Schedule 13D

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G1x4AwomILvt5L0kleSDdlKJoINbQNmxLy0NApI9f/iuc/HSsFqNXQvPHZ9T9StM QYD60Mon2H3HhyN/ykndOQ== 0001188112-07-002032.txt : 20070702 0001188112-07-002032.hdr.sgml : 20070702 20070702123012 ACCESSION NUMBER: 0001188112-07-002032 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20070702 DATE AS OF CHANGE: 20070702 GROUP MEMBERS: CHARLES L. ROBINSON GROUP MEMBERS: CRITICAL CAPITAL GROWTH FUND, L.P. GROUP MEMBERS: SANDS BROTHERS VENTURE CAPITAL II LLC GROUP MEMBERS: SANDS BROTHERS VENTURE CAPITAL III LLC GROUP MEMBERS: SANDS BROTHERS VENTURE CAPITAL IV LLC GROUP MEMBERS: SANDS BROTHERS VENTURE CAPITAL LLC GROUP MEMBERS: SCOTT BAILY SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: KRONOS ADVANCED TECHNOLOGIES INC CENTRAL INDEX KEY: 0001108248 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 870440410 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-79038 FILM NUMBER: 07953802 BUSINESS ADDRESS: STREET 1: 333 S STATE ST STREET 2: PMB111 CITY: LAKE OSWEGO STATE: OR ZIP: 97034 BUSINESS PHONE: 5035981900 MAIL ADDRESS: STREET 1: 333 S STATE ST STREET 2: PMB 111 CITY: LAKE OSWEGO STATE: OR ZIP: 97034 FORMER COMPANY: FORMER CONFORMED NAME: TSET INC DATE OF NAME CHANGE: 20000301 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SANDS BROTHERS VENTURE CAPITAL II LLLC CENTRAL INDEX KEY: 0001374201 IRS NUMBER: 134110488 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 90 PARK AVENUE 31ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 212 953 4983 MAIL ADDRESS: STREET 1: 90 PARK AVENUE 31ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 SC 13D 1 t15077_sands13d.htm SCHEDULE 13D Schedule 13D

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934

Kronos Advanced Technologies, Inc.

(Name of Issuer)

Common Stock, $0.001 Par Value Per Share

(Title of Class of Securities)

50105X106

(CUSIP Number)

Sands Brothers Venture Capital LLC

90 Park Avenue, 31st Floor

New York, NY 10016

212-697-5200

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

June 19, 2007

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box o.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 50105X106

SCHEDULE 13D

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON SANDS BROTHERS VENTURE CAPITAL LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION NEW YORK
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON OO

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON SANDS BROTHERS VENTURE CAPITAL II LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION NEW YORK
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON OO

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON SANDS BROTHERS VENTURE CAPITAL III LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION NEW YORK
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON OO

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON SANDS BROTHERS VENTURE CAPITAL IV LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON OO

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON CRITICAL CAPITAL GROWTH FUND, L.P.
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON PN

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON CHARLES L. ROBINSON
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON IN

CUSIP No. 50105X106

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON SCOTT BAILY
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP			(a) ý (b) ¨
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)				o
6	CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER
		8	SHARED VOTING POWER 0⁽¹⁾
		9	SOLE DISPOSITIVE POWER
		10	SHARED DISPOSITIVE POWER 0⁽¹⁾
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0⁽¹⁾
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES				x
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0%
14	TYPE OF REPORTING PERSON IN

CUSIP No. 50105X106

_______________________

(1) Excludes 306,785,714 shares of Common Stock which may become issuable in certain circumstances upon conversion of the $859,000 Secured Convertible Promissory Note due December 31, 2007 which was issued to Sands Brothers Venture Capital, LLC, Sands Brothers Venture Capital II LLC, Sands Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC and Critical Capital Growth Fund, L.P. on June 19, 2007.

This Schedule 13D has been prepared taking into account that, as described in Items 3, 4 and 5 below, pursuant to the Lender Voting Agreement (as defined below) and the Letter Agreement (as defined below), AirWorks (as defined below) and RS Properties (as defined below) have agreed to convert a sufficient principal amount of their respective Notes (as defined below) to secure voting control of the Issuer and will subsequently vote to approve an amendment to the Issuer’s articles of incorporation to increase the authorized share capital of the Issuer to allow the Lenders (as defined below) to convert the entire principal amounts advanced under the Notes into shares of Common Stock of the Issuer.

As described in Items 3, 4 and 5 below, the Critical Capital Entities (as defined below) may be deemed to be part of a group with RS Properties and AirWorks pursuant to the terms of the Lender Voting Agreement and the Letter Agreement described below. The Reporting Persons expressly disclaim beneficial ownership of shares of Common Stock issuable to RS Properties and AirWorks upon conversion of the Notes (as defined below). Such shares of Common Stock are not included in the amounts specified by the Reporting Persons above.

CUSIP No. 50105X106

Item 1. Security and Issuer.

The title of the class of equity securities to which this statement relates is Common Stock, par value $0.001each (“Common Stock”) of Kronos Advanced Technologies, Inc., a Nevada corporation (the “Issuer”). The principal executive office of the Issuer is located at 494 Common Street, Suite 301, Belmont, MA 02478.

Item 2. Identity and Background.

(a) This Statement is being filed jointly by (i) Sands Brothers Venture Capital, LLC (“SB I”), (ii) Sands Brothers Venture Capital II LLC (“SB II”), (iii) Sands Brothers Venture Capital III LLC (“SB III”), (iv) Sands Brothers Venture Capital IV LLC (“SB IV”), (v) Critical Capital Growth Fund, L.P. (“Critical Capital” and together with SB I, SB II, SB III, SB IV and Critical Capital, the “Critical Capital Entities”) and Messrs. Charles L. Robinson, President of Critical Capital Corporation, a Delaware Corporation that is the managing general partner of Critical Capital, and Scott Baily, Chief Operating Officer of each of SB I, SB II, SB III and SB IV. Collectively, Messrs. Robinson and Baily, Critical Capital, SB I, SB II, SB III and SBs IV are referred to herein as the “Reporting Persons”.

Critical Capital is a Delaware Limited Partnership that operates as a debenture licensed U.S. Small Business Investment Company. Critical Capital, L.P., a Delaware Limited Partnership, is the General Partner of Critical Capital. Critical Capital Corporation, a Delaware Corporation, is the managing general partner of Critical Capital, L.P.

Critical Capital Corporation’s officers and directors are: Charles L. Robinson, President and Steven B. Sands, Chairman. Steven B. Sands owns all shares of Critical Capital Corporation stock.

Critical Capital Corporation has vested Mr. Robinson with sole dispositive and sole voting power for Critical Capital as to such shares of the Issuer proportionately held by Critical Capital.

Mr. Robinson may be deemed to be the indirect beneficial owner of the shares of the Issuer’s common stock reported herein that are proportionately owned by Critical Capital. Mr. Robinson disclaims beneficial ownership of such shares proportionately and respectively held by the Reporting Persons, except to the extent of Mr. Robinson’s pecuniary interests therein, if any.

Each of SB I, SB II, SB III and SB IV is a New York limited liability company. SB Venture Capital Management LLC, SB Venture Capital Management II LLC, SB Venture Capital Management III LLC and SB Venture Capital Management IV LLC, each a New York limited liability company, are the member managers of SB I, SB II, SB III and SB IV, respectively.

Each of SB Venture Capital Management LLC, SB Venture Capital Management II LLC, SB Venture Capital Management III LLC and SB Venture Capital Management IV LLC is owned by trusts for the benefit of members of the families of Steven B. Sands and Martin S. Sands. Neither Steven B. Sands nor Martin S. Sands serves as a trustee of or exercises control over these trusts. Messrs. Steven B. Sands and Martin S. Sands are each managers of each of SB Venture Capital Management LLC, SB Venture Capital Management II LLC, SB Venture Capital Management III LLC and SB Venture Capital Management IV LLC.

CUSIP No. 50105X106

Each of SB Venture Capital Management LLC, SB Venture Capital Management II LLC, SB Venture Capital Management III LLC and SB Venture Capital Management IV LLC. has vested Mr. Scott Baily, the Chief Operating Officer of each of SB I, SB II, SB III and SB IV with sole dispositive and sole voting power for each of SB I, SB II, SB III and SB IV, respectively, as to such shares of the Issuer proportionately and respectively held by SB I, SB II, SB III and SB IV.

Because of his management position with Sands I, Sands II, Sands III and Sands IV, Mr. Scott Baily may be deemed to be the indirect beneficial owner of the shares of the Issuer's common stock reported herein that are proportionately owned by Sands I, Sands II, Sands III and Sands IV, respectively. Mr. Scott Baily disclaims beneficial ownership of such shares proportionately and respectively held by the Reporting Persons, except to the extent of Messrs. Robinson’s pecuniary interests therein, if any.

(b) The address of each of the Reporting Persons is 90 Park Avenue, 31st Floor, New York, New York 10016.

(c) The principal business of each of Critical Capital, SB I, SB II, SB III and SB IV is that of a private investment entity engaged in the purchase and sale of securities.

(d) and (e) None of the Reporting Persons has, during the last five years, been (a) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or (b) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which he or it is or was subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration.

On July 19, 2007, pursuant to a Funding Agreement (the “Funding Agreement”), among the Issuer, AirWorks Funding LLLP (“AirWorks”), the Critical Capital Entities and RS Properties I LLC (“RS Properties”, and collectively with AirWorks and the Critical Capital Entities, the “Lenders”), the Issuer issued a $859,000 Secured Convertible Promissory Note due December 31, 2007 (the “Critical Capital Note”) to the Critical Capital Entities, the outstanding principal amount of which is convertible in certain circumstances into an aggregate of up to 306,785,714 shares of the Issuer’s Common Stock at the initial conversion price of $.0028 per share. On July 19, 2007, the Critical Capital Entities made its advance under the Funding Agreement and the Critical Capital Note in the amount of $859,000. Since the Issuer currently is only authorized to issue 500 million shares of Common Stock and as of May 18, 2007, 242,342,803 shares of Common Stock were issued and outstanding (according to filings made by the Issuer with the Securities and Exchange Commission), the Critical Capital Entities will not be able to convert the entire current outstanding principal amount of the Critical Capital Note, if applicable, until such time as the Issuer increases its authorized share capital to authorize additional shares of Common Stock. As described in Item 4, pursuant to the Lender Voting Agreement and the Letter Agreement, AirWorks and RS Properties have agreed to convert a sufficient principal amount of their respective Notes to secure voting control of the Issuer and will subsequently vote to approve an amendment to the Issuer’s articles of incorporation to increase the authorized share capital of the Issuer to allow the Lenders to convert the entire principal amounts advanced under the Notes into shares of Common Stock of the Issuer. The source of funds used for the Critical Capital Note was the working capital of the Critical Capital Entities. None of the funds used in connection with the issuance of the Critical Capital Note were borrowed by the Critical Capital Entities.

CUSIP No. 50105X106

See Item 4 below for more information.

Item 4. Purpose of Transaction.

Funding Agreement and Secured Convertible Promissory Notes

Pursuant to the Funding Agreement, the Lenders agreed to loan the Issuer up to an aggregate of $18,159,000 (the “Loan”), evidenced by a $10,820,000 Secured Convertible Promissory Note due June 19, 2010 to AirWorks (the “AirWorks Note”), Critical Capital Note and a $6,480,000 Secured Convertible Promissory Note due June 19, 2010 to RS Properties (the “RS Note” and together with the AirWorks Note and the Critical Capital Note, the “Notes”). The first installment of the Loan, totaling $4,259,000, was advanced to the Issuer in the following amounts: AirWorks advanced $2,480,000, the Critical Capital Entities advanced $859,000 and RS Properties advanced $920,000. Pursuant to the Funding Agreement, AirWorks may advance up to an additional $8,340,000 under the AirWorks Note and RS Properties may advance up to an additional $5,560,000 under the RS Note, at any time, and from time to time, prior to the maturity date of such notes, in the sole discretion of AirWorks and RS Properties, respectively.

Pursuant to the terms of the Notes, based on the amounts advanced in the first installment of the Loan, (1) the AirWorks Note is convertible into 885,714,285 shares of Common Stock, (2) the Critical Capital Note is convertible into 306,785,714 shares of Common Stock upon the occurrence of certain events described below and (3) the RS Note is convertible into 328,571,428 shares of Common Stock, in each case, based on the initial conversion price of the Notes (which is subject to adjustment under certain specified circumstances). Assuming the full amount of the Notes are funded and the entire aggregate principal amount of the Notes is converted, (1) the AirWorks Note will be convertible into up to 3,864,285,714 shares of Common Stock, (2) the Critical Capital Note will be convertible into up to 306,785,714 shares of Common Stock and (3) the RS Note will be convertible into up to 2,314,285,714 shares of Common Stock, in each case, based on the initial conversion price of the Notes (which is subject to adjustment under certain specified circumstances). The AirWorks Note and the RS Note are convertible at any time, in whole or in part, and the Critical Capital Note is only convertible in the event that all principal and accrued interest is not paid in full to the Critical Capital Entities on or prior to the maturity date of the Critical Capital Note. Each of the Notes bear interest, in arrears, at a rate of 12% per annum, payable in cash with respect to the AirWorks and RS Note commencing on January 1, 2008 and payable in cash with respect to the Critical Capital Note commencing on July 1, 2007. All outstanding principal and accrued interest under the Critical Capital Note is due and payable on December 31, 2007. All outstanding principal and accrued interest on the AirWorks Note and the RS Note is due and payable on June 19, 2010. In addition, pursuant to the Notes, the Lenders have been granted certain preemptive rights in the event the Issuer proposes to issue or sell any shares of Common Stock or any rights or options to purchase shares of Common Stock. Each of the Notes contains additional terms and conditions, including events of default, that are generally consistent with securities of this kind.

CUSIP No. 50105X106

Pursuant to the Funding Agreement, the Issuer has agreed to take all actions necessary to ensure that AirWorks and RS Properties have the right to designate a majority of the members of the board of directors of the Issuer, including increasing the number of members of the issuer’s board of directors.

The Issuer’s obligations under the Notes are secured by substantially all of the assets of the Issuer and its subsidiary Kronos Air Technologies, Inc., pursuant to a Security Agreement dated June 19, 2007.

In connection with the Funding Agreement, the Lenders entered into an Intercreditor Agreement with certain existing creditors of the Issuer (the “Existing Creditors”) whereby the Existing Creditors agreed to subordinate their security interest to that of the Lenders. In addition, the Lenders also entered into an Intercreditor Agreement whereby AirWorks and RS Properties agreed to subordinate their security interest to that of the Critical Capital Entities.

Voting and Support Agreements

On June 19, 2007, the Issuer, AirWorks, the Critical Capital Entities and RS Properties entered into a Voting and Support Agreement (the “Lender Voting Agreement”) pursuant to which the Lenders agreed to vote the shares of Common Stock entitled to vote on the following matters in the following manner: (1) in favor of a slate of directors to serve on the Company’s board of directors as proposed by AirWorks and RS Properties, (2) in favor or adjusting the size of the Issuer’s board of directors such that upon the election of the slate of directors proposed by AirWorks and RS Properties, such directors hold a majority of the seats on the Issuer’s board of directors, (3) in favor of approving an amendment to the Issuer’s articles of incorporation to increase the Issuer’s authorized common stock to a number of shares necessary to allow the Lenders to convert the entire principal amount of the Notes into share of common stock of the Company, (4) in favor of approving the reincorporation of the Company in Delaware, (5) in favor of a reverse stock split proposed by AirWorks or the Issuer’s board of directors and (6) 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. The expiration of the Lender Voting Agreement is the earlier of (a) the date on which the matters set forth in (1)-(5) above have been approved by the stockholders of the Issuer and (b) August 1, 2008.

Additionally, on June 19, 2007, the Issuer entered into Voting and Support Agreements (the “Securityholder Voting Agreements”) with Messrs. Dwight, McDermott, Segal, Tusing, Krichtafovitch, Poster, Sun and Gumbinner (collectively, the “Securityholders”) pursuant to which the Securityholders agreed to vote the Issuer’s securities owned by them on certain specified matters in accordance with the Securityholder Voting Agreement. The terms and expiration date of the Securityholder Voting Agreements are substantially similar to those of the Lender Voting Agreement. In addition, on June 19, 2007, each of the Securityholders granted Mr. Perlman, the President of Compass Partners, L.L.P., the general partner of AirWorks, a proxy to vote the Issuer’s securities owned by each of them in accordance with the Securityholder Voting Agreements.

CUSIP No. 50105X106

Letter Agreement

On June 19, 2007, AirWorks and RS Properties entered into a letter agreement (the “Letter Agreement”) pursuant to which the parties agreed (1) that any advances made to the Issuer pursuant to the Funding Agreement and the AirWorks Note and RS Note, respectively, at a subsequent closing, will be made 60% by AirWorks and 40% by RS Properties, (2) that following the closing of the Funding Agreement, AirWorks and RS Properties will secure more than 50% of the voting control of the Issuer with AirWorks converting such portion of the AirWorks Note as is necessary to represent 60% of such controlling position and RS Properties converting such portion of the RS Note as is necessary to represent 40% of such controlling position, (3) to enter into the Lender Voting Agreement and (4) to make certain adjustments to the percentage of additional advances required to be made by AirWorks and RS Note if certain specified events occurred. This Schedule 13D has been prepared taking into account that, pursuant to the terms of the Letter Agreement, AirWorks and RS Properties, will have voting control of the Issuer once the above actions have been taken and will vote their respective shares of Common Stock in accordance with the terms of the Lender Voting Agreement.

Registration Rights Agreement

In connection with the Funding Agreement, the Issuer and the Lenders entered into a Registration Rights Agreement dated June 19, 2007. Pursuant to the Registration Rights Agreement, the Issuer agreed to file a registration statement registering the Common Stock owned by the Lenders, the Common Stock underlying the Notes and any other securities issued or issuable with respect to such securities upon any classification, share combination, share division, share dividend, merger consolidation or similar event (the “Registrable Securities”), upon demand of the holders of at least 20% of the Registrable Securities. The Issuer is required to file such registration statement within 45 days (or 90 days if the registration statement is on a form other than Form S-3) after notice is give and to use its reasonable best efforts to cause the registration statement to become effective as promptly as practicable. The Issuer is required to keep such registration statement effective until the earlier of (1) the date all Registrable Securities covered by such registration statement have been sold or (2) the date on which all of the Registrable Securities may be sold without restriction pursuant to subsection (k) of Rule 144 of the Securities Act of 1933, as amended. The Registration Rights Agreement also provides the Lenders with piggy back registration rights with respect to certain offerings of the Issuer’s securities.

The foregoing summaries of the Funding Agreement, the Notes, the Security Agreement, the Intercreditor Agreements, the Lender Voting Agreement, the Securityholder Voting Agreements, the Proxy, the Letter Agreement and the Registration Rights Agreement are qualified in their entirety by reference to the copies of such agreements which are attached hereto as Exhibits 2 through 14, respectively, and which are hereby incorporated by this reference.

Except as set forth herein, the Reporting Person has no present plan or proposal that relates to or would result in any other action specified in clauses (a) through (j) of Item 4 of Schedule 13D.

CUSIP No. 50105X106

Item 5. Interest in Securities of the Issuer.

(a) and (b) See Items 7 through 11 and 13 of the cover sheet for each Reporting Person.

If the Critical Capital Note becomes convertible into Common Stock, each of the Reporting Persons may be deemed to beneficially own 306,785,714 shares of Common Stock, representing 56% of the outstanding shares of Common Stock (based upon 242,342,803 shares of Common Stock as of May 18, 2007, as reported in the Issuer’s quarterly report on Form 10-QSB for the quarter ended March 31, 2007).

In addition, by virtue of any of the Lender Voting Agreement and the Letter Agreement, a “group,” within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or Rule 13d-5(b)(1) thereunder, may have been formed that includes, AirWorks, RS Properties and the Critical Capital Entities. Such a group including AirWorks, RS Properties and the Critical Capital Entities would be deemed to beneficially own, in the aggregate, 1,214,285,713 shares of Common Stock, representing 83% of the Common Stock outstanding (based upon 242,342,803 shares of Common Stock outstanding as of May 18, 2007). Such shares of Common Stock which would be deemed beneficially owned by such a group includes (1) 328,571,428 shares of Common Stock issuable upon conversion of the funded portion of the RS Note and (2) 885,714,285 shares of Common Stock issuable upon conversion of the funded portion of the AirWorks Note, but excludes (1) 1,985,714,285 shares of Common Stock which may become issuable if the RS Note is funded in full, (2) 2,978,571,428 shares of Common Stock which may become issuable if the AirWorks Note is funded in full and (3) 306,785,714 shares of Common Stock underlying the Critical Capital Note which is not presently convertible. The Reporting Persons expressly disclaim beneficial ownership of Common Stock beneficially owned by RS Properties and AirWorks.

Since the Issuer currently is only authorized to issue 500 million shares of Common Stock and as of May 18, 2007, 242,342,803 shares of Common Stock were issued and outstanding (according to filings made by the Issuer with the Securities and Exchange Commission), the Lenders will not be able to convert the entire current outstanding principal amount of the Notes until such time as the Issuer increases its authorized share capital to authorize additional shares of Common Stock. As described above, pursuant to the Lender Voting Agreement and the Letter Agreement, AirWorks and RS Properties have agreed to convert a sufficient principal amount of the their respective Notes to secure voting control of the Issuer and will subsequently vote to approve an amendment to the Issuer’s articles of incorporation to increase the authorized share capital of the Issuer to allow the Lenders to convert the entire principal amounts advanced under the Notes into shares of Common Stock of the Issuer.

(c) Except as set forth in Items 3 and 4 above, no transactions in the Common Stock were effected by the Reporting Persons in the last 60 days.

(d) and (e) Not applicable.

CUSIP No. 50105X106

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of Issuer.

See Items 3, 4 and 5 above. Except as set forth in this Schedule 13D, to the best knowledge of the Reporting Persons, no contracts, arrangements, understandings or relationships (legal or otherwise) exist among the Reporting Persons and between the Reporting Persons and any other person with respect to the securities of the Issuer.

Item 7. Materials to be Filed as Exhibits.

Exhibit No.	Description
1.	Consent and Joint Filing Statement
2.	Funding Agreement, dated June 19, 2007 between the Issuer, AirWorks, the Critical Capital Entities and RS Properties
3.	AirWorks Note, dated June 19, 2007
4.	Critical Capital Note, dated June 19, 2007
5.	RS Properties Note, dated June 19, 2007
6.	Security Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical Capital Entities and RS Properties
7.	Intercreditor Agreement, dated June 19, 2007 among AirWorks, the Critical Capital Entities, RS Properties and certain existing creditors of the Issuer
8.	Intercreditor Agreement, dated June 19, 2007 among AirWorks, the Critical Capital Entities and RS Properties
9.	Lender Voting Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical Capital Entities and RS Properties
10.	Securityholder Voting Agreement, dated June 19, 2007 between the Issuer and the Securityholders specified therein
11.	Securityholder Voting Agreement, dated June 19, 2007 between the Issuer and the Securityholders specified therein
12.	Proxy granted in favor of Mr. Perlman dated June 19, 2007
13.	Letter Agreement, dated June 19, 2007 between AirWorks and RS Properties
14.	Registration Rights Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical Capital Entities and RS Properties
15.	Information regarding AirWorks and RS Properties

SIGNATURE

After reasonable inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct.

Dated: June 29, 2007

SANDS BROTHERS VENTURE CAPITAL LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL II LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL III LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL IV LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

CRITICAL CAPITAL GROWTH FUND, L.P.

By:_/s/ Charles L. Robinson________________

Name: Charles L. Robinson

Title: Chief Investment Officer

CHARLES L. ROBINSON

_/s/ Charles L. Robinson__________________

SCOTT BAILY

_/s/ Scott Baily_________________________

EX-1 2 ex1.htm EXHIBIT 1 Exhibit 1

Exhibit 1

CONSENT AND AGREEMENT TO JOINT FILING

Pursuant to Rule 13d-1(k)(1)(iii) of Regulation 13D-G of the Rules and Regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, each of the undersigned persons does hereby consent to and agree to jointly file with the Securities and Exchange Commission a Schedule 13D on behalf of each of them with respect to their beneficial ownership of common stock, par value $0.001 per share, of Kronos Advanced Technologies, Inc., and any future amendments thereto as may be required from time to time.

Dated: June 29, 2007

SANDS BROTHERS VENTURE CAPITAL LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL II LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL III LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

SANDS BROTHERS VENTURE CAPITAL IV LLC

By:_/s/ Scott Baily________________________

Name: Scott Baily

Title: COO

CRITICAL CAPITAL GROWTH FUND, L.P.

By:_/s/ Charles L. Robinson________________

Name: Charles L. Robinson

Title: Chief Investment Officer

CHARLES L. ROBINSON

_/s/ Charles L. Robinson__________________

SCOTT BAILY

_/s/ Scott Baily_________________________

EX-2 3 ex2.htm EXHIBIT 2 Unassociated Document

Exhibit 2

FUNDING AGREEMENT

among

KRONOS ADVANCED TECHNOLOGIES, INC.,

AIRWORKS FUNDING LLLP,

SANDS BROTHERS VENTURE CAPITAL LLC,

SANDS BROTHERS VENTURE CAPITAL II LLC,

SANDS BROTHERS VENTURE CAPITAL III LLC,

SANDS BROTHERS VENTURE CAPITAL IV LLC,

CRITICAL CAPITAL GROWTH FUND, L.P.,

and

RS PROPERTIES I LLC

DATED JUNE 19, 2007

FUNDING AGREEMENT

THIS FUNDING AGREEMENT (this “Agreement”) is made as of June 19, 2007 by and among Kronos Advanced Technologies, Inc., a Nevada corporation (“Borrower”), AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”), Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”), Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”) and RS Properties I LLC, a Delaware limited liability company (“RS Properties”) (AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF and RS Properties are individually referred to herein as, a “Lender” and collectively as, the “Lenders”).

RECITALS:

A.	Borrower has authorized the issuance of (i) a secured convertible promissory note in the principal amount of $859,000 to Sands I, Sands II, Sands III, Sands IV and CCGF (the “Sands Entity Note”), (ii) a secured convertible promissory note in the principal amount of up to $6,480,000 to RS Properties (the “RS Properties Note”), and (iii) a secured convertible promissory note in the principal amount of up to $10,820,000 to AirWorks (the “AirWorks Note”) (each of the Sands Entity Note, the RS Properties Note and the AirWorks Note are referred to herein individually as, a “Note” and collectively as, the “Notes”) evidencing loans in the aggregate principal amount of up to $18,159,000 made available by Lenders to Borrower, convertible into shares of Borrower’s Common Stock, par value $0.001 per share (the “Common Stock”) (as converted, the “Conversion Shares”) at a conversion price per share of $0.0028, as adjusted in accordance with the terms hereof and of the Notes.

B.	Lenders desire to loan up to $18,159,000 in the aggregate to Borrower, and Borrower desires to borrow up to $18,159,000 in the aggregate from Lenders, pursuant to the terms and conditions set forth in the Transaction Documents.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.1 Certain Definitions. Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to them below.

“Act” means the Securities Act of 1933, as amended.

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“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified.

“Benefit Plan” means with respect to Borrower each written or oral plan, fund, program, Contract or scheme, in each case, that is currently or in the past was, sponsored or maintained or required to be sponsored or maintained by Borrower or to which Borrower makes or has in the past made, or has or has had in the past an obligation to make, contributions providing for employee benefits or for the remuneration, direct or indirect, of the employees, former employees, officers, contingent workers or leased employees of Borrower or the dependents of any of them, including each written or oral deferred compensation, bonus, incentive compensation, pension, retirement, stock purchase, stock option and other equity compensation plan, “welfare” plan (within the meaning of Section 3(1) of ERISA, determined without regard to whether such plan is subject to ERISA); each “pension” plan (within the meaning of Section 3(2) of ERISA, determined without regard to whether such plan is subject to ERISA); each severance plan or Contract; and each health, vacation, summer hours, supplemental unemployment benefit, hospitalization insurance, medical, dental, legal program, agreement or arrangement.

“CERCLA” means the Comprehensive Environmental Response Compensation and Liability Act, as amended, 42 U.S.C. §9601 et seq.

“Closing” means the First Closing and any Subsequent Closing.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute.

“Contract” means any agreement, lease (including all real and personal property leases), policy, plan, instrument, contract, note, power of attorney, insurance policy covenant, guaranty, arrangement, escrow account, commitment or other instrument.

“Environmental Claim” means any and all actions, suits, demands, demand letters, claims, Liens, notices of potential responsibility, noncompliance or violation, investigations or proceedings brought by any Person relating in any way to any Environmental Law or any environmental permit, including, without limitation (a) for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in relation to the presence of Hazardous Substances.

“Environmental Laws” means all Laws relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, drinking supply water, land or soil, surface or subsurface strata or medium, or any other environmental medium), including all Laws which are administered, interpreted, or enforced by the United States Environmental Protection Agency or state or local agencies with jurisdiction over and including common law in respect of, pollution or protection of human health or the environment, including CERCLA, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., and other Laws relating to emissions, discharges, releases, or threatened releases of any Hazardous Substances, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of any Hazardous Substances.

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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means any Person (whether incorporated or unincorporated), that together with Borrower, would be deemed a “single employer” within the meaning of Section 414 of the Code.

“ERISA Affiliate Plan” means each Benefit Plan sponsored or maintained or required to be sponsored or maintained at any time by any ERISA Affiliate, or to which such ERISA Affiliate makes or has made, or has or has had an obligation to make, contributions at any time.

“Exchange Act” means the Securities Exchange Act of 1934, together with the rules and regulations thereunder.

“GAAP” shall mean accounting principles generally accepted in the United States of America.

“Governmental Entity” means any federal, state or local or foreign government or any court, administrative or arbitrative agency or commission or other governmental authority or agency, domestic or foreign.

“Hazardous Substances” means (a) any substance or material identified in CERCLA; (b) any substance or material that may be toxic, a pollutant or a contaminant under any applicable Law, including but not limited to petroleum products; (c) asbestos, radon, urea formaldehyde, poly-chlorinated biphenyls, lead or electromagnetic waves; (d) mold, mildew or other fungal growth; and (e) any other waste, pollutant, hazardous substance, toxic, flammable, explosive, reactive, corrosive, infectious, radioactive, carcinogenic or mutagenic substance, hazardous waste, special waste, industrial substance, by-product, process intermediate product or waste, chemical liquids or solids, liquid or gaseous products, or any constituent of any such substance or waste, the generation, use, handling, storage, treatment, transport or disposal of which is any way governed by or subject to any Laws.

“Intellectual Property” means all United States and non-United States (a) patents and patent applications, whether or not patents are issued on such patent applications and whether or not such patents or applications are modified, withdrawn or resubmitted, (b) registered and unregistered trade names, trade dress, trademarks, service marks and service names (and all applications for registration of the same) and all goodwill associated therewith, (c) designs and design rights, whether or not such designs or design rights are the subject of any patents or patent or other applications for registration, (d) copyrights and copyright registrations (and all applications for registration of the same) and works of authorship (whether or not copyrighted or copyrightable), (e) trade secrets, know-how, formulae, patterns, compilations, devices, methods, techniques or processes, and confidential or proprietary information, (f) inventions, processes and designs (whether or not patentable or reduced to practice), (g) any Software, (h) domain names or uniform resource locators used in connection with any global computer or electronic network (including, without limitation, the Internet and the World Wide Web), together with all translations, adaptations, derivations and combinations thereof, and including all goodwill associated therewith, all applications, registrations and renewals in connection therewith, and all source code, object code, data and documentation relating thereto, and (i) all other intellectual property rights and assets.

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“Laws” means all laws, codes, statutes, ordinances, orders, judgments, decrees, administrative or judicial promulgations, injunctions, determinations, approvals, rules, regulations, permits, certificates, licenses and authorizations of all Governmental Entities with jurisdiction over Borrower or its assets or business.

“Leased Real Property” means all parcels of real property used or held for use in connection with Borrower’s business and leased by Borrower (together with all fixtures and improvements thereon).

“Licenses” means all notifications, licenses, permits (including environmental, construction and operation permits), franchises, registrations, certificates, approvals, exemptions, classifications, registrations and other similar documents, rights and authorizations issued by any Governmental Entity.

“Liens” means all mortgages, liens, pledges, security interests, charges, claims, restrictions and encumbrances of any nature whatsoever.

“Loan” means collectively the loans made available by Lenders to Borrower, evidenced by the Notes, in the aggregate principal amount of up to Eighteen Million One Hundred Fifty-Nine Thousand Dollars ($18,159,000).

“Material Adverse Effect” means, when taken together with all other states of fact, changes, events, effects, developments or occurrences, any material adverse effect on the condition (financial or otherwise), prospects, operations, properties, business or assets of Borrower.

“Maturity Date” means June 19, 2010

“NCL” means the Nevada Corporation Law, as amended.

“Option Plan” means Borrower’s 2007 Incentive Stock Option Plan, as amended.

“Permitted Liens” means (a) Liens for taxes not yet due and payable, (b) statutory Liens of landlords and (c) Liens of carriers, warehousemen, mechanics, materialmen and repairmen incurred in the ordinary course of business consistent with past practice and not yet delinquent.

“Person” means an individual, sole proprietorship, partnership, corporation, association, institution, joint stock company, limited liability company, trust, joint venture, unincorporated organization, or Governmental Entity or any other legal entity.

“SBA” means the U.S. Small Business Administration.

“SEC” shall mean the Securities and Exchange Commission, or any successor organization.

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“Securities Act” means the Securities Act of 1933, together with the rules and regulations thereunder.

