**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
  **x** **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
  **For
        the quarterly period ended September 30, 2008**
 
 **OR**
 
 **o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **Commission
        File Number**
 **000-51119**
 
 **SKINS
        INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Nevada**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **20-4711789**
                (I.R.S.
                  Employer
                Identification
                  No.)**1
                  Newark Street, Suite 25A**
                **Hoboken,
                  New Jersey**
                (Address
                  of principal executive offices)
              
              **07030**
                (Zip
                  Code)
 
 **(201)
        377-5502**
 (Registrant's
        telephone number, including area code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days.
 Yes x No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer or a smaller reporting company.
        See
        definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” as defined in Rule 12b-2 of the Exchange Act.
  Large
                  accelerated filer  o
              
              Accelerated
                  filer   ̈Non-accelerated
                  filer   ̈
              
              Smaller
                  reporting companyx
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No x
 
 There
        were 58,566,793 shares outstanding of registrant's common stock, par value
        $.001
        per share, as of November 19, 2008.
  
 
 **SKINS
        INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **FORM
        10-Q**
 
 **TABLE
        OF CONTENTS**
  **Page**PART
                  I - FINANCIAL INFORMATIONITEM
                  1.
              FINANCIAL
                  STATEMENTS
              
              1Consolidated
                  Balance Sheets as of September 30, 2008 (unaudited) and December
                  31, 2007
                  (audited)
              
              2Consolidated
                  Statements of Operations for the Three and Nine Months ended September
                  30,
                  2008 and 2007 and the period from Inception (May 18, 2004) to September
                  30, 2008 (unaudited)
              
              3Consolidated
                  Statements of Stockholders' Equity (Deficiency) the period from
                  Inception (May 18, 2004) to September 30, 2008 (unaudited)
              
              4Consolidated
                  Statements of Cash Flows for the Nine Months ended September 30,
                  2008 and
                  2007, and the period from Inception (May 18, 2004) to September
                  30, 2008
                  (unaudited)
              
              5Notes
                  to Condensed Consolidated Interim Financial Statements
              
              6ITEM
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              
              23ITEM
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              28ITEM
                  4.
              CONTROLS
                  AND PROCEDURES
              
              28PART
                  II - OTHER INFORMATION
              
              28ITEM
                  1.
              LEGAL
                  PROCEEDINGS
              
              28ITEM
                  1A.
              RISK
                  FACTORS
              
              28ITEM
                  2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              
              30ITEM
                  3.
              DEFAULTS
                  UPON SENIOR SECURITIES
              
              31ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              31ITEM
                  5.
              OTHER
                  INFORMATION
              
              31ITEM
                  6.
              EXHIBITS
              
              31SIGNATURES
              
              
              32
  
  **PART
        I - FINANCIAL INFORMATION**
  **ITEM
        1. FINANCIAL STATEMENTS**
 
 The
        accompanying unaudited condensed consolidated interim financial statements
        have
        been prepared in accordance with generally accepted accounting principles
        for
        interim financial information and in accordance with the instructions for
        Form
        10-Q and article 10 of Regulation S-X of the U.S. Securities and Exchange
        Commission (“SEC”). Accordingly, they do not include all of the information and
        footnotes required by generally accepted accounting principles for complete
        financial statements.
 
 In
        the
        opinion of management, the financial statements contain all material
        adjustments, consisting only of normal recurring adjustments necessary to
        present fairly the financial condition, results of operations, and cash flows
        of
        the Company for the interim periods presented.
 
 The
        results for the three and nine months ended September 30, 2008 are not
        necessarily indicative of the results of operations for the full year. These
        financial statements and related footnotes should be read in conjunction
        with
        the financial statements and footnotes thereto included in the Company’s Annual
        Report on Form 10-KSB for the period ended December 31, 2007 filed with the
        Securities and Exchange Commission on April 14, 2008.
  1
  **SKINS
        INC. AND SUBSIDIARY**
 **(A
        Development Stage Company)**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **September 30,**
                **2008**
              
              
              **December 31,**
                **2007****(unaudited)**
              
              
              (Audited)**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              5,644
              
              $
              6,186Prepaid
                  expenses
              
              
              66,842
              
              
              251,034Inventory
                  (Note 5)
              
              
              335,094
              
              
              -**Total
                  current assets**
              
              
              407,580
              
              
              257,220Property
                  and equipment, net (Note 6)
              
              
              264,080
              
              
              13,209Software
                  costs, net (Note 7)
              
              
              859
              
              
              16,634Capitalized
                  production molds (Note 8)
              
              
              128,780
              
              
              10,660Patent
                  costs, net (Note 9)
              
              
              187,431
              
              
              159,400Other
                  intangibles, net (Note 10)
              
              
              4,312
              
              
              1,378**Total
                  Assets**
              
              $
              993,042
              
              $
              458,501**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIENCY)**Current
                  liabilities:Accounts
                  payable and accrued liabilities (Note 11)
              
              $
              1,252,997
              
              $
              750,425Liquidated
                  damages
              
              
              21,988
              
              
              21,988Notes
                  Payable, net of discounts (Note 12)
              
              
              -
              
              
              95,777**Total
                  current liabilities**
              
              
              1,274,985
              
              
              868,190**Commitments
                  and contingencies** **(Note 13)**Stockholders'
                  Deficiency (Notes 1 and 15)Common
                  Stock, $.001 par value; 436,363,650 shares authorized; 56,066,793
                  and
                  40,961,294 shares issued and outstanding at September 30, 2008
                  and
                  December 31, 2007, respectively
              
              
              56,067
              
              
              40,961Additional
                  paid in capital
              
              
              14,020,381
              
              
              10,570,983Deficit
                  accumulated in the development stage
              
              
              (14,358,391
              )
              
              (11,021,633
              )**Total
                  stockholders' deficiency**
              
              
              (281,943
              )
              
              (409,689
              )**Total
                  Liabilities and Stockholders' Deficiency**
              
              $
              993,042
              
              $
              458,501
 
 The
        accompanying notes are an integral part of the consolidated interim financial
        statements.
  2
  **SKINS
        INC. AND SUBSIDIARY**
 **(A
        Development Stage Company)**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(Unaudited)**
  **Three Months Ended**
                **September 30,**
              
              **Nine Months Ended**
                **September 30,**
              
              **Period from**
                **Inception (May**
                **18, 2004) to**
                **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **2008****Operating
                  expenses:**Design
                  and development
              
              $
              72,793
              
              $
              965,878
              
              $
              371,959
              
              $
              1,851,009
              
              $
              2,706,803Selling,
                  general and administrative
              
              
              768,904
              
              
              1,285,600
              
              
              2,855,226
              
              
              3,421,787
              
              
              10,633,926Total
                  operating expenses
              
              
              841,697
              
              
              2,251,478
              
              
              3,227,185
              
              
              5,272,796
              
              
              13,340,729Operating
                  loss
              
              
              (841,697
              )
              
              (2,251,478
              )
              
              (3,227,185
              )
              
              (5,272,796
              )
              
              (13,268,729
              )Unrealized
                  (loss) on derivative instruments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,306,754
              )Liquidated
                  damages
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,988
              )Interest
                  income
              
              
              53
              
              
              15,814
              
              
              2,235
              
              
              45,617
              
              
              77,810Loss
                  on disposal of property and equipment
              
              
              -
              
              
              -
              
              
              (1,993
              )
              
              -
              
              
              (24,172
              )Amortization
                  of discount on notes payable
              
              
              
              
              
              -
              
              
              (100,873
              )
              
              -
              
              
              (104,003
              )Interest
                  expense
              
              
              (1,417
              )
              
              -
              
              
              (8,942
              )
              
              -
              
              
              (14,413
              )**Net
                  loss**
              
              $
              (843,061
              )
              $
              (2,235,664
              )
              $
              (3,336,758
              )
              $
              (5,227,179
              )
              $
              (14,734,249
              )**Basic
                  and diluted loss per share**
              
              $
              (0.02
              )
              $
              (0.06
              )
              $
              (0.07
              )
              $
              (0.14
              )**Weighted
                  average number of common shares outstanding, basic and
                  diluted**
              
              
              55,911,707
              
              
              39,500,824
              
              
              45,276,455
              
              
              37,324,237
  The
        accompanying notes are an integral part of the consolidated interim financial
        statements.
  3
  **SKINS
        INC. AND SUBSIDIARY**
 **(A
        Development Stage Company)**
 
 **CONSOLIDATED
        STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)**
  **Deficit****Additional**
              
              
              **Accumulated**
              
              
              **Total****Paid-in**
              
              
              **In The**
              
              
              **Stockholders'****Common Stock**
              
              
              **(deficit in)**
              
              
              **Development**
              
              
              **Equity/****Shares**
              
              
              **Amounts**
              
              
              **Capital**
              
              
              **Stage**
              
              
              **(Deficiency)**Transfer
                  of net liabilities from a predecessor entity - May 18,
                  2004
              
              
              
              
              $
              -
              
              $
              (32,312
              )
              $
              -
              
              $
              (32,312
              )Shares
                  issued on June 1, 2004
              
              
              954,513
              
              
              955
              
              
              9,045
              
              
              
              
              
              10,000Shares
                  issued on July 2, 2004
              
              
              954,513
              
              
              955
              
              
              9,045
              
              
              
              
              
              10,000Shares
                  issued on August 4, 2004
              
              
              1,909,026
              
              
              1,909
              
              
              18,091
              
              
              
              
              
              20,000Shares
                  issued on August 10, 2004
              
              
              1,909,026
              
              
              1,909
              
              
              18,091
              
              
              
              
              
              20,000Shares
                  issued on December 1, 2004
              
              
              8,338,484
              
              
              8,338
              
              
              79,162
              
              
              
              
              
              87,500Shares
                  issued on December 30, 2004
              
              
              144,077
              
              
              144
              
              
              1,356
              
              
              
              
              
              1,500Shares
                  issued on December 31, 2004
              
              
              3,818,053
              
              
              3,818
              
              
              36,182
              
              
              
              
              
              40,000Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (152,706
              )
              
              (152,706
              )Balances
                  at December 31, 2004
              
              
              18,027,692
              
              
              18,028
              
              
              138,660
              
              
              (152,706
              )
              
              3,982Shares
                  issued for services on October 20, 2005
              
              
              1,376,308
              
              
              1,376
              
              
              (1,370
              )
              
              -
              
              
              6Net
                  Loss January 1, 2005 to October 20, 2005
              
              
              
              
              
              
              
              
              
              
              
              (223,152
              )
              
              (223,152
              )Recapitalization
                  of deficit upon merger of Skins Shoes, LLC into Skin Shoes, Inc.
                  on
                  October 20, 2005 (Note 1)
              
              
              
              
              
              
              
              
              (375,858
              )
              
              375,858
              
              
              -Net
                  Loss Oct 21, 2005 to Dec 31, 2005
              
              
              
              
              
              -
              
              
              -
              
              
              (309,162
              )
              
              (309,162
              )Balances
                  at December 31, 2005
              
              
              19,404,000
              
              
              19,404
              
              
              (238,568
              )
              
              (309,162
              )
              
              (528,326
              )Reclassification
                  of Share based liability Awards to equity Awards upon the re-Adoption
                  of
                  the 2005 Incentive Stock Plan on March 16, 2006
              
              
              -
              
              
              -
              
              
              241,157
              
              
              -
              
              
              241,157Skins
                  Inc. net assets assumed - March 20, 2006
              
              
              14,821,434
              
              
              14,821
              
              
              1,693,886
              
              
              
              
              
              1,708,707Conversion
                  of convertible debenture - Common Stock - March 20, 2006
              
              
              178,572
              
              
              179
              
              
              119,821
              
              
              
              
              
              120,000Shares
                  issued for consulting services on April 3, 2006
              
              
              122,000
              
              
              122
              
              
              145,058
              
              
              
              
              
              145,180Share
                  based Compensation, June 30, 2006
              
              
              
              
              
              
              
              
              86,156
              
              
              
              
              
              86,156Share
                  based Compensation, September 30, 2006
              
              
              
              
              
              
              
              
              130,218
              
              
              
              
              
              130,218Reclassification
                  of Derivative Liability as Form SB-2 became effective on October
                  10,
                  2006
              
              
              
              
              
              
              
              
              1,890,600
              
              
              
              
              
              1,890,600Warrants
                  Exercised December 5, 2006
              
              
              30,000
              
              
              30
              
              
              29,970
              
              
              
              
              
              30,000Warrants
                  Exercised December 8, 2006
              
              
              120,000
              
              
              120
              
              
              119,880
              
              
              
              
              
              120,000Warrants
                  Exercised December 11, 2006
              
              
              320,000
              
              
              320
              
              
              319,680
              
              
              
              
              
              320,000Warrants
                  Exercised December 12, 2006
              
              
              115,715
              
              
              116
              
              
              115,599
              
              
              
              
              
              115,715Warrants
                  Exercised December 14, 2006
              
              
              119,000
              
              
              119
              
              
              118,881
              
              
              
              
              
              119,000Warrants
                  Exercised December 15, 2006
              
              
              274,000
              
              
              274
              
              
              273,726
              
              
              
