ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  PRINCIPAL
STOCKHOLDERS
  The
following table presents certain information regarding the beneficial ownership
of all shares of common stock at January 9, 2009 for each named 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 and our
executive officers and directors as a group. The percentage ownership shown in
such table is based upon the 487,626,690 common shares issued and outstanding at
January 9, 2009, and ownership by these persons of options or warrants
exercisable within sixty 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 January 9, 2009, as issued and outstanding. Unless
otherwise indicated, each person has sole voting and investment power over such
shares.


COMMON
      STOCKBENEFICIALLY
      OWNED6/30/2008NAME
      AND ADDRESS
                        Shares
                        Percent
      of ClassHilltop
      Holding LP
                        97,525,360
                        20.00%111
      BroadwayNew
      York, NY 10021Richard
      E. Perlman
                        14,662,593
                        3.01%655
      Madison AvenueNew
      York, NY 10021James
      K. Price
                        15,789,615
                        3.24%655
      Madison AvenueNew
      York, NY 10021Jack
      Silver
                        0
                        0.00%111
      BroadwayNew
      York, NY 10021Marc
      Kloner
                        39,969,187
                        8.20%655
      Madison AvenueNew
      York, NY 10021Barry
      Salzman
                        12,945,844
                        2.65%655
      Madison AvenueNew
      York, NY 10021                               28
  Daniel
      R. Dwight (1)
                        27,201,926
                        5.30%464
      Common StreetSuite
      301Belmont,
      MA  02478Richard
      F. Tusing (2)
                        15,852,758
                        3.15%464
      Common StreetSuite
      301Belmont,
      MA  02478James
      P. McDermott (3)
                        2,294,118
                        0.47%464
      Common StreetSuite
      301Belmont,
      MA  02478M.J.
      Segal (4)
                        1,500,000
                        0.31%464
      Common StreetSuite
      301Belmont,
      MA  02478


(1)
Includes options to purchase 26,000,000 shares of common stock that can be
acquired up to June 16, 2017.
 (2)
Includes options to purchase 15,000,000 hares of common stock that can be
acquired up to June 16, 2017.
 (3)
Includes options to purchase 2,000,000 hares of common stock that can be
acquired up to June 16, 2017.
 (4)
Includes options to purchase 1,500,000 shares of common stock that can be
acquired up to June 16, 2017.




29




ITEM 12. 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 March
31, 2004, we entered into Promissory Notes with Richard F. Tusing in exchange
for past due compensation, expenses and interest due for
$485,883.  The Notes bear a simple interest rate of 1% per month and
call for aggregate monthly principal and interest payments of  $8,989
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, 20% of the proceeds derived from the financing will be used to pay
down the outstanding interest and principal obligations.  The Notes
are due and payable in full.




On April
14, 2008, Richard Perlman became a Board member of the Company, pursuant to
terms of the Airworks Funding LLLP Agreements dated June 19,
2007.  Mr. Perlman is the principal for Airworks Funding,
LLLP.




On April
14, 2008, Jack Silver became a Board member of the Company, pursuant to terms of
the Hilltop Holding Company, LP  (formerly RS Properties I LLC)
Funding Agreement dated June 19, 2007.  Mr. Silver is the principal
for Hilltop Holding Company, LP.




On July
1, 2007, we entered into an Advisory Agreement with Barry Salzman for consulting
services to the Company as related to general business matters, funding
activities and customer relationship management.  Mr. Salzman was
compensated $20,833./month until the Agreement was terminated with notice,
effective September 30, 2008.




On June
1, 2008, we entered into an Advisory Agreement with Marc Kloner, for consulting
services to the Company as related to Sales and Marketing support
services.  Mr. Kloner was compensated $10,000.00/month for the period
of June 1, 2008 through August 31, 2008, at which time the agreement was
terminated.