“Software” means any and all (a) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code, (b) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (c) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, (d) the technology supporting and content contained on any owned or operated Internet site(s), and (e) all documentation, including user manuals and training materials, relating to any of the foregoing.

“Subsequent Closing” means the closing of any Subsequent Tranche.

“Subsequent Closing Date” means the date on which any Subsequent Closing occurs.

“Taxes” means all federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, premium, recording, documentary, documentary stamps, real estate transfer, transfer, back-up withholding or similar taxes imposed on the income, properties or operations of Borrower, together with any interest, additions, or penalties with respect thereto and with respect to any information reporting requirements imposed by the Code or any similar provision of foreign, state or local law, together with any interest in respect of such additions or penalties.

“Tax Returns” means all reports and returns with respect to Taxes that are required to be filed with any taxing authority or retained by or with respect to Borrower, including without limitation consolidated federal income tax returns of Borrower that are includible therein.

“Transaction Documents” means, collectively, this Agreement, the Notes, the Security Agreement, the Registration Rights Agreement and all other documents or instruments executed in connection with the transactions contemplated by this Agreement.

1.2 Other Definitions. In addition to the terms defined in Section 1.1, certain other terms are defined elsewhere in this Agreement, and, whenever such terms are used in this Agreement, they shall have their respective defined meanings, unless the context expressly or by necessary implication otherwise requires. The definitions of such terms are set forth in the sections listed below.

Term	Section
Agreement	Preamble
AirWorks Note	Recitals
Borrower	Preamble
Borrower Counsel Opinion	6.2(b)
Borrower Financial Statements	3.7
Borrower Officer’s Certificate	6.2(d)
Borrower Reports	3.6
CCGF	Preamble

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Closing Date(s)	3.3
Common Stock	Recitals
Conversion Shares	Recitals
Fairness Opinion	6.2(f)
First Closing	2.3
First Closing Date	2.3
First Tranche	2.1(a)
Lender(s)	Preamble
Lender Officer’s Certificate	6.3(a)
Letter Agreements	2.4(a)(iii)
Litigation	3.15(a)
Material Contracts	3.12(a)
Nevada Opinion	6.2(c)
Note(s)	Recitals
Registration Rights Agreement	2.4(a)(iv)
RS Properties Note	Recitals
Sands I	Preamble
Sands II	Preamble
Sands III	Preamble
Sands IV	Preamble
Sands Entity Note	Recitals
SBIA	3.30(a)
Security Agreement	2.4(a)(v)
Subsequent Tranche(s)	2.1(b)
Voting Agreement	2.4(a)(ii)
Work-for-Hire Agreement	3.16(d)

ARTICLE II

AUTHORIZATION; PURCHASE AND SALE; CLOSING

2.1 Term Loan. Lenders agree, subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Borrower contained herein, to make the Loan as follows:

(a) The first installment of the Loan, totaling Four Million Two Hundred Fifty-Nine Thousand Dollars ($4,259,000) (the “First Tranche”), shall be advanced by Lenders on the First Closing Date and each Lender shall advance on the First Closing Date the following amounts: Sands I, Sands II, Sands III, Sands IV and CCGF shall collectively advance Eight Hundred Fifty-Nine Thousand Dollars ($859,000), RS Properties shall advance Nine Hundred Twenty Thousand Dollars ($920,000) and AirWorks shall advance Two Million Four Hundred Eighty Thousand Dollars ($2,480,000).

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(b) Any other installments of the Loan, totaling in the aggregate up to Thirteen Million Nine Hundred Thousand Dollars ($13,900,000.00) (each, a “Subsequent Tranche” and collectively, the “Subsequent Tranches”), may be advanced by AirWorks up to Eight Million Three Hundred Forty Thousand Dollars ($8,340,000) and by RS Properties up to Five Million Five Hundred Sixty Thousand Dollars ($5,560,000), in whole or in part, at any time prior to the Maturity Date in the sole discretion of AirWorks and RS Properties, respectively, even if not requested by Borrower, and if so advanced, Borrower shall be obligated to accept such amount. Each of AirWorks and RS Properties shall maintain a record of all advances of the Loan made to Borrower by it, and such record shall be conclusive evidence of the advances of the Loan made to Borrower.

2.2 Notes. The Loan shall be evidenced by the Notes.

2.3 Closing. The closing of the First Tranche of the Loan (the “First Closing”) shall take place at the offices of Paul, Hastings, Janofsky & Walker LLP, 600 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia 30308, simultaneously with the execution hereof (the “First Closing Date”).

2.4 First Closing Deliveries.

(a)

At the First Closing, Borrower shall deliver to Lenders:


	(i)	the Sands Entity Note, the RS Properties Note and the AirWorks Note, each duly executed by Borrower;

	(ii)	the Voting Agreement, in substantially the form attached hereto as Exhibit A, duly executed by each of Daniel Dwight, James McDermott, Milton Segal, Richard Tusing, Igor Krichtafovitch, William Poster, Richard Sun and Frederic Gumbinner (the “Voting Agreement”);

	(iii)	the Letter Agreements, in substantially the form attached hereto as Exhibit B, duly executed by each of Eagle Rock Group LLC, The Wall Street Group, Daniel Dwight, Richard Tusing, Igor Krichtafovitch, Karl Winkler, Vladimir Gorobets, Jacob Oharah, Sergey Karpov, Vladimir Bibikov, Terence Tam, Maciej Ziomkowski, Vladislov Korlov, James McDermott, Milton Segal, William Poster, J. Alexander Chriss, Richard Sun and Frederic Gumbinner (collectively, the “Letter Agreements”)

	(iv)	the Registration Rights Agreement, in the form attached hereto as Exhibit C, duly executed by Borrower (the “Registration Rights Agreement”);

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	(v)	the Security Agreement, in the form attached hereto as Exhibit D, duly executed by Borrower (the “Security Agreement”);

	(vi)	the Patent Security Agreement, in the form attached hereto as Exhibit E, duly executed by Borrower (the “Patent Security Agreement”);

	(vii)	Borrower Counsel Opinion and Nevada Opinion;

	(viii)	the Fairness Opinion;

	(ix)	Borrower Officer’s Certificate;

	(x)	a certificate by the Secretary of Borrower, dated as of the First Closing Date, as to (A) the good standing of Borrower in its jurisdiction of incorporation, (B) no amendments to Borrower’s charter documents between the date hereof and the First Closing Date that would adversely affect Borrower’s obligations under this Agreement were approved by the Board of Directors or shareholders or filed with the Secretary of State of the State of Nevada, (C) the effectiveness of resolutions of Borrower’s board of directors authorizing the execution, delivery and performance of this Agreement by Borrower passed in connection with this Agreement and the transactions contemplated hereby, and (D) the incumbency of such officer of Borrower executing this Agreement or any other document on behalf of Borrower;

	(xi)	confidentiality agreements, in such form as is acceptable to Lenders in their reasonable discretion, from each employee of Borrower;

	(xii)	such other documents as may be required under this Agreement or as a Lender or its counsel may reasonably request.

(b)

At the First Closing, each of the Lenders, severally and not jointly, shall deliver to Borrower:

	(i)	such Lender’s portion of the aggregate amount of the First Tranche by wire transfer of immediately available funds, subject to Section 5.12;

	(ii)	the Registration Rights Agreement;

	(iii)	the Security Agreement;

	(iv)	the Patent Security Agreement;

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	(v)	Lender Officer’s Certificate executed by an officer of such Lender, dated as of the First Closing Date; and

	(vi)	such other documents as may be required by this Agreement.

2.5 Subsequent Closing Deliveries.

(a)

At each Subsequent Closing, Borrower shall deliver to AirWorks, RS Properties or their respective designees:

	(i)	Borrower Officer’s Certificate, dated as of such Subsequent Closing Date;

	(ii)	a certificate by the Secretary of Borrower, dated as of the Second Closing Date, as to (A) the good standing of Borrower in its jurisdiction of incorporation, (B) no amendments to Borrower’s charter documents between the date hereof and such Subsequent Closing Date that would adversely affect Borrower’s obligations under this Agreement were approved by the Board of Directors or shareholders or filed with the Secretary of State of the State of Nevada, (C) the effectiveness of resolutions of Borrower’s board of directors authorizing the execution, delivery and performance of this Agreement by Borrower passed in connection with this Agreement and the transactions contemplated hereby, (D) the incumbency of such officer of Borrower executing this Agreement or any other document on behalf of Borrower, (E) no defaults have occurred or are occurring with respect to the Notes and (F) setting forth all adjustments to the Conversion Price (as defined in the Notes) required to be made by Borrower pursuant to the terms of the Notes since the preceding Closing Date; and

	(iii)	such other documents as may be required under this Agreement, the AirWorks Note, the RS Properties Note or as AirWorks or RS Properties or their respective designees or counsel may reasonably request.

(b)

At each Subsequent Closing, AirWorks, RS Properties or their respective designees, severally and not jointly, shall deliver to Borrower:

	(i)	the amount of the Subsequent Tranche to be delivered at such Subsequent Closing, as determined in the sole discretion of AirWorks and RS Properties;

	(ii)	a Lender Officer’s Certificate executed by an officer of AirWorks, RS Properties or their respective designees, as the case may be, dated as of such Subsequent Closing Date; and

	(iii)	such other documents as may be required by this Agreement or the Notes.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF BORROWER

Borrower hereby represents and warrants to each of the Lenders as of the First Closing Date and to AirWorks or RS Properties, as the case may be, as of each Subsequent Closing Date as follows:

3.1 Organization; Power; Standing. Borrower is a corporation duly organized, validly existing in good standing under the laws of the State of Nevada, with its principal executive offices located in Belmont, Massachusetts. Borrower has full corporate power and authority to own or lease all of its properties and assets, and to carry on its business as it is now being conducted. Borrower is duly qualified to do business and is in good standing in the jurisdictions described on Schedule 3.1, except where failure to qualify would not have, or would not reasonably be expected to have, a Material Adverse Effect on Borrower, which constitute all the jurisdictions in which the ownership of its property or the conduct of its business requires such qualification. Except as set forth on Schedule 3.1, Borrower does not have any subsidiaries, does not exercise voting control, directly or indirectly, over any other corporation or business entity, does not own or control any material portion of the shares of stock, partnership interests, membership interests or other securities of any corporation or other business entity, and does not have any investment in any other Person.

3.2 Capitalization.

(a) As of the date hereof, the capital stock of Borrower consists of 500,000,000 authorized shares of Common Stock, of which 242,342,803 shares are issued and outstanding. All of the outstanding shares of capital stock of Borrower have been duly authorized and validly issued, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws and not in violation of any preemptive or similar rights. Schedule 3.2(a) hereto sets forth the number of shares of capital stock held by each of Daniel Dwight, James McDermott, Milton Segal, Richard Tusing, Igor Krichtafovitch, and William Poster.

(b) Schedule 3.2(b) hereto sets forth a complete list of all holders of options, warrants and other similar rights to acquire capital stock of Borrower as of the date of this Agreement, indicating the number of shares of capital stock underlying such options, warrants or similar rights, vesting schedule, exercise price and expiration date, if applicable, for each such option, warrant or similar right. Except for (i) the rights created under this Agreement, (ii) the options issued and reserved for issuance under the Option Plan, and (iii) all other options, warrants and other similar rights set forth on Schedule 3.2(b), there are no outstanding rights of first refusal, preemptive rights or other rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from Borrower of any shares of its capital stock.

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3.3 Authority; Due Execution. Borrower has the right, power and capacity to execute and deliver this Agreement and the other agreements entered into in connection with this Agreement and to perform its obligations under this Agreement and the other agreements entered into in connection with this Agreement to which it is a party to and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the other agreements entered into in connection with this Agreement by Borrower and the performance by Borrower of its obligations hereunder and thereunder and the consummation of the transactions provided for herein and therein have been duly and validly authorized and approved by Borrower’s board of directors and no further consent or authorization is required by the Borrower, its board of directors or its shareholders. This Agreement has been, and the other agreements entered into in connection with this Agreement will be as of the First Closing Date and each Subsequent Closing Date (each individually, a “Closing Date” and collectively, the “Closing Dates”), duly executed and delivered by Borrower and do or will, as the case may be, constitute the valid and binding agreement of Borrower, enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable remedies.

3.4 Validity of the Notes and the Conversion Shares. The issuance of the Notes and the Conversion Shares upon conversion of the Notes are not and will not be subject to any preemptive rights, rights of first refusal or other preferential rights that have not been waived, and the Notes when issued, sold and delivered in accordance with the terms of this Agreement and the Conversion Shares when issued upon conversion of the Notes will be validly issued, fully paid and nonassessable and will be free of any Liens, other than Liens arising as a result of actions taken by Lenders in their capacity independent of Borrower; provided, however, that the Notes and the Conversion Shares will be subject to applicable restrictions on transfer under state and federal securities laws.

3.5 Non-Contravention. Except as set forth on Schedule 3.5, neither the execution and delivery of this Agreement by Borrower nor the consummation of the transactions contemplated hereby (including, without limitation, the conversion of any Note to Common Stock) does or would, after the giving of notice or the lapse of time or both, (a) conflict with, result in a breach of, constitute a default under, or violate the Certificate of Incorporation or the bylaws of Borrower, (b) conflict with, result in a breach of, constitute a default under, or violate any Law applicable to Borrower, (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, amend, modify, cancel or refuse to perform under, or require any notice under any, Contract, commitment, License or other arrangement, including any express or implied warranty, to which Borrower is a party or by which it is bound or to which any of its assets is subject, or (d) result in the creation of, or give any party other than the Lenders the right to create, any Lien, other than Permitted Liens, or other rights upon any right, property or asset of Borrower.

3.6 Borrower Reports. Except as set forth on Schedule 3.6, Borrower has timely filed (after giving effect to any extensions timely filed for) all material reports, registrations, statements and other filings, together with any amendments required to be made with respect thereto, that were required to be filed since December 31, 2004, with the SEC (all such reports being collectively referred to herein as the “Borrower Reports”). As of their respective dates (and without giving effect to any amendments or modifications filed after the date of this Agreement with respect to Borrower Reports filed before the date of this Agreement), each of Borrower Reports and the contents thereof complied in all material respects with the statutes, rules, regulations and orders enforced or promulgated by the SEC (including Regulation FD), and, as of the respective date any such Borrower Report was filed, did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Borrower has filed all contracts, agreements and other documents or instruments required to be filed as exhibits to Borrower Reports. Borrower has furnished or made available to Lenders true and complete copies of any comments, notices or other correspondence it has received from the staff of the SEC.

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3.7 Borrower Financial Statements. The balance sheets of Borrower contained in Borrower Reports, and the related statements of earnings, stockholders’ equity and cash flows contained in Borrower Reports (including all notes and schedules related thereto) (such financial statements, notes and any schedules thereto, being referred to herein as the “Borrower Financial Statements”), present fairly, in all material respects, the financial position and the results of operations and cash flows of Borrower as of the dates, or for the periods, presented therein in conformity with GAAP applied on a consistent basis during the periods involved, except as otherwise noted therein, including all requirements of applicable Law (including applicable provisions of the Sarbanes-Oxley Act of 2002 and all regulations of the SEC with respect thereto).

3.8 Absence of Undisclosed Liabilities. Except as set forth on Schedule 3.8, as of the date hereof, Borrower does not have any liability or financial obligation, whether accrued, absolute, contingent or otherwise, that was not fully reflected or reserved against in the Borrower Financial Statements, or disclosed in the accompanying notes thereto, except for liabilities incurred in the ordinary course of business since December 31, 2006.

3.9 Minute Books and Organizational Documents. Borrower has furnished or made available to Lenders true and complete copies of its Certificate of Incorporation and bylaws, each as amended to date. Such organizational documents are in full force and effect, and Borrower is not in violation of any provision of its Certificate of Incorporation or bylaws. The minute books of Borrower contain records that are accurate in all material respects of all meetings and other corporate actions of its stockholders and board of directors (including committees of the board of directors) through the date hereof and the signatures contained therein are the true signatures of the Persons whose signatures they purport to be.

3.10 Absence of Certain Changes. Since December 31, 2006, except as set forth in Borrower’s annual report on Form 10-KSB dated June 30, 2006 and quarterly reports on Form 10-QSB as filed with the SEC for the quarters ended December 31, 2006 and March 31, 2007, the business of Borrower has been conducted in the ordinary and usual course, consistent with past practice and there has not been: (a) any event, occurrence, development or state of circumstances or facts which has had or could reasonably be expected to constitute or result in a Material Adverse Effect on Borrower; or (b) any event, occurrence, development or state of circumstances or facts which would result in a violation of the covenants set forth in Article V of this Agreement, had such event, occurrence, development or state of circumstances or facts occurred after the date hereof.

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3.11 Properties; Securities.

(a) Except as set forth on Schedule 3.11 and except for those properties and assets that have been sold or otherwise disposed of in the ordinary course of business, Borrower has good and marketable title, free and clear of all Liens, other than Permitted Liens, to all of the properties and assets, tangible and intangible, reflected in the Borrower Financial Statements as being owned by Borrower as of the dates thereof, other than those Liens that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on Borrower.

(b) All buildings and all fixtures, equipment, and other property and assets which are held under leases or subleases by Borrower are held under valid leases or subleases enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable remedies.

(c) Borrower has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity), free and clear of any Lien, except to the extent such securities are pledged in the ordinary course of business consistent with commercially reasonable business practices to secure obligations of Borrower. Such securities are valued on the books of Borrower in accordance with GAAP.

3.12 Material Contracts.

(a) Schedule 3.12(a) hereto sets forth a complete list of all of the following agreements, commitments, arrangements, understandings or instruments (whether written or oral) to which Borrower is a party, other than those which are contemplated by this Agreement (collectively, the “Material Contracts”), true, correct and complete copies of which have been provided or made available to Lender:

	(i)	Contracts providing for annual payments in excess of Twenty-Five Thousand Dollars ($25,000) or aggregate payments in excess of Fifty Thousand Dollars ($50,000);

	(ii)	leases or subleases of real property;

	(iii)	partnership, joint venture or similar Contracts, or any rights to acquire from any person any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of such person;

	(iv)	executory Contracts relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise);

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	(v)	outstanding indentures, mortgages, promissory notes, loan agreements, guarantees or other Contracts or commitments for the borrowing of money by Borrower (in any case, whether incurred, assumed, guaranteed or secured by any asset);

	(vi)	licenses, franchises or similar Contracts material to Borrower, or any agreement relating to any trade name or Intellectual Property that is material to Borrower;

	(vii)	exclusive dealing arrangements or other Contracts or arrangements containing covenants which limit the ability of Borrower to compete in any line of business or with any person or which involve any restriction of geographical area in which, or method by which, Borrower may carry on its business (other than as may be required by law or any applicable Governmental Entity);

	(viii)	Contracts between any Affiliate of Borrower, on the one hand, and Borrower, on the other hand;

	(ix)	Contracts, which will survive any Closing, with any director, officer or employee of Borrower, other than those agreements being executed and delivered in connection with this Agreement;

	(x)	collective bargaining agreements;

	(xi)	Contracts which will survive any Closing for the employment or other engagement of any individual on a full time, part time, consulting or other basis;

	(xii)	Contracts under which Borrower has advanced or loaned any amount to any of the directors, officers, employees or independent contractors of Borrower; and

	(xiii)	any other Contract that is material to Borrower.

(b) Except as set forth on Schedule 3.12(b) hereto, and in the case of subparagraphs (ii), (iii) and (iv), in the Borrower Reports:

(i)

each of the Material Contracts is valid, binding and enforceable and in full force and effect, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable remedies, and subject to the rights of other parties thereto to terminate, will continue to be valid, binding, enforceable and in full force and effect on substantially identical terms following consummation of the transactions contemplated hereby;

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	(ii)	Borrower is not in breach or default and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification or acceleration by any other party under any Material Contract and no other party is in breach or default and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification or acceleration by Borrower under any Material Contract;

	(iii)	Borrower has not and no other party has, repudiated any provision of any Material Contract; and

	(iv)	Borrower has not received any written notice that the other party to any Material Contract intends to exercise any termination rights with respect to any Material Contract.

3.13 No Consents. Except as otherwise set forth on Schedule 3.13, no permit, consent, approval, novation, authorization or other order of or filing with any Governmental Entity or any other Person is required in connection with the execution, delivery and consummation of this Agreement by Borrower and the actions of Borrower contemplated hereby, or to permit Borrower to continue to conduct its business as currently conducted in all material respects following the consummation of the transactions contemplated hereby other than as a result of any facts or circumstances relating solely to Lender.

3.14 Related Party Transactions. Schedule 3.14 sets forth all existing transactions, investments and loans, including loan guarantees existing as of the date hereof, to which Borrower is a party with any director, executive officer or 5% or greater stockholder of Borrower (or holder of securities that would represent 5% or more of the shares of Borrower on an as-converted basis, including, without limitation, Cornell Capital Partners, LP and Homedics, Inc.), or any Affiliate of Borrower. All such transactions, investments and loans are on terms no less favorable to Borrower than could be obtained from unrelated parties.

3.15 Litigation; Regulatory Action. Except as set forth on Schedule 3.15 hereto:

(a) no litigation, proceeding (administrative or otherwise) or controversy (“Litigation”) before any court, arbitrator, mediator or Governmental Entity is pending against Borrower, any director or officer of Borrower, or, to Borrower’s knowledge, any employee of Borrower, which relates to Borrower’s activities, business or assets, and, to Borrower’s knowledge, no such Litigation has been threatened; and

(b) Borrower is not party or subject to, and none of the properties or assets of Borrower is subject to, any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Governmental Entity, and Borrower has not been advised in writing by any Governmental Entity that such Governmental Entity is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum or understanding, commitment letter or similar submission.

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3.16 Intellectual Property.

(a) Schedule 3.16(a) sets forth a complete list of all Intellectual Property which is owned or used by Borrower, all of which, to Borrower’s knowledge, is valid and is enforceable and in full force and effect. Borrower owns, or has the valid and exclusive right to use and to transfer, in each case free and clear of all Liens, other than licenses granted by Borrower which are listed on Schedule 3.16(a), all Intellectual Property used in its business as it currently is conducted or held for use in such business. Except as set forth on Schedule 3.16(a), the validity and enforceability of such Intellectual Property or Borrower’s title thereto (i) have not been questioned in any prior Litigation, (ii) are not being questioned in any pending Litigation, and (iii) are not the subject of any threatened or proposed Litigation. Except as set forth on Schedule 3.16(a), Borrower is not aware of any information that would, or that another Person has asserted that would, cause any of the Intellectual Property identified on Schedule 3.16(a) to be invalid or unenforceable. The consummation of the transactions contemplated hereby (including, without limitation, the conversion of the Note to Common Stock) will not result in any loss or impairment of or to any such Intellectual Property of Borrower.

(b) Borrower is not party to, whether as licensor or licensee, and is not bound by or subject to, any license agreement for any Intellectual Property or process, except as described on Schedule 3.16(b). With respect to all licenses identified on Schedule 3.16(b) under which Borrower is the licensor, no claim, request or demand for indemnity for infringement has been made by any licensee. Except as set forth on Schedule 3.16(b), Borrower is not aware of any breach or anticipated breach of any license identified on Schedule 3.16(b), nor has it received notice of termination of any such license. Borrower has provided to Lender true, correct and complete copies of each license agreement listed on Schedule 3.16(b).

(c) All maintenance fees, annuities, affidavits and renewals due from Borrower or required to be paid by Borrower through the date of this Agreement with respect to the Intellectual Property identified on Schedule 3.16(a) have been paid or filed.

(d) Schedule 3.16(d) sets forth a list of each of Borrower’s officers, directors, employees, consultants and independent contractors who are contractually obligated to disclose and assign all rights with respect to their work for Borrower to Borrower, and to cooperate with Borrower in obtaining and perfecting ownership of patents, copyrights and other statutory or related rights with respect to such work (any such contract being referred to herein as a “Work-for-Hire Agreement”). Borrower has provided true, correct and complete copies of any such agreement to Lender. Schedule 3.16(d) also sets forth a list of each of Borrower’s officers, directors, employees, consultants and independent contractors who provided material assistance to Borrower in connection with, or who otherwise may have a claim to ownership of, any of Borrower’s patents, copyrights or other related rights, and who are not party to a Work-for-Hire Agreement with Borrower.

(e) Except as set forth on Schedule 3.16(e), the conduct of Borrower’s business as currently conducted does not, in any material respect, infringe upon (either directly or indirectly such as through contributory infringement or inducement to infringe), dilute, misappropriate or otherwise violate any Intellectual Property owned and controlled by any third party.

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(f) Except as set forth on Schedule 3.16(f), (i) to Borrower’s knowledge, no third party is misappropriating, infringing, diluting, or violating any Intellectual Property owned by or licensed to or by Borrower, and (ii) no claims alleging a third party is misappropriating, infringing, diluting or violating any Intellectual Property owned by or licensed to or by Borrower have been made against a third party by Borrower or, to Borrower’s knowledge, the licensor of any Intellectual Property licensed by Borrower.

3.17 Taxes.

(a) Except as otherwise disclosed on Schedule 3.17(a):

	(i)	all Tax Returns due to have been filed through the date hereof in accordance with any applicable Law have been duly filed and are correct and complete;

	(ii)	all Taxes, deposits or other payments for which Borrower may have any liability through the date hereof (whether or not shown on any Tax Return) have been paid in full or are accrued as liabilities for Taxes on the books and records of Borrower;

	(iii)	the amounts so paid on or before the date hereof, together with any amounts accrued as liabilities for Taxes (including Taxes accrued as currently payable) on the books of Borrower, will be adequate based on the tax rates, applicable laws and regulations in effect on the date hereof to satisfy all material liabilities for Taxes of Borrower in any jurisdiction through June 19, 2007 including Taxes accruable upon income earned through each Closing;

	(iv)	there are not now any extensions of time in effect with respect to the dates on which any Tax Returns were or are due to be filed;

	(v)	all deficiencies asserted as a result of any examination of Tax Return have been paid in full, accrued on the books of Borrower, or finally settled, and no issue has been raised in any such examination which, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined;

	(vi)	no claims have been asserted and no proposals or deficiencies for any Taxes are being asserted, proposed or threatened, and no audit or investigation of any Tax Return is currently underway, pending or threatened;

	(vii)	no claim has ever been made by any Governmental Entity in a jurisdiction where Borrower does not file Tax Returns and where it is or may be subject to taxation;

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	(viii)	in all material respects, Borrower has withheld and paid all Taxes required to have been paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party;

	(ix)	there are no outstanding waivers or agreements by Borrower for the extension of time for the assessment of any Taxes or deficiency thereof, nor are there any requests for rulings, outstanding subpoenas or requests for information, notice of proposed reassessment of any property owned or leased by Borrower or any other matter pending between Borrower and any taxing authority;

	(x)	there are no Liens for Taxes other than Liens for Taxes which are not yet due and payable, nor are there any Liens which are pending or threatened;

	(xi)	Borrower has not been a member of an affiliated group filing a consolidated federal income tax return;

	(xii)	neither Borrower nor Lender, as a consequence of Borrower’s actions prior to any Closing Date, will be obligated to make a payment to an individual that would be a “parachute payment” as such term is defined in Section 280G of the Code without regard to whether such payment is to be paid in the future; and

	(xiii)	Borrower does not have any liability for the Taxes of any Person (other than for itself) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise.

(b) Borrower has delivered to Lenders true and complete copies of all income Tax Returns (together with any agent’s reports and any accountants’ work papers) relating to its operations for the years for which Tax Returns are due to have been filed.

3.18 Insurance.

(a) Schedule 3.18(a) sets forth a list of all insurance policies maintained by or for the benefit of Borrower or its directors, officers, employees, agents or independent contractors.

(b) Except as set forth on Schedule 3.18(b), with respect to each insurance policy maintained by Borrower: (i) such policy is in full force and effect, and is legal, valid, binding and enforceable as to Borrower and the other party or parties thereto; (ii) subject to the rights of other parties thereto to terminate, such policy will continue to be legal, valid, binding, enforceable and in full force and effect on substantially identical terms on each Closing Date (iii) neither Borrower nor, to Borrower’s knowledge, any other party to the policy, is in breach or default (including with respect to the payment of premiums or the giving of notices) and no event has occurred which, with notice or the lapse of time or both, would constitute such a breach or default by Borrower, or to Borrower’s knowledge, a breach or default by the other party to the policy or permit termination, modification or acceleration under the policy; (iv) no party to the policy has repudiated any provision thereof in writing, and (v) Borrower has not received any written notice that any insurer under the policy intends to exercise any termination right or fail to renew such policy.

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(c) Except as set forth on Schedule 3.18(c), Borrower has been covered during the three (3) year period preceding the date hereof by insurance in type, scope and amount which (i) meets the minimum requirements of any Contract to which Borrower is a party and (ii) is customary and commercially reasonable for the business(es) in which Borrower has engaged during such period.

3.19 Financial Controls.

(a) Borrower has maintained a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(b) No employee of Borrower who serves in an accountancy or a financial management capacity with Borrower has been convicted of theft, embezzlement, fraud, or any other crime which is considered to be a felony.

(c) Borrower has made available to Lenders any written reports that Borrower has received from its public accounting firm since January 1, 2002, regarding critical accounting policies and practices, or alternative treatments of financial information within GAAP that have been discussed with management of Borrower, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by such public accounting firm.

3.20 Compliance with Laws. Except as set forth on Schedule 3.20, Borrower is in compliance with all Laws, and has obtained and maintained all permits, licenses and registrations applicable to the conduct of its business, and Borrower has not received written notification that has not lapsed, been withdrawn or abandoned by any Governmental Entity (i) asserting a material violation or possible violation of any such Law, (ii) threatening to revoke any permit, license, registration, or other government authorization, or (iii) materially restricting or in any material way limiting its operations. Borrower is not subject to any regulatory or supervisory cease and desist order, agreement, directive, memorandum of understanding or commitment, and has not received any written communication requesting that it enter into any of the foregoing.

3.21 Real Property. Borrower does not own, of record or beneficially, any right, title or interest in any real property (including any easement, license or right-of-way) or any asset consisting of realty, including appurtenances, improvements or fixtures, nor has it previously owned, any right, title or interest in any real property, other than leasehold interests with respect to the Leased Real Property pursuant to those leases set forth on Schedule 3.21. Borrower is not a fiduciary as to any real property and no purchase of real property has been effected by or through Borrower by any separate account or commingled fund.

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3.22 Accounts Receivable. All of the accounts receivable of Borrower shown on the balance sheets included in the Borrower Financial Statements, or arising thereafter, arose in the ordinary course of business. The values at which accounts receivable are carried reflect the accounts receivable valuation policy of Borrower which is consistent with past practice and in accordance with GAAP (applied on a consistent basis throughout the period involved).

3.23 Employees; Employment Agreements.

(a) Schedule 3.23(a) sets forth a true and complete list of (i) all of the employees (whether full-time or part-time), (ii) independent contractors, (iii) consultants, and (iv) other service providers of Borrower as of the date hereof, specifying their position, annual salary or hourly wage or other service fee, date of hire or other service commencement date.

(b) Except as set forth on Schedule 3.23(b), Borrower is not a party to or bound by any employment agreement or other arrangement for services, including with respect to a Person acting as a consultant, independent contractor or otherwise. Borrower has provided to Lender true, correct and complete copies of each such agreement or arrangement that is written, and, other than with respect to common law employment-at-will arrangements, no such agreement or arrangement exists which is not written.

(c) Except as set forth on Schedule 3.23(c), Borrower does not have any agreement providing for severance payments to terminated employees and Borrower has not made any verbal commitments to any officer, employee, former employee, consultant, independent contractor or other service provider of Borrower with respect to compensation, promotion, retention, termination, severance or similar matters in connection with the transactions contemplated hereby or otherwise.

(d) Except as set forth on Schedule 3.23(d) and any Contracts being executed in connection with this Agreement, Borrower does not have any Contract obligating it with respect to payments or other rights upon any change in control of Borrower or the transactions contemplated hereby.

3.24 Labor Relations. Borrower is in compliance in all material respects with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, the Immigration Reform and Control Act, the Worker Adjustment and Retraining Notification Act, any such laws respecting employment discrimination, disability rights or benefits, equal opportunity, plant closure issues, affirmative action, workers’ compensation, employee benefits, severance payments, labor relations, employee leave issues, wage and hour standards, occupational safety and health requirements and unemployment insurance and related matters, and except as set forth on Schedule 3.24 there are no internal complaints by or on behalf of employees in regard to any of the foregoing. Except as set forth on Schedule 3.24, Borrower is not currently, and has not in the past been, a party to an arrangement for services from a professional employer organization. Borrower is not engaged in any unfair labor practice and there is no unfair labor practice complaint pending or, to Borrower’s knowledge, threatened against Borrower before the National Labor Relations Board. Borrower is not a party to, and is not bound by, any collective bargaining agreement, Contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of a proceeding asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel it to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving Borrower pending or, to its knowledge, threatened, nor is Borrower aware of any activity involving its employees seeking to certify a collective bargaining unit or engaging in any other organization activity.

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3.25 Benefit Plans.

(a) Schedule 3.25(a) sets forth a true and complete list of each Benefit Plan currently sponsored, maintained or contributed to by Borrower. Any special tax status enjoyed by such plan is noted on such schedule.