              
              
              274,000Warrants
                  Exercised December 19, 2006
              
              
              363,476
              
              
              363
              
              
              363,113
              
              
              
              
              
              363,476Warrants
                  Exercised December 21, 2006
              
              
              238,572
              
              
              238
              
              
              238,334
              
              
              
              
              
              238,572Warrants
                  Exercised December 22, 2006
              
              
              100,000
              
              
              100
              
              
              99,900
              
              
              
              
              
              100,000Share
                  based Compensation, December 31, 2006
              
              
              
              
              
              
              
              
              356,240
              
              
              
              
              
              356,240Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              (4,100,278
              )
              
              (4,100,278
              )Balances
                  at December 31, 2006
              
              
              36,206,769
              
              
              36,206
              
              
              6,103,651
              
              
              (4,409,440
              )
              
              1,730,417Warrants
                  Exercised January 5, 2007
              
              
              100,000
              
              
              100
              
              
              99,900
              
              
              
              
              
              100,000Warrants
                  Exercised January 6, 2007
              
              
              11,904
              
              
              12
              
              
              11,882
              
              
              
              
              
              11,894Warrants
                  Exercised January 10, 2007
              
              
              100,000
              
              
              100
              
              
              99,900
              
              
              
              
              
              100,000Warrants
                  Exercised January 25, 2007
              
              
              200,000
              
              
              200
              
              
              199,800
              
              
              
              
              
              200,000Warrants
                  Exercised February 7, 2007
              
              
              59,524
              
              
              60
              
              
              59,464
              
              
              
              
              
              59,524Warrants
                  Exercised February 26, 2007
              
              
              138,070
              
              
              138
              
              
              137,906
              
              
              -
              
              
              138,044Repurchase
                  of options
              
              
              -
              
              
              -
              
              
              (30,445
              )
              
              -
              
              
              (30,445
              )Share
                  based Compensation, March 31, 2007
              
              
              
              
              
              
              
              
              195,381
              
              
              
              
              
              195,381Shares
                  issued on May 21, 2007 (net of issuance costs of $37,987)
              
              
              4,000,000
              
              
              4,000
              
              
              2,958,013
              
              
              
              
              
              2,962,013Share
                  based Compensation,  June 30, 2007
              
              
              
              
              
              
              
              
              156,138
              
              
              
              
              
              156,138Warrants
                  exercised July 24, 2007
              
              
              60,000
              
              
              60
              
              
              59,865
              
              
              
              
              
              59,925Warrants
                  exercised August 7, 2007
              
              
              10,000
              
              
              10
              
              
              9,965
              
              
              
              
              
              9,975Warrants
                  exercised August 14 2007
              
              
              75,000
              
              
              75
              
              
              75,000
              
              
              
              
              
              75,075Share
                  based compensation, September 30, 2007
              
              
              
              
              
              
              
              
              213,453
              
              
              
              
              
              213,453Shares
                  issued on October 31, 2007 to correct prior balances
              
              
              2Discount
                  on note payable for common stock to be issued - December 21, 2007
                  (Note
                  12)
              
              
              
              
              
              
              
              
              57,353
              
              
              
              
              
              57,353Share
                  based compensation for the three months ended December 31,
                  2007
              
              
              
              
              
              
              
              
              163,757
              
              
              
              
              
              163,757Net
                  loss
              
              
              -
              
              
              -
              
              
              
              
              
              (6,612,193
              )
              
              (6,612,193
              )Balances
                  at December 31, 2007
              
              
              40,961,294
              
              
              40,961
              
              
              10,570,983
              
              
              (11,021,633
              )
              
              (409,689
              )Discount
                  on notes payable for common stock to be issued - January 7, 2008
                  (Note
                  12)
              
              
              
              
              
              
              
              
              68,382
              
              
              
              
              
              68,382Discount
                  on note payable for common stock to be issued- February 11, 2008
                  (Note
                  12)
              
              
              
              
              
              
              
              
              15,294
              
              
              
              
              
              15,294Discount
                  on note payable for common stock to be issued- February 14, 2008
                  (Note
                  12)
              
              
              
              
              
              
              
              
              50,000
              
              
              
              
              
              50,000Discount
                  on note payable for common stock to be issued- February 28, 2008
                  (Note
                  12)
              
              
              
              
              
              
              
              
              8,478
              
              
              
              
              
              8,478Shares
                  issued on March 14, 2008 for the common stock to be issued on the
                  December
                  21, 2007 note discount (Note 12)
              
              
              220,588
              
              
              221
              
              
              (221
              )
              
              
              
              
              -Shares
                  issued on March 14, 2008 for the common stock to be issued on the
                  January
                  7, 2008 note discount (Note 12)
              
              
              220,588
              
              
              221
              
              
              (221
              )
              
              
              
              
              -Shares
                  issued on March 14, 2008 for the common stock to be issued on the
                  February
                  11, 2008 note discount (Note 12)
              
              
              58,824
              
              
              59
              
              
              (59
              )
              
              
              
              
              -Shares
                  issued on March 14, 2008 for the common stock to be issued on the
                  February
                  14, 2008 note discount (Note 12)
              
              
              185,185
              
              
              185
              
              
              (185
              )
              
              
              
              
              -Shares
                  issued on March 14, 2008 for the common stock to be issued on the
                  February
                  28, 2008 note discount (Note 12)
              
              
              32,609
              
              
              32
              
              
              (32
              )
              
              
              
              
              -Discount
                  on note payable for common stock to be issued- March 17, 2008 (Note
                  12)
              
              
              
              
              
              
              
              
              90,909
              
              
              
              
              
              90,909Share
                  based compensation for the three months ended March 31,
                  2008
              
              
              
              
              
              
              
              
              74,454
              
              
              
              
              
              74,454Proceeds
                  received on March 27, 2008 for issuance of common stock in relation
                  to the
                  April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              150,000
              
              
              
              
              
              150,000Proceeds
                  received on March 28, 2008 for issuance of common stock in relation
                  to the
                  April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              160,000
              
              
              
              
              
              160,000Proceeds
                  received on April 1, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              100,000
              
              
              
              
              
              100,000Compensation
                  expense on repriced stock options April 2, 2008 (Note 14)
              
              
              
              
              
              
              
              
              76,338
              
              
              
              
              
              76,338Proceeds
                  received on April 2, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              150,000
              
              
              
              
              
              150,000Proceeds
                  received on April 3, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              45,000
              
              
              
              
              
              45,000Proceeds
                  received on April 4, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              215,000
              
              
              
              
              
              215,000Proceeds
                  received on April 7, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              65,000
              
              
              
              
              
              65,000Proceeds
                  received on April 9, 2008 for the issuance of common stock in relation
                  to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              200,000
              
              
              
              
              
              200,000Exchange
                  of $705,000 of secured promissory notes, net of unamortized discount
                  of
                  $186,413 and accrued interest of $6,114 for private placement units
                  on
                  April 9, 2008 (Note 15)
              
              
              
              
              
              
              
              
              524,701
              
              
              
              
              
              524,701Fee
                  expense on additional shares to be issued to secured promissory
                  note
                  holders in lieu of principal and interest payment as of April 9,
                  2008
                  (Note 15)
              
              
              
              
              
              
              
              
              186,413
              
              
              
              
              
              186,413Private
                  placement units from April 9, 2008 offering to be issued to non-employee
                  and advisory board members in lieu of payment of fees owed (Note
                  15)
              
              
              
              
              
              
              
              
              40,645
              
              
              
              
              
              40,645Proceeds
                  received on April 11, 2008 for the issuance of common stock in
                  relation to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              600,000
              
              
              
              
              
              600,000Proceeds
                  received on April 12, 2008 for the issuance of common stock in
                  relation to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              220,000
              
              
              
              
              
              220,000Proceeds
                  received on April 15, 2008 for the issuance of common stock in
                  relation to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              20,000
              
              
              
              
              
              20,000Proceeds
                  received on April 16, 2008 for the issuance of common stock in
                  relation to
                  the April 9, 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              10,000
              
              
              
              
              
              10,000Issuance
                  of shares on April 18, 2008 in relation to March 17, 2008 promissory
                  note
                  (Note 15)
              
              
              568,182
              
              
              569
              
              
              (569
              )
              
              
              
              
              -Shares
                  issued on May 28, 2008 related to private placement cash proceeds
                  received
                  in March and April 2008, less direct costs of $66,547 (Note
                  15)
              
              
              9,675,000
              
              
              9,675
              
              
              (76,222
              )
              
              
              
              
              (66,547
              )Shares
                  issued on May 28, 2008 related to exchange of promissory notes
                  in April 9,
                  2008 private placement (Note 15)
              
              
              3,525,000
              
              
              3,525
              
              
              (3,525
              )
              
              
              
              
              -Shares
                  issued on May 28, 2008 for Fee Expense in relation to additional
                  shares on
                  exchange of promissory notes (Note 15)
              
              
              316,298
              
              
              316
              
              
              (316
              )
              
              
              
              
              -Shares
                  issued on May 28, 2008 in relation to April 9, 2008 private placement
                  for
                  payment of fees due to non-employee board and advisory board members
                  (Note
                  15)
              
              
              203,225
              
              
              203
              
              
              (203
              )
              
              
              
              
              -Shares
                  issued on May 28, 2008 to consultant in relation to the April 9,
                  2008
                  private placement (Note 15)
              
              
              100,000
              
              
              100
              
              
              (100
              )
              
              
              
              
              -Share-based
                    compensation for the threemonths
                    ended June 30, 2008
              
              
              
              
              
              
              
              
              78,977
              
              
              
              
              
              78,977Proceeds
                  received on September 4, 2008for
                  the issuance of common stock inrelation
                  to the September 2008 privateplacement
                  (Note 15)
              
              
              
              
              
              
              
              
              125,000
              
              
              
              
              
              125,000Proceeds
                  received on September 5, 2008for
                  the issuance of common stock inrelation
                  to the September 2008 privateplacement
                  (Note 15)
              
              
              
              
              
              
              
              
              50,000
              
              
              
              
              
              50,000Proceeds
                  received on September 10, 2008 for the issuance of common stock
                  in
                  relation to the September 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              20,000
              
              
              
              
              
              20,000Proceeds
                  received on September 18, 2008 for the issuance of common stock
                  in
                  relation to the September 2008 private placement (Note 15)
              
              
              
              
              
              
              
              
              50,000
              
              
              
              
              
              50,000Share-based
                  compensation for the three months ended September 30, 2008
              
              
              
              
              
              
              
              
              136,460
              
              
              
              
              
              136,460Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (3,336,758
              )
              
              (3,336,758
              )Balances
                  at September 30, 2008 (unaudited)
              
              
              56,066,793
              
              $
              56,067
              
              $
              14,020,381
              
              $
              (14,358,391
              )
              $
              (281,943
              )
  The
        accompanying notes are an integral part of the consolidated interim financial
        statements.
  4
  **SKINS
        INC. AND SUBSIDIARY**
 **(A
        Development Stage Company)**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  **Nine Months Ended**
                **September 30,**
              
              **Period from**
                **Inception**
                **(May 18, 2004) to
                  September 30,****2008**
              
              **2007**
              
              **2008**Cash
                  flows used in operating activities:Net
                  loss
              
              $
              (3,336,758
              )
              $
              (5,227,179
              )
              $
              (14,734,249
              )Adjustments
                  to reconcile net loss from operations to net cash used in operating
                  activities:Depreciation
              
              
              109,014
              
              
              5,979
              
              
              128,983Amortization
              
              
              23,135
              
              
              14,541
              
              
              52,468Issuance
                  of common stock for services
              
              
              18,140
              
              
              55,340
              
              
              145,186Share
                  based compensation expense
              
              
              366,229
              
              
              564,972
              
              
              1,908,729Loss
                  on write down of molds
              
              
              -
              
              
              114,376
              
              
              114,376Loss
                  on disposal of property and equipment
              
              
              1,993
              
              
              -
              
              
              24,172Amortization
                  on discount of note payable
              
              
              100,873
              
              
              -
              
              
              104,003Unrealized
                  loss on derivative instruments
              
              
              -
              
              
              -
              
              
              1,306,754Issuance
                  of common stock for fee in lieu of payment
              
              
              186,413
              
              
              -
              
              
              186,413Changes
                  in operating assets and liabilities:Prepaid
                  expenses
              
              
              166,052
              
              
              1,380
              
              
              (65,751
              )Inventory
              
              
              (335,094
              )
              
              (91,728
              )
              
              (335,094
              )Accounts
                  payable and accrued liabilities
              
              
              549,330
              
              
              260,295
              
              
              1,283,938Liquidated
                  Damages
              
              
              -
              
              
              -
              
              
              21,988Net
                  cash used in operating activities
              
              
              (2,150,673
              )
              
              (4,302,024
              )
              
              (9,858,084
              )Cash
                  flows used in investing activities:Purchases
                  of molds
              
              
              (118,120
              )
              
              (114,376
              )
              
              (243,156
              )Software
                  costs
              
              
              -
              
              
              (29,600
              )
              
              (31,551
              )Purchase
                  of property and equipment
              
              
              (361,877
              )
              
              (40,324
              )
              