30


ITEM
13. EXHIBITS




EXHIBIT
      NO.
                                  DESCRIPTION
                                  LOCATION2.1
                                  Articles
      of Merger for Technology
                                  Incorporated
      by reference toSelection,
      Inc. with the Nevada
                                  Exhibit
      2.1 to the Registrant'sSecretary
      of State
                                  Registration
      Statement on FormS-1
      filed on August 7, 2001 (the"Registration
      Statement")3.1
                                  Articles
      of Incorporation
                                  Incorporated
      by reference toExhibit
      3.1 to the RegistrationStatement
      on Form S-1 filed onAugust
      7, 20013.2
                                  Bylaws
                                  Incorporated
      by reference toExhibit
      3.2 to the RegistrationStatement
      on Form S-1 filed onAugust
      7, 20014.1
                                  2001
      TSET Stock Option Plan
                                  Incorporated  by  reference  toExhibit
      4.1 to Registrant's Form10-Q
      for the  quarterly  periodended  March
      31,  2002 filed onMay
      15, 20024.2
                                  2007
      Kronos Stock Option Plan
                                  Provided
      Herewith10.21
                                  Indemnification
      Agreement, dated May 1,
                                  Incorporated
      by reference to2001,
      by and between TSET, Inc. and
                                  Exhibit
      10.38 to theDaniel
      R. Dwight
                                  Registration
      Statement on FormS-1
      filed on August 7, 200110.22
                                  Indemnification
      Agreement, dated May 1,
                                  Incorporated
      by reference to2001,
      by and between TSET, Inc. and
                                  Exhibit
      10.39 to theRichard
      F. Tusing
                                  Registration
      Statement on FormS-1
      filed on August 7, 200110.23
                                  Employment
      Agreement, effective
                                  Incorporated
      by reference toFebruary
      11, 2001 by and between
                                  Exhibit
      10.55 to the Registrant'sTSET,
      Inc. and Daniel R. Dwight
                                  Form
      10-Q for the quarterly periodended
      March 31, 2002 filed onMay
      15, 200210.24
                                  Master
      Loan and Investment
                                  Incorporated
      by reference toAgreement,
      dated May 9, 2003,
                                  the
      Registrant's 8-K filed onby
      and among Kronos Advanced
                                  May
      15, 2003Technologies,
      Inc., Kronos AirTechnologies,
      Inc. and FKADistributing
      Co. d/b/a HoMedics,Inc.,
      a Michigan corporation("HoMedics")10.25
                                  Secured
      Promissory Note, dated
                                  Incorporated
      by reference toMay
      9, 2003, in the principal
                                  Exhibit
      99.2 to the Registrant'samount
      of $2,400,000 payable to
                                  8-K
      filed on May 15, 2003HoMedics10.26
                                  Secured
      Promissory Note, dated
                                  Incorporated
      by reference toMay
      9, 2003, in the principal
                                  Exhibit
      99.4 to the Registrant'samount
      of $1,000,000 payable to
                                  8-K
      filed on May 15, 2003HoMedics10.27
                                  Security
      Agreement dated May 9,
                                  Incorporated
      by reference to2003,
      by and among Kronos Air
                                  Exhibit
      99.4 to the Registrant'sTechnologies,
      Inc. and HoMedics
                                  8-K
      filed on May 15, 200310.28
                                  Registration
      Rights Agreement,
                                  Incorporated
      by reference todated
      May 9, 2003, by and between
                                  Exhibit
      99.5 to the Registrant'sKronos
      and HoMedics
                                  8-K
      filed on May 15, 200310.29
                                  Warrant
      No. 1 dated May 9, 2003,
                                  Incorporated
      by reference toissued
      to HoMedics
                                  Exhibit
      99.7 to the Registrant's8-K
      filed on May 15, 200310.30
                                  Warrant
      No. 2 dated May 9, 2003,
                                  Incorporated
      by reference toissued
      to HoMedics
                                  Exhibit
      99.7 to the Registrant's8-K
      filed on May 15,
2003