(b) Except as set forth on Schedule 3.25(b):

	(i)	with respect to each Benefit Plan identified on Schedule 3.25(a), Borrower has heretofore delivered or made available to Lenders true and complete copies of the plan documents, any amendments thereto, the summary plan description and any amendments thereto (or, if the plan is not written, a written description thereof), as reasonably requested by a Lender;

	(ii)	Borrower’s records accurately reflect its employees’ employment histories, including their hours of service and all such data is maintained in a usable form;

	(iii)	no Benefit Plan or ERISA Affiliate Plan is or was at any time subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code;

	(iv)	no Benefit Plan or ERISA Affiliate Plan is or was at any time a “multiemployer plan” as defined in Section 3(37) of ERISA or a “multiple employer welfare arrangement” as defined in Section 3(40) of ERISA;

	(v)	Borrower has not incurred, and, to Borrower’s knowledge, no facts exist which reasonably could be expected to result in, liability to Borrower as a result of a termination with respect to a Benefit Plan or an ERISA Affiliate Plan;

	(vi)	no insurance policy or contract maintained in connection with a Benefit Plan provides for a termination fee or penalty upon termination of the policy or contract;

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	(vii)	each Benefit Plan has been established, registered, qualified, invested, operated and administered in all material respects in accordance with its terms and in compliance with ERISA, the Code and all applicable Laws;

	(viii)	Borrower has not incurred, and no facts exist which reasonably could be expected to result in any liability to Borrower with respect to any Benefit Plan or any ERISA Affiliate Plan, including any liability, tax, penalty or fee under ERISA, the Code or any applicable Law (other than to pay premiums, contributions or benefits in the ordinary course);

	(ix)	each Benefit Plan intended to be “qualified” within the meaning of Section 401(a) of the Code is the subject of a favorable Internal Revenue Service determination, opinion or notification letter indicating that it is so qualified, and each trust maintained under such a Benefit Plan intended to be exempt from taxation under Section 501(a) of the Code has received a favorable Internal Revenue Service determination, opinion or notification letter indicating that it is so tax-exempt, and no fact or circumstance exists that could adversely affect the qualified status of such a Benefit Plan or the tax-exempt status of such a trust;

	(x)	there is no pending or threatened complaint, claim (other than routine claims for benefits), proceeding, examination, audit, investigation or other proceeding or action of any kind in or before any court, tribunal or governmental agency with respect to any Benefit Plan and there exists no state of facts which after notice or lapse of time or both reasonably could be expected to give rise to any such claim, investigation, examination, audit or other proceeding or to affect the registration of any Benefit Plan required to be registered;

	(xi)	no assets of any Benefit Plan are or at any time have been invested in common stock of Borrower; and

	(xii)	Schedule 3.25(b) contains the name of each individual currently receiving or entitled to receive continuation coverage under any Benefit Plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

3.26 Environmental.

(a) Borrower is and at all times has been in compliance with all Environmental Laws. Borrower has not received any written communication alleging that it is not in such compliance, and there are no circumstances that would prevent or interfere with the continuation of such compliance.

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(b) There are no pending Environmental Claims, Borrower has not received notice of any pending Environmental Claims, and there are no conditions or facts existing which might reasonably be expected to result in legal, administrative, arbitral or other proceedings asserting Environmental Claims or other claims, causes of action or governmental investigations of any nature seeking to impose, or that could result in the imposition of, any liability arising under any Environmental Laws upon (i) Borrower, (ii) any Person whose liability for any Environmental Claim that Borrower has or may have retained or assumed, either contractually or by operation of law, or (iii) any real or personal property owned or leased by Borrower, or any real or personal property which Borrower has or is judged to have managed or supervised. Borrower is not subject to any agreement, order, judgment, decree or memorandum by or with any court, regulatory agency, other Governmental Entity or third party imposing any liability under any Environmental Laws.

(c) Borrower is in compliance with all recommendations contained in any environmental audits, analyses and surveys received by Borrower relating to all real and personal property owned, operated or leased by Borrower.

(d) There are no past or present actions, activities, circumstances, conditions, events or incidents that could reasonably form the basis of any Environmental Claim, or other claim or action or governmental investigation that could result in the imposition of liability arising under any Environmental Laws, against Borrower or against any Person whose liability for any Environmental Claim Borrower has or may have retained or assumed, either contractually or by operation of Law.

(e) No remediation, removal or cleanup of any Hazardous Substances is being conducted or has been conducted at any time in the past, in connection with or associated with, the operations or activities of Borrower or any real or personal property at any time owned, operated or leased by Borrower; provided, however, that, with respect to any time period other than when Borrower owned, operated or leased such real or personal property, the representations and warranties of this Section 3.26(e) are made to the knowledge of Borrower.

(f) Hazardous Substances are not and have not been at any time in the past, generated, used, stored, treated, or disposed of in connection with or associated with the operations or activities of Borrower or any real or personal property at any time owned, operated or leased by Borrower in any case that could reasonably be expected to require remediation under applicable Environmental Laws or otherwise result in liability to Borrower; provided, however, that, with respect to any time period other than when Borrower owned, operated or leased such real or personal property, the representations and warranties of this Section 3.26(f) are made to the knowledge of Borrower.

(g) No underground or aboveground storage tanks, solid waste management units, landfills or other waste disposal areas, dikes or impoundments of any kind are located at, on or under any real or personal property at any time owned, operated or leased by Borrower.

(h) There are no (i) friable asbestos-containing materials, (ii) lead-based paint, (iii) polychlorinated biphenyls or (iv) mold or fungi in quantities and of a character (A) for which investigation or remedial actions would be reasonably required, (B) for which investigation or remedial action has been recommended or undertaken by environmental professionals on behalf of Borrower or (C) that have been the subject of written, or to the knowledge of Borrower, any other, claim, complaint, allegation, or inquiry made to Borrower present on, in or at any real or personal property at any time owned, operated or leased by Borrower.

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3.27 State Takeover Laws; Certificate of Incorporation. Borrower has taken all necessary action to exempt this Agreement and the transactions contemplated hereby (including, without limitation, the issuance of the Conversion Shares upon conversion of the Notes) from, and this Agreement and the transactions contemplated hereby (including, without limitation, the issuance of the Conversion Shares upon conversion of the Notes) are exempt from, (a) any applicable state takeover laws, including, without limitation, the provisions of the NCL, (b) any applicable takeover provisions in Borrower’s Certificate of Incorporation or bylaws, and (c) except as set forth on Schedule 3.27, any change of control or other takeover provisions set forth in any Contract to which Borrower is a party or may be bound.

3.28 Offering Exemption. Subject in part to the truth and accuracy of each Lender’s representations set forth in Section 4.2 hereof, the offer, sale and issuance of the Notes is exempt from the registration requirements of the Securities Act and under applicable state securities and “blue sky” laws, as currently in effect and, neither Borrower nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption.

3.29 Certain Business Practices. Neither Borrower nor any director, officer, agent or employee of Borrower has (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (c) made any other unlawful payment.

3.30 U.S. Small Business Administration.

(a) Borrower, together with its affiliates (as that term is defined in Title 13, Code of Federal Regulations, 121,103), is a “small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “SBIA”), and the regulations thereunder, including title 13, Code of Federal Regulations, 121.301(c). The information set forth in SBA Forms 480, 652 and 1031 regarding Borrower and its affiliates, when delivered to Lenders will be accurate and complete. Copies of such forms have been completed and executed by Borrower and delivered to Lenders on or before the date hereof.

(b) No portion of the proceeds from the Loan will be used by Borrower (i) to provide capital to a corporation licensed under the SBIA, (ii) outside the United States (except (A) to acquire abroad materials and industrial property rights for a United States domestic operation or (B) for transfer to a controlled foreign subsidiary of Borrower, so long as at least fifty-one percent (51%) of Borrower’s assets and activities will remain within the United States) or (iii) for any purpose contrary to the public interest (including, but not limited to, activities which are in violation of law) or inconsistent with free competitive enterprise, in each case within the meaning of 13 C.F.R. 107.720.

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(c) Borrower’s primary business activity does not involve, directly or indirectly, providing funds to others, the purchase of or discounting of debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair.

(d) If Borrower breaches the representations in subsections 3.30(b) or (c) above in any material respect, then in addition to all other remedies available to Lenders, Lenders may demand that Borrower immediately repurchase all of the Notes acquired by Lenders hereunder. The purchase price of the Notes shall be the outstanding principal and all accrued interest then remaining unpaid.

(e) On or before the date of this Agreement, and, in any event, prior to the First Closing, Borrower shall have delivered to Lenders duplicate originals of (i) an executed copy of SBA Forms 480 Size Status Declaration, (ii) an executed copy of SBA Form 652 Assurance of Compliance for Nondiscrimination, and (iii) the information needed to complete Part A and Part B of SBA Form 1031 Portfolio Financing Report.

3.31 Full Disclosure. None of the representations and warranties furnished by or on behalf of Borrower to Lender in writing pursuant to this Agreement or any information contained in the Schedules thereto referred to in this Agreement, contains any untrue statement of a material fact and, does not omit to state any material fact required or necessary to make any statement, in light of the circumstances under which such statement is made, not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF LENDERS

Each of the Lenders hereby represents and warrants to Borrower, severally but not jointly, as follows as of the First Closing Date and AirWorks or RS Properties, as the case may be, represents and warrants to Borrower, severally but not jointly, as follows as of each Subsequent Closing Date:

4.1 Power; Authority; Due Execution. Such Lender has the right, power and capacity to execute and deliver this Agreement and any other agreement entered into in connection with this Agreement and to perform its obligations under this Agreement and any other agreement entered into in connection with this Agreement to which it is a party to and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and any other agreement entered into in connection with this Agreement by such Lender and the performance by such Lender of its obligations hereunder and thereunder and the consummation of the transactions provided for herein and therein have been duly and validly authorized and approved by such Lender. This Agreement has been, and any other agreement entered into in connection with this Agreement will be as of the applicable Closing Date, duly executed and delivered by such Lender and do or will, as the case may be, constitute the valid and binding agreement of such Lender, enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable remedies.

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4.2 Investment Representations.

(a) Such Lender represents and warrants that the Note issued to it is being acquired for investment only for its own account and not with a view to the sale or distribution of any part thereof, except to the extent that it serves as a nominee for a limited number of “accredited investors,” as that term is defined in Rule 501 of Regulation D as promulgated by the SEC pursuant to the Securities Act.

(b) Such Lender understands that the Note issued to it has not been registered under the Securities Act or any state securities laws on the grounds that the sale provided for in this Agreement and the issuance of securities hereunder are exempt from registration under the Securities Act and applicable state securities laws, and that Borrower’s reliance on such exemption is predicated in part on such Lender’s representations set forth herein.

(c) Such Lender recognizes that the investment in the Note issued to it involves a special risk, and represents that it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Note issued to it, and has the ability to bear the economic risks of its investment. Prior to making a decision to enter into this Agreement, such Lender was provided the opportunity to ask questions of, and receive answers from, the executive officers of Borrower concerning Borrower, and to obtain from Borrower information requested from Borrower. Based on the materials provided by Borrower in response to due diligence requests, such Lender has conducted an investigation to its satisfaction of the investment in the Note issued to it and has received all information requested from Borrower it considers necessary or appropriate for deciding whether to purchase the Note issued to it; provided, however, that no investigation conducted by such Lender shall be deemed to release Borrower in any manner whatsoever from any breach of a representation or warranty contained in this Agreement. On the basis of the foregoing, and on the basis of the representations, warranties and covenants of Borrower contained in this Agreement and the other documents and instruments delivered in connection herewith, such Lender acknowledges that it has, individually or through advisers, such knowledge or experience in financial, tax and business matters to enable it to understand and evaluate the merits and risks associated with an investment in the Note issued to it.

(d) Such Lender understands that each certificate representing the Note or the shares into which the Note is convertible will be endorsed with the following legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, ANY APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS.”

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(e) Such Lender and the persons for which it acts as nominee are “accredited investors” within the meaning of Rule 501(a) of Regulation D of the SEC.

(f) Such Lender is financially able to hold the Note issued to it for long-term investment, believes that the nature and amount of the Note issued to it are consistent with its overall investment program and financial position, and recognizes that there are substantial risks associated with the acquisition of the Note issued to it.

4.3 No Public Market. Each Lender understands that no public market exists for the Notes and there is no assurance that a public market will ever exist for the Notes.

4.4 Non-Contravention. Neither the execution and delivery of this Agreement by Lenders nor the consummation of the transactions contemplated hereby does or would, after the giving of notice or the lapse of time or both, (a) conflict with, result in a breach of, constitute a default under, or violate the organic documents of such Lender, or (b) conflict with, result in a breach of, constitute a default under, or violate any Law applicable to such Lender, except as would not otherwise have a Material Adverse Effect on such Lender.

4.5 No Consents. No permit, consent, approval, novation, authorization or other order of or filing with any Governmental Entity or any other Person is required in connection with the execution, delivery and consummation of this Agreement by such Lender and the actions of such Lender contemplated hereby, other than what may be required as a result of any facts or circumstances relating solely to Borrower.

ARTICLE V

CERTAIN COVENANTS AND AGREEMENTS

5.1 Review of Operations. Each Lender may, so long as any amount is outstanding under the Note issued to it, directly or through its representatives, review, during normal business hours and upon reasonable notice to Borrower, the premises and books and records of Borrower to the extent it deems necessary or advisable to familiarize itself with such premises and other matters; such review, and the reviews made by such Lender or its representatives prior to the date of this Agreement, shall not, however, affect the representations and warranties made by Borrower in this Agreement or the remedies of such Lender for breaches of those representations and warranties.

5.2 Confidentiality.

(a) Between the date hereof and the Maturity Date, Lenders and Borrower will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Lenders and Borrower to maintain in confidence, all information provided in connection herewith, whether written or oral, unless (i) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (ii) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated hereby, or (iii) the furnishing or use of such information is otherwise required by Law.

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(b) Notwithstanding anything set forth in this Agreement to the contrary (including the confidentiality obligations set forth in this Section 5.2), or in any other agreement executed in connection herewith, Borrower and Lenders (and any directors, officers, employees, agents or advisors of either of Borrower or Lenders), are hereby expressly authorized to disclose the “tax treatment” and “tax structure” (as those terms are defined in Treasury Regulation §§1.6011-4(c)(8) and (9), respectively) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to such Persons relating to such “tax treatment” or “tax structure” of the transactions contemplated hereby; provided, however, that (i) such disclosure shall not be made until the earliest of (A) the date of the public announcement of discussions relating to such transactions, (B) the date of the public announcement of such transactions, or (C) the date of the execution of this Agreement, and (ii) this provision shall not permit disclosure to the extent that nondisclosure is required to comply with any applicable federal or state securities laws.

5.3 Conduct of Business. Except with the prior written consent of AirWorks, Borrower shall not:

(a) conduct its business other than in the ordinary and usual course, or fail to use reasonable efforts to preserve intact its business organizations and assets and maintain its rights, franchises and existing relations with clients, customers, suppliers, employees, business associates and any independent contractors associated with it, or take any action reasonably likely to have an adverse affect upon the its ability to perform any of its obligations under this Agreement, or engage in any new lines of business;

(b) issue, sell or otherwise permit to become outstanding, or authorize the creation of, any (i) additional shares of capital stock, other than upon exercise of outstanding options and warrants or other outstanding convertible securities, or (ii) securities or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, or any options, calls or commitments relating to, shares of capital stock (including stock appreciation rights and all similar derivative rights), or enter into any agreement with respect to the foregoing;

(c) except as permitted by Section 5.3(g), permit any additional shares of its capital stock to become subject to new grants of employee or director stock options, options, calls or commitments, or similar rights;

(d) make, declare, pay or set aside for payment any dividend on or in respect of, or declare or make any distribution on, any shares of its capital stock;

(e) directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire, any shares of its capital stock;

(f) enter into, amend, modify or renew any employment, consulting, severance or similar agreements or arrangements with any of its directors, officers or employees, or grant any salary, pay or wage increase or increase any employee benefit (including incentive or bonus payments), except (i) for normal individual increases in compensation to employees in the ordinary course of business consistent with past practice, (ii) for other changes that are required by applicable law, or (iii) for employment or other arrangements for, or grants of awards to, newly hired employees in the ordinary course of business consistent with past practice and after prior consultation with AirWorks;

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(g) enter into, establish, adopt or amend (except as may be required by applicable law or for employment or other arrangements for, or grants of awards to, newly hired employees in the ordinary course of business consistent with past practice and after prior consultation with AirWorks) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any of its directors, officers or employees, or take any action to accelerate the vesting or exercisability of stock options, restricted stock or other compensation or benefits payable thereunder;

(h) sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its material assets, business or properties other than in the ordinary course of business;

(i) acquire any assets, business, securities or properties of any other entity other than in the ordinary course of business;

(j) amend its Certificate of Incorporation or bylaws;

(k) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP and after notifying AirWorks of any such required change;

(l) enter into or terminate any Material Contract or amend or modify any of its existing Material Contracts, other than in the ordinary course of business consistent with past practice, with the exception of any bulk orders for Borrower’s products upon AirWorks’ consent, such consent not to be unreasonably withheld;

(m) settle any claim, action or proceeding, except for any claim, action or proceeding involving solely money damages to be paid by Borrower in an amount, individually and in the aggregate for all such settlements, not more than Ten Thousand Dollars ($10,000.00) and which is not reasonably likely to establish an adverse precedent or basis for subsequent settlements;

(n) take any action that is intended or reasonably likely to (i) result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect (excluding any materiality provision relating thereto) at any time at or prior to the last Closing Date, (ii) result in any of the conditions to the transaction set forth in Article VI not being satisfied, or (iii) result in a violation of any provision of this Agreement, except, in each case, as may be required by applicable law or regulation;

(o) incur any indebtedness (including indebtedness relating to acquisitions of its Common Stock) other than as contemplated hereby or in the ordinary course of business in excess of Ten Thousand Dollars ($10,000.00) in the aggregate;

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(p) settle, modify or forgive any indebtedness for borrowed money owed to it (including indebtedness relating to acquisitions of its Common Stock);

(q) enter into any sale/lease back, synthetic lease, receivables financing or other transaction however entitled which would or could be excluded from its balance sheet prepared in accordance with GAAP;

(r) solicit or encourage inquires or proposals with respect to, or furnish any nonpublic information relating to or participate in any negotiations or discussion concerning, any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, Borrower, or any merger or other business combination with Borrower, other than as contemplated by this Agreement;

(s) issue or authorize the issuance of stock options under the Option Plan; or

(t) agree, commit to or enter into any agreement to take any of the actions referred to in this Section 5.3.

In connection with Borrower’s continued operation of its business between the date hereof and the date on which no amounts due under the Notes are outstanding, Borrower will confer in good faith on a regular basis with one (1) or more representatives of AirWorks designated to Borrower regarding operational matters and the general status of ongoing operations. Borrower acknowledges that Lenders do not and will not waive any rights it may have under this Agreement as a result of such consultations.

5.4 Supplements to Schedules. From time to time, but in no event less than every ninety (90) days, until the date on which no amounts due under the Notes are outstanding, Borrower shall supplement or amend the Schedules that it has delivered with respect to any matter first existing or occurring following the date hereof that (a) if existing or occurring at or prior to the date hereof, would have been required to be set forth or described in the Schedules, or (b) is necessary to correct any information in the Schedules that has been rendered inaccurate thereby. No supplement or amendment to any Schedule shall have any effect for the purpose of determining satisfaction of the conditions to closing set forth in Section 6.2 or otherwise.

5.5 Authorization and Reservation of Common Stock. It is the intent of Lenders and Borrower that, upon issuance, the shares of Common Stock issuable to AirWorks and RS Properties upon conversion of the AirWorks Note and the RS Properties Note in full, assuming the entire $17,300,000 amount is advanced by AirWorks and RS Properties, (the “AirWorks and RS Properties Notes Shares”) will represent, on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by Borrower, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of Borrower shall have been exercised, and all outstanding shares of all series of Borrower’s preferred stock, if any, have been converted into Common Stock), no less than 93.3% of the outstanding capital stock of Borrower. As soon as reasonably practicable following the First Closing Date, Borrower shall take such action as is necessary to authorize and reserve a number of shares of Common Stock sufficient to permit Lenders to convert the Notes in whole. Accordingly, without limiting the generality of the foregoing, Lenders and Borrower agree that if at any time after the First Closing Date it is determined that the AirWorks and RS Properties Notes Shares will not, or did not represent, on an as-converted, fully-diluted basis at least 93.3% of the outstanding capital stock of Borrower, Lenders and Borrower will take all such action as is necessary for Borrower to authorize and reserve, and Borrower shall authorize and reserve for Lenders, such additional shares of its Common Stock as are necessary for AirWorks and RS Properties to hold, beneficially and of record, at least 93.3% of the outstanding capital stock of Borrower on an as-converted, fully-diluted basis upon conversion of their respective Notes in whole.

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5.6 Expansion of Board of Directors; Observer.

(a) From and after the First Closing Date, Borrower shall take all such actions as are necessary to ensure that AirWorks and RS Properties have the right to designate a majority of the members of the board of directors of Borrower, including increasing the number of members of Borrower’s board of directors and electing AirWorks’ and RS Properties’ designees to fill all such vacancies, if necessary.

(b) For so long as a Lender owns any portion of the Notes or any Conversion Shares, such Lender shall have the right to have one representative present at all meetings of the Borrower’s board of directors and committees of the Borrower’s board of directors as an observer.

5.7 Publicity. Except as otherwise required by Law as advised by counsel, neither Lenders nor Borrower shall issue any press release or make any other public statement, in each case relating to or connected with or arising out of this Agreement or the matters contained herein, without obtaining the prior written approval of the other party to the contents and the manner of presentation and publication thereof, which approval shall not be unreasonably withheld.

5.8 Expenses.

(a) Except as set forth in Section 5.8(b), Borrower and each of the Lenders shall be responsible for all of its respective costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby.

(b) Borrower shall pay all reasonable out-of-pocket expenses of Lenders relating to the negotiation and execution of the Transaction Documents and the closing of the transactions contemplated thereby, including, without limitation, the fees, charges, expenses and disbursements of Paul, Hastings, Janofsky & Walker LLP and Kilpatrick Stockton LLP, legal counsel to AirWorks, upon the First Closing.

5.9 Cooperation. Lenders and Borrower shall cooperate and use their respective commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement, including, their respective commercially reasonable efforts to obtain, prior to each Closing Date, all consents and approvals of Persons, including Governmental Entities, as are necessary for consummation of the transactions contemplated by this Agreement with respect to such Closing Date and to fulfill the applicable conditions to closing.

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5.10 Notification of Certain Matters. Borrower shall give prompt notice to Lenders, and each Lender shall give prompt notice to Borrower, of (a) the occurrence, or nonoccurrence, of any event which would be likely to cause any representation or warranty on its part contained in this Agreement to be untrue or inaccurate and (b) any failure by such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.10 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice (including, any condition to closing).

5.11 SBIA Regulatory Compliance.

(a) Within seventy-five (75) days after the date hereof, Borrower shall provide to Lenders a certificate of Borrower’s chief financial office and chief executive officer (a) verifying (and describing in reasonable detail) the use of the proceeds of the Lenders’ financing hereunder to such date and (b) certifying compliance by Borrower with the provisions of this Section 5.11. In addition to any other rights granted hereunder, Borrower shall at all times provide Lenders and the SBA access to Borrower’s books and records for the purposes of, without limitation, verifying the use of the proceeds of Lenders’ financing and for all other purposes required by the SBA.

(b) Promptly after the end of each of Borrower’s fiscal years (but in any event prior to February 28 of each calendar year) during which any amounts under the Loan are outstanding, Borrower shall provide to Lenders a written assessment, in form and substance reasonably satisfactory to Lenders of the economic impact of Lenders’ financing hereunder, specifying the full-time equivalent jobs created or retained, the impact of the financing on Borrower’s business in terms of expanded revenue and taxes and other appropriate economic benefits, including, but not limited to, technology development or commercialization, minority business development, urban or rural business development, expansion of exports and assistance to manufacturing firms.

(c) Upon the request of Lenders for so long as any amounts under the Notes are outstanding, Borrower will (i) provide to Lenders such financial statements and other information as Lenders may from time to time reasonably request for the purpose of assessing Borrower’s financial condition and (ii) furnish to Lenders all information reasonable requested by them in order for them to prepare and file SBA Form 468 and any other documents, forms or information reasonably requested or required by any Governmental Entity asserting jurisdiction over Lenders.

(d) For a period of one year following the date of this Agreement, neither Borrower nor any of its subsidiaries will change its business activity if such change would render Borrower ineligible to receive financial assistance from a Small Business Investment Company under the SBIA and the regulations thereunder (within the meanings of 13 C.F.R. 107.720). If Borrower breaches this covenant, then, in addition to all other remedies available to Lenders, Lenders may demand that Borrower immediately repurchase all Notes acquired by Lenders. The purchase price of the Notes shall be the outstanding principal and all accrued interest then remaining unpaid.

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5.12 Use of Proceeds. Borrower shall use the proceeds of the First Tranche as follows:

(a) to repay in full all debt owed by Borrower to FKA Distributing Co.;

(b) to repay in full all debt owed by Borrower to Cornell Capital Partners, L.P.;

(c) to pay all legal fees, charges, expenses and disbursements of Paul, Hastings, Janofsky & Walker LLP and Kilpatrick Stockton LLP that were incurred as a result of their legal representation of AirWorks;

(d) to pay all legal fees, charges, expenses and disbursements of Kirkpatrick & Lockhart Preston Gates Ellis LLP;

(e) to pay all fees, charges, expenses and disbursements of the Maxim Group LLC related to the preparation and delivery of the Fairness Opinion;

(f) to reimburse Richard E. Perlman for expenses of the Borrower that were paid by Richard E. Perlman on the Borrower’s behalf;

(g) to pay that portion of the broker’s fees due to The Wall Street Group upon the First Closing; and

(h) for working capital of the Borrower’s business.

5.13 Key-Man Life Insurance. Upon receipt of written request from Lenders, Borrower shall acquire a term life insurance policy with a reasonable coverage amount for key employees identified by Lenders. Each such insurance policy shall be issued by an insurance carrier that maintains an A.M. Best Rating of “B++” or better and shall name Borrower as the beneficiary of such policy.

5.14 Further Assurances. From and after each Closing Date, Lenders and Borrower agree to execute, acknowledge, deliver and file, or cause to be executed, acknowledged, delivered and filed, all further instruments, agreement or documents as may be necessary to consummate the transactions provided for in this Agreement and to do all further things necessary to carry out the purpose and intent of this Agreement.

ARTICLE VI

CONDITIONS TO CLOSING

6.1 Conditions to Lenders’ and Borrower’s Obligations. The obligations of each Lender and Borrower to effect the transactions contemplated hereby shall be subject to the satisfaction on or prior to (i) the First Closing Date of the following conditions unless waived by such Lender and by Borrower and (ii) each Subsequent Closing Date of the following conditions unless waived by AirWorks or RS Properties, as the case may be, and by Borrower.

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(a) All approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained.

(b) No Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and prohibits consummation of the transactions contemplated by this Agreement.

6.2 Conditions to Obligations of Lenders. The obligations of each Lender to effect the transactions contemplated hereby are subject to the satisfaction on or prior to (i) the First Closing Date (unless otherwise specified below) of the following conditions, unless waived by such Lender and (ii) each Subsequent Closing Date (unless otherwise specified below) of the following conditions, unless waived by AirWorks or RS Properties, as the case may be.

(a) Borrower shall have taken all action necessary to authorize the issuance and sale to Lenders of the Notes.

(b) Lenders shall have received an opinion, dated the First Closing Date, of Kirkpatrick & Lockhart Preston Gates Ellis LLP, counsel to Borrower, in substantially the form attached hereto as Exhibit F (the “Borrower Counsel Opinion”).

(c) Lenders shall have received an opinion, dated the First Closing Date, of Burton, Bartlett & Glogovac, Nevada counsel to Borrower, in substantially the form attached hereto as Exhibit G (the “Nevada Opinion”).

(d) (i) The representations and warranties of Borrower set forth in this Agreement shall be true and correct in all material respects (except that those representations and warranties that are limited by materiality shall be true and correct in all respects) as of the date of this Agreement and as if made at and as of each Closing Date (except where such representations and warranties are made expressly as of a specific date), (ii) Borrower shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to each Closing Date, (iii) since the date of this Agreement, there shall have been no changes in the condition (financial or otherwise), business, employees, operations, obligations or liabilities of Borrower which, in the aggregate, have had or may be reasonably expected to have a Material Adverse Effect on Borrower, and (iv) Lenders shall have received a certificate signed an authorized officer of Borrower as of each Closing Date to such effect (each such certificate being a “Borrower Officer’s Certificate”).

(e) All consents and approvals of third parties required to consummate the transactions contemplated hereby and for Lenders to operate the business of Borrower as contemplated herein after the each Closing, shall have been obtained.

(f) Prior to the First Closing Date, Borrower shall have received an opinion of an independent financial advisor, reasonably acceptable to Lenders, to the effect that, as of the date of such opinion, the terms of the transactions contemplated by this Agreement, including, without limitation, the terms of the Notes and the conversion of the Notes into the number shares of Common Stock into which the Notes would be convertible if the entire $18,159,000 amount is advanced by the Lenders, are fair to Borrower and its stockholders from a financial point of view, and a copy of such opinion shall have been delivered to Lenders (the “Fairness Opinion”).

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(g) Borrower shall have entered into confidentiality agreements, in such form as is acceptable to Lenders in their reasonable discretion, with each employee of Borrower.

(h) Borrower shall have delivered, or caused to be delivered, to Lenders each of the documents set forth in Sections 2.4(a) and 2.5(a), as applicable.

(i) With respect to the First Closing only, each Lender shall have funded the amounts designated to be delivered by such Lender pursuant to Section 2.1(a), in accordance with the terms hereof.

6.3 Conditions to Obligations of Borrower. The obligations of Borrower to effect the transactions contemplated hereby are subject to the satisfaction on or prior to the First Closing Date of the following additional conditions unless waived by Borrower.

(a) (i) The representations and warranties of Lenders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as if made at and as of the First Closing Date (except where such representations or warranties are made expressly as of a specific date), (ii) Lenders shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the First Closing Date, and (iii) Borrower shall have received a certificate signed by each Lender to such effect (each, a “Lender Officer’s Certificate”).

(b) Lenders shall have delivered, or caused to be delivered, to Borrower each of the documents set forth in Sections 2.4(b) and 2.5(b), as applicable.

ARTICLE VII

MISCELLANEOUS

7.1 Survival. This Section 7.1 shall survive the last Closing Date. All other representations, warranties, covenants and agreements in the Agreement will survive until the earlier of conversion or payment of the Note in whole, provided that no such termination will relieve any party of any liability or damages resulting from any willful or intentional breach of the Agreement or any willful or intentional material misstatement or failure to state any item required to be stated therein.

7.2 Entire Agreement; Binding Effect. This Agreement and the documents referred to herein constitute the entire agreement between the parties with respect to the subject matter hereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants with respect to such subject matter, except as specifically set forth herein or therein. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Borrower may not terminate this Agreement prior to the Maturity Date without first obtaining the express written consent of Lender.

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7.3 Third Party Beneficiaries. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement; provided, however, that Borrower and AirWorks hereby agree that each individual or entity owning a partnership interest in AirWorks shall be considered a third party beneficiary under this Agreement.

7.4 Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among residents of New York made and to be performed entirely within the State of New York, and without regard to the conflicts of law principles as may otherwise be applicable.

7.5 Jurisdiction and Venue; Waiver of Jury Trial. Each party to this Agreement hereby irrevocably agrees that any legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereunder may be brought in the courts of New York County in the State of New York or of the United States of America for the Southern District of New York, and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding, by the mailing of copies thereof by registered or certified mail, postage prepaid, to its address set forth in this Agreement, such service to become effective ten (10) days after such mailing. IF LITIGATION IS BROUGHT TO ENFORCE THIS AGREEMENT, EACH PARTY KNOWINGLY AND INTENTIONALLY WAIVES THE RIGHT IT HAS TO A TRIAL BY JURY. THE PARTIES AGREE THIS PROVISION IS A MATERIAL INDUCEMENT TO THE PARTIES’ ENTERING INTO THIS AGREEMENT.

7.6 Counterparts and Signature by Facsimile. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The facsimile signature of any party to this Agreement for purposes of execution or otherwise, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature on an original document. At the request of any party, any facsimile or telecopy document is to be re-executed in original form by the parties who executed the facsimile or telecopy document. No party may raise the use of a facsimile machine or telecopier or the fact that any signature was transmitted through the use of a facsimile or telecopier machine as a defense to the enforcement of this Agreement or any notice required thereof.

7.7 Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

7.8 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, delivery by recognized overnight courier (such as FedEx) or upon receipt of confirmation of delivery by facsimile, telecopy, or registered or certified mail, return receipt requested, postage prepaid, addressed:

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to Lenders:

AirWorks Funding LLLP

655 Madison Avenue

23rd Floor

New York, New York 10021

Attn: Richard E. Perlman

Telephone: (212) 223-8633

Facsimile: (212) 888-8133

with a copy to:

Paul, Hastings, Janofsky & Walker LLP

600 Peachtree Street

Suite 2400

Atlanta, Georgia 30308

Attn: Reinaldo Pascual

Telephone: (404) 815-2227

Facsimile: (404) 685-5227

with a copy to:

RS Properties I LLC

111 Broadway

8th Floor

New York, New York 10006

Attn: John Lack

Telephone: (212) 542-8201

Facsimile: (212) 542-8212

to Borrower:

Kronos Advanced Technologies, Inc.

494 Common Street, Suite 301

Belmont, MA 02478

Attn: Daniel R. Dwight

Telephone: (617) 364-5087

Facsimile: (617) 364-5085

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with a copy to:

Kirkpatrick & Lockhart Preston Gates Ellis LLP

Miami Center, 20th Floor

201 South Biscayne Blvd.

Miami, FL 33131-2399

Attn: Clayton E. Parker

Telephone: (305) 539-3306

Facsimile: (305) 358-7095

7.9 Attorneys’ Fees. Should any litigation or arbitration be commenced between the parties hereto concerning this Agreement, the party prevailing in such litigation or arbitration shall be entitled, upon final judgment and expiration of all appeals, in addition to such other relief as may be granted, to a reasonable sum for attorneys’ fees and costs in such litigation or arbitration, which shall be determined by the court or arbitrator, as the case may be.