              (415,256
              )Patent
                  Costs
              
              
              (35,127
              )
              
              (29,157
              )
              
              (200,480
              )Other
                  intangibles
              
              
              (3,198
              )
              
              -
              
              
              (4,588
              )Cash
                  used in investing activities
              
              
              (518,322
              )
              
              (213,457
              )
              
              (895,031
              )Cash
                  flows provided by financing activities:Cash
                  assumed in connection with Recapitalization
              
              
              -
              
              
              -
              
              
              2,261,462Related-party
                  payments
              
              
              -
              
              
              -
              
              
              (26,924
              )Proceeds
                  from issuance of Common Stock (net of issuance costs)
              
              
              2,113,453
              
              
              3,716,450
              
              
              7,699,666Proceeds
                  from notes payable
              
              
              555,000
              
              
              -
              
              
              855,000Repurchase
                  of options (Note 14)
              
              
              -
              
              
              (30,445
              )
              
              (30,445
              )Net
                  cash provided by financing activities
              
              
              2,668,453
              
              
              3,686,005
              
              
              10,758,759Net
                  increase (decrease) in cash and cash equivalents
              
              
              (542
              )
              
              (829,476
              )
              
              5,644Cash
                  and cash equivalents at beginning of period
              
              
              6,186
              
              
              1,754,926
              
              
              -Cash
                  and cash equivalents at end of period
              
              $
              5,644
              
              $
              925,450
              
              $
              5,644Supplemental
                  Disclosure of Cash Flow InformationCash
                  paid during this period for:Interest
              
              $
              -
              
              $
              -
              
              $
              5,266Supplemental
                  Schedule of Non-Cash Investing and Financing Activities:On
                  May 18, 2004 the Company received Net Liabilities from a predecessor
                  entity totaling
              
              
              -
              
              
              -
              
              
              32,312Net
                  liabilities assumed from reverse acquisition on March 20, 2006,
                  net of
                  cash of $2,261,462
              
              
              -
              
              
              -
              
              
              552,755Conversion
                  of convertible debenture, assumed from reverse acquisition, to
                  common
                  stock
              
              
              -
              
              
              -
              
              
              120,000Conversion
                  of convertible debenture, assumed from reverse acquisition, to
                  warrant
                  liability
              
              
              -
              
              
              -
              
              
              30,000Transfer
                  of deficit due to merger of Skin Shoes, LLC into Skin Shoes, Inc.
                  on
                  October 20, 2005
              
              
              -
              
              
              -
              
              
              375,568Issuance
                  of Common Stock to consultants on April 3, 2006 for services to
                  be
                  provided for a two year term
              
              
              -
              
              
              -
              
              
              145,180Reclassification
                  of share based liability awards to equity awards upon the re-adoption
                  of
                  the 2005 Incentive Stock Plan on March 16, 2006
              
              
              -
              
              
              -
              
              
              241,157Reclassification
                  of derivative liability to equity upon the declaration of the SB-2
                  registration statement as effective.
              
              
              -
              
              
              -
              
              
              1,890,600Exchange
                  of $705,000 of secured promissory notes, net of unamortized discount
                  of
                  $186,413 and accrued interest of $6,114, for private placement
                  units on
                  April 9, 2008
              
              
              524,701
              
              
              -
              
              
              524,701Discounts
                  on notes payable for common stock to be issued December 31, 2007,
                  January
                  7, February 11, February 24, February 28, March 17, 2008 (Note
                  12)
              
              
              233,063
              
              
              -
              
              
              290,416203,225
                  shares of common stock issued to non-employee and Advisory Board
                  members
                  for payment of fees due
              
              $
              40,645
              
              $
              -
              
              $
              40,645
  The
        accompanying notes are an integral part of the consolidated interim financial
        statements.
  5


**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      1: DESCRIPTION OF BUSINESS**




**Overview**





Skins
      Inc. and subsidiary (“Company”), a Nevada corporation with its corporate office
      located in Hoboken, New Jersey, has designed and continues to develop a patented
      two-part, footwear structure consisting of an outer collapsible “Skin” and an
      inner orthopedic support section called the “Bone.” The design is intended to
      allow consumers to purchase one inner section, the Bone, and numerous outer
      Skins, resulting in multiple style variations from the same pair of shoes,
      with
      the same feel and fit despite which Skin is being worn.





**Basis
      of presentation, organization and other matters**





On
      March
      20, 2006, the Company, as Logicom Inc. (“Logicom”), acquired all of the
      outstanding capital stock of Skins Footwear Inc. (formerly known as Skin Shoes,
      Inc.) (“Skins Footwear”). Skins Footwear thereupon became a wholly owned
      subsidiary of Logicom, and the former shareholders of Skins Footwear became
      shareholders of the Company. The business of Skins Footwear became the only
      business of Logicom.





Logicom
      was incorporated in the State of Nevada on January 23, 2004. Logicom was in
      the
      development stage since its formation and it had not realized any revenues
      from
      its planned operations. Logicom entered into a share exchange agreement with
      all
      of the shareholders of Skins Footwear, a privately held development stage
      footwear company, on November 2, 2005.




Skins
      Footwear was originally organized on May 18, 2004 as a New Jersey limited
      liability company under the name Skin Shoes, LLC. On October 11, 2005, Skins
      Shoes, LLC created a Delaware corporation under the name Skin Shoes, Inc. as
      a
      wholly owned subsidiary and merged with and into Skin Shoes, Inc. on October
      20,
      2005, resulting in Skin Shoes, Inc. becoming the surviving Delaware corporation
      and the limited liability company ceasing to exist. The merger on October 20,
      2005 was a conversion of a non-taxable entity to a taxable corporation. The
      deficit accumulated in the development stage on October 20, 2005 was treated
      as
      a return of capital to the members of Skin Shoes, LLC, which was then
      contributed to Skin Shoes, Inc., and as a result the accumulated deficit was
      reclassified to additional paid in capital at October 20, 2005 in the
      consolidated statements of stockholders' equity. On April 10, 2006, Logicom
      changed its corporate name to Skins Inc. and Skins Shoes, Inc. changed its
      corporate name to Skins Footwear Inc.





The
      acquisition of Skins Footwear by the Company on March 20, 2006 was accounted
      for
      as a recapitalization by the Company. The recapitalization was the merger of
      a
      private operating company (Skins Footwear) into a non-operating public shell
      corporation (the Company) with nominal net assets and as such is treated as
      a
      capital transaction, rather than a business combination. As a result no Goodwill
      is recorded. The transaction is the equivalent to the issuance of stock by
      the
      private company for the net monetary assets of the shell corporation. The pre
      acquisition financial statements of Skins Footwear are treated as the historical
      financial statements of the consolidated companies. The financial statements
      presented reflect the change in capitalization for all periods presented,
      therefore the capital structure of the consolidated enterprise, being the
      capital structure of the legal parent, is different from that appearing in
      the
      financial statements of Skins Shoes, LLC and Skins Shoes, Inc. in earlier
      periods due to the recapitalization.




**Development
      Stage**




The
      Company is in the development stage. Since its formation the Company has not
      realized any revenues from its planned operations. The Company intends to
      design, manufacture and market high quality men's and women's footwear. The
      Company's primary activities since incorporation have been conducting research
      and development, performing business, strategic and financial planning, and
      raising capital. The deficit accumulated in the development stage presented
      on
      the consolidated balance sheet on September 30, 2008 will not agree with the
      total loss from May 18, 2004 (inception date) to September 30, 2008 due to
      the
      treatment of the merger of the non-taxable entity to a taxable corporation
      on
      October 20, 2005 described in paragraph three of Note 1, basis of presentation,
      organization and other matters.




6




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      1: DESCRIPTION OF BUSINESS (continued)**





**Going
      Concern**





The
      financial statements have been prepared using accounting principles generally
      accepted in the United States of America applicable for a going concern which
      assumes that the Company will realize its assets and discharge its liabilities
      in the ordinary course of business. As of September 30, 2008, the Company had
      no
      established source of revenues and has accumulated losses of $14,734,249
      since its inception. If the Company is unable to obtain additional financing
      or
      enter into a merger or acquisition, it may not have sufficient cash to continue
      operations beyond December 31, 2008. Its ability to continue as a going concern
      is dependent upon achieving production or sale of goods, the ability of the
      Company to obtain the necessary financing to meet its obligations and pay its
      liabilities arising from normal business operations when they come due and
      upon
      profitable operations. The outcome of these matters cannot be predicted with
      any
      certainty at this time and raises substantial doubt that the Company will be
      able to continue as a going concern. These unaudited consolidated financial
      statements do not include any adjustments to the amounts and classification
      of
      assets and liabilities that may be necessary should the Company be unable to
      continue as a going concern.





The
      Company intends to overcome the circumstances that impact its ability to remain
      a going concern through a combination of the commencement of revenues, with
      interim cash flow deficiencies being addressed through additional equity and
      debt financing. The Company anticipates raising additional funds through public
      or private financing, strategic relationships or other arrangements in the
      near
      future to support its business operations; however the Company may not have
      commitments from third parties for a sufficient amount of additional capital.
      The Company cannot be certain that any such financing will be available on
      acceptable terms, or at all, and its failure to raise capital when needed could
      limit its ability to continue its operations. The Company’s ability to obtain
      additional funding prior to December 31, 2008, and thereafter, will determine
      its ability to continue as a going concern. Failure to secure additional
      financing in a timely manner and on favorable terms would have a material
      adverse effect on the Company’s financial performance, results of operations and
      stock price and require it to curtail or cease operations, sell off its assets,
      seek protection from its creditors through bankruptcy proceedings, or otherwise.
      Furthermore, additional equity financing may be dilutive to the holders of
      the
      Company’s common stock, and debt financing, if available, may involve
      restrictive covenants, and strategic relationships, if necessary to raise
      additional funds, may require that the Company relinquish valuable rights.





The
      Company has received gross proceeds of $245,000 in September 2008 and $220,000
      in November 2008 pursuant to a private placement offering (see Note 15
      Stockholders' Deficiency). In addition the Company closed on a Revolving Loan
      and Security Agreement (“agreement”) on November 11, 2008 , which included a
      September 12, 2008 Facility Letter with Ashford Finance, LLC. The agreement
      provides for a $3 million Letter of Credit and accounts receivable financing
      facility as more further described in Note 13 Commitments and Contingencies.
      To
      date the Company has not made any borrowings under this agreement.




The
      Company has accepted subscription agreements for private placement
      units totaling $773,218 of which $465,000 cash proceeds have been
      received, $83,218 is derived from offsets against Board fees and consulting
      fees
      payable to members of the Board of Directors and Board of Advisors,
      and anticipated, but not received, cash proceeds of $225,000. Each private
      placement unit has a subscription price of $0.05 per unit and consists of one
      share of Company Common Stock and a one and one-half share purchase Warrant
      at
      an exercise price of $0.05.  The Warrants would expire 30 months from the
      date of issuance. There cannot be any assurances that the anticipated cash
      proceeds not yet received from the accepted subscription agreements will
      ultimately be received and the underlying securities issued.




**NOTE
      2: CONDENSED PRESENTATION**





The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and in accordance with the rules and
      regulations of the Securities and Exchange Commission. Accordingly, they do
      not
      include all of the information and footnotes required by accounting principles
      generally accepted in the United States of America for complete financial
      statements.





In
      the
      opinion of management, these financial statements contain all material
      adjustments, consisting only of normal recurring adjustments necessary to
      present fairly the financial condition, results of operations, and cash flows
      of
      the Company for the interim periods presented.





The
      results for the nine months ended September 30, 2008 are not necessarily
      indicative of the results of operations for the full year. These financial
      statements should be read in conjunction with the summary of accounting policies
      and the notes to condensed consolidated interim financial statements for the
      year ended December 31, 2007 included in our annual report on Form
      10-KSB.





**NOTE
      3: NET LOSS PER COMMON SHARE**





Basic
      net
      loss per share is computed by dividing net loss by the weighted average number
      of common shares outstanding during the period. For each the three-and nine
      -months ended September 30, 2008 and 2007, the Company had 1,404,000 common
      shares held in escrow, respectively. The escrow amounts for all periods prior
      to
      the March 20, 2006 transaction are shown retroactively based on the
      recapitalization of the Company (Note 1). The shares held in escrow are excluded
      from the weighted average common share calculation at each date because all
      the
      necessary conditions for the release of the escrow shares have not been
      satisfied.




Diluted
      net loss per share is computed by dividing the net loss by the weighted average
      number of common and common equivalent shares outstanding during the period.
      Basic and diluted net loss per share are the same.