31






10.31
                                Promissory
      Note by and among Kronos
                                Incorporated
      by reference toAdvanced
      Technologies, Inc., and
                                Exhibit
      10.67 to the Registrant'sDaniel
      R. Dwight
                                Form
      10-Q for the quarterly periodended
      March 31, 2004 filed onMay
      17, 200410.32
                                Promissory
      Note by and among Kronos
                                Incorporated
      by reference toAdvanced
      Technologies, Inc., and
                                Exhibit
      10.67 to the Registrant'sRichard
      F. Tusing
                                Form
      10-Q for the quarterly periodended
      March 31, 2004 filed onMay
      17, 200410.33
                                Promissory
      Note by and among Kronos
                                Incorporated
      by reference toAdvanced
      Technologies, Inc., and
                                Exhibit
      10.67 to the Registrant'sIgor
      Krichtafovitch
                                Form
      10-Q for the quarterly periodended
      March 31, 2004 filed onMay
      17, 200410.34
                                Securities
      Purchase Agreement, dated
                                Incorporated
      by reference toOctober
      15, 2004, by and between Kronos
                                Exhibit
      99.5 to the Registrant'sAdvanced
      Technologies, Inc. and Cornell
                                Form
      8-K filed on November 12, 2004Capital
      Partners, LP10.35
                                Investor
      Registration Rights Agreement,
                                Incorporated
      by reference todated
      October 15, 2004, by and between
                                Exhibit
      99.6 to the Registrant'sKronos
      Advanced Technologies, Inc. and
                                Form
      8-K filed on November 12, 2004Cornell
      Capital Partners, LP10.36
                                Escrow
      Agreement, dated October 15, 2004,
                                Incorporated
      by reference toby
      and between Kronos Advanced
                                Exhibit
      99.7 to the Registrant'sTechnologies,
      Inc. and Cornell Capital
                                Form
      8-K filed on November 12, 2004Partners,
      LP10.37
                                Amended
      and Restated Warrant No. 1,
                                Incorporated
      by reference todated
      October 25, 2004, issued to FKA
                                Exhibit
      99.11 to the Registrant'sDistributing
      Co. d/b/a HoMedics, Inc.
                                Form
      8-K filed on November 12, 200410.38
                                Amended
      and Restated Warrant No. 2,
                                Incorporated
      by reference todated
      October 25, 2004, issued to FKA
                                Exhibit
      99.12 to the Registrant'sDistributing
      Co. d/b/a HoMedics, Inc.
                                Form
      8-K filed on November 12, 200410.39
                                Warrant
      No. 3, dated October 25, 2004,
                                Incorporated
      by reference toissued
      to FKA Distributing Co. d/b/a
                                Exhibit
      99.13 to the Registrant'sHoMedics,
      Inc.10.40
                                Amended
      and Restated Registration Rights
                                Incorporated
      by reference toAgreement,
      dated October 25, 2004, by
                                Exhibit
      99.14 to the Registrant'sAnd
      between Kronos Advanced
                                Form
      8-K filed on November 12, 2004Technologies
      Inc., a Nevada corporationand
      FKA Distributing Co. d/b/a HoMedics,a
      Michigan corporation10.41
                                Termination
      Agreement dated March 28,
                                Incorporated
      by reference to2005,
      by and between Kronos Advanced
                                Exhibit
      10.63 to the Registrant'sTechnologies,
      Inc. and Cornell Capital
                                Form
      SB-2 filed on April 19, 2005Partners,
      LP10.42
                                Standby
      Equity Distribution Agreement,
                                Incorporated
      by reference todated
      April 13, 2005, by and between
                                Exhibit
      10.64 to the Registrant'sKronos
      Advanced Technologies, Inc. and
                                Form
      SB-2 filed on April 19, 2005Cornell
      Capital Partners, LP10.43
                                Registration
      Rights Agreement, dated
                                Incorporated
      by reference toApril
      13, 2005, by and between Kronos
                                Exhibit
      10.65 to the Registrant'sAdvanced
      Technologies, Inc. and Cornell
                                Form
      SB-2 filed on April 19, 2005Capital
      Partners, LP10.44
                                Escrow
      Agreement, dated April 13, 2005,
                                Incorporated
      by reference toby
      and between Kronos Advanced
                                Exhibit
      10.66 to the Registrant'sTechnologies,
      Inc. and Cornell Capital
                                Form
      SB-2 filed on April 19, 2005Partners,
      LP10.45
                                Placement
      Agent Agreement, dated April
                                Incorporated
      by reference to13,
      2005, by and between Kronos Advanced
                                Exhibit
      10.67 to the Registrant'sTechnologies,
      Inc. and Cornell Capital
                                Form
      SB-2 filed on April 19, 2005Partners,
      LP10.46
                                Form
      of Equity-Back Promissory Note in
                                Incorporated
      by reference tothe
      principal amount of $2,000,000 dated
                                Exhibit
      10.68 to the Registrant'sMarch
      7, 2005 between Kronos Advanced
                                Form
      SB-2 filed on April 19, 2005Technologies,
      Inc. and Cornell CapitalPartners,
      LP