7.10 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall to the extent practicable be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

7.11 Amendments; Waivers; Delays or Omissions. No waiver, amendment, modification or change of any provision of this Agreement shall be effective unless and until made in writing and signed by AirWorks and Borrower. No delay or omission to exercise any right, power or remedy accruing to Borrower or a Lender upon any breach, default or noncompliance of Lenders or Borrower under this Agreement, the Notes or the other Transaction Documents, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the part of Borrower or Lenders of any breach, default or noncompliance under this Agreement, the Notes or the other Transaction Documents or any waiver on Borrower’s or Lenders’ part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing and that all remedies, either under this Agreement, the Notes, the other Transaction Documents, the Certificate of Incorporation or bylaws of Borrower, or otherwise afforded to Borrower and Lenders, shall be cumulative and not alternative. Notwithstanding anything to the contrary contained herein, AirWorks and RS Properties shall have the right, in their sole discretion, to change the respective amounts that may be advanced by them pursuant to the terms of Section 2.1(b); provided, however, that in no event shall AirWorks and RS Properties have the right to contribute in excess of $14,200,000 in the aggregate at all Subsequent Closings.

7.12 Finder’s Fees.

(a) Except for The Wall Street Group, which is entitled to receive a fee equal to three percent (3%) of the first Sixteen Million Five Hundred Thousand Dollars ($16,500,000) of the Loan that is actually advanced to the Borrower by the Lenders, Borrower (i) represents and warrants that it has not retained any finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold Lenders harmless of and from any liability for any commission or compensation in the nature of a finder’s fee to any broker or other Person (and the costs and expenses of defending against such liability or asserted liability) for which Borrower is responsible. Notwithstanding anything to the contrary contained herein, under no circumstance will the amount paid to The Wall Street Group exceed Four Hundred Ninety-Five Thousand Dollars ($495,000)

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(b) Each Lender, severally but not jointly, hereby agrees to indemnify and to hold Borrower harmless of and from any liability for any commission or compensation in the nature of a finder’s fee to any broker or other Person (and the costs and expenses of defending against such liability or asserted liability) for which such Lender is responsible.

7.13 Assignment. No party hereto may assign any of its rights, duties or obligations hereunder or any part thereof to any other person or entity; provided, however, that AirWorks shall be permitted to freely assign any of its rights, duties or obligations hereunder.

7.14 Independent Nature of Lenders’ Obligations. The obligations of each Lender under any Transaction Document are several and not joint with the obligations of any other Lender, and no Lender shall be responsible in any way for the performance of the obligations of any other Lender under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Lender pursuant hereto or thereto, shall be deemed to constitute the Lenders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Lenders are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement or the Transaction Documents. The Company hereby confirms that it understands and agrees that the Lenders are not acting as a “group” as that term is used in Section 13(d) of the Exchange Act.

7.15 Construction. Borrower and each of the Lenders have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by Borrower and Lender and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

[signatures on following page]

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IN WITNESS WHEREOF, Borrower and Lenders have each executed and delivered this Agreement as of the day and year first above written.

LENDERS:

AirWorks Funding LLLP		Sands Brothers Venture Capital LLC

By: Compass Partners, LLC, its general partner

By: /s/ Richard E. Perlman		By: /s/ Scott A Baily
Name: Richard E. Perlman		Name: Scott A. Baily
Title: President		Title: COO

Sands Brothers Venture Capital II LLC		Sands Brothers Venture Capital III LLC

By: /s/ Scott A Baily		By: /s/ Scott A Baily
Name: Scott A. Baily		Name: Scott A. Baily
Title: COO		Title: COO

Sands Brothers Venture Capital IV LLC		Critical Capital Growth Fund, L.P.

By: /s/ Scott A Baily		By: Critical Capital, L.P., its general partner
Name: Scott A. Baily
Title: COO		By: Critical Capital Corporation, its general partner

		By: /s/ Steven B. Sands
		Name: Steven B. Sands
		Title: Chairman

		By: /s/ Charlie L. Robinson
		Name: Charles L. Robinson
		Title: President

RS Properties I LLC

By: /s/ John Lack
Name: John Lack
Title: Manager

BORROWER:

Kronos Advanced Technologies, Inc.

By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO

EXHIBITS

Exhibit A	Form of Voting Agreement
Exhibit B	Form of Registration Rights Agreement
Exhibit C	Form of Letter Agreements
Exhibit D	Form of Security Agreement
Exhibit E	Form of Patent Security Agreement
Exhibit F	Form of Borrower Counsel Opinion
Exhibit G	Form of Nevada Opinion

SCHEDULES

Schedule 3.1	Foreign Qualification
Schedule 3.2(a)	Capital Stock
Schedule 3.2(b)	Options, Warrants and Rights to Acquire Capital Stock
Schedule 3.5	Non-Contravention
Schedule 3.6	Borrower Reports
Schedule 3.8	Undisclosed Liabilities
Schedule 3.11	Liens
Schedule 3.12(a)	List of Material Contracts
Schedule 3.12(b)	Exceptions to Material Contracts
Schedule 3.13	Consents
Schedule 3.14	Related Party Transactions
Schedule 3.15	Litigation
Schedule 3.16(a)	List of Intellectual Property
Schedule 3.16(b)	Intellectual Property Licenses
Schedule 3.16(d)	Confidentiality Agreements
Schedule 3.16(e)	Intellectual Property Infringement
Schedule 3.16(f)	Third Party Intellectual Property Infringement
Schedule 3.17(a)	Taxes
Schedule 3.18(a)	Insurance Policies
Schedule 3.18(b)	Exceptions to Insurance Policies
Schedule 3.18(c)	Insurance Policy Coverage Exceptions
Schedule 3.20	Compliance with Laws
Schedule 3.21	Leased Real Property
Schedule 3.23(a)	Employees
Schedule 3.23(b)	Employment Agreements
Schedule 3.23(c)	Severance Agreements
Schedule 3.23(d)	Change of Control Agreements
Schedule 3.24	Labor Relations
Schedule 3.25(a)	List of Benefit Plans
Schedule 3.25(b)	Exceptions to Benefit Plans
Schedule 3.27	Change of Control or Takeover Provisions

ARTICLE I		DEFINITIONS	1
	1.1	Certain Definitions	1
	1.2	Other Definitions	5
ARTICLE II		AUTHORIZATION; PURCHASE AND SALE; CLOSING	6
	2.1	Term Loan	6
	2.2	Notes	7
	2.3	Closing	7
	2.4	First Closing Deliveries	7
	2.5	Subsequent Closing Deliveries	9
ARTICLE III		REPRESENTATIONS AND WARRANTIES OF BORROWER	10
	3.1	Organization; Power; Standing	10
	3.2	Capitalization	10
	3.3	Authority; Due Execution	11
	3.4	Validity of the Notes and the Conversion Shares	11
	3.5	Non-Contravention	11
	3.6	Borrower Reports	11
	3.7	Borrower Financial Statements	12
	3.8	Absence of Undisclosed Liabilities	12
	3.9	Minute Books and Organizational Documents	12
	3.10	Absence of Certain Changes	12
	3.11	Properties; Securities	13
	3.12	Material Contracts	13
	3.13	No Consents	15
	3.14	Related Party Transactions	15
	3.15	Litigation; Regulatory Action	15
	3.16	Intellectual Property	16
	3.17	Taxes	17
	3.18	Insurance	18
	3.19	Financial Controls	19
	3.20	Compliance with Laws	19
	3.21	Real Property	19
	3.22	Accounts Receivable	20
	3.23	Employees; Employment Agreements	20

	3.24	Labor Relations	20
	3.25	Benefit Plans	21
	3.26	Environmental	22
	3.27	State Takeover Laws; Certificate of Incorporation	24
	3.28	Offering Exemption	24
	3.29	Certain Business Practices	24
	3.30	U.S. Small Business Administration	24
	3.31	Full Disclosure	25
ARTICLE IV		REPRESENTATIONS AND WARRANTIES OF LENDERS	25
			25
	4.1	Power; Authority; Due Execution	25
	4.2	Investment Representations	26
	4.3	No Public Market	27
	4.4	Non-Contravention	27
	4.5	No Consents	27
ARTICLE V		CERTAIN COVENANTS AND AGREEMENTS	27
	5.1	Review of Operations	27
	5.2	Confidentiality	27
	5.3	Conduct of Business	28
	5.4	Supplements to Schedules	30
	5.5	Authorization and Reservation of Common Stock	30
	5.6	Expansion of Board of Directors; Observer	31
	5.7	Publicity	31
	5.8	Expenses	31
	5.9	Cooperation	31
	5.10	Notification of Certain Matters	32
	5.11	SBIA Regulatory Compliance	32
	5.12	Use of Proceeds	33
	5.13	Key-Man Life Insurance	33
	5.14	Further Assurances	33
ARTICLE VI		CONDITIONS TO CLOSING	33
	6.1	Conditions to Lenders’ and Borrower’s Obligations	33
	6.2	Conditions to Obligations of Lenders	34
	6.3	Conditions to Obligations of Borrower	35

ARTICLE VII		MISCELLANEOUS	35
	7.1	Survival	35
	7.2	Entire Agreement; Binding Effect	35
	7.3	Third Party Beneficiaries	36
	7.4	Governing Law	36
	7.5	Jurisdiction and Venue; Waiver of Jury Trial	36
	7.6	Counterparts and Signature by Facsimile	36
	7.7	Headings	36
	7.8	Notices	36
	7.9	Attorneys’ Fees	38
	7.10	Severability	38
	7.11	Amendments; Waivers; Delays or Omissions	38
	7.12	Finder’s Fees	38
	7.13	Assignment	39
	7.14	Independent Nature of Lenders’ Obligations	39
	7.15	Construction	39

EX-3 4 ex3.htm EXHIBIT 3 Unassociated Document

Exhibit 3

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

KRONOS ADVANCED TECHNOLOGIES, INC.

Secured Convertible Promissory Note

due June 19, 2010

June 19, 2007

Belmont, Massachusetts

$10,820,000.00

For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common Street, Box 301, Belmont, Massachusetts 02478 (the “Maker”), hereby promises to pay to the order of AirWorks Funding LLLP, a Georgia limited liability limited partnership, whose principal office is located at 655 Madison Avenue, 23rd Floor, New York, New York 10021 (together with its successors, representatives, and permitted assigns, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of Ten Million Eight Hundred Twenty Thousand Dollars ($10,820,000.00) or so much thereof as may be advanced by the Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This Secured Convertible Promissory Note (this “Note”) is one of the duly authorized Notes of Maker issued in connection with that Funding Agreement of even date herewith by and among the Maker and the Lenders (the “Funding Agreement”).

All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by wire transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A. The outstanding principal balance of this Note and all accrued interest hereon shall be due and payable on June 19, 2010 (the “Maturity Date”) or at such earlier time as provided herein.

ARTICLE I

GENERAL

Section 1.1 Definitions. Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in the Funding Agreement.

Section 1.2 Interest. Beginning on the issuance date of this Note (the “Issuance Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a rate per annum equal to twelve percent (12%), payable in cash commencing on January 1, 2008 and on the first business day of each following calendar quarter. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1 hereof), then to the extent permitted by law, the Maker will pay interest in cash to the Holder, payable on demand, on the outstanding principal balance of this Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of eighteen percent (18%) per annum and the maximum applicable legal rate per annum.

Section 1.3 Security. This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security Agreement dated of even date herewith among the Maker and the Lenders.

Section 1.4 Payment on Non-Business Days. Whenever any payment to be made hereunder shall be due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.

Section 1.5 Transfer. Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or pledged, hypothecated or otherwise granted as security by the Holder.

Section 1.6 Replacement. Upon receipt of a duly executed, notarized and unsecured written statement from the Holder with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note.

Section 1.7 Record Keeping. The Holder shall maintain a record of all advances made to Maker under this Note, and such record shall be conclusive evidence of the amounts disbursed to Maker under this Note.

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ARTICLE II

EVENTS OF DEFAULT; REMEDIES

Section 2.1 Events of Default. The occurrence of any of the following events shall be an “Event of Default” under this Note:

(a) the Maker shall fail to make any principal or interest payments on the date such payments are due and such default is not fully cured within seven (7) business days after the occurrence thereof; or

(b) the suspension from listing, without subsequent listing on any one of, or the failure of the Common Stock of the Maker (the “Common Stock”) to be listed or quoted on at least one of the NASD Over-The-Counter Bulletin Board (the “OTC Bulletin Board”), the American Stock Exchange, the NASDAQ National Market, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or The New York Stock Exchange, Inc.; or

(c) the Maker’s notice to the Holder, including by way of public announcement, at any time, of Maker’s inability to comply (including for any of the reasons described in Section 3.6(a) hereof) or its intention not to comply with proper requests for conversion of this Note into shares of Common Stock; or

(d) the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of the Note, (ii) file a registration statement in accordance with the terms of the Registration Rights Agreement or (iii) make the payment of any fees and/or liquidated damages under this Note, the Funding Agreement, the Registration Rights Agreement or other Transaction Documents, which failure in the case of items (i) and (iii) of this Section 2.1(d) is not remedied within ten (10) business days after the incurrence thereof and, solely with respect to item (iii) above, after the Holder delivers written notice to the Maker of the occurrence thereof; or

(e) while a registration statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of such registration statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the Holder for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive Trading Days; or

(f) default shall be made in the performance or observance of (i) any covenant, condition or agreement contained in this Note (other than as set forth in clause (f) of this Section 2.1) and such default is not fully cured within twenty (20) business days after the Holder delivers written notice to the Maker of the occurrence thereof or (ii) any covenant, condition or agreement contained in the Funding Agreement, the Registration Rights Agreement or any other Transaction Document which is not covered by any other provisions of this Section 2.1 and such default is not fully cured within twenty (20) business days after the Holder delivers written notice to the Maker of the occurrence thereof; or

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(g) any material representation or warranty made by the Maker herein or in the Funding Agreement, the Registration Rights Agreement, or any other Transaction Document shall prove to have been false or incorrect or breached by Maker and the Holder delivers written notice to the Maker of the occurrence thereof; or

(h) the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any Indebtedness (other than the Indebtedness hereunder) the aggregate principal amount of which Indebtedness is in excess of $50,000 or (B) default in the observance or performance of any other agreement or condition relating to any Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required, such Indebtedness to become due prior to its stated maturity; or

(i) the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or

(j) a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it for all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of thirty (30) days; or

(k) the failure of the Maker to instruct its transfer agent to remove any legends from shares of Common Stock eligible to be sold under Rule 144 of the Securities Act and issue such unlegended certificates to the Holder within five (5) business days of the Holder’s request so long as the Holder has provided reasonable assurances to the Maker that such shares of Common Stock can be sold pursuant to Rule 144; or

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(l) the Maker ceases to operate its business as a going concern; or

(m) the Security Agreement, or any other security agreement, pledge agreement, collateral assignment, mortgage, control agreement or other grants or transfers for security executed and delivered by Maker or any other obligor creating (or purporting to create) a Lien in favor of the Holder (collectively, the “Security Documents”), at any time for any reason cease to be in full force and effect, or shall cease to grant to the Holder the Liens, rights, powers and privileges purported to be created thereby, superior to and prior to the rights of all third Persons other than the holders of Permitted Liens and subject to no other Liens other than Permitted Liens; or

(n) the Maker or any other obligor, directly or indirectly, contest in any manner the effectiveness, validity, binding nature or enforceability of the Security Agreement or any of the other Security Documents.

Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have occurred and shall be continuing, the Holder of this Note may at any time at its option, (a) declare the entire unpaid principal balance of this Note, together with all interest accrued hereon, due and payable, and thereupon, the same shall be accelerated and so be due and payable, without presentment, demand, protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker, (b) demand that the principal amount of this Note then outstanding shall be converted into shares of Common Stock at a Conversion Price per share calculated pursuant to Section 3.1 hereof assuming that the date that the Event of Default occurs is the Conversion Date (as defined in Section 3.1 hereof), or (c) exercise or otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies and interests under this Note, the Funding Agreement, the Security Agreement, the Registration Rights Agreement, the Security Documents, any other Transaction Document or applicable law. No course of delay on the part of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise.

ARTICLE III

CONVERSION; ANTIDILUTION; PREPAYMENT

Section 3.1 Conversion Option. At any time on or after the Issuance Date, this Note shall be convertible (in whole or in part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance under this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as defined in Section 3.2(a) hereof) then in effect on the date on which the Holder faxes a notice of conversion in the form attached hereto (the “Conversion Notice”), duly executed, to the Maker (facsimile number (617) 364-5085, Attn.: Chief Executive Officer) (the “Conversion Date”), provided, however, that the Conversion Price shall be subject to adjustment as described in Section 3.4 of this Note. The Holder shall deliver this Note to the Maker at the address designated in the Funding Agreement at such time that this Note is fully converted. With respect to partial conversions of this Note, the Maker shall keep written records of the amount of this Note converted as of each Conversion Date.

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Section 3.2 Conversion Price.

(a) The term “Conversion Price” shall mean $0.0028, subject to adjustment under Section 3.4 hereof.

(b) Notwithstanding the foregoing, it is the intent of the Maker and the Holder that the Conversion Price equal an amount that results in the shares of Common Stock issuable to Lender upon conversion of this Note (i) in full will represent, on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by the Maker, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than 58.35% of the outstanding capital stock of the Maker and (ii) in part will represent, on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by the Maker, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than the product of (A) 58.35% of the outstanding capital stock of the Maker and (B) a fraction, the numerator of which is equal to the amount of this Note that is converted and the denominator of which is equal to $10,820,000.

Section 3.3 Mechanics of Conversion.

(a) Not later than three (3) Trading Days after any Conversion Date (the “Delivery Date”), the Maker shall deliver to the Holder by (i) express courier a certificate or certificates representing the number of shares of Common Stock being acquired upon the conversion of all or part of this Note, or (ii) provided that Maker’s designated transfer agent participates in the DTC Fast Automated Securities Transfer Program, at all times after the Holder has notified the Maker that this clause (ii) shall apply, credit the number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with The Depository Trust Corporation through its Deposit Withdrawal Agent Commission System. If in the case of any Conversion Notice such certificate, certificates or shares are not delivered to or as directed by the Holder by the Delivery Date, the Holder shall be entitled by written notice to the Maker at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Maker shall immediately return this Note tendered for conversion, whereupon the Maker and the Holder shall each be restored to their respective positions immediately prior to the delivery of such notice of revocation, except that any amounts described in Sections 3.3(b) shall be payable through the date notice of rescission is given to the Maker. The Maker shall upon request of the Holder, use its best efforts to deliver Conversion Shares hereunder electronically through the Depository Trust Company.

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Trading Day for each Trading Day until such certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until such amount and any accrued interest thereon is paid in full, equal to the greater of (A) the sum of (i) 1% of the aggregate principal amount of this Note requested to be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount of this Note requested to be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as liquidated damages and not as a penalty). Nothing herein shall limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief). Notwithstanding anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.

Section 3.4 Adjustment of Conversion Price.

(a) The Conversion Price shall be subject to adjustment from time to time as follows:

(i) Adjustments for Additional Issuances of Common Stock. In the event that the Maker at any time after the First Closing Date issues additional shares of Common Stock (including additional shares of Common Stock deemed to be issued) without consideration or for a consideration per share less than the Conversion Price then in effect, then the Conversion Price shall be reduced, concurrently with such issuance, to a price (calculated to the nearest hundredth of one cent) equal to the consideration per share received by the Maker upon such issuance of additional shares of Common Stock. For purposes of this Section 3.4, shares of Common Stock shall be deemed to be issued if the Maker or any of its subsidiaries issues additional shares of Common Stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common Stock (collectively, “Common Stock Equivalents”). For purposes of this Section 3.4, in connection with any issuance or deemed issuance of any Common Stock, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or exchange of such Common Stock Equivalents (the “Deemed Number”) the shall be deemed to be outstanding upon issuance of such Common Stock Equivalents, (B) the consideration deemed to have been received by the Maker applicable to such Common Stock shall equal the minimum dollar value of consideration payable to the Maker to purchase such Common Stock Equivalents and to convert, exercise or exchange them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the Deemed Number, and (C) no further adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents.

(ii) Adjustments for Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided or increased, by stock split or stock dividend, into a greater number of shares of Common Stock, the Conversion Price then in effect shall concurrently with the effectiveness of such subdivision or payment of such stock dividend, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.

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(iii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination or shares provided for above), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Common Stock issuable upon conversion of this Note shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the Holder upon conversion of this Note immediately before that change.

(iv) Adjustments for Merger, Sale, Lease or Conveyance. In the event of any consolidation with or merger of the Maker with or into another entity, or in case of any sale, lease or conveyance to another person or entity of the assets of the Maker as an entirety or substantially as an entirety, the Common Stock issuable upon conversion of this Note shall after the date of such consolidation, merger, sale, lease or conveyance be convertible into the number of shares of stock or other securities or property (including cash) to which the Common Stock issuable (at the time of such consolidation, merger, sale, lease or conveyance) upon conversion of this Note would have been entitled upon such consolidation, merger, sale, lease or conveyance; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or property thereafter deliverable on the conversion of this Note.

(v) Other Provisions Applicable to Adjustment Under this Section. The following provisions will be applicable to the adjustments in Conversion Price as provided in this Section 3.4:

(1) The number of shares of Common Stock at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Maker.

(2) In case the Maker shall take any action affecting the outstanding number of shares of Common Stock other than an action described in any of the foregoing subsections above, inclusive, which would have an inequitable effect on the Holder, the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors of the Maker on the advice of the Maker’s independent public accountants may in good faith determine to be equitable in the circumstances.

(3) No adjustment of the Conversion Price shall be made if the amount of any such adjustment would be an amount less than one percent (1%) of the Conversion Price then in effect, but any such amount shall be carried forward and an adjustment with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate an increase or decrease of one percent (1%) or more.

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(4) The Conversion Price shall not be adjusted upward except in the event of a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock.

(b) Record Date. In the event that the Maker shall propose at any time:

(i) to declare any dividend or distribution (other than by purchase of Common Stock of employees, officers and directors pursuant to the termination of such persons or pursuant to the Maker’s exercise of rights of first refusal with respect to Common Stock held by such persons) upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

(ii) to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a change in the Common Stock; or

(iii) to merge or consolidate with or into any other entity, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Maker shall send to the Holder:

(1) at least twenty (20) days’ prior written notice of the date on which a record shall be taken for such dividend or distribution (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (i) and (ii) above; and

(2) in the case of the matters referred to in (ii) and (iii) above, at least twenty (20) days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event).

Each such written notice shall be given by first class mail, postage prepaid, addressed to the Holder at the address first set forth above. Any such action shall at all times be subject to the voting rights and other rights, preferences and privileges of the Holder set forth herein.

(c) No Impairment. The Maker shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action (other than actions taken in good faith), avoid the observance or performance of any of the terms to be observed or performed hereunder by the Maker but will at all times in good faith assist in carrying out all the provisions of this Section 3.4 and in taking all such action as may be necessary or appropriate in order to protect the conversion rights of the Holder against impairment.

(d) Certificates as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this section, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment in accordance with the terms hereof and showing in detail the facts upon which such adjustment or readjustment is based. The Maker shall, upon the written request at any time of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth (A) such adjustments and readjustments, (B) the Conversion Price at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of this Note.

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(e) Issue Taxes. The Maker shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of this Note pursuant thereto; provided, however, that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the Holder in connection with any such conversion.

(f) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares to which the Holder would otherwise be entitled, the Maker shall pay cash equal to the product of such fraction multiplied by the average of the Closing Bid Price of the Common Stock into which this Note is convertible for the five (5) consecutive Trading Days immediately preceding the Conversion Date. The term “Closing Bid Price” shall mean, on any particular date (i) the last closing bid price per share of the Common Stock on such date on the OTC Bulletin Board or another registered national stock exchange on which the Common Stock is then listed, or if there is no such price on such date, then the last closing bid price on such exchange or quotation system on the date nearest preceding such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin Board or any registered national stock exchange, the last trading price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker.

(g) Reservation of Common Stock.

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Without limiting the generality of the foregoing sentence, as soon as practicable after the occurrence of an Authorized Share Failure, but in no event later than 60 days after the occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting of its stockholders or (B) obtain a majority written consent of its stockholders, for the authorization of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Maker shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal. The inability of the Maker to reserve the required number of shares of Common Stock required by this Section 3.4(g) shall have no impact on the rank, rights, preferences and privileges of this Note, which shall be interpreted and applied as if the Maker had sufficient shares of Common Stock authorized but unissued to effect any conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this Note or which would cause the effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the Maker shall take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the case may be.

(h) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of this Note require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Maker shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

Section 3.5 Preemptive Rights.

(a) Except as set forth in Section 3.5(c), the Maker shall not issue or sell any shares of Common Stock or other securities, or any rights or options to purchase Common Stock or other securities, or any debt or shares convertible into or exchangeable for Common Stock or other securities, whether now or hereafter authorized and whether unissued or in the treasury (collectively, “Preemptive Shares”), unless the Holder shall first have been given the right to acquire, at a price no less favorable than that at which such Preemptive Shares are to be offered to others, a portion of the Preemptive Shares, as provided in Section 3.5(b).

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Common Stock into which this Note could be converted, and (z) the number of shares of Common Stock issuable upon conversion or exercise of all outstanding options, warrants and other rights for the purchase of capital stock of the Company, and all outstanding shares of all series of preferred stock (such number of Preemptive Shares being referred to herein as the “Common Stock Preemptive Shares”). The Holder may acquire that portion of the Common Stock Preemptive Shares being offered equal to its percentage ownership of the outstanding Common Stock immediately preceding the issuance of the Preemptive Shares. If any transaction specified by the Maker in any such notice shall not be consummated within one hundred twenty (120) days from the date of such notice, the Corporation shall again comply with the provisions of this Section 3.5 with respect to such transaction, and the Holder shall again have preemptive rights hereunder with respect to the transaction, regardless of whether any such stockholder had previously exercised or failed to exercise such rights. Any purchase of securities pursuant to the exercise of preemptive rights shall be consummated simultaneously with, and shall be conditioned upon, consummation of the transaction proposed by the Maker.

(i) shares of Common Stock issued upon conversion of this Note;

(ii) shares of capital stock of the Maker issued in a public offering occurring after the date hereof that results in aggregate gross proceeds to the Maker of at least Fifty Million Dollars ($50,000,000); or

(iii) shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other Common Stock equivalents in existence on the Issuance Date.

The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by the Holder.

Section 3.6 Prepayment. The Maker shall not be permitted to prepay some or all of the principal and accrued interest outstanding under this Note at any time prior to the date that is six (6) months after the First Closing Date but shall be permitted to prepay some or all of the principal and accrued interest outstanding under this Note at any time after such date; provided, however, that (i) in advance of any such prepayment, the Maker shall deliver to the Holder a written notice (the “Prepayment Notice”) setting forth the Maker’s intention to make such prepayment and the amount thereof, and (ii) the Holder shall have the right to convert some or all of the amount proposed to be prepaid into such number of shares of Common Stock as is determined by dividing the amount to be converted by the Conversion Price then in effect. The Holder shall exercise the conversion right set forth in this Section 3.6 by notifying the Maker in writing within sixty (60) Trading Days of the Holder’s receipt of Prepayment Notice. In the event that the Maker prepays some, but not all, of the principal and accrued interest outstanding under this Note, such prepaid amount shall be applied first to the amount owing on the date on which the Maker’s final payment is due hereunder and then to amounts owing on any preceding dates on which the Maker is required to make payments hereunder.

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Section 3.7 No Rights as Shareholder. Nothing contained in this Note shall be construed as conferring upon the Holder, prior to the conversion of this Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.

ARTICLE IV

MISCELLANEOUS

Section 4.1 Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address or number first set forth above (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.

Section 4.2 Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.

Section 4.3 Headings. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.

Section 4.4 Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a Holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Maker (or the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or threatened breach, without the necessity of showing economic loss and without any bond or other security being required.

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Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses of enforcement of this Note, including, without limitation, reasonable attorneys’ fees and expenses.

Section 4.6 Binding Effect. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and permitted assigns of each such party.

Section 4.7 Amendments. This Note may not be modified or amended in any manner except in a writing executed by the Maker and the Holder.

Section 4.8 Compliance with Securities Laws. The Holder of this Note acknowledges that this Note is being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a legend in substantially the following form:

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

Section 4.9 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under the Funding Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 4.9 shall affect or limit any right to serve process in any other manner permitted by law. Each of the Maker and the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Note shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party.

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Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and their respective successors and permitted assigns.

Section 4.11 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

Section 4.12 Maker Waivers. Except as otherwise specifically provided herein, the Maker and all others that may become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon, all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.

(a) No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right or rights on any future occasion.

(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

Section 4.13 Definitions. For the purposes hereof, the following terms shall have the following meanings:

“business day” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are authorized or required by law to close.

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or similar arrangement which, in connection with GAAP, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above. For purposes of the definition of Indebtedness, “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

“Person” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.

“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

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IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the date first written above.

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Title: Chief Operating Officer

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EXHIBIT A

WIRE INSTRUCTIONS

Payee:____________________________________________________________________

Bank:_____________________________________________________________________

Address:___________________________________________________________________

Bank No.:___________________________________________________________________

Account No.:________________________________________________________________

Account Name:______________________________________________________________

FORM OF

NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Note)

The undersigned hereby irrevocably elects to convert $ ________________ of the principal amount of the above Note No. ___ into shares of Common Stock of Kronos Advanced Technologies, Inc. (the “Maker”) according to the conditions hereof, as of the date written below.

Date of Conversion _________________________________________________________________

Applicable Conversion Price __________________________________________________________

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion: _____________

Signature _______________________________________________________________________

[Name]

Address: _______________________________________________________________________

_______________________________________________________________________

EX-4 5 ex4.htm EXHIBIT 4 Unassociated Document

Exhibit 4

KRONOS ADVANCED TECHNOLOGIES, INC.

Secured Convertible Promissory Note

due December 31, 2007

June 19, 2007

Belmont, Massachusetts

$859,000

For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common Street, Box 301, Belmont, Massachusetts 02478 (the “Maker”), hereby promises to pay to the order of Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”), Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”) and Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”) (Sands I, Sands II, Sands III, Sands IV, and CCGF, together with their respective successors, representatives, and permitted assigns, are collectively referred to as, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of Eight Hundred Fifty-Nine Thousand Dollars ($859,000.00) or so much thereof as may be advanced by the Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This Secured Convertible Promissory Note (this “Note”) is one of the duly authorized Notes of Maker issued in connection with that Funding Agreement of even date herewith by and among the Maker and the Lenders (the “Funding Agreement”).

All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by wire transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A. The outstanding principal balance of this Note and all accrued interest hereon shall be due and payable on December 31, 2007 (the “Maturity Date”) or at such earlier time as provided herein.

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ARTICLE I

GENERAL

Section 1.1 Definitions. Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in the Funding Agreement.

Section 1.2 Interest. Beginning on the issuance date of this Note (the “Issuance Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a rate per annum equal to twelve percent (12%), payable in cash commencing on July 1, 2007 and on the first business day of each following month. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1 hereof), then to the extent permitted by law, the Maker will pay interest in cash to the Holder, payable on demand, on the outstanding principal balance of this Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of eighteen percent (18%) per annum and the maximum applicable legal rate per annum.

Section 1.3 Security. This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security Agreement dated of even date herewith among the Maker and the Lenders.

Section 1.5 Transfer. Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or pledged, hypothecated or otherwise granted as security by the Holder.

ARTICLE II

EVENTS OF DEFAULT; REMEDIES

Section 2.1 Events of Default. The occurrence of any of the following events shall be an “Event of Default” under this Note:

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(l) the Maker ceases to operate its business as a going concern; or

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ARTICLE III

CONVERSION; ANTIDILUTION; PREPAYMENT

Section 3.1 Conversion Option. In the event that all of the principal and accrued interest due hereunder is not paid in full on or prior to the Maturity Date, the Holder shall have the right to convert this Note at any time after the Maturity Date into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance under this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as defined in Section 3.2(a) hereof) then in effect on the date on which the Holder faxes a notice of conversion in the form attached hereto (the “Conversion Notice”), duly executed, to the Maker (facsimile number (617) 364-5085 Attn.: Chief Executive Officer) (the “Conversion Date”), provided, however, that the Conversion Price shall be subject to adjustment as described in Section 3.4 of this Note. The Holder shall deliver this Note to the Maker at the address designated in the Funding Agreement at such time that this Note is fully converted. With respect to partial conversions of this Note, the Maker shall keep written records of the amount of this Note converted as of each Conversion Date. Notwithstanding anything contained herein to the contrary, the Holder shall have no right to convert this Note into shares of Common Stock unless the Maker fails to pay all of the principal and accrued interest due hereunder on or prior to the Maturity Date.

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Section 3.2 Conversion Price. The term “Conversion Price” shall mean $0.0028, subject to adjustment under Section 3.4 hereof.

Section 3.3 Mechanics of Conversion.

(b) The Maker understands that a delay in the delivery of the shares of Common Stock upon conversion of this Note beyond the Delivery Date could result in economic loss to the Holder. If the Maker fails to deliver to the Holder a certificate or certificates pursuant to this Section by the Delivery Date, the Maker shall pay to the Holder, in cash, an amount per Trading Day for each Trading Day until such certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until such amount and any accrued interest thereon is paid in full, equal to the greater of (A) the sum of (i) 1% of the aggregate principal amount of this Note requested to be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount of this Note requested to be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as liquidated damages and not as a penalty). Nothing herein shall limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief). Notwithstanding anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.

Section 3.4 Adjustment of Conversion Price.