7




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      3: NET LOSS PER COMMON SHARE (continued)**





*Net
      Loss per Common Share*


**Three Months ended**
                **September 30,**
              
              **Nine Months ended**
                **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**Numerator:Net
                  loss - basic and diluted
              
              $
              (843,061
              )
              $
              (2,235,664
              )
              $
              (3,336,758
              )
              $
              (5,227,179
              )Denominator:Weighted
                  average shares - basic
              
              
              55,911,707
              
              
              39,500,824
              
              
              45,276,455
              
              
              37,324,237Effect
                  of dilutive stock options and warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -Denominator
                  for diluted earnings per share
              
              
              55,911,707
              
              
              39,500,824
              
              
              45,276,455
              
              
              37,324,237Loss
                  per share:Basic
              
              $
              (0.02
              )
              $
              (0.06
              )
              $
              (0.07
              )
              $
              (0.14
              )Diluted
              
              $
              (0.02
              )
              $
              (0.06
              )
              $
              (0.07
              )
              $
              (0.14
              )





At
      September 30, 2008 and 2007 the Company’s stock options outstanding totaled
      3,509,092 and 3,904,375, respectively. In addition, at September 30, 2008 and
      2007, the Company’s warrants outstanding were 23,117,939 and
      4,561,714, respectively. Inclusion of the Company’s options and warrants in
      diluted loss per share for the three and nine months ended September 30, 2008
      and 2007 have an anti-dilutive effect because the Company incurred a loss
      from operations.





**NOTE
      4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Recently
      Adopted and Issued Accounting Pronouncements*





Effective
      January 1, 2008, the Company adopted the provisions of Statement of
      Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS
      157”), which did not have a material impact on the Company’s consolidated
      financial statements. SFAS 157 establishes a common definition for fair value,
      a
      framework for measuring fair value under generally accepted accounting
      principles in the United States, and enhances disclosures about fair value
      measurements. In February 2008, the Financial Accounting Standards Board
      (“FASB”) issued Staff Position No. 157-2, which delays the effective date
      of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets
      and nonfinancial liabilities until fiscal years beginning after
      November 15, 2008. The Company is evaluating the expected impact of SFAS
      157 for nonfinancial assets and nonfinancial liabilities on its consolidated
      financial position and results of operations.




8




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (continued)**





*Recently
      Adopted and Issued Accounting Pronouncements* (continued)





In
      October 2008 the FASB issued FSP FAS No. 157-3 (“FSP FAS 157-3”), “Determining
      Fair Value of a Financial Asset When the Market for That Asset is Not Active.”
FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is
      not
      active and provides an example to illustrate key considerations in determining
      the fair value of a financial asset when the market for that financial asset
      is
      not active. FSP FAS 157-3 is effective upon issuance, including prior periods
      for which financial statements have not been issued. Revisions resulting from
      a
      change in the valuation technique or its application should be accounted for
      as
      a change in accounting estimate following the guidance in FASB Statement No.
      154, “Accounting Changes and Error Corrections.” FSP 157-3 is effective for the
      financial statements included in the Company’s quarterly report for the period
      ended September 30, 2008 and application of FSP FAS 157-3 had no impact on
      the
      Company’s consolidated financial statements.





In
      December 2007, the FASB issued Statement No. 160, "Non-controlling Interests
      in
      Consolidated Financial Statements - an amendment of ARB No. 51 (Consolidated
      Financial Statements)" ("SFAS 160"). SFAS 160 establishes accounting and
      reporting standards for a non-controlling interest in a subsidiary and for
      the
      deconsolidation of a subsidiary. In addition, SFAS 160 requires certain
      consolidation procedures for consistency with the requirements of SFAS 141(R)
      "Business Combinations." SFAS 160 is effective for fiscal years, and interim
      periods within those fiscal years, beginning on or after December 15, 2008
      with
      earlier adoption prohibited. The Company is currently evaluating the impact
      adoption of SFAS 160 may have on the financial statements.





In
      December 2007, the FASB issued Statement No. 141(R), "Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions and events
      that qualify as business combinations; requires that the acquired assets and
      liabilities, including contingencies, be recorded at the fair value determined
      on the acquisition date and changes thereafter reflected in revenue, not
      goodwill; changes the recognition timing for restructuring costs; and requires
      acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is
      required for business combinations for which the acquisition date is on or
      after the beginning of the first annual reporting period beginning on
      or after December 15, 2008. Early adoption and retroactive application of
      SFAS 141(R) to fiscal years preceding the effective date are not permitted.
      The
      Company is currently evaluating the impact adoption of SFAS 141(R) may have
      on
      the financial statements.





SFAS
      No.
      161, Disclosures about Derivative Instruments and Hedging Activities - An
      Amendment of FASB Statement No. 133 (Summary - On March 19, 2008, the FASB
      issued FASB Statement No. 161, Disclosures about Derivative Instruments and
      Hedging Activities - an Amendment of FASB Statement 133. Statement 161 enhances
      required disclosures regarding derivatives and hedging activities, including
      enhanced disclosures regarding how: (a) an entity uses derivative instruments;
      (b) derivative instruments and related hedged items are accounted for under
      FASB
      Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
      and (c) derivative instruments and related hedged items affect an entity's
      financial position, financial performance, and cash flows. Specifically,
      Statement 161 requires:




·
            Disclosure
                of the objectives for using derivative instruments be disclosed in
                terms
                of underlying risk and accounting designation;·
            Disclosure
                of the fair values of derivative instruments and their gains and
                losses in
                a tabular format;




·
            Disclosure
                of information about credit-risk-related contingent features;
                and·
            Cross-reference
                from the derivative footnote to other footnotes in which
                derivative-related information is
                disclosed.




Statement
      161 is effective for fiscal years and interim periods beginning after November
      15, 2008.. Early application is encouraged. The Company is currently evaluating
      the impact adoption of SFAS 161 may have on the financial
      statements.





In
      May
      2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS 162”). The new standard is intended to improve
      financial reporting by identifying a consistent framework, or hierarchy, for
      selecting accounting principles to be used in preparing financial statements
      that are presented in conformity with U.S. generally accepted accounting
      principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS
      162, GAAP hierarchy was defined in the American Institute of Certified Public
      Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, *The
      Meaning of* Present
      Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69
      has
      been criticized because it is directed to the auditor rather than the entity.
      SFAS 162 addresses these issues by establishing that the GAAP hierarchy should
      be directed to entities because it is the entity (not its auditor) that is
      responsible for selecting accounting principles for financial statements that
      are presented in conformity with GAAP.





SFAS
      162
      is effective 60 days following the SEC's approval of the Public Company
      Accounting Oversight Board Auditing amendments to AU Section 411, *The
      Meaning of* Present
      Fairly in Conformity with Generally Accepted Accounting Principles. It is only
      effective for nongovernmental entities; therefore, the GAAP hierarchy will
      remain in SAS 69 for state and local governmental entities and federal
      governmental entities. The Company is currently evaluating the impact adoption
      of SFAS 162 may have on the financial statements.




In
      May
      2008, the financial accounting standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May
      Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP
      APB 1401”). FSP APB 14-1 clarifies that convertible debt instruments may be
      settled in cash upon either mandatory or optional conversion (including partial
      cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
“Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.”
Management does not anticipate this pronouncement to have any effect on the
      Company’s financial statements.





In
      June
      2008 the FAB issued FSP Emerging Task Force (“EITF”) 03-6-1, “Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based
      payment awards that contain non-forfeitable rights to dividends or dividend
      equivalents (whether paid or unpaid) are participating securities and shall
      be
      included in the computation of earnings per share pursuant to the two-class
      method. FSP EITF-03-6-1 is effective for fiscal years beginning after December
      15, 2008, and interim periods within those years. Upon adoption, a company
      is
      required to retrospectively adjust its earnings per share data (including any
      amounts related to interim periods, summaries of earnings and selected financial
      data) to conform to the provisions of FSP EITF 03-6-1. Management is currently
      evaluating the requirements of FSP EITF 03-6-1 and has not yet determined the
      impact on the Company’s consolidated financial statements.


9




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE 5: INVENTORY**


Inventory
        at September 30, 2008 (unaudited) and December 31, 2007 consisted of the
        following:
  **September 30,**
                **2008**
              
              **December 31,**
                **2007**Raw
                  Materials
              
              $
              247,017
              
              $
              -Finished
                  Goods
              
              
              88,077
              
              
              -$
              335,094
              
              $
              -
  Inventory
        was located at the Company’s independently contracted warehouse and production
        factories in the United States and China. Inventory is stated at the lower
        of
        cost (first-in, first-out) or market.
  **NOTE 6: PROPERTY
        AND EQUIPMENT, NET**
 
 Property
        and equipment, net at September 30, 2008 and December 31, 2007 consist of
        the
        following:
  **September 30,**
                **2008**
              
              **December 31,**
                **2007**Sewing
                  equipment
              
              $
              1,882
              
              $
              1,882Computer
                  equipment
              
              
              18,624
              
              
              19,652Store
                  displays
              
              
              360,343
              
              
              -380,849
              
              
              21,534Less
                  accumulated depreciation
              
              
              116,769
              
              
              8,325$
              264,080
              
              $
              13,209
 
 Depreciation
        expense related to property and equipment was $83,901 and $4,015 for the
        three
        months ended September 30, 2008 and 2007 and $109,014 and $5,979 for the
        nine
        months ended September 30, 2008 and 2007, respectively.
  **NOTE
        7: SOFTWARE COSTS**
 
 Software
        costs, net at September 30, 2008 and December 31, 2007 consist of the
        following:
  **September 30,**
                **2008**
              
              **December 31,**
                **2007**Website
                  design costs
              
              $
              31,551
              
              $
              31,551Less
                  accumulated amortization
              
              
              30,692
              
              
              14,917$
              859
              
              $
              16,634
 
 Amortization
        expense related to software costs was $5,258 and $0 for the three months
        ended
        September 30, 2008 and 2007 and $15,775 and $9,767 for the nine months ended
        September 30, 2008 and 2007, respectively.


10




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**




**NOTE 8: CAPITALIZED
      PRODUCTION MOLDS**





During
      the nine months ended September 30, 2008, and the year ended December 31, 2007,
      respectively, the Company purchased $118,120 and $125,036, respectively of
      production molds. The Company periodically evaluates the value of its assets
      and
      will write off the unamortized value if it is determined that the asset will
      not
      be recovered in the ordinary course of business. During the year ended December
      31, 2007, the Company determined that capitalized molds of $114,376 to be
      obsolete. The Company’s capitalized production molds are $128,780 at September
      30, 2008 and $10,660 at December 31, 2007, respectively.





No
      amortization of production molds is included in the September 30, 2008 and
      2007
      consolidated statement of operations as they were not placed in
      service.




**NOTE
      9: PATENT COSTS**




The
      Company periodically evaluates the recoverability of unamortized patents and
      will write off the unamortized value if it is determined they no longer have
      value. Patent costs as of September 30, 2008 and December 31, 2007 consists
      of:


**September 30,**
                **2008**
              
              **December 31,**
                **2007**Patent
                  costs
              
              $
              208,931
              
              $
              173,804Less
                  accumulated amortization
              
              
              21,500
              
              
              14,404$
              187,431
              
              $
              159,400




Amortization
      expense related to patents was $2,493 and $1,656 for the three months ended
      September 30, 2008 and 2007 and $7,096 and $4,774 for the nine months ended
      September 30, 2008 and 2007, respectively. The estimated aggregate amortization
      expense for the next five years is estimated to be approximately $10,000 for
      each year.





**NOTE
      10: OTHER INTANGIBLES**





The
      Company’s capitalized internet brand name was $4,588 and $1,390 at September 30,
      2008 and December 31, 2007, respectively, and is being amortized using the
      straight line method over an estimated useful life of 10 years. Accumulated
      amortization at September 30, 2008 and December 31, 2007 is $276 and $12,
      respectively. Amortization expense related to other intangibles was $115 and
      $0
      for the three months ended September 30, 2008 and 2007 and $264 and $0 for
      the
      nine months ended September 30, 2008 and 2007, respectively.


11




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**




**NOTE
      11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**




Accounts payable and accrued liabilities at September 30, 2008 and December
      31,
      2007 consist of the following:


**September 30,**
                **2008**
              
              **December 31,**
                **2007**Trade
                  payables
              
              $
              832,831
              
              $
              590,556Professional
                  fees
              
              
              155,058
              
              
              87,943Commissions
                  payable
              
              
              33,796
              
              
              28,000Board
                  Fees and Director Fees
              
              
              81,250
              
              
              18,750Payroll
                  and payroll taxes payable
              
              
              76,292
              
              
              -Other
                  accrued liabilities
              
              
              73,770
              
              
              25,176$
              1,252,997
              
              $
              750,425




**NOTE
      12: NOTES PAYABLE**





On
      December 21, 2007, January 7, 2008, February 11, 2008, February 24, 2008,
      February 28, 2008 and March 17, 2008, the Company issued Secured Promissory
      Notes totaling $705,000 to various lenders (the “Notes”). The Notes bore
      interest at a rate of 5% per annum compounded annually and were secured by
      the
      grant of a security interests by the Company to the lenders in all of its
      intellectual property rights, patents, copyrights, trademarks which the Company
      now has or acquires and all proceeds and products thereof. The Company agreed
      to
      repay the loans upon the Company’s completion of a financing, and in no event
      later than six months from the Notes’ respective date of issuance. Pursuant to
      the Notes, and in consideration of entering into the Notes, the lenders
      collectively received a total of 1,285,976 shares of the Company’s common stock
      (the “Shares”). In addition, the lenders received piggy-back registration rights
      with respect to the Shares.