32




10.47
                                  Form
      of Equity-Back Promissory Note in
                                  Incorporated
      by reference tothe
      principal amount of $2,000,000 dated
                                  Exhibit
      10.59 to the Registrant'sJune
      22, 2005 between Kronos Advanced
                                  Form
      10-KSB filed on SeptemberTechnologies,
      Inc. and Cornell Capital
                                  28,
      2005Partners,
      LP10.48
                                  Form
      of Convertible Debenture in the
                                  Incorporated
      by reference toprincipal
      amount of $1,645,476 dated
                                  Exhibit
      10.1 to the Registrant'sDecember
      13, 2006 between Kronos Advanced
                                  Form
      8-K filed on December 15, 2007Technologies,
      Inc. and Cornell CapitalPartners,
      LP10.49
                                  Kronos
      Advanced Technologies, Inc. Stock
                                  Incorporated
      by reference toIncentive
      Plan
                                  Exhibit
      3.1 to the Registrant'sForm
      8-K filed on June 22, 200710.50
                                  Voting
      Agreement dated June 19, 2007 by
                                  Incorporated
      by reference toand
      between the Company and Daniel Dwight,
                                  Exhibit
      3.1 to the Registrant'sJames
      McDermott, Milton Segal, Rich Tusing
                                  Form
      8-K filed on June 22, 2007And
      Igor Krichtafovitch10.51
                                  Voting
      Agreement dated June 19, 2007 by
                                  Incorporated
      by reference toand
      between the Company and Richard Sun
                                  Exhibit
      9.1 to the Registrant'sand
      Frederic Gumbinner
                                  Form
      8-K filed on June 22, 200710.53
                                  Funding
      Agreement dated June 19, 2007 by
                                  Incorporated
      by reference toand
      between the Company and Sand Brothers
                                  Exhibit
      10.1 to the Registrant'sVenture
      Capital LLC, Sands Brothers
                                  Form
      8-K filed on June 22, 2007Venture
      Capital II LLC, , Sands BrothersVenture
      Capital III LLC, and Sands BrothersVenture
      Capital IV LLC, (collectively,"Sands");
      Critical Capital Growth Fund,L.P.,
      ("CCGF"); Airworks Funding LLLP,("AirWorks")
      and RS Properties I LLC,("RSP",
      and together with Sands, CCGF andAirWorks,
      the "Lenders")10.54
                                  Registration
      Rights Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.2 to the Registrant'sand
      the Lenders
                                  Form
      8-K filed on June 22, 200710.55
                                  Security
      Agreement dated June 19, 2007
                                  Incorporated
      by reference toby
      and among the Company and the Lenders
                                  Exhibit
      10.3 to the Registrant'sForm
      8-K filed on June 22, 200710.56
                                  Patent
      Security Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.4 to the Registrant'sand
      the Lenders
                                  Form
      8-K filed on June 22, 200710.57
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.5 to the Registrant'sand
      Daniel Dwight
                                  Form
      8-K filed on June 22, 200710.58
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.6 to the Registrant'sand
      Richard Tusing
                                  Form
      8-K filed on June 22, 200710.59
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.7 to the Registrant'sand
      James McDermott
                                  Form
      8-K filed on June 22, 200710.60
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.8 to the Registrant'sand
      Eagle Rock Group LLC
                                  Form
      8-K filed on June 22, 200710.61
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.9 to the Registrant'sand
      Milton Segal
                                  Form
      8-K filed on June 22, 200710.62
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.10 to the Registrant'sand
      J. Alexander Chriss
                                  Form
      8-K filed on June 22, 200710.63
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.11 to the Registrant'sand
      Igor Krichtafovitch
                                  Form
      8-K filed on June 22, 200710.64
                                  Standstill
      Letter Agreement dated
                                  Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                  Exhibit
      10.12 to the Registrant'sand
      Karl Winkler
                                  Form
      8-K filed on June 22,
2007