(a) The Conversion Price shall be subject to adjustment from time to time as follows:

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(v) Other Provisions Applicable to Adjustment Under this Section. The following provisions will be applicable to the adjustments in Conversion Price as provided in this Section 3.4:

(1) The number of shares of Common Stock at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Maker.

(4) The Conversion Price shall not be adjusted upward except in the event of a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock.

(b) Record Date. In the event that the Maker shall propose at any time:

(ii) to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a change in the Common Stock; or

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for the five (5) consecutive Trading Days immediately preceding the Conversion Date. The term “Closing Bid Price” shall mean, on any particular date (i) the last closing bid price per share of the Common Stock on such date on the OTC Bulletin Board or another registered national stock exchange on which the Common Stock is then listed, or if there is no such price on such date, then the last closing bid price on such exchange or quotation system on the date nearest preceding such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin Board or any registered national stock exchange, the last trading price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker.

(g) Reservation of Common Stock.

(i) In the event that at anytime when this Note shall be outstanding, the Maker shall not have sufficient authorized but unissued Common Stock for the purpose of effecting the conversion of all amounts outstanding under this Note at such time (without regard to any limitations on conversion) (an “Authorized Share Failure”), it shall immediately reserve and keep available such number of its duly authorized shares of Common Stock as is in fact available as of that date and shall immediately take all action necessary to increase the number of its authorized shares of Common Stock until such time as the Maker’s Certificate of Incorporation shall have been amended to increase the number of authorized shares of Common Stock to such number as would, at a minimum, permit the reservation by the Maker of sufficient shares to allow conversion of all amounts outstanding under this Note as provided herein. Without limiting the generality of the foregoing sentence, as soon as practicable after the occurrence of an Authorized Share Failure, but in no event later than 60 days after the occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting of its stockholders or (B) obtain a majority written consent of its stockholders, for the authorization of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Maker shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal. The inability of the Maker to reserve the required number of shares of Common Stock required by this Section 3.4(g) shall have no impact on the rank, rights, preferences and privileges of this Note, which shall be interpreted and applied as if the Maker had sufficient shares of Common Stock authorized but unissued to effect any conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this Note or which would cause the effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the Maker shall take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the case may be.

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Section 3.5 Preemptive Rights.

(b) The Maker shall give the Holder prior written notice of any proposed issuance or sale described in Section 3.5(a), including the price at which such securities are to be offered and the time period for the offering, and the Holder shall have thirty (30) days from the giving of such notice within which to elect to acquire that number of the Preemptive Shares equal to the product of the total number of Preemptive Shares being offered and a fraction, determined as of the time immediately prior to the issuance of the Preemptive Shares, the numerator of which is equal to the sum of (i) the number of shares of Common Stock then outstanding as a result of the conversion of this Note, and (ii) the number of shares of Common Stock into which this Note could be converted, and the denominator of which is equal to the sum of (x) the number of shares of Common Stock then outstanding, (y) the number of shares of Common Stock into which this Note could be converted, and (z) the number of shares of Common Stock issuable upon conversion or exercise of all outstanding options, warrants and other rights for the purchase of capital stock of the Company, and all outstanding shares of all series of preferred stock (such number of Preemptive Shares being referred to herein as the “Common Stock Preemptive Shares”). The Holder may acquire that portion of the Common Stock Preemptive Shares being offered equal to its percentage ownership of the outstanding Common Stock immediately preceding the issuance of the Preemptive Shares. If any transaction specified by the Maker in any such notice shall not be consummated within one hundred twenty (120) days from the date of such notice, the Corporation shall again comply with the provisions of this Section 3.5 with respect to such transaction, and the Holder shall again have preemptive rights hereunder with respect to the transaction, regardless of whether any such stockholder had previously exercised or failed to exercise such rights. Any purchase of securities pursuant to the exercise of preemptive rights shall be consummated simultaneously with, and shall be conditioned upon, consummation of the transaction proposed by the Maker.

(i) shares of Common Stock issued upon conversion of this Note;

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(iii) shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other Common Stock equivalents in existence on the Issuance Date.

The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by the Holder.

Section 3.6 Prepayment. The Maker shall be permitted to prepay some or all of the principal and accrued interest outstanding under this Note at any time prior to the Maturity Date, without penalty. In the event that the Maker prepays some, but not all, of the principal and accrued interest outstanding under this Note, such prepaid amount shall be applied first to the amount owing on the date on which the Maker’s final payment is due hereunder and then to amounts owing on any preceding dates on which the Maker is required to make payments hereunder.

ARTICLE IV

MISCELLANEOUS

Section 4.3 Headings. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.

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Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses of enforcement of this Note, including, without limitation, reasonable attorneys’ fees and expenses.

Section 4.6 Binding Effect. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and permitted assigns of each such party.

Section 4.7 Amendments. This Note may not be modified or amended in any manner except in a writing executed by the Maker and the Holder.

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

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Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and their respective successors and permitted assigns.

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Section 4.13 Definitions. For the purposes hereof, the following terms shall have the following meanings:

“business day” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are authorized or required by law to close.

“Indebtedness” of any Person means without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above. For purposes of the definition of Indebtedness, “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

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IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the date first written above.

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard R. Tusing

Title: Chief Operating Officer

Sands Note

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EXHIBIT A

WIRE INSTRUCTIONS

Payee: _________________________________________________________

Bank: __________________________________________________________

Address: _______________________________________________________

________________________________________________

Bank No.: ______________________________________________________

Account No.: ___________________________________________________

Account Name: __________________________________________________

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FORM OF

NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Note)

Date of Conversion _______________________________________________________________

Applicable Conversion Price ________________________________________________________

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion: _______________

Signature ______________________________________________________________________

[Name]

Address: ______________________________________________________________________

_____________________________________________________________

EX-5 6 ex5.htm EXHIBIT 5 Unassociated Document

Exhibit 5

KRONOS ADVANCED TECHNOLOGIES, INC.

Secured Convertible Promissory Note

due June 19, 2010

June 19, 2007

Belmont, Massachusetts

$6,480,000.00

For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common Street, Box 301, Belmont, Massachusetts 02478 (the “Maker”), hereby promises to pay to the order of RS Properties I LLC, a Delaware limited liability company (together with its successors, representatives, and permitted assigns, collectively, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of Six Million Four Hundred Eighty Thousand Dollars ($6,480,000.00) or so much thereof as may be advanced by the Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This Secured Convertible Promissory Note (this “Note”) is one of the duly authorized Notes of Maker issued in connection with that Funding Agreement of even date herewith by and among the Maker and the Lenders (the “Funding Agreement”).

ARTICLE I

GENERAL

Section 1.1 Definitions. Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in the Funding Agreement.

Section 1.3 Security. This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security Agreement dated of even date herewith among the Maker and the Lenders.

Section 1.5 Transfer. Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or pledged, hypothecated or otherwise granted as security by the Holder.

ARTICLE II

EVENTS OF DEFAULT; REMEDIES

Section 2.1 Events of Default. The occurrence of any of the following events shall be an “Event of Default” under this Note:

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(l) the Maker ceases to operate its business as a going concern; or

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ARTICLE III

CONVERSION; ANTIDILUTION; PREPAYMENT

Section 3.2 Conversion Price.

(a) The term “Conversion Price” shall mean $0.0028, subject to adjustment under Section 3.4 hereof.

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ate, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than 34.95% of the outstanding capital stock of the Maker and (ii) in part will represent, on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by the Maker, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than the product of (A) 34.95% of the outstanding capital stock of the Maker and (B) a fraction, the numerator of which is equal to the amount of this Note that is converted and the denominator of which is equal to $6,480,000.

Section 3.3 Mechanics of Conversion.

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Section 3.4 Adjustment of Conversion Price.

(a) The Conversion Price shall be subject to adjustment from time to time as follows:

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(v) Other Provisions Applicable to Adjustment Under this Section. The following provisions will be applicable to the adjustments in Conversion Price as provided in this Section 3.4:

(1) The number of shares of Common Stock at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Maker.

(4) The Conversion Price shall not be adjusted upward except in the event of a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock.

(b) Record Date. In the event that the Maker shall propose at any time:

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(ii) to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a change in the Common Stock; or

(2 in the case of the matters referred to in (ii) and (iii) above, at least twenty (20) days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event).

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(g) Reservation of Common Stock.

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shares of Common Stock authorized but unissued to effect any conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this Note or which would cause the effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the Maker shall take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the case may be.

Section 3.5 Preemptive Rights.

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(i) shares of Common Stock issued upon conversion of this Note;

(iii) shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other Common Stock equivalents in existence on the Issuance Date.

The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by the Holder.

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ARTICLE IV

MISCELLANEOUS

Section 4.3 Headings. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.

Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses of enforcement of this Note, including, without limitation, reasonable attorneys’ fees and expenses.

Section 4.6 Binding Effect. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and permitted assigns of each such party.

Section 4.7 Amendments. This Note may not be modified or amended in any manner except in a writing executed by the Maker and the Holder.

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THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and their respective successors and permitted assigns.

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Section 4.13 Definitions. For the purposes hereof, the following terms shall have the following meanings:

“business day” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are authorized or required by law to close.

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dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

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IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the date first written above.

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Title: Chief Operating Officer

RS Properties Note

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EXHIBIT A

WIRE INSTRUCTIONS

Payee: ____________________________________________________

Bank: ____________________________________________________

Address: _________________________________________________

___________________________________________

Bank No.: _______________________________________________

Account No.: ____________________________________________

Account Name: ___________________________________________

FORM OF

NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Note)

Date of Conversion ________________________________________________________

Applicable Conversion Price _________________________________________________

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion: ______________

Signature ____________________________________________________________________

[Name]

Address: ____________________________________________________________________

____________________________________________________________

EX-5 7 ex6.htm EXHIBIT 6 Unassociated Document

Exhibit 6

SECURITY AGREEMENT

THIS SECURITY AGREEMENT dated as of June 19, 2007 (this “Agreement”), is by and among Kronos Advanced Technologies, Inc., a Nevada corporation with its chief executive office and principal place of business located at 464 Common Street, Box 301, Belmont, Massachusetts 02478 (the “Debtor”) and Kronos Air Technologies, Inc. a Nevada corporation with its chief executive office and principal place of business located at 15241 NE 90th Street, Redmond, Washington 98052 (the “Subsidiary” and collectively with the Debtor, the “Pledgors”), and AirWorks Funding LLLP, a Georgia limited liability limited partnership, (“AirWorks”), Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”) Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”) and RS Properties I LLC, a Delaware limited liability company (“RS Properties”). AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF and RS Properties are collectively referred to herein as the “Secured Parties.”

WHEREAS, pursuant to those certain Secured Convertible Promissory Notes, dated June 19, 2007 (the “Notes”), the Secured Parties loaned to the Debtor the principal amount of $18,159,000 or so much thereof as may be advanced by the Secured Parties to the Debtor pursuant to the terms thereof;

WHEREAS, the Subsidiary is a direct subsidiary of the Debtor and has determined that its execution, delivery and performance of this Agreement directly or indirectly benefits, and is within the corporate purposes and in the best interest of, it;

WHEREAS, the Secured Parties would not have advanced funds to the Debtor under the Notes without Debtor’s and Subsidiary’s execution and delivery of this Agreement;

WHEREAS, in order to secure the Debtor’s obligations under the Notes, the Pledgors have agreed to execute and deliver this Agreement; and

WHEREAS, this Agreement is subject to the terms and conditions of that certain Intercreditor Agreement of even date herewith by and among the Secured Parties.

NOW, THEREFORE, in consideration of the above premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Pledgors, the Pledgors hereby agree with the Secured Parties as follows:

Section 1. Definitions.

(a) For the purposes of this Agreement:

“Applicable Law” means all applicable provisions of constitutions, statutes, laws, rules, regulations and orders of all governmental bodies and all orders, rulings and decrees of all courts and arbitrators.

“Business Day” means any day other than a Saturday, Sunday or other day on which banks in New York, New York are authorized or required by law to close.

“Collateral” means the following properties, assets and rights of each of the Pledgors, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof: all personal and fixture property of every kind and nature, including, without limitation, all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, intellectual property (including, without limitation, patents), securities of United States Persons and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, tort claims, and all general intangibles, and all products and proceeds of the foregoing, in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of the other Collateral.

“Event of Default” means the occurrence or existence of an Event of Default under any Note.

“Lien”, as applied to the property of any Person, means any security interest, lien, encumbrance, mortgage, deed to secure debt, deed of trust, pledge, charge, conditional sale or other title retention agreement, or other encumbrance of any kind covering any property of such Person, or upon the income or profits therefrom or any agreement to convey any of the foregoing or any other agreement or interest covering the property of a Person which is intended to provide collateral security for the obligation of such Person.

“Obligations” means, individually and collectively:

(i) all obligations of either of the Pledgors owing to the Secured Parties under or with respect to this Agreement or, only with respect to the Debtor, the Notes; and

(ii) all renewals, substitutions, modifications, extensions and supplements to any of the foregoing.

“Permitted Liens” means:

(i) Liens securing taxes, assessments and other governmental charges or levies not yet due and payable or the claims of, or obligations owing to, materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business but not yet due and payable;

(ii) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure payment of, obligations under workmen’s compensation, unemployment insurance or similar legislation;

(iii) Liens which in the sole judgment of the Secured Parties do not materially detract from the value of the Collateral;

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(iv) Liens in favor of the Secured Parties;

(v) Liens in favor of FKA Distributing Co.; and

(vi) Purchase money security interests and Liens to secure the Debtor’s performance of equipment leases arising in the ordinary course of business; provided that such Liens do not extend to any property or assets which is not acquired property (in the case of purchase money security interest) or is not leased property (in the case of equipment leases) subject to such purchase or lease.

“Person” means an individual, corporation, partnership, limited liability company, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof.

“UCC” means the Uniform Commercial Code of the State of New York, as in effect from time to time.

(b) Unless otherwise set forth herein to the contrary, all terms not otherwise defined herein and which are defined in the UCC are used herein with the meanings ascribed to them in the UCC. However, if a term is defined in Article 9 of the UCC differently than in another Article of the UCC, the term has the meaning specified in Article 9 of the UCC.

Section 2. Grant of Security. To secure the prompt and complete payment, observance and performance when due (whether at stated maturity, by acceleration or otherwise) of all of the Obligations, each of the Pledgors hereby collaterally assigns and pledges to the Secured Parties, and grants to the Secured Parties a security interest and Lien in and to, the Collateral. The Secured Parties acknowledge that the attachment of their security interest in any commercial tort claim as original collateral is subject to the Debtor’s compliance with Section 4(a).

Section 3. Authorization to File Financing Statements. Each of the Pledgors hereby irrevocably authorizes the Secured Parties at any time and from time to time to file in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of such Pledgor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC or Article 9 of the Uniform Commercial Code of such other jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by part 5 of Article 9 of the UCC or the analogous part of Article 9 of the Uniform Commercial Code of such other jurisdiction for the sufficiency or filing office acceptance of any financing statement or amendment. Each Pledgor agrees to furnish any such information to the Secured Parties promptly upon request.

Section 4. Other Actions. Further to ensure the attachment, perfection and priority of, and the ability of the Secured Parties to enforce, the Secured Parties’ security interest in the Collateral, each Pledgor agrees, in each case at such Pledgor’s own expense, to take the following actions with respect to the following Collateral:

(a) Commercial Tort Claims. If such Pledgor shall at any time hold or acquire a commercial tort claim, such Pledgor shall immediately notify the Secured Parties in a writing signed by such Pledgor of the brief details thereof and grant to the Secured Parties in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Parties.

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(b) Actions as to any and all Collateral. Such Pledgor agrees to take any other action reasonably requested by the Secured Parties to ensure the attachment, perfection and, priority of, and the ability of the Secured Parties to enforce, the Secured Parties’ security interest in any and all of the Collateral, including, without limitation, the execution and delivery of patent security agreements (substantially in the form attached hereto as Exhibit A) for filing with the United States Patent and Trademark Office and fully executed deposit control agreements in form and substance reasonable acceptable to the Secured Parties with respect to any deposit accounts of the Pledgors.

Section 5. Representations and Warranties Regarding Legal Status.

(a) The Debtor represents and warrants to the Secured Parties as follows: (a) the correct legal name of the Debtor is set forth in the introductory paragraph of this Agreement, and the Debtor does not conduct and, during the five-year period immediately preceding the date of this Agreement, has not conducted, business under any trade name other than Technology Selection, Inc., TSET, Inc. and as set forth in the introductory paragraph of this Agreement, (b) the Internal Revenue Service taxpayer identification number of the Debtor is 87-0440410, (c) the Debtor is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and (d) the Debtor’s place of business is accurately set forth in the introductory paragraph hereof.

(b) The Subsidiary represents and warrants to the Secured Parties as follows: (a) the correct legal name of the Subsidiary is set forth in the introductory paragraph of this Agreement, and the Subsidiary does not conduct and, during the five-year period immediately preceding the date of this Agreement, has not conducted, business under any trade name other than as set forth in the introductory paragraph of this Agreement, (b) the Internal Revenue Service taxpayer identification number of the Subsidiary is 91-2046697 (c) the Subsidiary is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and (d) the Subsidiary’s place of business is accurately set forth in the introductory paragraph hereof.

(c) Each of the Pledgors represents and warrants to the Secured Parties (i) it is a corporation duly organized and in good standing under the laws of its state of incorporation, and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on its financial condition, results of operation or business or the rights of Secured Parties in or to any of the Collateral; (ii) the execution, delivery and performance of this Agreement and the transactions contemplated hereunder (A) are all within its corporate or other powers, (B) have been duly authorized, (C) are not in contravention of law or the terms of its certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which it is a party or by which it or its property are bound and (D) will not result in the creation or imposition of, or require or give rise to any obligation to grant, any lien, security interest, charge or other encumbrance upon any its property; and (iii) this Agreement constitutes the legal, valid and binding obligations of such Pledgor enforceable against such Pledgor in accordance with the terms hereof.

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Section 6. Covenants Regarding Legal Status. Each of the Pledgors covenants with the Secured Parties as follows: (a) without providing at least 15 Business Days prior written notice to the Secured Parties, such Pledgor will not change its name, its place of business or, if more than one, chief executive office, or its mailing address or organizational identification number if it has one, and (b) without providing at least 15 Business Days prior written notice to the Secured Parties, such Pledgor will not change its type of organization, jurisdiction of organization or other legal structure.

Section 7. Representations and Warranties Regarding Collateral, Etc. Each of the Pledgors further represents and warrants to the Secured Parties as follows: (a) such Pledgor is the owner of the Collateral pledged by it, free from any Lien, except for Permitted Liens, (b) none of the Collateral pledged by it constitutes or is the proceeds of “farm products” as defined in § 9-102(a)(34) of the UCC, (c) none of the account debtors or other persons obligated on any of the Collateral pledged by it is a governmental authority covered by the Federal Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral, (d) such Pledgor does not hold any commercial tort claim, and (e) to the best of such Pledgor’s knowledge, such Pledgor has at all times operated its business in compliance in all material respects with all Applicable Laws.

Section 8. Covenants Regarding Collateral Generally. Each of the Pledgors further covenants with the Secured Parties as follows: (a) other than Permitted Liens, such Pledgor shall not pledge, mortgage or create, or suffer to exist any Lien in the Collateral in favor of any Person, (b) such Pledgor shall keep the Collateral in good order and repair and will not use the same in violation of any Applicable Law or any policy of insurance thereon, (c) such Pledgor shall permit the Secured Parties, or their designees, to inspect the Collateral at any reasonable time upon reasonable prior notice, wherever located, (d) such Pledgor shall not sell, transfer or otherwise dispose, or offer to sell, transfer or otherwise dispose, of the Collateral or any interest therein except for (i) sales and leases of inventory in the ordinary course of business and (ii) so long as no Event of Default has occurred and is continuing, sales or other dispositions of obsolescent items of equipment in the ordinary course of business consistent with past practices and (e) the equipment constituting Collateral shall remain personal property and such Pledgor shall not permit any such equipment to be or become a part of or affixed to any real property.

Section 9. Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, the Secured Parties, without any other notice to or demand upon the Pledgors, shall have in any jurisdiction in which enforcement hereof is sought, in addition to the rights and remedies of the Secured Parties under the UCC and any additional rights and remedies as may be provided to the Secured Parties in any jurisdiction in which Collateral is located or enforcement is sought, including, without limitation, the right to take possession of the Collateral, and for that purpose the Secured Parties may, so far as the Pledgors can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Secured Parties may in their discretion require the Pledgors to assemble all or any part of the Collateral at such location or locations within the jurisdiction(s) of each Pledgor’s principal office(s) or at such other locations as the Secured Parties may reasonably designate. Unless the

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Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Parties shall give to the Pledgors at least five (5) Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. Each of the Pledgors hereby expressly acknowledges that five (5) Business Days prior written notice of such sale or sales shall be reasonable notice. In addition, each of the Pledgors waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Secured Parties’ rights and remedies hereunder, including, without limitation, the Secured Parties’ right following an Event of Default to take immediate possession of the Collateral and to exercise their rights and remedies with respect thereto.

Section 10. No Waiver by Secured Parties, Etc. The Secured Parties shall not be deemed to have waived any of their rights and remedies in respect of the Obligations or the Collateral unless such waiver shall be in writing and signed by the Secured Parties. No delay or omission on the part of the Secured Parties in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies of the Secured Parties with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Secured Parties deem expedient.

Section 11. Suretyship Waivers by Pledgors. Each of the Pledgors waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of each description. With respect to both the Obligations and the Collateral, each of the Pledgors assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Secured Parties may deem advisable. The Secured Parties shall not have any duty as to the collection or protection of the Collateral or any income therefrom, the preservation of rights against prior parties, or the preservation of any rights pertaining thereto beyond any duties imposed by Applicable Law. Each of the Pledgors further waives any and all other suretyship defenses.

Section 12. Marshalling. The Secured Parties shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of the rights and remedies of the Secured Parties hereunder and of the Secured Parties in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, each of the Pledgors hereby agrees that it will not invoke any Applicable Law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Secured Parties’ rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each of the Pledgors hereby irrevocably waives the benefits of all such laws.

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Section 13. Proceeds of Dispositions; Expenses. The Pledgors, jointly and severally, agree to pay to the Secured Parties on demand any and all expenses, including attorneys’ fees and disbursements, incurred or paid by the Secured Parties in protecting, preserving or enforcing the Secured Parties’ rights and remedies under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale or other disposition of Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as the Secured Parties may determine, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the UCC, any excess shall be returned to the Pledgors. In the absence of final payment and satisfaction in full of all of the Obligations, the Pledgors shall remain liable for any deficiency.

Section 14. Pledgors Remain Liable. Anything herein to the contrary notwithstanding (a) each Pledgor will remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, to the same extent as if this Agreement had not been executed; (b) the exercise by the Secured Parties of any of their rights hereunder will not release any Pledgor from any of its duties or obligations under any such contracts or agreements included in the Collateral; and (c) no Secured Party will have any obligation or liability under any contracts or agreements included in the Collateral by reason of this Agreement, nor will any Secured Party be obligated to perform any of the obligations or duties of any Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

Section 15. Postponement of Subrogation, etc. Each Pledgor hereby agrees that it will not exercise any rights against any other Pledgor which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise, until the full satisfaction of all Obligations. Any amount paid to any Pledgor on account of any payment made hereunder prior to the full and complete satisfaction of the all the Obligations shall be held in trust for the benefit of the Secured Parties and shall immediately be paid to the Secured Parties. In furtherance of the foregoing, at all times prior to the full and complete satisfaction of all of the Obligations, each Pledgor shall refrain from taking any action or commencing any proceeding against any other Pledgor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Agreement to any Secured Party.

Section 16. Power of Attorney. Each Pledgor hereby irrevocably designates and appoints each of the Secured Parties as such Pledgor’s true and lawful attorney-in-fact, and authorizes the Secured Parties, in Pledgor’s or each Secured Party’s name, to: (a) at any time an Event of Default exists or has occurred and is continuing (i) demand payment on receivables or other Collateral, (ii) enforce payment of receivables by legal proceedings or otherwise, (iii) exercise all of such Pledgor’s rights and remedies to collect any receivable or other Collateral, (iv) sell or assign any receivable upon such terms, for such amount and at such time or times as the Secured Parties deems advisable, (v) settle, adjust, compromise, extend or renew an account, (vi) discharge and release any receivable, (vii) prepare, file and sign such Pledgor’s name on any

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proof of claim in bankruptcy or other similar document against an account debtor or other obligor in respect of any receivables or other Collateral, (viii) notify the post office authorities to change the address for delivery of remittances from account debtors or other obligors in respect of receivables or other proceeds of Collateral to an address designated by Secured Parties, and open and dispose of all mail addressed to such Pledgor and handle and store all mail relating to the Collateral; (ix) at any time to take control in any manner of any item of payment in respect of receivables or constituting Collateral or otherwise received in or for deposit in any deposit accounts maintained by such Pledgor or otherwise received by the Secured Parties, (x) have access to any lockbox or postal box into which remittances from account debtors or other obligors in respect of receivables or other proceeds of Collateral are sent or received, (xi) endorse such Pledgor’s name upon any items of payment in respect of receivables or constituting Collateral or otherwise received by the Secured Parties and deposit the same in Secured Parties’ account for application to the Obligations, (xii) endorse such Pledgor’s name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any receivable or any goods pertaining thereto or any other Collateral, including any warehouse or other receipts, or bills of lading and other negotiable or non-negotiable documents, and (xiii) sign such Pledgor’s name on any verification of receivables and notices thereof to account debtors or any secondary obligors or other obligors in respect thereof and (b) do all acts and things which are necessary, in the Secured Parties’ determination, to fulfill such Pledgor’s obligations under this Agreement and the other Transaction Documents. Each Pledgor hereby releases each Secured Party and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of such Secured Party’s own gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction.

Section 17. Right to Cure. The Secured Parties may, but are not required to, at any time an Event of Default exists or has occurred and is continuing (a) upon notice to any Pledgor, cure any material default by such Pledgor under any material agreement with a third party that materially affects the Collateral, its value or the ability of the Secured Parties to collect, sell or otherwise dispose of the Collateral or the rights and remedies of the Secured Parties therein or the ability of such Pledgor to perform its obligations hereunder or under the other Transaction Documents, (b) pay or bond on appeal any judgment entered against any Pledgor, (c) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (d) pay any amount, incur any expense or perform any act which, in the Secured Parties’ judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of the Secured Parties with respect thereto. The Secured Parties may add any amounts so expended to the Obligations and charge the applicable Pledgor therefor, such amounts to be repayable by such Pledgor on demand. The Secured Parties shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of any Pledgor. Any payment made or other action taken by the Secured Parties under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly.

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Section 18. Governing Law; Consent to Jurisdiction; Jury Trial Waiver. THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. Each of the parties hereto hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of New York, New York County and the United States District Court of New York, New York County and waives trial by jury in any action or proceeding with respect to this Agreement. EACH PLEDGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF SUCH PLEDGOR AND SECURED PARTIES IN RESPECT OF THIS AGREEMENT OR THE TRANSACTIONS RELATED HERETO WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.

Section 19. Amendments, Etc. No amendment or waiver of any provision of this Agreement or consent to any departure by either of the Pledgors herefrom shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

Section 20. Notices. Unless otherwise provided herein, communications provided for hereunder shall be in writing and shall be mailed, couriered, telecopied or delivered, to any party at its address for notices set forth in the Funding Agreement (and in the case of the Subsidiary, to the address of the Debtor set forth in the Funding Agreement), or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and other communications to the Pledgors or the Secured Parties shall be deemed given when delivered personally, mailed by certified mail (postage pre-paid and return receipt requested), sent by overnight courier service or faxed (transmission confirmed), or otherwise actually received.

Section 21. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such provisions shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

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Section 22. Relationship with Intercreditor Agreement. ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE LIENS AND SECURITY INTERESTS SECURING THE OBLIGATIONS AND THE EXERCISE OF ANY RIGHT OR REMEDY WITH RESPECT THERETO ARE SUBJECT TO THE PROVISIONS OF THAT CERTAIN INTERCREDITOR AGREEMENT DATED AS OF JUNE ___, 2007 (AS AMENDED, RESTATED, SUPPLEMENTED, OR OTHERWISE MODIFIED FROM TIME TO TIME, THE “INTERCREDITOR AGREEMENT”), AMONG SANDS I, SANDS II, SANDS III, SANDS IV AND CCGF, AS FIRST LIEN CREDITORS, AND AIRWORKS FUNDING LLLP AND RS PROPERTIES I LLC, AS SECOND LIEN CREDITORS. IN THE EVENT OF ANY CONFLICT BETWEEN THE TERMS OF THE INTERCREDITOR AGREEMENT AND THIS AGREEMENT, THE TERMS OF THE INTERCREDITOR AGREEMENT SHALL GOVERN AND CONTROL.

Section 23. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which, taken together, shall constitute one and the same instrument.

Section 24. Miscellaneous. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon each of the Pledgors and its successors and assigns (including, without limitation, trustees and liquidators), and shall inure to the benefit of the Secured Parties and their successors and assigns (including, without limitation, trustees and liquidators).

[Signatures on Next Page]

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IN WITNESS WHEREOF, each of the Secured Party and the Pledgors has caused this Agreement to be duly executed and delivered under seal by its duly authorized officer as of the day first above written.

	KRONOS ADVANCED TECHNOLOGIES, INC. By: /s/ Richard F. Tusing Name: Richard F. Tusing Title: COO
	KRONOS AIR TECHNOLOGIES, INC. By: /s/ Richard F. Tusing Name: Richard F. Tusing Title: COO
	AIRWORKS FUNDING LLLP By: Compass Partners, LLC, its general partner By: /s/ Richard E. Perlman Name: Richard E. Perlman Title: President
	SANDS BROTHERS VENTURE CAPITAL LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	SANDS BROTHERS VENTURE CAPITAL II LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO

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	SANDS BROTHERS VENTURE CAPITAL III LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	SANDS BROTHERS VENTURE CAPITAL IV LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	CRITICAL CAPITAL GROWTH FUND, L.P. By: Critical Capital, L.P., its General Partner By: Critical Capital Corporation, its General Partner By: /s/ Steven B. Sands Name: Steven B. Sands Title: Chairman By: /s/ Charles L. Robinson Name: Charles L. Robinson Title: President
	RS PROPERTIES I LLC By: /s/ John Lack Name: John Lack Title: Manager

EX-7 8 ex7.htm EXHIBIT 7 Unassociated Document

Exhibit 7

INTERCREDITOR AGREEMENT

This INTERCREDITOR AGREEMENT (this “Agreement”) is entered into as of June 19, 2007, among Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”), Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”), AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”) and RS Properties I LLC, a Delaware limited liability company (“RS Properties”) (Sands I, Sands II, Sands III, Sands IV, CCGF, AirWorks and RS Properties are collectively, the “First Lien Creditors,” and each, a “First Lien Creditor”), Richard A. Sun, an individual resident of the State of Virginia (“Sun”) and Fredric R. Gumbinner, an individual resident of the State of Virginia (“Gumbinner” and together with Sun, collectively, “Second Lien Creditors” and each, a “Second Lien Creditor”), in light of the following:

R E C I T A L S

A. Kronos Advanced Technologies, Inc., a Nevada corporation (“Borrower”), has issued to each of the First Lien Creditors and Second Lien Creditors certain Secured Convertible Promissory Notes in the aggregate principal amount of $18,359,000, including those certain Convertible Promissory Notes dated as of April 27, 2007 made by Borrower in favor of Sun and Gumbinner, respectively.

C. First Lien Creditors have entered into a separate Intercreditor Agreement among themselves pursuant to which First Lien Creditors have evidenced their mutual agreement and understanding with respect to the priority of the security interests among First Lien Creditors (the “First Lien Intercreditor Agreement”).

D. First Lien Creditors and Second Lien Creditors wish to agree as to their respective rights, priorities, and interests with respect to the liens upon and security interests in the Collateral as between First Lien Creditors, on the one hand, and Second Lien Creditors, on the other hand.

A G R E E M E N T

In consideration of the foregoing, the mutual covenants contained herein, and for other good and valuable consideration, the receipt of which First Lien Creditors and Second Lien Creditors hereby acknowledge, First Lien Creditors and Second Lien Creditors hereby agree as follows:

1. Definitions.

(a) Capitalized terms used but not defined herein shall have the meanings given to them in the Funding Agreement. In addition, the following terms, as used in this Agreement, shall have the following meanings:

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy”, as now or hereafter in effect, or any successor statute.

“Bankruptcy Law” means the Bankruptcy Code and any other federal, state, or foreign law for the relief of debtors.

“Collateral” shall mean all assets of the Obligors and all proceeds thereof.

“Control Collateral” means any Collateral consisting of a certificated security, investment property, a deposit account, and any other Collateral as to which a Lien may be perfected through physical possession or control by the secured party, or any agent therefor.

“Discharge of First Lien Obligations” means (a) payment in full in cash of the principal of and interest (including interest accruing on or after the commencement of any Insolvency Proceeding, whether or not a claim for such interest is, or would be, allowed in such Insolvency Proceeding) constituting First Lien Obligations and termination of all commitments to lend or otherwise extend credit by First Lien Creditors under the Note Documents and (b) payment in full in cash of all other First Lien Obligations that are due and payable or otherwise accrued and owing at or prior to the time such principal and interest are paid (including legal fees and other expenses, costs or charges accruing on or after the commencement of any Insolvency Proceeding, whether or not a claim for such fees, expenses, costs or charges is, or would be, allowed in such Insolvency Proceeding).

“Disposition” or “Dispose” means the sale, assignment, transfer, license, lease (as lessor), or other disposition of any property by any Person (or the granting of any option or other right to do any of the foregoing).

“Distribution” means any payment or distribution by any Person of assets of any kind or character (whether in cash, securities, assets, by set-off, or otherwise and including by purchase redemption or other acquisition).