A
      total discount of $290,416 was taken on the Notes for the fair value
      of the shares of common stock issuable upon each note's issuance date. The
      unamortized discount at December 31, 2007 was $54,223. The Company amortized
      the
      discount using the effective interest rate method over the term of the
      Notes.




The
      Company issued 717,794 and 568,182 common shares on March 14 and April 18,
      2008,
      respectively, related to the issuance of the notes.





Amortization
      of discounts was $0 for the three months ended September 30, 2008 and 2007
      and
      $100,873 and $0 for the nine months ended September 30, 2008 and 2007,
      respectively.





On
      April
      9, 2008, the Company conducted a private placement and all the lenders invested
      their principal amount due under the Notes of $705,000 net of amortized discount
      of $186,413 into the placement and waived interest due under the Notes of $6,114
      for 3,525,000 shares of common stock. As part of the consideration, the Company
      issued an additional 316,298 shares of common stock to the lenders as part
      of
      the transaction (Note 15).


12




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      13: COMMITMENTS AND CONTINGENCIES**





On
      November 7, 2006 the Company entered into a factoring agreement with FCC, LLC
      (“First Capital”) through October 31, 2008. The agreement provides for the
      Company to sell its credit-approved accounts receivable to First Capital without
      recourse as to bad debts but with recourse as to all future customer claims.
      First Capital will provide cash advances to the Company in an amount equal
      to
      85% of the value of the assigned accounts receivable, as defined. In addition
      the First Capital will make cash advances to the Company against the value
      of
      the Company’s future finished goods inventory, up to a maximum of $500,000. The
      unpaid advances will bear interest at the greater of 6% or 1% above the prime
      rate. Upon commencement of factoring, the Company’s obligation to First Capital
      will be secured by all of its tangible and intangible assets. The Company has
      the right to terminate the agreement prior to its expiration term, for a maximum
      fee payable of $24,000. This agreement expired on October 31, 2008.





On
      November 11, 2008 the Company closed on a Revolving Loan and Security Agreement
      (the “Loan Agreement) which included a September 12, 2008 Facility Letter signed
      with Ashford Finance, LLC (“Ashford”), the terms of which provide for a $3
      million Letter of Credit and Accounts Receivable financing facility. The Loan
      Agreement terminates on November 30, 2009. All financings by Ashford are subject
      to Ashford’s sole discretion.. All Letters of Credit funded for inventory
      production will be based upon purchase orders from customers acceptable to
      Ashford. In addition Ashford will finance up to 75% of eligible accounts
      receivable, as defined. This agreement is collateralized by a first priority
      security interest in all Company assets, as defined. In addition all borrowings
      under the terms of the Facility are personally guaranteed by Mark Klein, the
      Company’s Chief Executive Officer. As of September 30, 2008 the Company has not
      made any borrowings under the Loan Agreement.





Further,
      Ashford will only finance Letters of Credit or accounts receivable for
      transactions involving customers for whom the Company has obtained credit
      insurance. Accordingly, on September 15, 2008 the Company obtained a one-year
      $500,000 credit insurance policy on certain customers for a total cost of
      $13,080 which represents the annual insurance premium plus expenses which is
      being amortized on a straight-line basis over the policy term. For the three
      months and nine months ended September 30, 2008 the Company recorded insurance
      expense of $538 which is included in selling, general and administrative
      expenses.





All
      financings by Ashford will be charged interest at a rate of Prime plus 3%,
      as
      defined. Ashford will also charge an account management fee between 2.25% and
      3%
      per month on the face value of each Letter of Credit issued, the fee depending
      upon total volume of Letters of Credit issued. Accounts receivable financing
      will be charged an account management fee ranging from 1.75%-2.5% per month
      depending on the total volume of accounts receivable financed. On any default,
      as defined, both the interest rate and the account management fees will be
      increased by an additional 4% per annum.





The
      Company entered into an agreement with SLAM (Sportie LA Media) in March 2007
      to
      obtain SLAM’s advertising, marketing, promoting and consulting services. The
      agreement between the Company and SLAM has an effective date of March 1, 2007
      and expired on February 29, 2008. The Company has continued the contract on
      a
      month to month basis at $500 per month.





On
      February 9, 2008, the Company and Dennis Walker executed an Employment Agreement
      (the “Agreement”) in connection with the employment of Mr. Walker as the
      Company’s Senior Vice President of Sales.. Pursuant to the terms of the
      Agreement, the Company will employ Mr. Walker for a period of three years with
      successive one-year automatic renewals unless either party provides 180-days’
advance notice of intent not to renew. The Company will pay Mr. Walker an annual
      base salary of $200,000 with a bonus of up to 40% of the base salary at the
      discretion of the Board of Directors or its Compensation Committee. Mr. Walker
      is also eligible to receive paid vacation and other benefits made available
      by
      the Company to its executives, including a monthly automobile allowance. The
      Company also agreed to grant Mr. Walker 50,000 options exercisable at fair
      market value on the date of grant under the Company’s Amended and Restated 2005
      Incentive Plan. In the event Mr. Walker is terminated without cause or he
      resigns with good reason, as defined in the agreement, he will be entitled
      to
      severance pay from the Company. The amount of the severance pay will be an
      amount equal to (i) ten months of his base pay if the termination of his
      employment occurs during the first year of employment under the Agreement,
      (ii)
      eleven months of his base pay if termination of his employment occurs during
      the
      second year of employment under the Agreement, or (iii) months of his base
      pay
      if the termination occurs during the third year of employment under the
      Agreement. The severance pay would be paid in accordance with the Company’s
      usual paydays during the applicable severance period.





On
      March
      27, 2008, the Company received the resignation of its Chief Operating Officer
      (“COO”), from his position with the Company effective immediately. On April 8,
      2008, the Company entered into a separation agreement and release (“Separation
      Agreement”) with its COO in connection with his resignation as COO of the
      Company. Pursuant to the Separation Agreement, the COO agreed that he was not
      entitled to any further payments or benefits, including any annual
      incentive/performance bonus, under his employment agreement with the Company.
      The COO also agreed to release the Company from any and all claims and rights
      that the COO may have against the Company, including, but not limited to, any
      claims arising out of or relating to the employment agreement, those claims
      of
      which the COO is not aware, and all claims for attorney’s fees, costs, and
      interest. In exchange, the Company agreed to amend the COO’s stock option
      agreement to permit the vesting of 250,000 options, permit participation of
      such
      options in the option repricing, and permit the options to be exercisable for
      one year from the date of the termination of its COO’s employment.





On
      May
      27, 2008, the Company amended the agreement with TLD Asian Pacific Ltd (“TLD”)
      with an effective date of August 10, 2007 for a period of twelve months from
      the
      effective date ..
      According to the amended agreement the Company agreed to pay TLD $9,000 monthly
      totaling $108,000 over the twelve month period pursuant to which TLD will
      continue to be responsible for conceptualization, development,
      commercialization, product and consulting on the engineering and further
      development of Skins and Bones on a non-exclusive basis. Prior to the signing
      of
      the agreement the Company was paying TLD $9,600 monthly. TLD agreed to payback
      retroactively to August 10, 2007, $6,000 of previously paid fees.


13




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      13: COMMITMENTS AND CONTINGENCIES (continued)**





On
      July
      31, 2008 the Company signed a one year agreement with a Consultant (the
“Consultant”) for, among other things, introductions to institutional financing
      sources. For any non-equity financing received from funding sources introduced
      by the Consultant the Consultant shall be paid a cash fee of 2% of the gross
      proceeds of the funding and an equal amount in Warrants to purchase Company
      stock. For any equity financing received from sources introduced by the
      Consultant the Consultant shall be paid a finders fee of 2% in cash and 3%
      in
      Warrants to purchase Company stock. The Warrants will be issued at the closing
      bid price on the day the financing is procured, receive Piggy Back Registration
      Rights, and shall expire one year from the date of issuance.





On
      May 4,
      2007, the Company entered into an agreement to lease new corporate office space
      effective June 1, 2007 (the “Lease”). The Lease required the Company to pay
      approximately $95,000 through May 31, 2008, but the Company would be allowed
      to
      terminate the Lease and vacate the premise upon 60 days written notification.
      On
      February 12, 2008 the Company entered into an agreement for additional office
      space in the same location (“Additional Office Lease”). The Additional Office
      Lease required a base monthly rent of $1,430 (including utilities, maintenance,
      and a rate abatement). Both the Lease and the Additional Office Lease expired
      on
      May 31, 2008. The Company and the lessor agreed to continue the Lease on a
      month
      to month basis. On September 30, 2008 the Company vacated the premises. In
      October 2008 the Company authorized the lessor to utilize the Company’s security
      deposits to pay for prior rent, utilities, and fees due. The remaining security
      deposit of $1,759 was expected to be refunded to the Company in November 2008.





On
      September 26, 2008 the Company entered into a one year lease, beginning October
      1, 2008, for new office space in Hoboken, New Jersey. The minimum monthly rental
      under the lease is $2,200 per month.. The Company also paid a one-month security
      deposit. The lease is renewable for one year at a minimum rental rate of $2,300
      per month.





**NOTE
      14: STOCK OPTIONS**




In
      October 2005, Skins Footwear's Board of Directors approved the 2005 Incentive
      Plan (the “2005 Plan”). The 2005 Plan provides that the following types of
      awards may be granted under the 2005 Plan: stock appreciation rights (“SARs”);
      incentive stock options (“ISOs”); non-qualified stock options (“NQSOs”);
      restricted stock awards; unrestricted stock awards; and performance share awards
      which entitle recipients to acquire shares upon the attainment of specified
      performance goals, stock units and other stock-based awards, short-term cash
      incentive awards or any other award. Under the 2005 Plan, awards may be granted
      with respect to a maximum of 3,375,000 shares of Skins Footwear's common
      stock, subject to adjustment in connection with certain events such as a stock
      split, merger or other recapitalization of the Company. On September 28, 2007,
      the Company held its annual meeting of stockholders at which an amendment of
      our
      2005 Incentive Plan was approved to increase the authorized number of shares
      that are available for issuance under the 2005 Incentive Plan by 1,625,000
      shares, to a total of 5,000,000 shares.




On
      October 24, 2005 Skins Footwear granted the following individuals options under
      the 2005 Plan:




·
            Two
                board members were granted 421,875 options each at an exercise price
                of
                $0.80 that vest ratably over a 36-month
                period.




·
            Two
                consultants were granted 421,875 options each at an exercise price
                of
                $0.80 a share that vests ratably over a 36-month
                period.




·
            One
                consultant was granted 421,875 options at an exercise price of $0.80
                that
                vested immediately for finder fee services.





As
      part
      of the Share Exchange Agreement dated November 2, 2005, the Company assumed
      Skins Footwear’s 2005 Incentive Plan.




The
      awards granted to the two board members were treated as liability awards upon
      the grant on October 24, 2005.. The treatment of the awards as liability was
      due
      to an insufficient number of authorized shares at the time of issuance. The
      Company used the intrinsic value method to determine compensation on these
      liability awards.





March
      16, 2006 Replacement Option Grants




On
      March
      16, 2006 as a result of the granting of options in excess of the authorized
      shares allowed, Skins Footwear canceled and re-adopted its 2005 Incentive Stock
      Plan. In connection thereof, Skins Footwear increased its authorized shares
      to
      4,000,000. Additionally, all options granted under the original plan were
      canceled and re-granted in accordance with the terms of the re-adopted 2005
      Incentive Stock Option Plan.


14




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**




The
      replacement options to the two board members were treated as replacement equity
      awards. On the date of replacement the Company calculated the fair value
      (calculated method) of the replacement options using a Black-Scholes option
      valuation model that uses the assumptions noted in the following table. At
      the
      time of the replacement of the options the Company was non-public and calculated
      its expected volatility based on the calculated method using the Dow Jones
      US
      Footwear Index. The Company elected to use the calculated method because it
      did
      not have a trading history for its stock and it was a development stage company.
      The Company chose the Dow Jones US Footwear Index because it represents an
      industry index closest to which the Company operates. The Company estimates
      option exercise and employee termination within the valuation model; separate
      groups of employees that have similar historical exercise behavior are
      considered separately for valuation purposes. The expected term of options
      granted is derived from the output of the option valuation model and represents
      the period of time that options granted are expected to be outstanding. The
      risk-free rate for periods within the contractual life of the option is based
      on
      the U.S. Treasury yield curve in effect at the time of grant.




Expected
                volatility
            
            
            17.30
            %Expected
                dividends
            
            
            0Expected
                Term (Years)
            
            
            3Risk
                free interest rate
            
            
            4.70
            %




The
      total
      incremental compensation expense from the cancellation and replacement of the
      awards was $196,763, which is expected to be recognized over a period of 32
      months from March 16, 2006.. For the three months ended September 30, 2008
      and
      2007 and for the nine months ended September 30, 2008 and 2007, the Company
      recorded compensation expense of $9,732 and $18,447 and $21,977 and $55,341,
      respectively related to the replacement option grants to the board
      members.  On October 19, 2007, one of the board members that was granted
      421,875 replacement options resigned. Any non vested portion of the option
      expired immediately and the vested portion of the option was exercisable for
      a
      period of 90 days following optionee’s termination. As of January 19, 2008, the
      former board member did not exercise any of the vested options; subsequently
      all
      options have been forfeited.