33




10.65
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.13 to the Registrant'sand
      Maciej Ziomkowski
                                Form
      8-K filed on June 22, 200710.66
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.14 to the Registrant'sand
      Vladimir Gorobets
                                Form
      8-K filed on June 22, 200710.67
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.15 to the Registrant'sand
      Vladimir Bibikov
                                Form
      8-K filed on June 22, 200710.68
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.16 to the Registrant'sand
      Sergey Karpov
                                Form
      8-K filed on June 22, 200710.69
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.17 to the Registrant'sand
      Vladislov Korolyov
                                Form
      8-K filed on June 22, 200710.60
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.18 to the Registrant'sand
      Terence Tam
                                Form
      8-K filed on June 22, 200710.61
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.19 to the Registrant'sand
      Jacob Oharah
                                Form
      8-K filed on June 22, 200710.62
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.20 to the Registrant'sand
      Nels Jewell-Larsen
                                Form
      8-K filed on June 22, 200710.63
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.21 to the Registrant'sand
      Richard Sun
                                Form
      8-K filed on June 22, 200710.64
                                Standstill
      Letter Agreement dated
                                Incorporated
      by reference toJune
      19, 2007 by and among the Company
                                Exhibit
      10.22 to the Registrant'sand
      Frederic R. Gumbinner
                                Form
      8-K filed on June 22, 200710.65
                                US$859,000
      SCCGF Note dated June 19, 2007
                                Incorporated
      by reference toissued
      by the Company to Sands and CCGF
                                Exhibit
      10.23 to the Registrant'sForm
      8-K filed on June 22, 200710.66
                                US$10,820,000
      Note dated June 19, 2007
                                Incorporated
      by reference toissued
      by the Company to AirWorks
                                Exhibit
      10.24 to the Registrant'sForm
      8-K filed on June 22, 200710.67
                                US$6,480,000
      Note dated June 19, 2007
                                Incorporated
      by reference toissued
      by the Company to RSP
                                Exhibit
      10.25 to the Registrant'sForm
      8-K filed on June 22, 200710.68
                                Proxy
      date June 19, 2007 by and among
                                Incorporated
      by reference tothe
      Company, Daniel R. Dwight, James
                                Exhibit
      10.25 to the Registrant'sMcDermott,
      Milton Segal, Richard Tusing
                                Form
      8-K filed on June 22, 2007Igor
      Krichtafovitch, Richard A. Sun andRichard
      A. Sun, as attorney-in-factfor
      Fredric R. Gumbinner10.69
                                Salzman
      Advisory Agreement dated July 1,
                                Provided
      Herewith200710.70
                                Dwight
      Severance Agreement, dated May 16,
                                Provided
      Herewith200810.71
                                Kloner
      Advisory Agreement dated June 1,
                                Provided
      Herewith200831.1
                                Certification
      of principal executive
                                Provided
      herewithOfficer
      pursuant to 15 U.S.C.Section
      7241, as adopted pursuantto
      Section 302 of the Sarbanes-OxleyAct
      of 2002






34




31.2
                                Certification
      of principal financial
                                Provided
      herewithOfficer
      pursuant to U.S.C. Section7241,
      as adopted pursuant to Section302
      of the Sarbanes-Oxley Act of 200232
                                Certification
      by principal executive officer
                                Provided
      herewithand
      principal accounting Officerpursuant
      to 18 U.S.C. Section 1350, asadopted
      pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002






ITEM
14. PRINCIPAL ACCOUNTANT AND SERVICES




The firm
Sherb & Co. LLP, independent registered public accounting firm, has audited
our financial statements for the year ended June 30, 2008. The Board of
Directors has appointed Sherb & Co. LLP to serve as our independent
registered public accounting firm for the 2008 year-end audit and to review our
quarterly financial reports for filing with the Securities and Exchange
Commission during fiscal year 2008.




The
following table shows the fees paid or accrued by us for the audit and other
services provided by Sherb & Co. LLP for fiscal year 2008 and
2007.




June
      30, 2008
                                
                                
                                June
      30, 2007Audit
      Fees(1)
                                
                                $
                                75,000
                                
                                
                                $
                                70,000Tax
      & otherRelated
      Fees
                                
                                
                                14,185
                                
                                
                                
                                14,670Total
                                
                                $
                                89,185
                                
                                
                                $
                                84,670




(1) Audit
fees represent fees for professional services provided in connection with the
audit of our annual financial statements and review of our quarterly financial
statements and audit services provided in connection with other statutory or
regulatory filings






35


SIGNATURES




Pursuant
to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.




Date:
January 9, 2009.




KRONOS
      ADVANCED TECHNOLOGIES, INC.By:
                  /s/ Richard F.
      TusingRichard
      F. Tusingacting
      President, acting Chief ExecutiveOfficer,
      acting Principal Executive Officer,Chief
      Financial Officer, PrincipalFinancial
      Officer, Chief Operating Officer,Treasurer,
      Secretary, and Director




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




SIGNATURE
                                                    TITLE
                                                    DATE/s/
      Richard F. Tusing
                                                    acting
      President,
                                                    January
      9, 2009acting
      Chief ExecutiveOfficer,
      acting PrincipalExecutive
      Officer,Chief
      Financial Officer,Principal
      Financial Officer,Chief
      Operating Officer,Treasurer,
      Secretary,and
      Director/s/
      Richard Perlman
                                                    Director
                                                    January
      9, 2009Richard
      Perlman/s/
      James Price
                                                    Director
                                                    January
      9, 2009James
      Price/s/
      Jack Silver
                                                    Director
                                                    January
      9, 2009Jack
      Silver/s/
      Marc Kloner
                                                    Director
                                                    January
      9, 2009Marc
      Kloner/s/
      Barry Salzman
                                                    Director
                                                    January
      9, 2009Barry
      Salzman









36