“Enforcement Action” means: (a) the exercise of any right of set-off for the collection of any amounts due in respect of the Second Lien Obligations; (b) exercise of any Secured Creditor Remedy; or (c) in the event of an Insolvency Proceeding: (i) prosecuting a motion for relief from the automatic stay to exercise an Enforcement Action, (ii) objecting to First Lien Creditors’ motion for relief from the automatic stay to foreclose on and sell any of the Collateral or (iii) seeking to provide debtor in possession loans or advances to an Obligor wherein First Lien Creditors’ liens would be subordinated in priority. Notwithstanding the foregoing, none of the following shall constitute an “Enforcement Action” for purposes of this Agreement: (x) the delivery of any notice of default or other notice to an Obligor pursuant to or in connection with any Note Document; (y) the acceleration of the Second Lien Obligations; and (z) the filing by any Second Lien Creditor of a proof of claim in an Insolvency Proceeding, which proof of claim indicates the subordination of such Second Lien Creditor’s Lien on the Collateral pursuant hereto.

“First Lien Note Documents” means, collectively, the Funding Agreement, the First Lien Notes and the Security Agreement, together with any amendments, supplements, restatements or other modifications thereof.

“First Lien Notes” means, collectively, those Second Convertible Promissory Notes of even date herewith made by Borrower in favor of First Lien Creditors.

“First Lien Obligations” means, individually and collectively all obligations of either of the Obligors owing to First Lien Creditors under or with respect to the Security Agreement or, only with respect to the Borrower, the First Lien Notes and all renewals, substitutions, modifications, extensions and supplements to any of the foregoing.

“Funding Agreement” means that certain Funding Agreement of even date herewith by and among Borrower and First Lien Creditors.

“Insolvency Proceeding” means: (a) any voluntary or involuntary case or proceeding under the Bankruptcy Law with respect to any Obligor; (b) any other voluntary or involuntary insolvency or Insolvency Proceeding or proceeding, or any receivership, liquidation or other similar case or proceeding with respect to any Obligor or with respect to a material portion of its assets; (c) any liquidation, dissolution or winding up of any Obligor, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy; or (d) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of any Obligor.

“Note Documents” means the First Lien Note Documents and the Second Lien Notes.

“Obligations” means, individually and collectively, the First Lien Obligations and the Second Lien Obligations.

“Second Lien Notes” means, individually and collectively, those Secured Convertible Promissory Notes dated as of April 27, 2007 made by Borrower in favor of Second Lien Creditors.

“Second Lien Obligations” means, individually and collectively, all obligations of Borrower under or with respect to the Second Lien Notes, and all renewals, substitutions, modifications, extensions, and supplements to any of the foregoing.

“Secured Creditor” means any of First Lien Creditors or Second Lien Creditors, or any successor or assignee of any of them, in its capacity as a secured creditor under the Note Documents.

“Secured Creditor Remedies” means any action by a Secured Creditor in furtherance of the sale, foreclosure, realization upon, or the repossession or liquidation of any of the Collateral, including without limitation, (a) the exercise of any remedies or rights of a “Secured Creditor” under Article 9 of the UCC, such as the notification of account debtors; (b) the exercise of any remedies available to a judgment creditor; or (c) any other remedy available in respect of the Collateral available to such Secured Creditor under any Note Document to which it is a party.

“Security Agreement” means that certain Security Agreement of even date herewith by and among Borrower and First Lien Creditors.

“UCC” shall have the meaning given to such term in the Security Agreement.

2. Permitted Liens and Relative Priorities.

(a) As between the Secured Creditors, notwithstanding (i) the terms (including the description of collateral), dating, execution, or delivery of any document, instrument, or agreement; the time, order, occurrence, method, or manner of grant, attachment or perfection of any security interest or lien; the time of filing or recording of any financing statements, assignments, deeds of trust, mortgages, or any other documents, instruments, or agreements under the UCC or any other applicable law, (ii) the existence of (or the order in which any Secured Creditor becomes a party to or a beneficiary of) any collateral agency arrangement with any party other than a Secured Creditor, or the appointment of such other party as a collateral agent to perfect the Secured Creditors’ liens and security interests, in all or in any part of the Collateral, (iii) the existence of any control agreement in favor of any Secured Creditor or (iv) any provision of the UCC or any other applicable statute, rule, law, or court decision to the contrary, the Secured Creditors agree that, as to the Collateral of each Obligor:

(i) First Lien Creditors shall have a first priority security interest in and lien on the Collateral to secure the First Lien Obligations; and

(ii) Second Lien Creditors shall have a junior and subordinate security interest in and lien on the Collateral to secure the Second Lien Obligations.

(b) For purposes of the foregoing allocation of priorities, any claim or a right to a set-off shall be treated in all respects as a security interest and no claimed right of set-off shall be asserted to defeat or diminish the rights or priorities provided for herein.

(c) Each Second Lien Creditor agrees that it will not take any Enforcement Action until the Discharge of the First Lien Obligations.

3. No Alteration of Priority. The lien and security interest priorities provided in Section 2 shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement, or refinancing of any of the Secured Creditor indebtedness, nor by any action or inaction which any Secured Creditor may take or fail to take in respect of the Collateral, or otherwise. Each Second Lien Creditor agrees that it will not directly or indirectly take any action to contest or challenge the validity, legality, perfection, priority, avoidability, or enforceability of the liens or security interests of First Lien Creditors upon the Collateral or seek to have the same avoided, disallowed, set aside, or otherwise invalidated in any judicial proceeding or otherwise.

5. Agent for Perfection. Each Secured Creditor agrees to hold (or cause to be held) all Control Collateral in its possession, custody, or control (or in the possession, custody, or control of agents, bailees, or other similar third parties) as non-fiduciary agent for the other Secured Creditors solely for the purpose of perfecting the security interest granted to each in such Control Collateral subject to the terms and conditions of this Agreement. No Secured Creditor shall have any obligation whatsoever to the others to assure that the Control Collateral is genuine or owned by any Obligor or any other Person or to preserve their respective rights or benefits or those of any Person. The duties or responsibilities of each Secured Creditor under this Section 5 are and shall be limited solely to holding or maintaining control of the Control Collateral as non-fiduciary agent for the other Secured Creditors for purposes of perfecting the Liens held by First Lien Creditors or Second Lien Creditors, as applicable. First Lien Creditors are not and shall not be deemed to be a fiduciary of any kind for Second Lien Creditors or any other Person.

6. Management of Collateral. Notwithstanding anything to the contrary contained in any of the Note Documents, until Discharge of the First Lien Obligations has occurred: (a) First Lien Creditors shall have the exclusive right to manage the Collateral, including the exclusive right to perform and enforce the terms of the Note Documents with respect to the Collateral and to exercise and enforce all privileges and rights thereunder according to First Lien Creditors’ sole discretion, including, without limitation, the exclusive right to enforce or settle insurance claims with respect to the Collateral, to pay, compromise, or settle competing claims, liens, or security interests affecting the Collateral, to take or retake control or possession of the Collateral, and to hold, prepare for sale, sell, lease, or liquidate the Collateral; (b) neither Second Lien Creditors nor any Person acting on their behalf shall exercise any Secured Party Remedies with respect to the Collateral; and (c) any and all proceeds of the Collateral which shall come into the possession, control, or custody of any Second Lien Creditor will be deemed to have been received for the account of any First Lien Creditor and shall be immediately delivered or paid, as applicable, over to First Lien Creditors. In connection with the provisions of Second 6(a), each Second Lien Creditor waives any and all rights to affect the method or challenge the appropriateness of any action by First Lien Creditors with respect to the Collateral, and waives any claims or defenses it may have against First Lien Creditors, including any such claims or defenses based on any actions or omissions of any such person, in connection with the perfection, maintenance, enforcement, foreclosure, sale, liquidation, or release of any lien or security interest therein by First Lien Creditors, or any modification or waiver of any Note Documents, except as provided or limited under this Agreement.

7. Sale of Collateral. Until the Discharge of the First Lien Obligations has occurred: (a) only First Lien Creditors shall have the right to restrict or permit, or approve or disapprove, the sale or disposition of the Collateral; and (b) immediately upon the sale or disposition of such Collateral by any Obligor with the consent of First Lien Creditors or by or on behalf of First Lien Creditors in connection with the exercise of its Secured Creditor Remedies, each Second Lien Creditor’s lien and security interest upon the Collateral sold shall be automatically, unconditionally and simultaneously released, and each Second Lien Creditor will promptly deliver (at Obligors’ expense) such release, reconveyance, and termination documents as any First Lien Creditor or any Obligor may reasonably require in connection therewith.

8. Insurance. In the event of the occurrence of a fire or other casualty resulting in damage to all or any portion of any Collateral (collectively, a “Casualty”):

(a) each Second Lien Creditor hereby waives any right to participate or join in any adjustment, compromise or settlement of any claims resulting from a Casualty with respect to any Collateral;

(b) all proceeds received or to be received on account of a Casualty shall be applied in the manner or manners provided for in the Note Documents; and

(c) each Second Lien Creditor agrees to execute and deliver to First Lien Creditors any documents, instruments, agreements or further assurances reasonably required to effectuate any of the foregoing.

9. Insolvency Proceeding.

(a) 0Enforceability and Continuing Priority. This Agreement shall be applicable both before and after the commencement of any Insolvency Proceeding and all converted or succeeding cases in respect thereof. The relative rights of First Lien Creditors and Second Lien Creditors in or to any distributions from or in respect of any Collateral or proceeds of Collateral shall continue after the commencement of any Insolvency Proceeding. Accordingly, the provisions of this Agreement are intended to be and shall be enforceable as a subordination agreement within the meaning of Section 510 of the Bankruptcy Code.

(b) Financing. Until Discharge of the First Lien Obligations has occurred, if any Obligor shall be subject to any Insolvency Proceeding and First Lien Creditors consent to the use of cash collateral (as such term is defined in Section 363(a) of the Bankruptcy Code; herein, “Cash Collateral”) on which any First Lien Creditor has a Lien or to permit any Obligor to obtain financing provided by any First Lien Creditor under Section 364 of the Bankruptcy Code or any similar Bankruptcy Law (such financing, together with any Cash Collateral use, collectively a “DIP Financing”), then each Second Lien Creditor agrees that it will consent to such Cash Collateral use and raise no objection to such DIP Financing and, to the extent the Liens securing the First Lien Obligations are discharged, subordinated to or pari passu with such DIP Financing, each Second Lien Creditor will subordinate its Liens in the Collateral to the Liens securing such DIP Financing. If any First Lien Creditor offers to provide DIP Financing that meets the requirements set forth above, each Second Lien Creditor agrees that it shall not, directly or indirectly, (x) provide or offer to provide DIP Financing or support any DIP Financing secured by a Lien senior to or pari passu with the Liens securing the First Lien Obligations, or (y) request or accept any form of adequate protection or any other relief except as provided in Section 9(e)(ii). In connection with any DIP Financing, if any Liens on the Collateral held by First Lien Creditors are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee “carve out,” or fees owed to the United States Trustee, then the Liens on the Collateral of each Second Lien Creditor shall also be subordinated to such interest or claim and shall remain subordinated to the Liens on the Collateral of First Lien Creditors consistent with this Agreement.

(c) Sales. Until Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees that it will consent to the Disposition of, and will not object or oppose a motion to Dispose of, any Collateral free and clear of the Liens or the claims that are in favor of such Second Lien Creditor under Section 363 of the Bankruptcy Code if First Lien Creditors have consented to such Disposition of such assets free and clear of the Liens of the claims that are in favor of First Lien Creditors.

(d) Relief from the Automatic Stay. Until Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees that it shall not seek (or support any other person seeking) relief from the automatic stay or any other stay in any Insolvency Proceeding in respect of the Collateral, without the prior written consent of First Lien Creditors.

(e) Adequate Protection.

(i) First Lien Creditors. In any Insolvency Proceeding involving an Obligor, each Second Lien Creditor agrees that it shall not contest (or support any other person contesting):

(A) any request by any First Lien Creditor for adequate protection (whether in the form of payments, liens, a priority administrative expense claim or otherwise);

(B) any objection by any First Lien Creditor to any motion, relief, action, or proceeding based on any First Lien Creditor claiming a lack of adequate protection (whether in the form of payments, liens, a priority administrative expense claim or otherwise);

(C) the payment of interest, fees, expenses, or other amounts to any First Lien Creditor under Section 506(b) or 506(c) of the Bankruptcy Code or otherwise.

(ii) Second Lien Creditors. In any Insolvency Proceeding involving an Obligor:

(A) Replacement Liens.

(1) Until Discharge of the First Lien Obligations has occurred, if any First Lien Creditor is granted adequate protection in the form of a replacement Lien (on existing or future assets of Obligors) in connection with any DIP Financing, then each Second Lien Creditor shall also be entitled to seek, without objection from First Lien Creditors, adequate protection in the form of a replacement Lien (on existing or future assets of Obligors), which replacement Lien, if obtained, shall be subordinate to the Liens securing the First Lien Obligations and the Liens securing such DIP Financing on the same basis as the other Liens securing the Second Lien Obligations are subordinate to the First Lien Obligations under this Agreement; and

(2) In the event that Second Lien Creditors are granted adequate protection in the form of a replacement Lien (on existing or future assets of Obligors), then each Second Lien Creditor agrees that each First Lien Creditor shall also be entitled to seek, without objection from Second Lien Creditors, a senior adequate protection Lien on existing or future assets of Obligors as security for the First Lien Obligations and for any DIP Financing provided by any First Lien Creditor. Any adequate protection Lien on such existing or future assets securing the Second Lien Obligations shall be subordinated (i) to the Lien on such collateral securing the First Lien Obligations and any such DIP Financing provided by any First Lien Creditor, and (ii) to any other Liens granted to any First Lien Creditor as adequate protection on the same basis as the other Liens securing the Second Lien Obligations are so subordinated to such First Lien Obligations under this Agreement.

(B) No Distributions. In any Insolvency Proceeding involving an Obligor, Second Lien Creditors shall seek neither (a) adequate protection in the form of Distributions in respect of the Second Lien Obligations nor (b) adequate protection in the form of Distributions with respect to their rights to the Collateral.

(iii) Allowance of Postpetition Accrual. Second Lien Creditors shall not object to, oppose or challenge any claim by any First Lien Creditor for allowance in any Insolvency Proceeding of First Lien Obligations consisting of post-petition interest, fees, or expenses.

(f) Section 1111(b) of the Bankruptcy Code. Second Lien Creditors shall not object to, oppose, support any objection, or take any other action to impede, the right of any First Lien Creditor to make an election under Section 1111(b)(2) of the Bankruptcy Code. Each Second Lien Creditor waives any claim it may hereafter have against any First Lien Creditor arising out of the election by any First Lien Creditor of the application of Section 1111(b)(2) of the Bankruptcy Code.

(g) No Waiver. Nothing contained herein shall prohibit or in any way limit First Lien Creditors from objecting in any Insolvency Proceeding involving an Obligor to any action taken by any Second Lien Creditor, including the seeking by such Second Lien Creditor of adequate protection or the assertion by such Second Lien Creditor of any of its rights and remedies under the Note Documents.

(h) Avoidance Issues. If any First Lien Creditor is required in any Insolvency Proceeding or otherwise to turn over, disgorge or otherwise pay to the estate of any Obligor any amount paid in respect of the First Lien Obligations (a “First Lien Creditor Recovery”), then such First Lien Creditor shall be entitled to a reinstatement of First Lien Obligations with respect to all such recovered amounts, and all rights, interests, priorities and privileges recognized in this Agreement shall apply with respect to any such First Lien Creditor Recovery. If this Agreement shall have been terminated prior to such First Lien Creditor Recovery, this Agreement shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair, or otherwise affect the obligations of the parties hereto from such date of reinstatement. Collateral or proceeds thereof received by any Second Lien Creditor after a Discharge of First Lien Obligations and prior to the reinstatement of such First Lien Obligations shall be delivered to First Lien Creditors upon such reinstatement in accordance with Section 9(j).

(i) Plan of Reorganization.

(a) If, in any Insolvency Proceeding, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized debtor are distributed pursuant to a plan of reorganization or similar dispositive restructuring plan, both on account of First Lien Obligations and on account of Second Lien Obligations, then, to the extent the debt obligations distributed on account of the First Lien Obligations and on account of the Second Lien Obligations are secured by Liens upon the same property, the provisions of this Agreement will survive the distribution of such debt obligations pursuant to such plan and will apply with like effect to the Liens securing such debt obligations, and

(b) No Second Lien Creditor shall propose or support any plan of reorganization that is inconsistent with the priorities or other provisions of this Agreement.

(j) Payments Held in Trust/Turnover. In the event that, notwithstanding the foregoing provisions of this Section 9, any Distribution in respect of the Second Lien Obligations prohibited by this Agreement shall be received by any Second Lien Creditor before there has been a Discharge of the First Lien Obligations, such Distribution shall be held in trust for the benefit of and shall be paid over to or delivered to First Lien Creditors, until there has been a Discharge of the First Lien Obligations.

10. Notice of Default and Certain Events. Each Second Lien Creditor shall promptly notify First Lien Creditors in writing of the occurrence of any of the following as applicable:

(a) any default or event of default under the Second Lien Note issued to such Second Lien Creditor; or

(b) the demand for payment of, acceleration of or termination of any of the Second Lien Obligations.

11. Further Assurances.

(a) Additional Documents. Each Second Lien Creditor agrees to execute and deliver, upon the request of First Lien Creditors, such documents and instruments (appropriate for filing, if requested) as may be necessary or appropriate to fully implement or to fully evidence the understandings and agreements contained in this Agreement. Without limiting the foregoing, in the event that all or part of any of the First Lien Obligations is hereafter refinanced, each Second Lien Creditor agrees to enter into one or more new agreements with the refinancing lender or lenders on terms identical to those of this Agreement.

(b) Attorney in Fact. Each First Lien Creditor is hereby irrevocably constituted and appointed the attorney-in-fact of each Second Lien Creditor in order to take all action, either in such First Lien Creditor’s name or in the name of such Second Lien Creditor, which in such First Lien Creditor’s reasonable opinion is necessary or desirable to enable such First Lien Creditor to obtain all Distributions that are to be turned over to such First Lien Creditor pursuant to this Agreement.

12. Representations; Warranties. Each Second Lien Creditor represents and warrants to each First Lien Creditor that: (a) such Second Lien Creditor is the holder of the liens and security interests which secure or will secure the Second Lien Obligations; (b) there do not exist any currently effective subordinations of the Second Lien Obligations or of such Second Lien Creditor’s liens and security interests in the Collateral; (c) such Second Lien Creditor is currently informed of the financial condition of each Obligor and of all other circumstances which bear upon the risk of nonpayment of the First Lien Obligations; and (d) it has full right, power, and authority to enter into this Agreement and, to the extent such Second Lien Creditor is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties.

13. Modification of First Lien Obligations. Each Second Lien Creditor agrees that each First Lien Creditor shall have absolute power and discretion, without notice to such Second Lien Creditor, to deal in any manner with the First Lien Obligations, including, but not by way of limitation, the power and discretion to do any of the following: (a) any demand for payment of any First Lien Obligations may be rescinded in whole or in part, and any First Lien Obligations may be continued, and the First Lien Obligations or the liability of any Obligor upon or for any part thereof, or any Collateral or guaranty therefor, or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, modified, accelerated, compromised, waived, surrendered, or released; and (b) the First Lien Notes issued to First Lien Creditors may be amended, modified, supplemented, or terminated, in whole or in part, as First Lien Creditors may deem advisable from time to time, and any Collateral may be sold, exchanged, waived, surrendered, or released. Each Second Lien Creditor will remain bound under this Agreement, and the subordination provided for herein shall not be impaired, abridged, released, or otherwise affected notwithstanding any such renewal, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender, or release. All dealings between First Lien Creditors and any Obligor shall be deemed to have been consummated in reliance upon this Agreement.

14. Waivers by Second Lien Creditors.

(a) First Lien Obligations.

(i) All First Lien Obligations at any time incurred by any Obligor shall be deemed to have been incurred, and all First Lien Obligations held by First Lien Creditors shall be deemed to have been extended, acquired or obtained, as applicable, in reliance upon this Agreement, and each Second Lien Creditor hereby waives (i) notice of acceptance, or proof of reliance, by each First Lien Creditors of this Agreement, and (ii) notice of the existence, renewal, extension, accrual, creation, or non-payment of all or any part of the First Lien Obligations. Nothing contained in this Agreement shall preclude any First Lien Creditor from discontinuing the extension of credit to any Obligor (whether under the Note Documents or otherwise) or from taking (without notice to any Second Lien Creditor, any Obligor, or any other Person) any other action in respect of the First Lien Obligations or the Collateral which any First Lien Creditor is otherwise entitled to take with respect to the First Lien Obligations or the Collateral.

(ii) None of First Lien Creditors or any of their affiliates, directors, officers, employees, or agents shall be liable for failure to demand, collect, or realize upon any of the Collateral or any Proceeds or for any delay in doing so or shall be under any obligation to sell or otherwise Dispose of any Collateral or Proceeds thereof or to take any other action whatsoever with regard to the Collateral or any part or Proceeds thereof. If any First Lien Creditor should exercise any of its contractual rights or remedies under the Note Documents (subject to the express terms and conditions hereof), First Lien Creditors shall not have any liability whatsoever to any Second Lien Creditor as a result of such action, omission, or exercise. First Lien Creditors will be entitled to manage and supervise their loans and extensions of credit under the Note Documents as First Lien Creditors may, in their sole discretion, deem appropriate, and First Lien Creditors may manage their loans and extensions of credit without regard to any rights or interests that any Second Lien Creditor may have in the Collateral or otherwise except as otherwise expressly set forth in this Agreement. Each Second Lien Creditor agrees that First Lien Creditors shall not incur any liability as a result of a sale, lease, license, application or other Disposition of all or any portion of the Collateral or any part or Proceeds thereof. First Lien Creditors may, from time to time, enter into agreements and settlements with Obligors as they may determine in their sole discretion without impairing any of the subordinations, priorities, rights or obligations of the parties under this Agreement, including, without limitation, substituting Collateral, releasing any Lien and releasing any Obligor. Each Second Lien Creditor waives any and all rights it may have to require any First Lien Creditor to marshal assets, to exercise rights or remedies in a particular manner, or to forbear from exercising such rights and remedies in any particular manner or order.

(b) Notice of Acceptance and Other Waivers. To the fullest extent permitted by applicable law, each Second Lien Creditor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the First Lien Notes, or the creation or existence of any First Lien Obligations; (iii) notice of the amount of the First Lien Obligations; (iv) notice of any adverse change in the financial condition of any Obligor or of any other fact that might increase such Second Lien Creditor’s risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to the First Lien Notes; and (vi) all other notices (except if such notice is specifically required to be given to such Second Lien Creditor under this Agreement or any Note Document) and demands to which such Second Lien Creditor might otherwise be entitled.

(c) Lawsuits; Defenses; Set-off. To the fullest extent permitted by applicable law, each Second Lien Creditor (i) waives the right by statute or otherwise to require any First Lien Creditor to institute suit against any Obligor or to exhaust any rights and remedies which any First Lien Creditor has or may have against any Obligor; (ii) waives any defense arising by reason of any disability or other defense (other than the defense that the Discharge of the First Lien Obligations has occurred (subject to the provisions of Section 9(c)) of any Obligor or by reason of the cessation from any cause whatsoever of the liability of such Obligor in respect thereof, (iii) waives any rights to assert against any First Lien Creditor any defense (legal or equitable), set-off, counterclaim, or claim which such Second Lien Creditor may now or at any time hereafter have against any Obligor or any other party liable to any First Lien Creditor or such Second Lien Creditor, (iv) waives any defense arising by reason of any claim or defense based upon an election of remedies by any First Lien Creditor; and (vi) waives the benefit of any statute of limitations affecting such Second Lien Creditor’s obligations hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the First Lien Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Second Lien Creditor’s obligations hereunder.

(d) Subrogation. Solely after Discharge of the First Lien Obligations shall have occurred, Second Lien Creditors shall be subrogated to the rights of First Lien Creditors to the extent that distributions otherwise payable to Second Lien Creditors have been applied to the payment of the First Lien Obligations in accordance with the provisions of this Agreement. First Lien Creditors shall have no obligation or duty to protect any of Second Lien Creditors’ rights of subrogation arising pursuant to this Agreement or under any applicable law, nor shall First Lien Creditors be liable for any loss to, or impairment of, any subrogation rights held by Second Lien Creditors.

(e) ELECTION OF REMEDIES. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH SECOND LIEN CREDITOR WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY FIRST LIEN CREDITOR, EVEN THOUGH THAT ELECTION OF REMEDIES HAS DESTROYED THE RIGHTS OF SUBROGATION OF SECOND LIEN CREDITORS AND REIMBURSEMENT AGAINST ANY OBLIGOR BY THE OPERATION OF ANY APPLICABLE LAW.

15. Parties Intended to be Benefited. All of the understandings, covenants, and agreements contained herein are solely for the benefit of First Lien Creditors and Second Lien Creditors, and there are no other parties, including Obligors or any of the creditors, successors, or assigns of Obligors, which are intended to be benefited, in any way, by this Agreement.

16. No Limitation Intended. Nothing contained in this Agreement is intended to or shall affect or limit, in any way, the rights that the Secured Creditors have with respect to any third parties. The Secured Creditors hereby specifically reserve all of their respective rights against Obligors and all other third parties. The First Lien Creditors hereby acknowledge that each of them have received, or had an opportunity to receive, and have had an opportunity to review the Second Lien Notes and documents related thereto and acknowledge and ratify such agreements and the terms thereof except as specifically modified herein.

17. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, delivery by recognized overnight courier (such as FedEx) or upon receipt of confirmation of delivery by facsimile, telecopy, or registered or certified mail, return receipt requested, postage prepaid, addressed:

to First Lien Creditors:

AirWorks Funding LLLP

655 Madison Avenue

23rd Floor

New York, New York 10021

Attn: Richard E. Perlman

Telephone: (212) 223-8633

Facsimile: (212) 888-8133

with a copy to:

Paul, Hastings, Janofsky & Walker LLP

600 Peachtree Street

Suite 2400

Atlanta, Georgia 30308

Attn: Reinaldo Pascual

Telephone: (404) 815-2227

Facsimile: (404) 685-5227

with a copy to:

RS Properties I LLC

111 Broadway

8th Floor

New York, New York 10006

Attn: John Lack

Telephone: (212) 542-8201

Facsimile: (212) 542-8212

to Second Lien Creditors:

Richard A. Sun

10182 Castlewood Lane

Oakton, VA 22124

Telephone: (___) _____-__________

Facsimile: (___) _____-__________

and:

Fredric R. Gumbinner

11200 Sorrel Ridge Lane

Oakton, VA 22124

Telephone: (703) 577-6696

Facsimile: (703) 262-6696

18. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

19. Complete Agreement. Except with respect to the First Lien Intercreditor Agreement, this Agreement constitutes the complete agreement and understanding of each of the Secured Creditors and supersedes all prior or contemporaneous oral and written negotiations, agreements and understandings, express or implied, with respect to the subject matter hereof.

20. Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of First Lien Creditors and Second Lien Creditors. Each Second Lien Creditor agrees that it shall not assign or transfer any of the Second Lien Obligations or any of its rights under the Note Documents (including any liens and security interests in the Collateral) without (a) prior notice being given to First Lien Creditors and (b) such assignment or transfer being made expressly subject to the terms of this Agreement.

21. Waiver of Jury Trial. EACH SECURED CREDITOR HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF FIRST LIEN CREDITORS AND SECOND LIEN CREDITORS WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. EACH SECURED CREDITOR HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT EITHER OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT TO THE WAIVER OF RIGHT TO TRIAL BY JURY.

22. Waivers, Amendments, Choice of Law, etc. Any waiver or amendment hereunder must be evidenced by a signed writing of a party to be bound thereby, and shall only be effective in the specific instance. This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among residents of New York made and to be performed entirely within the State of New York. Each party to this Agreement hereby irrevocably agrees that any legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereunder may be brought in the courts of New York County in the State of New York or of the United States of America for the Southern District of New York, and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding, by the mailing of copies thereof by registered or certified mail, postage prepaid, to its address set forth in the Funding Agreement, such service to become effective ten (10) days after such mailing. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof.

23. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, the singular includes the plural, the part includes the whole, “including” is not limiting, and “or” has the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified.

24. Costs and Attorneys Fees. In the event it becomes necessary for any First Lien Creditor to commence or become a party to any proceeding or action to enforce the provisions of this Agreement, the court or body before which the same shall be tried shall award to such First Lien Creditor all costs and expenses thereof, including, but not limited to, reasonable attorneys’ fees, the usual and customary and lawfully recoverable court costs, and all other expenses in connection therewith.

25. Information Concerning Financial Condition. Each Second Lien Creditor hereby assumes responsibility for keeping itself informed of the financial condition of Obligors and of all other circumstances bearing upon the risk of nonpayment of the Second Lien Obligations, and agrees that First Lien Creditors have and shall have no duty to advise any Second Lien Creditor of information known to First Lien Creditors regarding such condition or any such circumstances. In the event that First Lien Creditors, in their sole discretion, undertake, at any time or from time to time, to provide any such information to any Second Lien Creditor, then First Lien Creditors shall not be under any obligation (a) to provide any such information to any Second Lien Creditor on any subsequent occasion, (b) to undertake any investigation, or (c) to disclose any information which, pursuant to its commercial finance practices, First Lien Creditors wish to maintain confidential. Each Second Lien Creditor acknowledges and agrees that First Lien Creditors have not made any warranties or representations with respect to the legality, validity, enforceability, collectibility or perfection of the First Lien Obligations or any liens or security interests held in connection therewith.

26. Counterparts. This Agreement may be executed in any number of counterparts, and by First Lien Creditors and Second Lien Creditors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same Agreement. Delivery of an executed counterpart of a signature page of this Agreement or any document or instrument delivered in connection herewith by telecopy or electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement or such other document or instrument, as applicable.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first herein above set forth.

FIRST LIEN CREDITORS:

SANDS BROTHERS VENTURE CAPITAL LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL II LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL III LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL IV LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

CRITICAL CAPITAL GROWTH FUND, L.P.

By: Critical Capital, L.P., its general partner

By: Critical Capital Corporation, its general partner

By: /s/ Steven B. Sands

Name: Steven B. Sands

Its: Chairman

By: /s/ Charles L. Robinson

Name: Charles L. Robinson

Its: President

AIRWORKS FUNDING LLLP

By: Compass Partners, LLC, its general partner

By: /s/ Richard E. Perlman

Name: Richard E. Perlman

Its: President

S-1

Sun and Gumbinner Intercreditor Agreement

RS PROPERTIES I LLC

By: /s/ John Lack

Name: John Lack

Its: Manager

SECOND LIEN CREDITORS:

/s/ Richard A. Sun

Richard A. Sun

/s/ Fredric R. Gumbinner by Richard A. Sun AIF

Richard A. Sun, as attorney-in-fact for Fredric R. Gumbinner

S-2

Sun and Gumbinner Intercreditor Agreement

ACKNOWLEDGMENT

Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Intercreditor Agreement (initially capitalized terms used without definitions herein shall have the meaning ascribed to such terms in the Intercreditor Agreement) and consents thereto, and agrees to recognize all rights granted thereby to the parties thereto, and will not do any act or perform any obligation which is not in accordance with the agreements set forth in such Intercreditor Agreement. Each of the undersigned further acknowledges that no Obligor is an intended beneficiary under the Intercreditor Agreement.

Dated as of June 19, 2007.

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Its: COO

KRONOS AIR TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Its: COO

S-3

Sun and Gumbinner Intercreditor Agreement

EX-8 9 ex8.htm EXHIBIT 8 Unassociated Document

Exhibit 8

INTERCREDITOR AGREEMENT

This INTERCREDITOR AGREEMENT (this “Agreement”) is entered into as of June 19, 2007, among Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”), Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”), and Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”) (Sands I, Sands II, Sands III, Sands IV and CCGF are collectively, the “First Lien Creditors,” and each, a “First Lien Creditor”), AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”) and RS Properties I LLC, a Delaware limited liability company (“RS Properties”, and together with AirWorks, collectively, “Second Lien Creditors” and each, a “Second Lien Creditor”), in light of the following:

R E C I T A L S

A. Kronos Advanced Technologies, Inc., a Nevada corporation (“Borrower”), has issued to First Lien Creditors and each of Second Lien Creditors those certain Secured Convertible Promissory Notes dated the date hereof in the aggregate amount of $18,159,000 pursuant to that certain Funding Agreement dated as of the date hereof among Borrower, First Lien Creditors and Second Lien Creditors (as amended, supplemented, restated or otherwise modified from time to time, the “Funding Agreement”).

B. As security for the prompt payment and performance of the Obligations (as hereinafter defined), Borrower and Kronos Air Technologies, Inc., a Nevada corporation (the “Subsidiary”, and together with Borrower, collectively, “Obligors” and each, an “Obligor”), have granted Secured Creditors (as hereinafter defined) a security interest in all of the Collateral (as hereinafter defined) for the benefit of Secured Creditors pursuant to that certain Security Agreement dated as of the date hereof among Obligors and Secured Creditors (as amended, supplemented, restated or otherwise modified from time to time, the “Security Agreement”).

C. First Lien Creditors and Second Lien Creditors wish to agree as to their respective rights, priorities, and interests with respect to the liens upon and security interests in the Collateral.

A G R E E M E N T

1. Definitions.

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy”, as now or hereafter in effect, or any successor statute.

“Bankruptcy Law” means the Bankruptcy Code and any other federal, state, or foreign law for the relief of debtors.

“Collateral” shall have the meaning given to such term in the Security Agreement.