On
      July
      25, 2008 Steve Reimer, a member of the Company’s board of directors resigned his
      board seat, effective on July 31, 2008. As a result of his resignation, Mr.
      Reimer forfeited 39,551 options originally granted to him on March 16, 2006..
      The Company recorded compensation expense of $9,732 in July 2008 based on Mr.
      Reimer's fully vested options on July 31, 2008.




·
            The
                421,875 options granted to two-consultants that vest over a 36-month
                period were granted for services not yet rendered. The Company used
                the
                provisions of FAS 123(R) and EITF 96-18,*Accounting for Equity Instruments That Are Issued to Other Than Employees
                for Acquiring, or in Conjunction with Selling, Goods or
                Services*to
                account for the compensation expense associated with these grants.
                The
                Company measured the compensation associated with these grants based
                on
                the fair value of the equity instruments issued. There is no measurement
                date to calculate the fair value of the options at the date of grant
                because the performance commitment had not yet occurred (there are
                no
                sufficiently large disincentives for non-performance) and the performance
                by the two consultants was not complete. The Company calculated the
                expense at each reporting period based upon fair value of the options
                that
                vested during the reporting period using the fair value on the reporting
                date. Fair value was calculated using the Black-Scholes model. The
                options
                were treated as liability awards upon the original grant because
                the
                Company did not have a sufficient number of authorized shares. The
                options
                became equity awards on the date they were cancelled and re-granted.
                For
                the three months ended September 30, 2008 and 2007 and for the nine
                months
                ended September 30, 2008 and 2007, the Company recorded compensation
                expense of $1,608 and $82,280 and $21,156 and $246,714,
                respectively.·
            The
                remaining 421,875 options were granted to a non-employee for services
                that
                had already been provided. The Company used the provisions of EITF-00-19
                to account for these options. At the grant date and at December 31,
                2005, the Company treated the option grant as liability award because
                it
                did not have enough authorized shares to settle the contract in equity.
                Therefore, these options were recorded at fair value as a liability
                at
                December 31, 2005. The fair value of the options was calculated using
                the
                Black-Scholes model at December 31, 2005. On March 16, 2006 the Company
                increased its authorization of Common Stock therefore alleviating
                the
                potential liability. The Company recorded the fair value of the options
                using a Black-Scholes model as of March 16, 2006 and reclassified
                the
                total remaining liability from these awards to additional paid in
                capital.


15




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**





The
      fair
      value of the options granted to consultants was calculated using the
      Black-Scholes option valuation model with the following assumptions at the
      applicable dates noted:





**September 30,**
              **2008**
            
            **September 30,**
              **2007**Expected
                volatility
            
            
            143.26
            %
            
            101..98
            %Expected
                dividends
            
            
            None
            
            
            NoneExpected
                term (in years)
            
            
            2.1
            
            
            3.07Risk-free
                interest rate
            
            
            2.03
            %
            
            4.14
            %





2006
      Option Grants




On
      May
      15, 2006 the Company granted 150,000 options to the Vice President of Sales..
      The options vest quarterly beginning three months after the grant date at 12,500
      per quarter and have an exercise price of $1.10. The options expire on May
      15,
      2011.





On
      June
      19, 2006 the Company granted 150,000 options to the Vice President of Finance
      and Operations. The options vest quarterly beginning three months after the
      grant date at 12,500 per quarter and have an exercise price of $1.19. In March
      2007 the Company cancelled all of these options in exchange for a cash payment
      to this Vice President of $88,500.




For
      the
      three months ended March 31, 2007, the Company recorded a total compensation
      expense of $67,190 related to the Former Vice President's June 19, 2006 option
      grant. Total compensation was made up of the $9,135 service period expense
      for
      the quarter and the $58,055 from the unrecognized compensation that effectively
      vests upon repurchase of the options. The $30,445 cost in excess of the
      repurchase amount is the difference between the $88,500 total cash paid less
      the
      unrecognized cost of $58,055 and is recognized as a charge to additional paid
      in
      capital.





The
      total
      compensation expense related to the non-vested options on 2006 awards at
      September 30, 2008 is $19,035. For the three months ended September 30, 2008
      and
      2007 and for the nine months ended September 30, 2008 and 2007, the Company
      recorded compensation expense of $7,614 and $7,614 and $22,842 and $31,820,
      respectively related to the two grants above.


16




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**





On
      May 9,
      2006 the Company granted 300,000 options to a consultant at a per share exercise
      price of $1.06. The options vest quarterly beginning three months from the
      date
      of the agreement and expire 30 days after the related investor relations
      agreement is terminated. The Company used the provisions of FAS 123(R) and
      EITF
      96-18 to account for the compensation expense associated with this grant. The
      Company measured the compensation associated with this grant based on the fair
      value of the equity instrument. There is no measurement date to calculate the
      fair value of this grant at the date of grant because the performance commitment
      had not yet occurred and the performance by the consultant was not complete.
      The
      Company calculated the expense at each reporting period based on the fair value
      of the options that vested during the reporting period. For the three months
      ended September 30, 2008 and 2007 and for the nine months ended September 30,
      2008 and 2007, the Company recorded compensation expense of $0 and $48,940
      and
      $35 and $146,356, respectively.





On
      October 12, 2006 the Company granted 375,000 options to a consultant. 175,000
      options vest immediately with the remaining 175,000 vesting annually over a
      three-year period with the first vesting occurring one year after the year
      of
      grant. In addition, the Company granted three other consultants a total of
      80,000 options that vest annually over a three-year period with the first
      vesting occurring one year after the year of grant. The 455,000 options were
      granted for services not yet occurred. The Company used the provisions of FAS
      123(R) and EITF 96-18, *Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services* to
      account for the compensation expense associated with these grants. The Company
      measured the compensation associated with these grants based on the fair value
      of the equity instruments issued. There is no measurement date to calculate
      the
      fair value of the options at the date of grant because the performance
      commitment had not yet occurred (there are no sufficiently large disincentives
      for non-performance) and the performance by the consultants were not complete.
      The Company will calculate the expense at each reporting period based upon
      fair
      value of the options that vested during the reporting period using the fair
      value on the reporting date. At September 30, 2008 and 2007 no options under
      this grant had vested, therefore no expense had been incurred.





The
      fair
      value of the options granted to a consultant on May 9, 2006 was calculated
      using
      the Black-Scholes option valuation model on February 9, 2008 (vest date) with
      the following assumptions:


**May 9, 2006**
                **Consultant Grant**
                **(Vest 2008)**Expected
                  Volatility
              
              
              114.58
              %Expected
                  dividends
              
              
              NoneExpected
                  Term (Years)
              
              
              .25Risk
                  Free Interest Rate
              
              
              2.31
              %




2007
      Option Grants





On
      March
      14, 2007 the Company granted 20,000 options to an employee of the Company.
      The
      options vest on an annual basis over three years, with the first one-third
      vesting on the one year anniversary of the grant date and have a per share
      exercise price of $1.63. The options expire on March 14, 2011. On November
      8,
      2007, the employee resigned and the options were forfeited.




On
      April
      13, 2007 the Company granted 500,000 options to its Chief Operating Officer.
      The
      options vest in six semi-annual installments from the date of grant over three
      years, and have a per share exercise price of $1.25. The options expire on
      April
      13, 2012.


17




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**





On
      March
      27, 2008, the Company received the resignation of its Chief Operating Officer
      (“COO”), from his position with the Company effective immediately. On April 8,
      2008, the Company entered into a separation agreement and release (“Separation
      Agreement”) with its COO in connection with his resignation as COO of the
      Company. Pursuant to the Separation Agreement, the COO agreed that he was not
      entitled to any further payments or benefits, including any annual
      incentive/performance bonus, under his employment agreement with the Company.
      The COO also agreed to release the Company from any and all claims and rights
      that the COO may have against the Company, including, but not limited to, any
      claims arising out of or relating to the employment agreement, those claims
      of
      which the COO is not aware, and all claims for attorney’s fees, costs, and
      interest. In exchange, the Company agreed to amend the COO’s stock option
      agreement to permit the vesting of 250,000 options, permit participation of
      such
      options in the option repricing on April 2, 2008, and permit the options to
      be
      exercisable for one year from the date of the termination of its COO’s
      employment.





On
      July
      3, 2007, the Company granted 200,000 options to its Chief Financial Officer.
      The
      options vest on an annual basis over three years, with the first one-third
      vesting on the one year anniversary of the grant date and have a per share
      exercise price of $1.29. The options expire on July 3, 2011.. On the same date,
      the Company granted 25,000 options to the Vice President of Sales. The options
      vest on an annual basis over three years, with the first one-third vesting
      on
      the one year anniversary of the grant date and have a per share exercise price
      of $1.29. The options expire on July 3, 2011. The stock options as of the date
      of the grant shall be expensed as compensation in the Company's consolidated
      statement of operations ratably over a 36 month service period.





On
      May
      22, 2008, effective immediately, Deborah A. Gargiulo tendered her resignation
      as
      Chief Financial Officer of the Company. As of the date of her resignation,
      200,000 options were forfeited, which resulted in the reversal of unvested
      cumulative compensation of $41,679 and the reversal of $11,300 of additional
      compensation related to the non-vested options that were repriced dated April
      2,
      2008.





On
      August
      27, 2007, the Company granted 20,000 options to an employee of the Company.
      The
      options vest on an annual basis over three years, with the first one-third
      vesting on the one year anniversary of the grant date and have a per share
      exercise price of $1.37. The options expire on August 27, 2012. On March 14,
      2008 the employee resigned and the options were forfeited.





On
      August
      27, 2007, the Company granted 150,000 options to a Director of the Company’s
      Board of Directors (the “Appointment Date”). The options vest on an annual basis
      from January 9, 2007, the date the Director was appointed to the Company, and
      vest over three years, with the first one-third vesting to occur one year from
      the Appointment Date. The grant has a per share exercise price of $1.37. The
      options expire on August 27, 2012.. The stock options as of the date of the
      grant shall be expensed as compensation in the Company's consolidated statement
      of operations ratably over a 36 month service period.





On
      September 28, 2007, the Company granted warrants to a consultant to purchase
      up
      to 150,000 shares of common stock from the Company at an exercise price of
      $1.38
      per share. The warrants were granted to the consultant in accordance with an
      Investor Relations Agreement dated May 9, 2006, as amended by the First Addendum
      dated September 19, 2007, entered into by the Company and the consultant. The
      vesting schedule of the consultant warrants are contingent upon the number
      of
      shares issued upon the exercise of investor warrants sold by the Company in
      a
      private placement in May 2007. A total of 4,000,000 warrants were issued in
      that
      private placement. The warrants become exercisable, subject to terms and
      conditions of the investor relations agreement, as follows: the first one-third
      of the consultant’s warrants vest upon the exercise of 1,217,200 investor
      warrants, the second one-third of the consultant’s warrants vest upon the
      exercise of 2,434,400 investor warrants, and the final one-third of the
      consultant’s warrants vest upon the exercise of 3,651,600 investor warrants. The
      Company used the provisions of FAS 123(R) and EITF 96-18 to account for the
      compensation expense associated with this warrant issuance. The Company measures
      the compensation associated with this issuance based on the fair value of the
      equity instrument. There was no measurement date to calculate the fair value
      of
      this issuance at the date of grant because the performance commitment had not
      yet occurred and the performance by the consultant was not complete. The Company
      calculates the expense at each reporting period based on the fair value of
      the
      warrants that will vest during the reporting period. At September 30, 2008
      no
      warrants under this issuance had vested, therefore no expense had been
      incurred.





On
      November 12, 2007, the Company granted 24,000 options to a consultant. The
      first
      one-third of the options vest on December 1, 2007, and the second and final
      one-third of the options vest on December 1, 2008 and 2009, respectively. The
      grant has an exercise price of $0.78 per share. The options expire on April
      7,
      2012. The Company will use the provisions of FAS 123(R) and EITF
      96-18, *Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services* to
      account for the compensation expense associated with this grant. The Company
      will measure the compensation associated with these grants based on the fair
      value of the equity instruments. At September 30, 2008, no additional options
      vested; therefore no expense had been incurred.





The
      total
      compensation expense related to the non-vested options on 2007 awards to
      employees at September 30, 2008 is $106,560. For the three months ended
      September 30, 2008 and 2007 and for the nine months ended September 30, 2008
      and
      2007, the Company recorded compensation expense of $14,723 and $56,172 and
      $111,502 and $84,741, respectively.


18




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**




2008
      Option Grants





On
      February 29, 2008, the Company granted 50,000 options to its Senior Vice
      President of Sales. On the same date, the Company granted 50,000 options to
      an
      employee. The options vest on an annual basis over three years, with the first
      one-third vesting on the one year anniversary of the grant date and have a
      per
      share exercise price of $0.24. The options expire on February 29, 2012 and
      February 28, 2013, respectively. The stock options as of the date of the grant
      have a fair value of $18,956, which shall be expensed as compensation in the
      Company’s consolidated statement of operations ratably over a 36 month service
      period.





On
      March
      26, 2008, the Company granted 50,000 options to an employee. The options vest
      on
      an annual basis over three years, with the first one-third vesting on the one
      year anniversary of the grant date and have a per share exercise price of $0.31.
      The options expire on March 26, 2013. The stock options as of the date of the
      grant have a fair value of $13,175, which shall be expensed as compensation
      in
      the Company’s consolidated statement of operations ratably over a 36 month
      service period.





On
      April
      9, 2008, the Company granted 125,000 options to an employee. The options vest
      on
      an annual basis over three years, with the first one-third vesting on the one
      year anniversary of the grant date and have a per share exercise price of $0.59.
      The options expire on April 9, 2012. The stock options as of the date of the
      grant have a fair value of $60,216, which shall be expensed as compensation
      in
      the Company’s consolidated statement of operations ratably over a 36 month
      service period.





On
      June
      10, 2008, in accordance with a May 27, 2008 revised agreement with TLD Asian
      Pacific Ltd (“TLD”), the Company granted a designee of TLD 257,143 options with
      an exercise price of $0.28 a share. The 257,143 options were calculated dividing
      $72,000 by the closing price of the Company’s common stock on the date of grant
      or $0.28 per share. The options have a term of five years from the date of
      grant
      and have the following vesting schedule: 214,290 options vested upon grant,
      21,427 options vest on July 10, 2008, and 21,426 options vest on August 10,
      2008. During the three and nine months ended September 30, 2008 the Company
      recognized $72,000 of expense relating to this grant.





The
      total
      compensation expense related to the non-vested options on 2008 awards to
      employees at September 30, 2008 is $67,405. For the three months ended September
      30, 2008 and 2007 and for the nine months ended September 30, 2008 and 2007,
      the
      Company recorded compensation expense of $6,741 and $0 and $13,462 and $0,
      respectively.


19




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      14: STOCK OPTIONS (continued)**





The
      fair
      value of the options granted to employees on February 29, 2008, March 26, 2008,
      and April 9, 2008 were calculated using the Black-Scholes option valuation
      model
      with the following assumptions:




**February 29,**
              **2008**
              **Option Grants**
            
            **March 26,**
              **2008**
              **Option Grant**
            
            **April 9,**
              **2008**
              **Option Grant**Expected
                volatility
            
            
            115.51
            %
            
            125.74
            %
            
            130.89
            %Expected
                dividends
            
            
            None
            
            
            None
            
            
            NoneExpected
                term (in years)
            
            
            4-5
            
            
            5
            
            
            4Risk-free
                interest rate
            
            
            2.50
            %
            
            2.55
            %
            
            2.59
            %




On
      April
      2, 2008, the Board of Directors of the Company acted to reprice a total of
      2,794,625 options that it had previously granted to certain employees, directors
      and consultants of the Company. The options, all of which had been previously
      issued pursuant to the Amended And Restated 2005 Incentive Plan (the “Plan”),
      were repriced to be $0.40 per share, which is greater than the $0.33 closing
      trading price of the Company’s common stock on the date of approval by the Board
      of Directors. The Board of Directors resolved that an exercise of $0.40 per
      share would provide an incentive to the recipients of the repriced options
      to
      continue to work in the best interests of the Company. The other terms of the
      options, including the vesting schedules, remained unchanged as a result of
      the
      repricing. Total additional compensation expense on non-vested options relating
      to the April 2, 2008 repricing is approximately $26,000 which will be expensed
      ratably over the 7 to 29 months service periods that remain. Additional
      compensation expense on vested and unvested options relating to the April 2,
      2008 repricing is $73,422 and $4,916, respectively, is included in selling,
      general and administrative expenses for the nine months ended September 30,
      2008. For the three months ended September 30, 2008 unvested options relating
      to
      the April 2, 2008 repricing is $2,000 which is included in selling, general
      and
      administrative expenses.





The
      repriced options had originally been issued with $0.80 to $1.37 per share option
      exercise prices, which prices reflected the then current market prices of the
      Company’s stock on the dates of original grant. As a result of the sharp
      reduction in the Company’s stock price, the Board of Directors believed that
      such options no longer would properly incentivize the Company’s employees,
      officers and consultants who held such options to work in the best interests
      of
      the Company and its stockholders. Moreover, the Board of Directors believed
      that
      if these options were repriced, that such options would provide better
      incentives to such employees, officers and directors.





A
      summary
      of option activity under the 2005 Plan as of September 30, 2008 and changes
      during the nine months then ended is presented below:


**Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted -**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
              
              **Aggregate**
                **Intrinsic**
                **Value****Options**Outstanding,
                  January 1, 2008
              
              
              3,486,500
              
              $
              1.00Granted
              
              
              532,143
              
              
              ..35Cancelled
              
              
              (509,551
              )
              
              .40Outstanding,
                  September 30, 2008
              
              
              3,509,092
              
              $
              .39
              
              
              2.78
              
              $
              -Exercisable,
                  September 30, 2008
              
              
              2,814,237
              
              $
              .39
              
              
              2.61
              
              $
              -




A
      summary
      of the status of the Company's non-vested shares as of September 30, 2008,
      and
      changes during the nine months ended September 30, 2008, is presented
      below:


**Shares**
              
              **Weighted-**
                **Average**
                **Grant-Date**
                **Fair Value****Non-vested
                  Shares**Non-vested,
                  January 1, 2008
              
              
              1,461,225
              
              $
              .72Granted
              
              
              532,143
              
              
              .31Cancelled
              
              
              (509,551
              )
              
              1.03Vested
              
              
              (788,962
              )
              
              .50Non-vested,
                  September 30, 2008
              
              
              694,855
              
              $
              ..56


20





**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**




**NOTE
      15: STOCKHOLDERS’ DEFICIENCY**





On
      April
      9, 2008, the Company sold a total of 13,403,225 units to 27 investors and raised
      aggregate gross proceeds of approximately $2,680,645 in a private offering.
      Of
      the gross proceeds of $2,680,645 raised in the offering,





(i)
            $1,935,000
                represents cash received by the Company from
                investors,




(ii)
            $705,000
                represents an amount due under six secured promissory notes previously
                issued by the Company that was invested by five holders into this
                offering, and




(iii)
            $40,645
                represents amounts owed by the Company to three non-employee board
                members
                and two advisory board members in lieu of payment for fees due to
                them.





In
      addition, the Company issued 100,000 units to a financial consultant that
      provided services in connection with the offering in lieu of a $20,000 payment
      in cash for such services.





The
      offering was made pursuant to a U.S. investor subscription agreement and an
      offshore subscription agreement, each dated April 9, 2008, Each unit was sold
      for $0.20 and consists of one share of common stock of the Company and one
      share
      purchase warrant, exercisable at an exercise price of $0.40 per share at any
      time upon election of the holder during the 24 month period following the
      offering. The Company agreed to register the shares of common stock and the
      shares of common stock underlying the warrants on a registration statement
      that
      must be filed with the Securities and Exchange Commission within the earlier
      of
      21 days after the closing of the offering or 10 days after the Company filed
      its
      Annual Report on Form 10-KSB. The Company filed the registration statement
      on
      Form S-1 on April 24, 2008. The registration statement was declared effective
      on
      August 7, 2008.





In
      an
      effort to preserve cash for Company operations, it agreed to convert the $40,645
      in debt owed to the non-employee board members and advisory board members into
      the offering in lieu of payment for fees due to them.


21




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      15: STOCKHOLDERS’ DEFICIENCY (continued)**





Upon
      execution of the secured notes (Note 12), the holders received shares of common
      stock in an amount that was equal to (x) half of the principal amount of the
      note *divided by* (y) the
      closing trading price of the Company’s common stock on the date of the note. The
      lowest trading price used to calculate the number so shares to be issued under
      the secured notes was $0.22 per share. In consideration of the holders investing
      the principal due into private placement in lieu of payment and waiving any
      and
      all interest due, each holder that received shares upon the execution of the
      note based on a trading price higher than $0.22 per share were issued additional
      shares of common stock. These additional shares were equal to the number of
      shares that would have been received if $0.22 were in the formula, minus the
      number of shares actually received upon execution of the secured note. A total
      of 316,298 additional shares were issued to these secured note holders. The
      Company booked a fee expense equal to the fair value of the additional common
      shares issuable at April 9, 2008 or approximately $187,000 in its consolidated
      statement of operations for the nine months ended September 30, 2008. Our former
      Chief Financial Officer and Chairman of the Board were each note holders that
      converted amounts of $15,000 and $100,000, respectively, in the private
      placement on the same terms and conditions as the rest of the
      investors.





On
      June 16, 2008 the Company appointed Michael Solomon as its new Chief Financial
      Officer and executed an employment letter on July 9, 2008. Mr. Solomon will
      be
      paid $175,000 base salary per year which will be increased to $200,000 per
      year
      after the Company completes a financing transaction or series of financing
      transactions cumulatively totaling in excess of $1 million. Mr. Solomon also
      was
      granted 150,000 shares of the Company’s common stock to be issued upon his
      appointment and will receive an additional 250,000 shares of common stock three
      months from the commencement of his employment. The common shares issued were
      originally subject to only certain legal restrictions. The total fair value
      of
      the common stock on the date of grant is $92,000 with $34,500 amortized on
      a straight-line basis over a six month period from the commencement date. The
      remaining $57,500 will be amortized on a straight line basis over a six month
      period beginning three months from the commencement date. For the three months
      and nine months ended September 30, 2008 the Company recognized $22,042 and
      24,917, respectively, of compensation expense which is included in selling,
      general and administrative expenses.





On
      July
      30, 2008, the Company and Mr. Solomon, entered into an amendment (the
“Amendment”) to the employment letter agreement dated July 9, 2008.





Pursuant
      to the terms of the Amendment, the 400,000 restricted shares of the Company’s
      Common Stock originally granted to Mr. Solomon on June 16, 2008 were subject
      to
      certain additional restrictions and subject to forfeiture, including the
      following:





(i)
      While
      an employee of the Company, Mr. Solomon will only be able to sell the shares
      in
      the event of a corporate action such as a merger, acquisition, sale of
      substantially all of the Company’s assets, change in control (as defined in the
      agreement), dissolution, or windup of the Company; however Mr. Solomon may,
      at
      the sole discretion of the Company, be allowed to sell some or all of the shares
      outside of this restriction.





(ii)
      If
      Mr. Solomon is terminated without cause or terminates employment for good
      reason, each as defined in the Amendment, Mr. Solomon may keep any of the shares
      granted to him for five years from the date of termination; however, Mr. Solomon
      will only be able to sell the shares in the event of a corporate action, unless
      otherwise authorized by the Company in its discretion. If at the end of the
      five
      year period the Company has not completed a corporate action or the Company
      has
      not allowed Mr. Solomon to sell the shares then Mr. Solomon will lose rights
      in
      any remaining shares at that time.





(iii)
      If
      Mr. Solomon is terminated for cause, he will lose all rights to all shares
      granted to him or due to be granted to him immediately.





(iv)
      Any
      sales of the shares are further restricted by the applicable securities
      regulations and in no event may a sale of the shares be in violation of such
      regulations or in conflict with the Company’s insider trading
      policy.





The
      Company concluded that the modification of the restricted terms was a probable
      to probable modification as defined by FAS 123(R) and therefore would not affect
      the fair value of the original grant or result in additional compensation
      because the modification does not affect the number of shares expected to
      vest.





On
      July
      30, 2008 (“date of grant”), the Company entered into a finder’s agreement with
      Alicia Johnson pursuant to which the Company agreed to issue 200,000 shares
      of
      common stock to Ms. Johnson in exchange for locating and placing Michael Solomon
      with the Company as its new Chief Financial Officer. Pursuant to the agreement,
      if during a six month probation period, starting on June 16, 2008, the Company
      terminates the employment of Mr. Solomon for cause or Mr. Solomon voluntarily
      terminates employment for any reason, Ms. Johnson agreed to use best efforts
      to
      locate the Company a suitable replacement candidate during the remaining portion
      of the six month period. Ms. Johnson agreed that the 200,000 shares to be issued
      to her can only be transferred or sold after the expiration of the six-month
      probation. In addition, if Ms. Johnson fails to present a suitable replacement
      candidate for the Company, if such requirement should arise, the 200,000 shares
      issued to her would be returned to the Company and cancelled. The Company will
      use the provisions of FAS 123(R) and EITF 96-18, *Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services* to
      account for the finders fee expense associated with the common
      stock grant. The Company will measure the compensation associated with this
      grant based on the fair value of the common stock issued. There is no
      measurement date to calculate the fair value of the common stock at the date
      of
      grant because the performance commitment had not yet occurred (there are no
      sufficiently large disincentives for non-performance) and the performance by
      the
      Ms. Johnson was not complete. Pursuant to FAS 5, *Accounting for Contingencies* ,
      the
      Company concluded that it is probable that a loss contingency related to the
      agreement with Ms. Johnson had occurred. As such, the Company has accrued on
      the
      date of grant a finders fee expense of $44,000 which equal to the fair value
      of
      the 200,000 common shares granted. Since the quantity and terms of the common
      stock grant are known up front and the measurement date has not occurred the
      Company will record any change in fair value of the common shares during any
      interim periods within the Statement of Operations. At September 30, 2008 the
      fair value of the grant was determined to be $8,000. The Company recorded a
      reduction of fee expense of $36,000 for the three months then ended.