“First Lien Obligations” means any and all Obligations of Obligors owed to First Lien Creditors under the Note Documents (but excluding any Obligations owed to a First Lien Creditor by virtue of its partnership interest in Airworks).

“Note Documents” means, collectively, the Funding Agreement, the Notes and the Security Agreement and all other notes, mortgages, deeds of trust, instruments, guarantees and other agreements, documents and instruments at any time executed or delivered by any Obligor or any other person with, to or in favor of a Secured Creditor in connection therewith or related thereto, together with any amendments, supplements, restatements or other modifications thereof.

“Obligations” shall have the meaning given to such term in the Security Agreement.

“Second Lien Obligations” means any and all Obligations of Obligors owed to Second Lien Creditors under the Note Documents.

“Secured Creditor” means any of First Lien Creditors or Second Lien Creditors, or any successor or assignee of any of them, in its capacity as a secured creditor under the Note Documents.

“UCC” shall have the meaning given to such term in the Security Agreement.

2. Permitted Liens and Relative Priorities.

(i) First Lien Creditors shall have a first priority security interest in and lien on the Collateral to secure the First Lien Obligations; and

(ii) Second Lien Creditors shall have a junior and subordinate security interest in and lien on the Collateral to secure the Second Lien Obligations.

(c) Each Second Lien Creditor agrees that it will not take any Enforcement Action until the Discharge of First Lien Obligations. Notwithstanding the foregoing, if an Insolvency Proceeding shall be commenced against any Obligor, each Second Lien Creditor shall be entitled to file proofs of claims and commence other proceedings in order to evidence and protect its interest in the Collateral so long as such filings are not in any manner inconsistent with the provisions of this Agreement.

3. No Alteration of Priority. The lien and security interest priorities provided in Section 2 shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement, or refinancing of any of the Secured Creditor Indebtedness, nor by any action or inaction which any Secured Creditor may take or fail to take in respect of the Collateral, or otherwise. Each Secured Creditor agrees that it will not directly or indirectly take any action to contest or challenge the validity, legality, perfection, priority, avoidability, or enforceability of the liens or security interests of the other Secured Creditors upon the Collateral or seek to have the same avoided, disallowed, set aside, or otherwise invalidated in any judicial proceeding or otherwise.

4. Payments Made to Second Lien Creditors. Notwithstanding anything to the contrary in this Agreement, each Second Lien Creditor shall be entitled to receive and retain payments of principal and interest made by Borrower to such Second Lien Creditor during the term of this Agreement; provided, however, that in the event there exists a default with respect to the First Lien Obligations, no Second Lien Creditor shall be entitled to receive and retain payments of principal and interest made by Borrower to any Second Lien Creditor until such time as such default is cured.

5. Agent for Perfection. Each Secured Creditor agrees to hold (or cause to be held) all Control Collateral in its possession, custody, or control (or in the possession, custody, or control of agents, bailees, or other similar third parties) as non-fiduciary agent for the other Secured Creditors solely for the purpose of perfecting the security interest granted to each in such Control Collateral subject to the terms and conditions of this Agreement. No Secured Creditor shall have any obligation whatsoever to the others to assure that the Control Collateral is genuine or owned by any Obligor or any other Person or to preserve their respective rights or benefits or those of any Person. The duties or responsibilities of each Secured Creditor under this Section 5 are and shall be limited solely to holding or maintaining control of the Control Collateral as non-fiduciary agent for the other Secured Creditors for purposes of perfecting the Lien held by First Lien Creditors or Second Lien Creditors, as applicable. First Lien Creditors are not and shall not be deemed to be a fiduciary of any kind for Second Lien Creditors or any other Person.

6. Management of Collateral. Notwithstanding anything to the contrary contained in any of the Note Documents, until Discharge of First Lien Obligations has occurred: (a) First Lien Creditors shall have the exclusive right to manage the Collateral, including the exclusive right to perform and enforce the terms of the Note Documents with respect to the Collateral and to exercise and enforce all privileges and rights thereunder according to First Lien Creditors’ sole discretion, including, without limitation, the exclusive right to enforce or settle insurance claims with respect to the Collateral, to pay, compromise, or settle competing claims, liens, or security interests affecting the Collateral, to take or retake control or possession of the Collateral, and to hold, prepare for sale, sell, lease, or liquidate the Collateral; (b) neither Second Lien Creditors nor any Person acting on their behalf shall exercise any Secured Party Remedies with respect to the Collateral; and (c) any and all proceeds of the Collateral which shall come into the possession, control, or custody of any Second Lien Creditor will be deemed to have been received for the account of any First Lien Creditor and shall be immediately delivered or paid, as applicable, over to First Lien Creditors. In connection with the provisions of Section 6(a), each Second Lien Creditor waives any and all rights to affect the method or challenge the appropriateness of any action by First Lien Creditors with respect to the Collateral, and waives any claims or defenses it may have against First Lien Creditors, including any such claims or defenses based on any actions or omissions of any such person, in connection with the perfection, maintenance, enforcement, foreclosure, sale, liquidation, or release of any lien or security interest therein by First Lien Creditors, or any modification or waiver of any Note Documents, except as provided or limited under this Agreement.

8. Insurance. In the event of the occurrence of a fire or other casualty resulting in damage to all or any portion of any Collateral (collectively, a “Casualty”):

(a) until the Discharge of the First Lien Obligations has occurred, each Second Lien Creditor hereby waives any right to participate or join in any adjustment, compromise or settlement of any claims resulting from a Casualty with respect to any Collateral;

(b) all proceeds received or to be received on account of a Casualty shall be applied in the manner or manners provided for in the Note Documents and in this Agreement; and

(c) until the Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees to promptly execute and deliver to First Lien Creditors any documents, instruments, agreements or further assurances reasonably required to effectuate any of the foregoing.

9. Insolvency Proceeding.

(a) Enforceability and Continuing Priority. This Agreement shall be applicable both before and after the commencement of any Insolvency Proceeding and all converted or succeeding cases in respect thereof. The relative rights of First Lien Creditors and Second Lien Creditors in or to any distributions from or in respect of any Collateral or proceeds of Collateral shall continue after the commencement of any Insolvency Proceeding. Accordingly, the provisions of this Agreement are expressly intended to be and shall be enforceable as a subordination agreement within the meaning of Section 510 of the Bankruptcy Code.

(b) Financing. Until Discharge of the First Lien Obligations has occurred, if any Obligor shall be subject to any Insolvency Proceeding and First Lien Creditors consent to the use of cash collateral (as such term is defined in Section 363(a) of the Bankruptcy Code; herein, “Cash Collateral”) on which any First Lien Creditor has a Lien or to permit any Obligor to obtain financing provided by any First Lien Creditor under Section 364 of the Bankruptcy Code or any similar Bankruptcy Law (such financing, together with any Cash Collateral use, collectively a “DIP Financing”), then each Second Lien Creditor agrees that it will consent to such Cash Collateral use and raise no objection to such DIP Financing, provided, the Second Lien Creditors retain a subordinate security interest in the collateral (including proceeds thereof) and obtains a replacement security interest on post-petition Collateral to the same extent as existed prior to the commencement of the Insolvency Proceeding, and, to the extent the Liens securing the First Lien Obligations are subordinated to or pari passu with such DIP Financing, each Second Lien Creditor will subordinate its Liens in the Collateral to the Liens securing such DIP Financing. If any First Lien Creditor offers to provide DIP Financing that meets the requirements set forth above, each Second Lien Creditor agrees that it shall not, directly or indirectly, (x) provide or offer to provide DIP Financing or support any DIP Financing secured by a Lien senior to or pari passu with the Liens securing the First Lien Obligations, or (y) request or accept any form of adequate protection or any other relief except as provided in Section 9(e)(ii). In connection with any DIP Financing, if any Liens on the Collateral held by First Lien Creditors are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee “carve out,” or fees owed to the United States Trustee, then the Liens on the Collateral of each Second Lien Creditor shall also be subordinated to such interest or claim and shall remain subordinated to the Liens on the Collateral of First Lien Creditors consistent with this Agreement.

(e) Adequate Protection.

(i) First Lien Creditors. In any Insolvency Proceeding involving an Obligor, each Second Lien Creditor agrees that it shall not contest (or support any other person contesting):

(A) any request by any First Lien Creditor for adequate protection (whether in the form of payments, liens, a priority administrative expense claim or otherwise);

(C) the payment of interest, fees, expenses, or other amounts to any First Lien Creditor under Section 506(b) or 506(c) of the Bankruptcy Code or otherwise.

(ii) Second Lien Creditors. In any Insolvency Proceeding involving an Obligor:

(A) Replacement Liens.

(B) No Distributions. Until the Discharge of the First Lien Obligations has occurred, in any Insolvency Proceeding involving an Obligor, Second Lien Creditors shall seek neither (a) adequate protection in the form of Distributions in respect of the Second Lien Obligations nor (b) adequate protection in the form of Distributions with respect to their rights to the Collateral.

(g) No Waiver. Except as otherwise provide in this Agreement, nothing contained herein shall prohibit or in any way limit First Lien Creditors from objecting in any Insolvency Proceeding involving an Obligor to any action taken by any Second Lien Creditor, including the seeking by such Second Lien Creditor of adequate protection or the assertion by such Second Lien Creditor of any of its rights and remedies under the Note Documents.

(i) Plan of Reorganization.

(a) If, in any Insolvency Proceeding, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized debtor are distributed pursuant to a plan of reorganization or similar dispositive restructuring plan, both on account of First Lien Obligations and on account of Second Lien Note Obligations, then, to the extent the debt obligations distributed on account of the First Lien Obligations and on account of the Second Lien Note Obligations are secured by Liens upon the same property, the parties hereto expressly agree that the provisions of this Agreement will survive the distribution of such debt obligations pursuant to such plan and will apply with like effect to the Liens securing such debt obligations, and

(b) No Second Lien Creditor shall propose or support any plan of reorganization that is inconsistent with the priorities or other provisions of this Agreement.

10. Notice of Default and Certain Events; Right to Cure. Each Secured Creditor shall promptly notify the other Secured Creditors in writing of the occurrence of any of the following as applicable:

(a) any default or event of default under the Note issued to such Secured Creditor; or

(b) the demand for payment of, acceleration of or termination of any of the Obligations.

Each of the Second Lien Creditors shall have the right, but not any obligation, to cure any events of default under the Note Documents for the account of the Obligors within fifteen (15) days after the receipt by such Second Lien Creditor of written notice of such event of default from the Secured Creditor or thereafter with the consent of the Secured Creditors. In no event shall any Second Lien Creditor, by virtue of the payment of amounts or performance of any obligation required to be paid or performed by any Obligor, be deemed to have assumed any obligations of any Obligor to the Secured Creditors or any other person.

11. Further Assurances.

(b)` Legending Documents, Instruments. Each party hereto agrees that the Security Agreement shall include the following language:

“Anything herein to the contrary notwithstanding, the liens and security interests securing the Obligations and the exercise of any right or remedy with respect thereto are subject to the provisions of that certain Intercreditor Agreement dated as of June ___, 2007 (as amended, restated, supplemented, or otherwise modified from time to time, the “Intercreditor Agreement”), among Sands I, Sands II, Sands III, Sands IV and CCGF, as First Lien Creditors, and AirWorks Funding LLLP and RS Properties I LLC, as Second Lien Creditors. In the event of any conflict between the terms of the Intercreditor Agreement and this Agreement, the terms of the Intercreditor Agreement shall govern and control.”

(c) Attorney in Fact. Each First Lien Creditor is hereby irrevocably constituted and appointed the attorney-in-fact of each Second Lien Creditor in order to take all action, either in such First Lien Creditor’s name or in the name of such Second Lien Creditor, which in such First Lien Creditor’s reasonable opinion is necessary or desirable to enable such First Lien Creditor to obtain all Distributions that are to be turned over to such First Lien Creditor pursuant to this Agreement.

12. Representations; Warranties. Each Second Lien Creditor represents and warrants to each First Lien Creditor that: (a) such Second Lien Creditor is the holder of the liens and security interests which secure or will secure the Second Lien Obligations; (b) there do not exist any currently effective subordinations of the Second Lien Obligations or of such Second Lien Creditor’s liens and security interests in the Collateral; (c) such Second Lien Creditor is currently informed of the financial condition of each Obligor and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the First Lien Obligations; and that such Second Lien Creditor will continue to keep informed of each Obligor’s financial condition and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the First Lien Obligations; and (d) it has full right, power, and authority to enter into this Agreement and, to the extent such Second Lien Creditor is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties.

13. Modification of First Lien Obligations. Each Second Lien Creditor agrees that each First Lien Creditor shall have absolute power and discretion, without notice to such Second Lien Creditor, to deal in any manner with the First Lien Obligations, including, but not by way of limitation, the power and discretion to do any of the following: (a) any demand for payment of any First Lien Obligations may be rescinded in whole or in part, and any First Lien Obligations may be continued, and the First Lien Obligations or the liability of any Obligor upon or for any part thereof, or any Collateral or guaranty therefor, or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, modified, accelerated, compromised, waived, surrendered, or released; and (b) the Note issued to First Lien Creditors may be amended, modified, supplemented, or terminated, in whole or in part, as First Lien Creditors may deem advisable from time to time, and any Collateral may be sold, exchanged, waived, surrendered, or released. Each Second Lien Creditor will remain bound under this Agreement, and the subordination provided for herein shall not be impaired, abridged, released, or otherwise affected notwithstanding any such renewal, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender, or release. All dealings between First Lien Creditors and any Obligor shall be deemed to have been consummated in reliance upon this Agreement.

14. Waivers by Second Lien Creditors.

(a) First Lien Obligations.

(ii) None of First Lien Creditors or any of their affiliates, directors, officers, employees, or agents shall be liable for failure to demand, collect, or realize upon any of the Collateral or any Proceeds or for any delay in doing so or shall be under any obligation to sell or otherwise Dispose of any Collateral or Proceeds thereof or to take any other action whatsoever with regard to the Collateral or any part or Proceeds thereof. If any First Lien Creditor should exercise any of its contractual rights or remedies under the Note Documents (subject to the express terms and conditions hereof), First Lien Creditors shall not have any liability whatsoever to any Second Lien Creditor as a result of such action, omission, or exercise. First Lien Creditors will be entitled to manage and supervise their loans and extensions of credit under the Note Documents as First Lien Creditors may, in their sole discretion, deem appropriate, and First Lien Creditors may manage their loans and extensions of credit without regard to any rights or interests that any Second Lien Creditor may have in the Collateral or otherwise except as otherwise expressly set forth in this Agreement. Each Second Lien Creditor agrees that First Lien Creditors shall not incur any liability as a result of a sale, lease, license, application or other Disposition of all or any portion of the Collateral or any part or Proceeds thereof. Until the Discharge of the First Lien Obligations has occurred, First Lien Creditors may, from time to time, enter into agreements and settlements with Obligors as they may determine in their sole discretion without impairing any of the subordinations, priorities, rights or obligations of the parties under this Agreement, including, without limitation, substituting Collateral, releasing any Lien and releasing any Obligor. Each Second Lien Creditor waives any and all rights it may have to require any First Lien Creditor to marshal assets, to exercise rights or remedies in a particular manner, or to forbear from exercising such rights and remedies in any particular manner or order.

(b) Notice of Acceptance and Other Waivers. To the fullest extent permitted by applicable law, each Second Lien Creditor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Note issued to First Lien Creditors, or the creation or existence of any First Lien Obligations; (iii) notice of the amount of the First Lien Obligations; (iv) notice of any adverse change in the financial condition of any Obligor or of any other fact that might increase such Second Lien Creditor’s risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to the Note issued to First Lien Creditors; and (vi) all other notices (except if such notice is specifically required to be given to such Second Lien Creditor under this Agreement or any Note Document) and demands to which such Second Lien Creditor might otherwise be entitled.

(c) Lawsuits; Defenses; Set-off. To the fullest extent permitted by applicable law, each Second Lien Creditor (i) waives the right by statute or otherwise to any require any First Lien Creditor to institute suit against any Obligor or to exhaust any rights and remedies which any First Lien Creditor has or may have against any Obligor; (ii) waives any defense arising by reason of any disability or other defense (other than the defense that the Discharge of the First Lien Obligations has occurred (subject to the provisions of Section 9(c)) of any Obligor or by reason of the cessation from any cause whatsoever of the liability of such Obligor in respect thereof, (iii) waives any rights to assert against any First Lien Creditor any defense (legal or equitable), set-off, counterclaim, or claim which such Second Lien Creditor may now or at any time hereafter have against any Obligor or any other party liable to any First Lien Creditor or such Second Lien Creditor, (iv) waives any defense arising by reason of any claim or defense based upon an election of remedies by any First Lien Creditor; and (vi) waives the benefit of any statute of limitations affecting such Second Lien Creditor’s obligations hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the First Lien Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Second Lien Creditor’s obligations hereunder.

17. Notices. Notices shall be delivered to the parties hereto as provided in Section 7.8 of the Funding Agreement.

19. Complete Agreement. This Agreement constitutes the complete agreement and understanding of each of the Secured Creditors and supersedes all prior or contemporaneous oral and written negotiations, agreements and understandings, express or implied, with respect to the subject matter hereof.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first herein above set forth.

FIRST LIEN CREDITORS:

SANDS BROTHERS VENTURE CAPITAL LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL II LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL III LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

SANDS BROTHERS VENTURE CAPITAL IV LLC

By: /s/ Scott A. Bailey

Name: Scott A. Bailey

Its: COO

CRITICAL CAPITAL GROWTH FUND, L.P.

By: Critical Capital, L.P., its general partner

By: Critical Capital Corporation, its general partner

By: /s/ Steven B. Sands

Name: Steven B. Sands

Its: Chairman

By: /s/ Charles L. Robinson

Name: Charles L. Robinson

Its: President

S-1

Lenders Intercreditor Agreement

SECOND LIEN CREDITORS:

AIRWORKS FUNDING LLLP

By: Compass Partners, LLC, its general partner

By: /s/ Richard E. Perlman

Name: Richard E. Perlman

Its: President

RS PROPERTIES I LLC

By: /s/ John Lack

Name: John Lack

Its: Manager

S-2

Lenders Intercreditor Agreement

ACKNOWLEDGMENT

Dated as of June 19, 2007.

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Its: COO

KRONOS AIR TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Its: COO

S-3

Lenders Intercreditor Agreement

EX-9 10 ex9.htm EXHIBIT 9 Unassociated Document

Exhibit 9

VOTING AND SUPPORT AGREEMENT

THIS VOTING AND SUPPORT AGREEMENT (this “Agreement”), dated as of June 19, 2007, is made and entered into by and among Kronos Advanced Technologies, Inc., a Nevada corporation (“Company”), and each of the undersigned holders of securities of the Company who are signatories hereto (each, a “Security Holder”).

WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into a Funding Agreement pursuant to which the Company is able to obtain secured convertible debt financing from the Security Holders (collectively referred to herein as, the “Lenders”) in an amount up to $18,159,000 (the “Financing”);

WHEREAS, the Financing was made pursuant to, among other documents, the Funding Agreement and the Security Agreement of even date herewith by and among the Company, its subsidiaries and the Lenders (the “Security Agreement”) and the Secured Convertible Promissory Notes of even date herewith made by the Company in favor of the Lenders (the “Notes”); and

WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Agreement pursuant to which he, she or it agrees, among other things, to vote all of the Subject Shares (as defined in Section 1(c)) held by such Security Holder in favor of the actions contemplated hereby.

NOW, THEREFORE, in consideration of the foregoing and of the promises, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows:

1. Representations and Warranties of Security Holder. Each Security Holder hereby represents and warrants to the Company as of the date hereof, as follows:

(a) Organization. Such Security Holder (to the extent such Security Holder is not a natural person) is duly organized, validly existing and in good standing under the laws of the state of its organization.

(b) Authority. Such Security Holder has all requisite power and authority (if not a natural person) or capacity (if a natural person) to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Security Holder and constitutes a valid and binding obligation of such Security Holder in accordance with its terms. The execution and delivery of this Agreement does not and compliance with the terms hereof will not (i) conflict with, result in any violation of, or constitute (with or without notice or lapse of time or both) a default under, any provision of any trust agreement, loan or credit agreement, bond, note, mortgage, indenture, lease or other contract or agreement to which such Security Holder is a party or applicable to the Subject Shares held by such Security Holder, (ii) require any filing with, or permit, authorization, consent or approval of, any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic or foreign, or (iii) violate any judgment, order, writ, injunction, decree, law, statute, rule or regulation applicable to such Security Holder or the Subject Shares held by such Security Holder.

(c) The Subject Shares. Such Security Holder is the record and beneficial owner (as such term is defined in Rule 13d-3 of the Securities Exchange Act of 1934) of, and has good and marketable title to, the number of shares of the Company’s common stock, $0.001 par value per share (the “Company Stock”), set forth opposite his, her or its name on the signature page hereto (such shares of the Company’s common stock, together with any other shares of capital stock of the Company acquired by such Security Holder after the date hereof and during the term of this Agreement, by conversion of the Notes, purchase, exercise of stock options or otherwise, collectively referred to herein as the “Subject Shares”), free and clear of any liens or other encumbrances whatsoever. Such Security Holder does not own, of record or beneficially, any shares of the Company’s capital stock other than the Subject Shares held by such Security Holder; and, such Security Holder does not have any voting rights with respect to any shares of the Company’s capital stock other than the Subject Shares held by such Security Holder, pursuant to any voting agreement or otherwise. As of the date hereof and for so long as this Agreement remains in effect, except for this Agreement or as otherwise permitted by this Agreement, such Security Holder has full legal power, authority and right to vote all of the Subject Shares held by such Security Holder in favor of the approval and authorization of the actions contemplated hereby (collectively, the “Proposed Actions”) without the consent or approval of, or any other action on the part of, any other person or entity. Without limiting the generality of the foregoing, such Security Holder has not entered into any voting agreement (other than this Agreement) with any person or entity with respect to any of the Subject Shares held by such Security Holder, granted any person or entity any proxy (revocable or irrevocable) or other power of attorney with respect to any of the Subject Shares held by such Security Holder, deposited any of the Subject Shares held by such Security Holder in a voting trust or entered into any arrangement or agreement with any person or entity limiting or affecting his, her or its legal power, authority or right to vote the Subject Shares held by such Security Holder on any matter.

2. Voting of Shares.

(a) Subject to the provisions of Section 9, and without in any way limiting any Security Holder’s right to vote the Subject Shares held by such Security Holder in his, her or its sole discretion on any other matters that may be submitted to a shareholder vote, consent or other approval (including by written consent) in a manner that is not inconsistent with such Security Holder’s obligations under this Agreement, each Security Holder hereby irrevocably and unconditionally agrees that, during the period beginning on the date hereof and ending on the earlier to occur of (Y) the date on which all of the matters set forth in Sections 2(a)(1)-(5) below have been approved by the stockholders of the Company or (Z) August 1, 2008 (the “Expiration Date”), at any meeting of the stockholders of the Company called to vote upon (1) a slate of directors of the Company’s board of directors as proposed by AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”), (2) 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, (3) 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 the common stock of the Company as provided in the Notes and in the Funding Agreement, (4) reincorporating the Company in Delaware and/or (5) a reverse stock split proposed by AirWorks or the Company’s board of directors, the approval of any of the foregoing or any rescission or withdrawal of such approval, or at any adjournment thereof, or in any other circumstances upon which a vote, consent or other approval (including written consent) with respect to such actions, each Security Holder shall vote (or cause to be voted) the Subject Shares held by such Security Holder:

(i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks and RS Properties I LLC, a Delaware limited liability company (“RS Properties”);

(ii) in favor of adjusting the size of the Company’s board of directors such that upon the election of the slate of directors proposed by AirWorks and RS Properties, such directors hold a majority of the seats on the Company’s board of directors;

(iii) in favor of 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) in favor of reincorporating the Company in Delaware;

(v) in favor of 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.

3. Covenants of the Security Holder. Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:

(a) subject to the provisions of Section 5, not sell, transfer (including by testamentary succession or otherwise by operation of law), pledge, hypothecate, encumber, assign, tender or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, hypothecation, encumbrance, assignment, tender or other disposition of, any of the securities of the Company or Subject Shares held by such Security Holder or any right, title or interest therein; and

(b) other than as expressly contemplated by this Agreement, not grant any powers of attorney or proxies or consents in respect of any of the securities of the Company or Subject Shares held by such Security Holder, deposit any of the securities of the Company or Subject Shares held by such Security Holder into a voting trust, enter into a voting agreement with respect to any of the securities of the Company or the Subject Shares held by such Security Holder or otherwise restrict his, her or its ability freely to exercise all voting rights with respect to the securities of the Company or Subject Shares held by such Security Holder, or commit any other act that could restrict or otherwise affect his, her or its legal power, authority and right to vote the securities of the Company or Subject Shares held by such Security Holder.

4. Certain Events. In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the capital structure of the Company affecting the Company Stock, or the acquisition of additional shares of Company Stock or securities of the Company by each Security Holder, the number of securities of the Company or Subject Shares held by such Security Holder shall be adjusted appropriately and this Agreement and the obligations hereunder shall attach to any additional securities of the Company or shares of Company Stock of the Company issued to or acquired by such Security Holder.

5. Assignment. Each Security Holder agrees that this Agreement and the obligations hereunder shall attach to the securities of the Company and Subject Shares held by such Security Holder and shall be binding upon any person or entity to which legal or beneficial ownership of or the right and ability to vote the securities of the Company or Subject Shares held by such Security Holder shall pass, whether by operation of law or otherwise, including such Security Holder’s successors. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Security Holder, on the one hand, without the prior written consent of the Company nor by the Company, on the other hand, without the prior written consent of such Security Holder. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

6. General Provisions.

(a) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto.

(b) Notice. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to each party hereto at his, her or its address set forth below such party’s name on the signature page hereto (or at such address for a party as shall be specified by like notice).

(c) Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Wherever the words “include, or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.”

(d) Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the other party.

(e) Entire Agreement; No Third Party Beneficiaries. This Agreement (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

(f) Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.

7. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement (including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.

8. Severability. In the event that any provisions of this Agreement or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the fullest extent possible, the original intent of the parties.

9. Fiduciary Duties. Each Security Holder is signing this Agreement solely in such Security Holder’s capacity as an owner of his, her or its respective securities of the Company and/or Subject Shares, and nothing in this Agreement shall prohibit, prevent or preclude such Security Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such action is not in conflict with provisions hereof.

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.

		COMPANY:

		Kronos Advanced Technologies, Inc.


		By: /s/ Richard F. Tusing
		Name: Richard F. Tusing
		Title: COO
		Address:	464 Common Street, Suite 301
			Belmont, MA 02478

		SECURITY HOLDERS:

Security Holder	Number of Shares of Common Stock Owned

AIRWORKS FUNDING LLLP		0

By: Compass Partners, LLC, its General Partner

By: /s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President

SANDS BROTHERS VENTURE CAPITAL LLC		0

By:/s/ Scott A. Baily
Name: Scott A. Baily
Title: COO

SANDS BROTHERS VENTURE CAPITAL II LLC		0

By:/s/ Scott A. Baily
Name: Scott A. Baily
Title: COO

SANDS BROTHERS VENTURE CAPITAL III LLC		0

By:/s/ Scott A. Baily
Name: Scott A. Baily
Title: COO

SANDS BROTHERS VENTURE CAPITAL IV LLC		0

By:/s/ Scott A. Baily
Name: Scott A. Baily
Title: COO

CRITICAL CAPITAL GROWTH FUND, L.P.			0

By: Critical Capital, L.P., its General Partner

By: Critical Capital Corporation, its General Partner

By: /s/ Steven B. Sands
Name: Steven B. Sands
Title: Chairman

By: /s/ Charles L. Robinson
Name: Charles L. Robinson
Title: President

RS PROPERTIES I LLC			0

By: /s/ John Lack
Name: John Lack
Title: Manager

EX-10 11 ex10.htm EXHIBIT 10 Unassociated Document

Exhibit 10

VOTING AND SUPPORT AGREEMENT

WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into letter agreements pursuant to which each Security Holder has agreed to take, or refrain from taking, certain actions to allow the Company to obtain secured convertible debt financing from AirWorks Funding LLLP (“AirWorks”) and other individuals and entities (AirWorks and such other individuals and entities are collectively referred to herein as, the “Lenders”) in an amount up to $18,159,000 (the “Financing”);

WHEREAS, the Financing was made pursuant to, among other documents, the Funding Agreement and the Security Agreement of even date herewith by and among the Company and the Lenders (the “Funding Agreement” and the “Security Agreement”) and the Secured Convertible Promissory Notes of even date herewith made by the Company in favor of AirWorks and the Lenders (the “Notes”); and

1. Representations and Warranties of Security Holder. Each Security Holder hereby represents and warrants to the Company as of the date hereof, as follows:

2. Voting of Shares.

directors, (3) 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 the common stock of the Company as provided in the Notes and in the Funding Agreement, (4) reincorporating the Company in Delaware, subject to the Company’s board of director’s recommendation of such action and/or (5) a reverse stock split proposed by AirWorks or the Company’s board of directors, the approval of any of the foregoing or any rescission or withdrawal of such approval, or at any adjournment thereof, or in any other circumstances upon which a vote, consent or other approval (including written consent) with respect to such actions, each Security Holder shall vote (or cause to be voted) the Subject Shares held by such Security Holder:

(i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks, subject to the composition of such slate’s compliance with all applicable laws and regulations;

(ii) in favor of 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;

(iv) in favor of reincorporating the Company in Delaware, subject to the Company’s board of director’s recommendation of such action;

(v) in favor of 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.

3. Covenants of the Security Holder. Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:

6. General Provisions.

(a) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto.

(e)\ Entire Agreement; No Third Party Beneficiaries. This Agreement (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

***************

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.

COMPANY:

Kronos Advanced Technologies, Inc.

By: /s/ Daniel Dwight

Name: Daniel Dwight

Title: President and CEO

Address: 464 Common Street, Suite 301

Belmont, MA 02478

STOCKHOLDERS:

Security Holder	Subject Shares
	Shares of Stock Held by Security Holder	Options to Purchase Shares of Stock Held by Security Holder

/s/ Daniel R. Dwight Daniel R. Dwight Address: 464 Common Street, Suite 301 Belmont, MA 02478	1,201,926	7,191,206

/s/ James McDermott James McDermott Address: 464 Common Street, Suite 301 Belmont, MA 02478	294,118	638,459

/s/ Milton Segal Milton Segal Address: 464 Common Street, Suite 301 Belmont, MA 02478	-	573,500

/s/ Richard Tusing Richard Tusing Address: 464 Common Street, Suite 301 Belmont, MA 02478	852,752	3,391,756

/s/ Igor Krichtafovitch Igor Krichtafovitch Address: 15241 NE 90^th Street Redmond, WA 98052	1,053,000	4,955,726

EX-11 12 ex11.htm EXHIBIT 11 Unassociated Document

Exhibit 11

VOTING AND SUPPORT AGREEMENT

1. Representations and Warranties of Security Holder. Each Security Holder hereby represents and warrants to the Company as of the date hereof, as follows:

2. Voting of Shares.

(a) Subject to the provisions of Section 9, and without in any way limiting any Security Holder’s right to vote the Subject Shares held by such Security Holder in his, her or its sole discretion on any other matters that may be submitted to a shareholder vote, consent or other approval (including by written consent) in a manner that is not inconsistent with such Security Holder’s obligations under this Agreement, each Security Holder hereby irrevocably and unconditionally agrees that, during the period beginning on the date hereof and ending on the earlier to occur of (Y) the date on which all of the matters set forth in Sections 2(a)(1)-(5) below have been approved by the stockholders of the Company or (Z) August 1, 2008 (the “Expiration Date”), at any meeting of the stockholders of the Company called to vote upon (1) a slate of directors of the Company’s board of directors as proposed by AirWorks, (2) 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, (3) 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 the common stock of the Company as provided in the Notes and in the Funding Agreement, (4) reincorporating the Company in Delaware and/or (5) a reverse stock split proposed by AirWorks or the Company’s board of directors, the approval of any of the foregoing or any rescission or withdrawal of such approval, or at any adjournment thereof, or in any other circumstances upon which a vote, consent or other approval (including written consent) with respect to such actions, each Security Holder shall vote (or cause to be voted) the Subject Shares held by such Security Holder:

(i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks;

(iv) in favor of reincorporating the Company in Delaware;

(v) in favor of 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.

3. Covenants of the Security Holder. Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:

6. General Provisions.

(a) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto.

***************

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.

		COMPANY:

		Kronos Advanced Technologies, Inc.


		By: /s/ Richard F. Tusing
		Name: Richard F. Tusing
		Title: COO

		Address:	464 Common Street, Suite 301
			Belmont, MA 02478



		STOCKHOLDERS:

Security Holder		Subject Shares

		Shares of Stock Held by Security Holder		Options to Purchase Shares of Stock Held by Security Holder

/s/ Richard A. Sun		4,587,400		-
Richard A. Sun
Address:	10182 Castlewood Lane
	Oakton, VA 22124



/s/ Richard A. Sun		601,500		-
Richard A. Sun, as attorney-in-fact for Fredric R. Gumbinner
Address:	11200 Sorrel Ridge Lane
	Oakton, VA 22124

EX-12 13 ex12.htm EXHIBIT 12 Unassociated Document

Exhibit 12

PROXY

THIS PROXY (this “Proxy”), dated as of June 19, 2007, is made and entered into by and among Kronos Advanced Technologies, Inc., a Nevada corporation (“Company”), and each of the undersigned holders of securities of the Company who are signatories hereto (each, a “Security Holder”).

WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into a Voting Agreement of even date herewith (the “Voting Agreement”) pursuant to which each Security Holder has agreed to vote (i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks Funding LLLP (“AirWorks”), subject to the composition of such slate’s compliance with all applicable laws and regulations, (ii) in favor of 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) in favor of 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 (as below defined) to convert the entire amount of the Financing (as below defined) into shares of common stock of the Company as provided in the Funding Agreement (as below defined), (iv) in favor of reincorporating the Company in Delaware, subject to the Company’s board of director’s recommendation of such action (v) in favor of 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., or refrain from taking, certain actions to allow the Company to obtain secured convertible debt financing from AirWorks and other individuals and entities (AirWorks and such other individuals and entities are collectively referred to herein as, the “Lenders”) in an amount up to $18,159,000 (the “Financing”) pursuant to the terms of that certain Funding Agreement of even date herewith (the “Funding Agreement”);

WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Proxy pursuant to which he, she or it agrees, among other things, that Richard E. Perlman may vote all of the Subject Shares (as defined in the Voting Agreement) held by such Security Holder in favor of the actions contemplated by the Voting Agreement; and

WHEREAS, the Lenders would not provide the Financing in the absence of this Proxy, and the Security Holders hereby acknowledge that each of them will derive a benefit as a result of the Financing.

1. Proxy. By executing this Proxy, each Security Holder hereby irrevocably appoints Richard E. Perlman, the attorney, agent and proxy for the undersigned and in the name, place and stead of the undersigned, in respect of any of the matters set forth in clauses (i) through (vi) of the first “Whereas” clause above set forth, to vote or, if applicable, to give written consent, with respect to all the Subject Shares owned by such Security Holder which such

Security Holder is or may be entitled to vote at any meeting of the Company held after the date hereof, whether annual or special and whether or not an adjourned meeting, or, if applicable, to give written consent with respect thereto. This proxy is coupled with an interest, shall be irrevocable and binding on any successor in interest of each Security Holder and shall not be terminated by operation of law upon the occurrence of any event, including the death or incapacity of any Security Holder. The proxy granted hereby and set forth herein shall operate to revoke any prior proxy as to the Subject Shares heretofore granted by any Security Holder. This proxy shall terminate on the Expiration Date (as defined in the Voting Agreement). This proxy has been executed in accordance with Section 78.355 of the Nevada Revised Statutes.

2. General Provisions.

(a) Amendments. This Proxy may not be amended except by an instrument in writing signed by each of the parties hereto.

(c) Interpretation. When a reference is made in this Proxy to a Section, such reference shall be to a Section of this Proxy unless otherwise indicated. The headings contained in this Proxy are for reference purposes only and shall not affect in any way the meaning or interpretation of this Proxy. Wherever the words “include, or “including” are used in this Proxy, they shall be deemed to be followed by the words “without limitation.”

(d) Counterparts. This Proxy may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the other party.

(e) Entire Agreement; No Third Party Beneficiaries. This Proxy (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

(f) Governing Law. This Proxy shall be governed by, and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.

3. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Proxy (including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.

4. Severability. In the event that any provisions of this Proxy or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Proxy shall continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Proxy with a valid and enforceable provision that will achieve, to the fullest extent possible, the original intent of the parties.

5. Fiduciary Duties. Each Security Holder is signing this Proxy solely in such Security Holder’s capacity as an owner of his, her or its respective securities of the Company and/or Subject Shares, and nothing in this Proxy shall prohibit, prevent or preclude such Security Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such action is not in conflict with provisions hereof.

***************

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.

COMPANY:

Kronos Advanced Technologies, Inc.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Title: COO

Address: 464 Common Street, Suite 301

Belmont, MA 02478

STOCKHOLDERS:

Security Holder	Subject Shares

	Shares of Stock Held by Security Holder	Options to Purchase Shares of Stock Held by Security Holder

/s/ Daniel R. Dwight Daniel R. Dwight Address: 464 Common Street, Suite 301 Belmont, MA 02478	1,201,926	7,191,206

/s/ James McDermott James McDermott Address: 464 Common Street, Suite 301 Belmont, MA 02478	294,118	638,459

/s/ Milton Segal Milton Segal Address: 464 Common Street, Suite 301 Belmont, MA 02478	-	573,500

Security Holder	Subject Shares

	Shares of Stock Held by Security Holder	Options to Purchase Shares of Stock Held by Security Holder

/s/ Richard Tusing Richard Tusing Address: 464 Common Street, Suite 301 Belmont, MA 02478	852,752	3,391,756

/s/ Igor Krichtafovitch Igor Krichtafovitch Address: 15241 NE 90^th Street\ Redmond, WA 98052	1,053,000	4,955,726

/s/ Richard A. Sun Richard A. Sun Address: 10182 Castlewood Lane Oakton, VA 22124	4,587,400	-

/s/ Richard A. Sun Richard A. Sun, as attorney-in-fact for Fredric R. Gumbinner Address: 11200 Sorrel Ridge Lane Oakton, VA 22124	601,500	-

EX-13 14 ex13.htm EXHIBIT 13 Unassociated Document

Exhibit 13

AIRWORKS FUNDING LLLP

655 Madison Avenue

23rd Floor

New York, N.Y. 10021

June 19, 2007

RS Properties I LLC

c/o Mr. John Lack

111 Broadway, 8th Floor

New York, NY 10006

Re:

Funding Agreement dated June 19, 2007 by and among Kronos Advanced Technologies, Inc. (“Kronos”), AirWorks Funding LLLP (“AirWorks”), RS Properties I, LLC (“RS Properties”) and several other lenders (collectively, the “Lenders”) (the “Funding Agreement”)

Dear Mr. Lack:

The purpose of this letter is to memorialize certain mutual agreements we have reached regarding our obligations under the Funding Agreement as follows:

1. We agree that all advances made at Subsequent Closings (as defined in the Funding Agreement) will be made sixty percent (60%) by AirWorks and forty percent (40%) by RS Properties. If either AirWorks or RS Properties refuses or is unable to make its share of any such advance (the “Defaulting Party”), the other (the “Non-Defaulting Party”) shall be entitled to advance itself the Defaulting Party’s share of the advance (the “Defaulted Amount”), and the amount that the Defaulting Party is entitled to advance pursuant to Section 2.1(b) shall be automatically decreased, and the amount that the Non-Defaulting Party is entitled to advance shall be automatically increased, by the Defaulted Amount. The Defaulting Party hereby agrees to execute such additional assignments and other documentation as may be requested by the Non-Defaulting Party or as may be necessary to properly reflect the foregoing, including proper amendments to or assignments of its Note (as defined in the Funding Agreement).

2. RS Properties and AirWorks will, immediately after the First Closing (as defined in the Funding Agreement) convert a sufficient principal amount of Notes (as defined in the Funding Agreement) to secure more than fifty percent (50%) voting control of Kronos. AirWorks will convert sixty percent (60%) and RS Properties forty percent (40%) of the amount necessary to secure such controlling position. If at any time prior to the increase in the authorized capital stock of Kronos, it is necessary for RS Properties and AirWorks to convert additional amounts to continue to have control, they will do so in the same proportion. In furtherance of the foregoing, we also agree to enter into a voting agreement providing that we will vote our respective Kronos shares:

RS Properties I LLC

June 19, 2007

Page 2

(i) in favor of a slate of directors of the Kronos’ board of directors as proposed by AirWorks and RS Properties, it being understood that subject to regulatory requirements and each party’s ability to waive this requirement, such slate will have sixty percent (60%) of the directors designated by AirWorks and forty percent (40%) designated by RS Properties;

(ii) in favor of adjusting the size of the Kronos’ board of directors such that upon the election of the slate of directors proposed as provided above, such directors hold at least a majority of the seats on the Kronos’ board of directors;

(iii) in favor of approving an amendment to the Kronos’ articles of incorporation to increase Kronos’ authorized common stock to a number of shares necessary to allow the Lenders to convert the entire amount of the amounts advanced under the Funding Agreement into shares Kronos common stock as provided in the Notes and the Funding Agreement;

(iv) in favor of reincorporating Kronos in Delaware;

(v) in favor of any 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.

3. We agree that if a combination of Barry Salzman and Henry Schein, Inc. or any of its subsidiaries, affiliates or joint ventures decides to become a limited partner in AirWorks, the amount which RS Properties is entitled to advance in Subsequent Closings shall be decreased, and the amount AirWorks is entitled to advance shall be increased, by forty percent (40%) of the amount contributed by Salzman/Schein to AirWorks. RS Properties agrees to execute such additional, consents, assignments or other documents as may be requested by AirWorks or may be necessary to properly reflect the foregoing, including proper amendments or assignments of the parties respective Notes.

Our signatures below evidence our agreement as set forth above. This Letter Agreement may be executed in two counterparts, each of which shall be an original, but both of which together shall constitute one and the same instrument.

[Signatures Appear on Next Page)

RS PROPERTIES I LLC		AIRWORKS FUNDING LLLP


By: /s/ John Lack		By: /s/ Richard E. Perlman
	Name: John Lack		Name: Richard E. Perlman
	Title: Manager		Title: President

EX-14 15 ex14.htm EXHIBIT 14 Unassociated Document

Exhibit 14

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of June 19, 2007, is by and among Kronos Advanced Technologies, Inc., a Nevada corporation (“Company”), and AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”), Sands Brothers Venture Capital LLC, a New York limited liability company (“Sands I”) Sands Brothers Venture Capital II LLC, a New York limited liability company (“Sands II”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“Sands III”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“Sands IV”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“CCGF”) and RS Properties I LLC, a Delaware limited liability company (“RS Properties”). AirWorks, Sands II, Sands III, Sands IV, CCGF and RS Properties are collectively referred to herein as the “Stockholders”).

WHEREAS, this Agreement is being entered into pursuant to that certain Funding Agreement of even date herewith by and among Company and the Stockholders and those certain Secured Convertible Promissory Notes of even date herewith made by Company in favor of the Stockholders (the “Notes”).

NOW THEREFORE, for and in consideration of the premises, the mutual promises herein contained, and for other good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows:

1. Certain Definitions. As used in this Agreement, the following initially capitalized terms shall have the following meanings:

(a) “Affiliate” means, with respect to any person, any other person who, directly or indirectly, is in control of, is controlled by or is under common control with such person.

(b) “Holder(s)” means the Stockholders and their successors and assigns who are holders of Registrable Securities, including, without limitation, each individual or entity owning a partnership or membership interest of AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF or RS Properties.

(c) “Registrable Securities” means (x) shares of Company’s common stock, par value $0.001 per share (“Common Stock”) owned by the Holders at any time, (y) shares of Common Stock issued or issuable to the Holders upon conversion or exchange of any securities of the Company, including, without limitation, the Notes, and (z) any other securities issued or issuable to the Holders of such shares of Common Stock (or such shares into which or for which such shares are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transactions or events; provided that any such securities shall cease to be Registrable Securities if (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act (as defined below) and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such securities shall have been transferred pursuant to Rule 144 (as defined below), (iii) the rights and obligations related thereto under this Agreement shall have been transferred in violation of Section 9, (iv) at any time the total number of Registrable Securities held by the Holder may then be distributed by the Holder in one transaction pursuant to Rule 144, or (v) at such time that such securities are no longer outstanding.

(d) “Registration Expenses” means all reasonable expenses incurred by Company in connection with any registration of Registrable Securities pursuant to this Agreement including, without limitation, the following: (i) SEC filing fees; (ii) the fees, disbursements and expenses of Company’s counsel(s) and accountants in connection with the registration of the Registrable Securities to be disposed of under the Securities Act; (iii) all expenses of Company and its agents and representatives in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus and amendments and supplements thereto and the mailing and delivering of a reasonable number of copies thereof to any Holders, underwriters and dealers and all actual expenses incidental to delivery of the Registrable Securities; (iv) the cost of producing blue sky memoranda (but specifically not including legal investment or foreign blue sky memoranda); (v) all expenses in connection with the qualification of the Registrable Securities to be disposed of for offering and sale under state securities laws; (vi) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Registrable Securities to be disposed of; (vii) the expenses of Company’s transfer agent and registrar appointed in connection with such offering; (viii) all engraving and printing expenses for the Company securities being offered; and (ix) all fees and expenses payable in connection with the listing of the Registrable Securities on each securities exchange or inter-dealer quotation system on which a class of common equity securities of Company is then listed.

(e) “Rule 144” means Rule 144 promulgated under the Securities Act (as defined below), or any successor rule to similar effect.

(f) “SEC” means the United States Securities and Exchange Commission.

(g) “Securities Act” means the Securities Act of 1933, as amended, or any successor statute.

2. Demand Registration.

(a) At any time following the date of this Agreement and upon written notice from a Holder or Holders of at least twenty percent (20%) of the Registrable Securities (without giving effect to any limitation on exercise or conversion) in the manner set forth in Section 11(h) hereof requesting that Company effect the registration under the Securities Act of any or all of the Registrable Securities held by such Holder as described in Section 2(b) (which notice shall specify the intended method or methods of disposition of such Registrable Securities), Company shall use its reasonable best efforts to effect, in the manner set forth in Section 5, the registration under the Securities Act of such Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such request; provided that:

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(i) if, prior to receipt of a registration request pursuant to this Section 2(a), Company had commenced a financing plan and held or identified a date to hold a formal “all hands” meeting with outside advisors, including an underwriter if such financing plan is an underwritten offering, and, in the good faith business judgment of Company’s underwriter (or outside advisors, if no underwriter), a registration at the time and on the terms requested could materially and adversely affect or interfere with such financing plan of Company or its subsidiaries (a “Transaction Blackout”), Company shall not be required to effect a registration pursuant to this Section 2(a) until the earliest of (A) the abandonment of such offering or (B) sixty (60) days after the termination of such offering; provided that Company shall only be permitted to delay a requested registration under this Section 2(a), whether in reliance on this subsection (i) or on subsection (ii) below, twice during the term of this Agreement.

(ii) if, while a registration request is pending pursuant to this Section 2(a), Company has determined in good faith that (A) the filing of a registration statement could jeopardize or delay any contemplated material transaction other than a financing plan involving Company or would require the disclosure of material information that Company had a bona fide business purpose for preserving as confidential; or (B) Company then is unable to comply with SEC requirements applicable to the requested registration (notwithstanding its reasonable best efforts to so comply), Company shall not be required to effect a registration pursuant to this Section 2(a) until the earlier of (A) the date upon which such contemplated transaction is completed or abandoned or such material information is otherwise disclosed to the public or ceases to be material or Company reasonably is able to so comply with applicable SEC requirements, as the case may be, and (B) thirty (30) days after Company makes such good-faith determination; provided that Company shall only be permitted to delay a requested registration under this Section 2(a), whether in reliance on this subsection (ii) or on subsection (i) above, twice during the term of this Agreement.

(iii) Company shall not be obligated to file more than two (2) registration statements under the Securities Act relating to a registration request pursuant to this Section 2(a) and shall not be obligated in any event if such a registration request is for a number of Registrable Securities which have an aggregate market value less than $1 million. If such a request shall be for an underwritten offering, such a request must be for a number of Registrable Securities which have an aggregate market value of at least $5 million.

(b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder pursuant to this Section 2 shall not be deemed to have been effected (and, therefore, not requested for purposes of Section 2(a)): (A) if it is withdrawn by the requesting Holder based upon material adverse information relating to Company that is (x) different from the information known to the Holder or Holders requesting registration at the time of their request for registration, or (y) promptly disclosed by Company to the Holder at the time of their request for registration; (B) if, when effective, it includes fewer than ninety (90%) percent of the number of shares of Registrable Securities which were the subject matter of the request; (C) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by such Holder and, as a result thereof, less than ninety (90%) percent of the Registrable Securities requested to be registered can be completely distributed in accordance with the plan of distribution set forth in the related registration statement.

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(c) In the event that any registration pursuant to this Section 2 shall involve, in whole or in part, an underwritten offering, Company shall have the right to designate the underwriter or underwriters, including the lead managing underwriter of such underwritten offering, subject to the reasonable approval of the Holders.

(d) Holders other than the Holder initiating the demand pursuant to Section 2(a) and holders of other registrable securities with the right to participate in a Company registration statement shall have the right to include their shares of Registrable Securities or other registrable securities, as the case may be, in any registration pursuant to Section 2(a). In connection with those registrations in which multiple Holders or holders of other registrable securities with the right to participate in such registration (“Piggy-back Rights Holders”) participate, in the event the facilitating broker/dealer or, in an underwritten offering, the lead managing underwriter advises that marketing factors require a limitation on the number of shares to be sold, the number of shares to be included in the sale or underwriting and registration shall be allocated pro rata among the Holders and the holders seeking registration pursuant to piggy-back registration rights otherwise granted by Company on the basis of the estimated proceeds from the sale of the securities covered by such registration.

(e) Company shall have the right to cause the registration of additional securities for sale for the account of Company in any registration of Registrable Securities requested by a Holder pursuant to Section 2(a) which involves an underwritten offering; provided that Company shall not have the right to cause the registration of such additional securities if such Holder is advised in writing (with a copy to Company) by the lead managing underwriter designated pursuant to Section 2(c) that, in such firm’s good faith opinion, registration of such securities in addition to those securities included pursuant to Sections 2(a)-(d) hereof would materially adversely affect the offering and sale of the Registrable Securities then contemplated by such Holder.

3. Piggy-back Registration. At any time during the term of this Agreement if Company proposes to register any of its Company Stock or any other of its common equity securities (but not including debt instruments or preferred stock convertible into its common equity securities) (collectively, “Other Securities”) under the Securities Act (other than a registration on Form S-4 or S-8 or any successor form thereto), whether or not for sale for its own account, in a manner which would permit registration of Registrable Securities for sale for cash to the public under the Securities Act, it will each such time give prompt written notice to each Holder of its intention to do so at least ten (10) days prior to the anticipated filing date of the registration statement relating to such registration. Such notice shall offer each such Holder the opportunity to include in such registration statement such number of Registrable Securities as each such Holder may request. Upon the written request of any such Holder, made no later than 5:00 p.m. New York City, New York time on the fifth (5^th) day after such Holder’s receipt of Company’s notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of disposition thereof), Company shall use its reasonable best efforts to effect, in the manner set forth in Section 5, in connection with the registration of the Other Securities, the registration under the Securities Act of all Registrable Securities which Company has been so requested to register, to the extent required to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so requested to be registered; provided that:

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(a) if at any time after giving written notice of its intention to register any securities and prior to the effective date of such registration, Company shall determine for any reason not to register or to delay registration of such securities, Company may, at its election, give written notice of such determination to the Holder and, thereupon, (A) in the case of a determination not to register, Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration and (B) in the case of a determination to delay such registration, Company shall be permitted to delay registration of any Registrable Securities requested to be included in such registration for the same period as the delay in registering such Other Securities;

(b) if the registration referred to in the first sentence of this Section 3 is to be an underwritten registration, and the managing underwriter advises Company in writing that, in such firm’s opinion, such offering would be materially and adversely affected by the inclusion therein of the Registrable Securities requested to be included therein, Company shall include in such registration: (1) first, all securities Company proposes to sell for its own account (“Company Securities”) if Company Securities are proposed to be included in such registration, (2) second, up to the full number of Registrable Securities in excess of the number or dollar amount of Company Securities, which, in the good faith opinion of such managing underwriter, can be so sold without materially and adversely affecting such offering (and, if less than the full number of such Registrable Securities, allocated among the Holders of such Registrable Securities and holders (other than Company) of Other Securities to be included in such registration pursuant to agreements with Company (“Other Holders”) pro rata on the basis of the net proceeds from the sale thereof), and (3) third, all other securities proposed to be registered. Notwithstanding any other provision in this Agreement to the contrary, Company shall not be required to include Registrable Securities in any registration statement if the inclusion of such Registrable Securities would violate the provisions of any agreements or arrangements pursuant to which such registration is being effected or entered into in connection with such registration;

(c) Company shall not be required to effect any registration of Registrable Securities under this Section 3 incidental to the registration of any of its securities in connection with mergers, acquisitions, dividend reinvestment plans or stock option or award or other executive or employee benefit or compensation plans; and

(d) no registration of Registrable Securities effected under this Section 3 shall relieve Company of its obligation to effect a registration of Registrable Securities pursuant to Section 2 hereof.

4. Expenses. Company agrees to pay all Registration Expenses with respect to an offering pursuant to Section 2 and Section 3 hereof (but not any fees or expenses of counsel to any Holder or the Holders or any commissions or underwriting discount in connection with an offering which shall be the expense of the Holder(s)).

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5. Registration and Qualification. If and whenever Company is required to use its reasonable best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2 or 3 hereof, Company shall:

(a) prepare and file a registration statement under the Securities Act relating to the Registrable Securities to be offered as soon as practicable, but in no event later than forty-five (45) days (ninety (90) days if the applicable registration form is other than Form S-3) after the date notice is given, and use its reasonable best efforts to cause the same to become effective as promptly as practicable;

(b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement continuously effective until the earlier of (x) all Registrable Securities covered by such registration statement have been sold or (y) when all Registrable Securities are eligible for resale pursuant to subsection (k) of Rule 144 of the Securities Act;

(c) furnish to the Holders and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as the Holders or such underwriter may reasonably request in order to facilitate the public sale of the Registrable Securities, and a copy of any and all transmittal letters or other correspondence to, or received from, the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering;

(d) use its reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such United States jurisdictions as the Holders or any underwriter of such Registrable Securities shall request, and use its best efforts to obtain all appropriate registrations, permits and consents required in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Holders or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; provided that Company shall not for any such purpose be required to register or qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction;

(e) in connection with any underwritten offering, (i) use its reasonable best efforts to furnish an opinion of counsel for Company addressed to the underwriters and each Holder of Registrable Securities included in such registration (each a “Selling Holder”) and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement), and (ii) use its reasonable best efforts to furnish a “cold comfort” letter addressed to each Selling Holder, if permissible under applicable accounting practices, and signed by the independent public accountants who have audited Company’s financial statements included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements;

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(f) immediately notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration pursuant to Section 2 or 3 hereof is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case (i) or (ii) at the request of the Selling Holders, subject to Section 4 hereof, prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading;

(g) list all such Registrable Securities covered by such registration on each national securities exchange and United States inter-dealer quotation system on which a class of common equity securities of Company is then listed, with expenses in connection therewith to be paid in accordance with Section 4 hereof; and

(h) furnish unlegended certificates representing ownership of the Registrable Securities (including, without limitation, upon conversion of the Notes) being sold in such denominations as shall be requested by the Selling Holders or the underwriters with expenses therewith to be paid in accordance with Section 4 hereof.

6. Underwriting, Due Diligence.

(a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Agreement, Company shall enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 7 hereof and the provision of opinions of counsel and accountants’ letters to the effect and to the extent provided in Section 5(e) hereof. The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by the Selling Holders on whose behalf the Registrable Securities are to be distributed as are customarily contained in underwriting agreements with respect to secondary distributions. Selling Holders may require that any additional securities included in an offering proposed by a Holder be included on the same terms and conditions as the Registrable Securities that are included therein.

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(b) In the event that any registration pursuant to Section 3 shall involve, in whole or in part, an underwritten offering, Company may require the Registrable Securities requested to be registered pursuant to Section 3 to be included in such underwriting on the same terms and conditions as shall be applicable to the other securities being sold through underwriters under such registration. If requested by the underwriters for such underwritten offering, the Selling Holders on whose behalf the Registrable Securities are to be distributed shall enter into an underwriting agreement with such underwriters, such agreement to contain such representations and warranties by the Selling Holders and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 7 hereof. Such underwriting agreement shall also contain such representations and warranties by Company and such other person or entity for whose account securities are being sold in such offering as are customarily contained in underwriting agreements with respect to secondary distributions.

(c) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act, Company shall give, subject to all parties executing confidentiality agreements with Company on terms reasonably acceptable to Company, the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books and records and such opportunities to discuss the business of Company with its officers and the independent public accountants who have certified Company’s financial statements as shall be necessary, in the opinion of such Holder and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act.

7. Indemnification and Contribution.

(a) In the case of each offering of Registrable Securities made pursuant to this Agreement, Company agrees to indemnify and hold harmless each Holder, its officers and directors, managers, employees, partners and members, as the case may be, each underwriter of Registrable Securities so offered and each person, if any, who controls any of the foregoing persons within the meaning of the Securities Act, from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not

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misleading; provided, however, that Company shall not be liable to a particular Holder in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission, if such statement or omission shall have been made in reliance upon and in conformity with information relating to such Holder furnished to Company in writing by or on behalf of such Holder specifically for use in the preparation of the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of a Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability which Company may otherwise have to each Holder, its officers and directors, members employees, partners and managers, as the case may be, underwriters of the Registrable Securities or any controlling person of the foregoing; provided, further, that, as to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim, damage or expense arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability or action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus.

(b) In the case of each offering made pursuant to this Agreement, each Holder of Registrable Securities included in such offering, by exercising its registration rights hereunder, agrees to indemnify and hold harmless Company, its officers, directors, agents and Affiliates and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (and if requested by the underwriters, each underwriter who participates in the offering and each person, if any, who controls any such underwriter within the meaning of the Securities Act), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or any omission or alleged omission to state therein a material fact relating to the Holder required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement of a material fact is contained in, or such material fact relating to the Holder is omitted from, information relating to such Holder furnished in writing to Company by or on behalf of such Holder specifically for use in the preparation of such registration statement (or in any preliminary or final prospectus included therein). The foregoing indemnity is in addition to any liability which such Holder may otherwise have to Company, or any of its directors, officers or controlling persons; provided, however, that, as to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim, damage or expense arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent to or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability or action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus. In no event shall the liability of any Holder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

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(c) Procedure for Indemnification. Each party indemnified under paragraph (a) or (b) of this Section 7 shall, promptly after receipt of notice of any claim or the commencement of any action against such indemnified party in respect of which indemnity may be sought, notify the indemnifying party in writing of the claim or the commencement thereof; provided that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) of this Section 7, except to the extent the indemnifying party was prejudiced by such failure, and in no event shall relieve the indemnifying party from any other liability which it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided that each indemnified party, its employees, officers and directors, if any, and each person, if any, who controls such indemnified party within the meaning of the Securities Act, shall have the right to employ separate counsel reasonably approved by the indemnifying party to represent them if the named parties to any action (including any impleaded parties) include both such indemnified party and an indemnifying party or an affiliate of an indemnifying party, and such indemnified party shall have been advised by counsel either (i) that there are one or more legal defenses available to such indemnified party that are different from or additional to those available to such indemnifying party or such affiliate or (ii) a conflict may exist between such indemnified party and such indemnifying party or such affiliate, and in that event the fees and expenses of one such separate counsel for all such indemnified parties shall be paid by the indemnifying party. An indemnified party will not enter into any settlement agreement which is not approved by the indemnifying party, such approval not to be unreasonably withheld. The indemnifying party may not agree to any settlement of any such claim or action which provides for any remedy or relief other than monetary damages for which the indemnifying party shall be responsible hereunder, without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel reasonably satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the indemnifying party shall not be obligated hereunder to reimburse the indemnified party for the costs thereof. In all instances, the indemnified party shall cooperate fully with the indemnifying party or its counsel in the defense of each claim or action.

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If the indemnification provided for in this Section 7 shall for any reason be unavailable to an indemnified party in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to herein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the indemnifying party on the one hand or the indemnified party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party’s stock ownership in Company. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the foregoing, no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such Holder from the sale of the Registrable Securities giving rise to such indemnification obligation exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

8. Rule 144. Company shall take such measures and timely file such information, documents and reports as shall be required by the SEC as a condition to the availability of Rule 144 and to remain in compliance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

9. Transfer of Registration Rights. A Holder may not transfer all or any portion of its rights and obligations under this Agreement to any transferee without the prior written consent of Company, which consent shall not be unreasonably withheld; provided, however, that AirWorks shall have the right to assign any or all of its rights and obligations hereunder to any individual or entity owning a partnership interest of AirWorks.

10. Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holder or Holders of 51% of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (i) to include such securities in any registration unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the number of the Registrable Securities of the Holders that are included or (ii) to demand registration of any securities held by such holder or prospective holder.

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11. Miscellaneous.

(a) Injunctions. Each party acknowledges and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. Therefore, each party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which such party may be entitled at law or in equity.

(b) Severability. If any term or provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms and provisions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and each of the parties shall use its best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term or provision.

(c) Further Assurances. Subject to the specific terms of this Agreement, each of the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby.

(d) Waivers, etc. No failure or delay on the part of either party (or the intended third-party beneficiaries referred to herein) in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power preclude any other or further exercise thereof or the exercise of any other right or power. No modification or waiver of any provision of this Agreement nor consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by an authorized officer of each of the parties, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.

(e) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to its subject matter. This Agreement supersedes all prior agreements and understandings between the parties, whether written or oral, with respect to the subject matter hereof. The paragraph headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement.

(f) Counterparts. For the convenience of the parties, this Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall be one and the same instrument.

(g) Amendment. This Agreement may be amended only by a written instrument duly executed by an authorized officer of each of Company and the Holders of at least 51% of the Registrable Securities.

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(h) Notices. Unless expressly provided herein, all notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to be duly given (i) when personally delivered, (ii) if mailed by registered or certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter refused by the addressee or its agent, (iii) if given by telex or telecopier, once such notice or other communication is transmitted to the telex or telecopier number specified below and the appropriate answer back or telephonic confirmation is received; provided that such notice or other communication is mailed in accordance with clause (ii) hereof or (iv) if sent by overnight courier which delivers only upon the signed receipt of the addressee, on the date the receipt acknowledgment is executed or refused by the addressee or its agent:

if to the Stockholders:

AirWorks Funding LLLP

655 Madison Avenue

23rd Floor

New York, New York 10021

Attention: Richard E. Perlman

Telephone: (212) 223-8633

Facsimile: (212) 888-8133

with a copy to:

Paul, Hastings, Janofsky & Walker LLP

600 Peachtree Street

Suite 2400

Atlanta, Georgia 30308

Attention: Reinaldo Pascual

Telephone: (404) 815-2227

Facsimile: (404) 685-5227

with a copy to:

RS Properties I LLC

111 Broadway

8th Floor

New York, New York 10006

Attention: John Lack

Telephone: (212) 542-8201

Facsimile: (212) 542-8212

if to Company to:

Kronos Advanced Technologies, Inc.

494 Common Street, Suite 301

Belmont, MA 02478

Attention: Daniel R. Dwight

Telephone: (___) ___-____

Facsimile: (___) ___-____

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with a copy to:

Kirkpatrick & Lockhart Preston Gates Ellis LLP

Miami Center, 20th Floor

201 South Biscayne Blvd.

Miami, FL 33131-2399

Attention: Clayton E. Parker

Telephone: (305) 539-3306

Facsimile: (305) 358-7095

(i) Governing Law. This Agreement is executed by Company in, and shall be construed in accordance with and governed by the laws of the State of New York without giving effect to the principles of conflicts of laws thereof.

(j) Term. This Agreement shall be effective as to each Stockholder that is a party to this Agreement upon the issuance of any Registrable Securities to such Stockholder and shall remain in full force and effect until there are no Registrable Securities outstanding or until terminated by the mutual agreement of Company and the Holders.

(k) Assignment. The Holders may not assign their rights, duties or obligations hereunder or any part thereof to any other person or entity; provided, however, that a Holder shall be permitted to assign its rights, duties and obligations hereunder in connection with the transfer of Registrable Securities owned by such Holder. This agreement and all of the obligations hereunder, shall be binding upon and enforceable against all permitted assigns and transferees.

[Signatures on next page]

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IN WITNESS WHEREOF, the Stockholders and Company have caused this Agreement to be duly executed by their authorized representatives as of the date first above written.

	STOCKHOLDERS: AIRWORKS FUNDING LLLP By: Compass Partners, LLC, its general partner By: /s/ Richard E. Perlman Name: Richard E. Perlman Title: President
	SANDS BROTHERS VENTURE CAPITAL LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	SANDS BROTHERS VENTURE CAPITAL II LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	SANDS BROTHERS VENTURE CAPITAL III LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO
	SANDS BROTHERS VENTURE CAPITAL IV LLC By: /s/ Scott A. Baily Name: Scott A. Baily Title: COO

	CRITICAL CAPITAL GROWTH FUND, L.P. By: Critical Capital, L.P., its General Partner By: Critical Capital Corporation, its General Partner By: /s/ Steven B. Sands Name: Steven B. Sands Title: Chairman By: /s/ Charles L. Robinson Name: Charles L. Robinson Title: President
	RS PROPERTIES I LLC By: /s/ John Lack Name: John Lack Title: Manager

COMPANY:

KRONOS ADVANCED TECHNOLOGIES, INC.

By: /s/ Richard F. Tusing

Name: Richard F. Tusing

Title: COO

EX-15 16 ex15.htm EXHIBIT 15 Exhibit 15

Exhibit 15

INFORMATION REGARDING AIRWORKS AND RS PROPERTIES

AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”)

655 Madison Avenue

23rd Floor

New York, New York 10021

AirWorks is a newly-formed limited liability limited partnership whose sole business purpose is to invest in the secured convertible promissory note issued by the Issuer and to acquire, own, hold, maintain and otherwise deal with the shares of the Issuer.

Compass Partners, L.L.C. (“Compass”)

655 Madison Avenue

23rd Floor

New York, New York 10021

Compass is a limited liability company whose business purpose is to act as the General Partner of AirWorks. Compass controls AirWorks through its role as General Partner of AirWorks.

Richard Perlman, an individual citizen of the United States

c/o AirWorks Funding LLP

655 Madison Avenue

23rd Floor

New York, New York 10021

Mr. Perlman’s present principal occupation is Chairman of the Board of TurboChef Technologies, Inc. Mr. Perlman also is the President and controlling member of Compass.

RS Properties I LLC (“RS Properties”)

40 Wall Street

26th floor

New York, New York 10005

RS Properties is an independent investment fund making investments in, among other things, real estate and securities. John Lack is the sole officer and manager of the Reporting Person

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