Pursuant
      to a private placement offering the Company sold 4,900,000 private placement
      units for $245,000 in September 2008. Each Unit was sold for $0.05 and consists
      of one share of the Company Common stock and one and one-half share purchase
      Warrants, exercisable at an exercise price of $0.05 per share. The Warrants
      expire 30 months from the date of issuance.





On
      November 7, 2008 and November 19, 2008 the Company sold an additional
      3,000,000 and 1,400,000 private placement units for $150,000 and $70,000,
      respectively, pursuant to a private placement offering. Each unit was sold
      for
      $0.05 and consists of one share of Company Common stock and one and one half
      share purchase Warrants exercisable at an exercise price of $0.05 per share.
      The
      Warrants expire 30 months from the date of issuance.








**NOTE
      16: SUBSEQUENT EVENTS**





On
      October 29, 2008 the Company Board of Directors approved an increase in the
      number of shares authorized to be issued under the Company’s 2005 Incentive Plan
      (see Note 14) from 5,000,000 to 13,000,000. The Directors also approved the
      registering of the shares authorized under the plan on Form S-8 with the
      Securities and Exchange Commission, which the Company filed on November 12,
      2008. In addition the Company registered on Form S-8 shares payable under two
      consulting agreements dated October 31, 2008 and November 5, 2008,
      respectively.





On
      October 31, 2008 the Company entered into a one year Consulting Agreement for,
      among other things, strategic planning and marketing services. For its services
      the Company shall pay to the consultant a total of 1,400,000 shares of
      unrestricted Company common stock as follows: 900,000 shares upon execution
      of
      the agreement, 250,000 shares 30 days after execution of the agreement, and
      250,000 shares 60 days after the execution of the agreement. Pursuant to this
      agreement the Company issued 900,000 shares of its common stock on November
      17,
      2008.





On
      November 5, 2008 the Company entered into a three month Consulting Agreement
      for
      corporate planning services for a fee of 1,000,000 shares of Company common
      stock. Pursuant to this agreement the Company issued these shares on November
      17, 2008.


22




**ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
 
 Management’s
        Discussion and Analysis contains various “forward looking statements” within the
        meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
        regarding future events or the future financial performance of the Company
        that
        involve risks and uncertainties. Certain statements included in this Form
        10-Q,
        including, without limitation, statements related to anticipated cash flow
        sources and uses, and words including but not limited to “anticipates”,
“believes”, “plans”, “expects”, “future” and similar statements or expressions,
        identify forward looking statements. Any forward-looking statements herein
        are
        subject to certain risks and uncertainties in the Company’s business, including
        but not limited to, reliance on key customers and competition in its markets,
        market demand, product performance, technological developments, maintenance
        of
        relationships with key suppliers, difficulties of hiring or retaining key
        personnel and any changes in current accounting rules, all of which may be
        beyond the control of the Company. The Company adopted at management’s
        discretion, the most conservative recognition of revenue based on the most
        astringent guidelines of the SEC in terms of recognition of revenue. Management
        will elect additional changes to revenue recognition to comply with the most
        conservative SEC recognition on a forward going accrual basis as the model
        is
        replicated with other similar markets (i.e. SBDC). The Company’s actual results
        could differ materially from those anticipated in these forward-looking
        statements as a result of certain factors, including those set forth therein.
 
 *The
        following discussion of our financial condition and plan of operation should
        be
        read in conjunction with our financial statements and the related notes,
        and the
        other financial information included in this report. This Management's
        Discussion and Analysis or Plan of Operation describes the matters we consider
        to be important to understanding our history, technology, current position,
        financial condition and future plans. .. Factors and risks that could affect
        our
        results and achievements and cause them to materially differ from those
        contained in the forward-looking statements include those identified in the
        section titled “Risk Factors” in the Company’s Annual Report on Form 10-KSB for
        the year ended December 31, 2007, as well as other factors that we are currently
        unable to identify or quantify, but that may exist in the future. Our fiscal
        year begins on January 1 and ends on December 31.*
 
 *The
        following discussion includes forward looking statements and uncertainties,
        including plans, objectives, goals, strategies, financial projections as
        well as
        known and unknown uncertainties. The actual results of our future performance
        may differ materially from the results anticipated in these forward-looking
        statements. Although we believe that the expectations reflected in the
        forward-looking statements are reasonable, we cannot guarantee future results,
        levels of activity, performance or achievement.*  *Forward-looking
        statements speak only as of the date the statement was made. We do not undertake
        and specifically decline any obligation to update any forward-looking
        statements.*
 
 **OVERVIEW**
 
 **Our
        Company**
 
 We
        are a
        development stage company. We have not yet realized any revenues from our
        planned operations.
 
 We
        have
        designed and continue to develop an innovative footwear product - a two-part
        footwear structure consisting of an outer collapsible “Skin” and an inner
        orthopedic support section called the “Bone.” This structure enables consumers
        to purchase one inner section and multiple outer skins - resulting in multiple
        style variations from the same pair of inner section, with the same feel
        and fit
        despite the type of Skin being worn. Our primary activities have been conducting
        research and development, performing business, strategic and financial planning,
        and raising capital.
 
 We
        have
        initially designed and manufactured men's and women's footwear and distributed
        to a test market through a soft commercial launch during the third quarter
        of
        2007. Due to technological advances in the product, we plan for an
        updated design of the Bone to be launched for the Fall/Winter 2008 season.
        The
        Bone is designed such that it can only be worn once it is inside the Skin
        and
        not on its own. As a result of the product enhancements and advanced
        technologies, we agreed to replace the existing Bones at retail and will
        replace
        the Skins as well, to ensure an ideal fit and match for the Skins and Bone.
        The
        improvements to the product, rendered inventory to be obsolete for the year
        ended December 31, 2007.
 
 We
        anticipate marketing our products via traditional footwear channels,
        non-traditional apparel channels, the Internet and other retail locations
        that
        traditionally do not have a footwear department. Due to the interchangeability
        of a Skin and a Bone, a consumer will know how the product will fit and feel
        once they own a Bone, allowing the customer to purchase a Skin from various
        venues without having to try on the product.
  Our
        objective is to create a new attire concept that allows and encourages consumers
        to more frequently change their footwear - positioning the Skins concept
        between
        footwear and apparel. Our footwear will initially be designed with an active,
        youthful lifestyle in mind. We will initially design most of our styles to
        be
        fashionable and marketable to the 18- to 35-year old consumer, with
        consideration in the future to lines that will appeal to the broad cross-section
        of the population.
  As
        of September, 2008, we had no established source of revenues and had accumulated
        losses of $14,734,249 since inception. Our ability to continue as a going
        concern is dependent upon achieving production, sales, profitability and
        our
        ability to obtain the necessary financing to meet our obligations and pay
        our
        liabilities arising from normal business operations when they come due. The
        outcome of these matters cannot be predicted with any certainty at this time
        and
        raise substantial doubt that we will be able to continue as a going concern.
        The
        financial statements contained in this Form 10-Q do not include any adjustments
        to the amounts and classification of assets and liabilities that may be
        necessary should we be unable to continue as a going concern. We anticipate
        that
        additional funding may be generated from the sale of common shares and/or
        debt
        with an equity feature and from asset based financing or
        factoring.
  23
 
 **PLANNED
        OPERATIONS**
 
 **Product
        Development**
 
 We
        have
        designed, outsourced manufactured and are marketing a patented quality men’s and
        women’s footwear with a limited distribution to select retailers that began in
        mid-April 2008. This marked our first mainstream limited consumer launch,
        after
        completing a test soft launch to a select 20 retailers during the third quarter
        of 2007. The focus is on creating a high-end line of Skins priced at a
        manufacturer's suggested average retail price of $110 to $130 for women and
        $140
        to $160 for men. The first test collection (Fall/Winter 2007) had approximately
        five to six styles per gender ranging three to five color ways per each style.
        The Spring/Summer 2008 Collection “(SS 08)” had approximately eight to nine
        styles per gender ranging three to five color ways per each style. Due to
        further updates to the Bone and a late delivery to retailers this past April
        we
        only shipped a portion of the SS 2008 styles produced. We are currently taking
        orders on Spring/Summer 2009 Collection (“SS 2009”). This collection feature an
        updated version of the new Bone. The updated Bone has no toe-box in an attempt
        to increase comfort and provide a better fit to a wider audience of consumers.
        The new version of the Bone interoperates with the existing SS 2008 Skins.
        The
        change to the new Bone came about through further market research conducted
        with
        our retail partners, design consultants, and the practical feedback that
        came
        about through the limited distribution this past SS 2008 season. The Bone
        and
        Skins technology, as it stands today, has now been field tested with different
        retailers, different consumers and is scalable and transferable. We continue
        to
        seek ways to lower costs, and explore other materials with various
        characteristic benefits and will always look to improve upon our
        product.
 
 Our
        Skins
        are being designed by our in-house designer and other outsourced design firms.
        They collaboratively put together the collection for men's and women's Skins,
        the packaging and retail displays, and help in refining the creative identity
        of
        the brand.
 
 During
        the third quarter 2007, we launched our product to a test market of
        approximately 20 select independent stores. In conjunction with the soft
        launch,
        we announced our Consumer Partnership Program, which is a program aimed to
        elicit feedback from consumers to aid us in product development and internal
        research. As part of the Program, we gave the Bone portion of the product
        to
        participating consumers without charge. As a result of input from our retail
        partners, continuous fit trials, and feedback from consumers through the
        Program, we were able to incorporate this information into a new Bone. On
        November 7, 2007, we announced an updated design of the Bone, an advanced
        product to be launched in first half 2008 for the SS 2008 season. This new
        Bone,
        as described above, has had one additional major update of not including
        a
        toe-box and was introduced to consumers in our limited Winter and Holiday
        08
        deliveries. All participants in our Program and all of the customers who
        have
        proof of purchase for either the 2007 test launch or the previous SS 08
        deliveries, will receive, at no charge, the latest version of the Bone.
        Individuals who participated in the Program will receive an email coupon
        that
        can be redeemed at their local retailer or online.
 
 As
        a
        result of the new Bone design, we informed our retail partners that we would
        not
        require payment for shipped product until the new Bones are supplied to them.
        Therefore, we will not recognize any revenue from our shipment of product
        in
        April 2008 until such time as the new Bones are delivered to our retail
        partners. In addition, in order to reduce any further inconvenience to our
        retail partners, and to save shipping and freight expenses, we requested
        that
        the retail partners store product at their locations until such time that
        the
        new Bones can be provided.
 
 The
        engineering of the Bone and Skin allows for a pressure fit attachment. The
        Bone
        is an exact fit to all corresponding Skins in the same size. The Skin cannot
        be
        worn on its own. The Bone is designed such that it can only be worn with
        a Skin
        and not on its own. As a result of the product enhancements and advanced
        technologies, we agreed to replace the existing Bones at retail and will
        replace
        the Skins, as well to ensure an ideal fit and match for the Skins and Bone
        technology. The improvements to the product, rendered inventory to be obsolete,
        as defined in management’s discussion below, for the test launch we conducted in
        SS 2007. The Bones we shipped to limited retailers this SS 08 will be switched
        with the updated Bone in addition to the inventory we currently have in our
        warehouse. All new Winter-Holiday 2008 goods have been assembled with the
        newly
        updated Bone.
 
 **Sourcing**
 
 On
        November 28, 2007, we executed a Buying Agency and Sourcing Agreement with
        Atsco
        Footwear, LLC. Pursuant to the agreement, Atsco will serve as our non-exclusive
        buying and sourcing agent and will be responsible for sourcing,
        commercialization and product line review. We will pay Atsco a commission
        of 7%
        on the first $5 million produced and 5% for the amounts above the first $5
        million at the FOB country of origin price for merchandise sourced by Atsco
        and
        shipped to the Company. The agreement has an initial term of one year, from
        November 15, 2007 through November 15, 2008, and each party has the option
        to
        extend the initial term of the agreement for an additional year upon providing
        written notice to the other party no less than thirty days prior to the
        expiration of the initial term. Either
        party may terminate the agreement at any time upon providing the other party
        with three months written notice. Mark Itzkowitz, the President of Atsco,
        is
        also an advisory member of the Board of Directors of the Company. The Company
        and Atsco have elected to not extended the agreement beyond the initial
        term.
 
 **Planned
        Distribution**
 
 We
        plan
        to act as a wholesaler and market our products to specialty, department,
        and
        Internet retail locations via our marketing and branding efforts in addition
        to
        international distributors
 
 Our
        management will consider the children's market and more mainstream middle-market
        retailers once our brand is more established. Our management is also considering
        licensing our technology in the future.
 
 We
        have
        designed, outsourced manufactured, and are now marketing quality men’s and
        women’s footwear with distribution to select retailers that began in April 2008.
        This marked our first limited main stream consumer launch after completing
        a
        test soft launch to a select 20 retailers during the third quarter of 2007
        this
        past fall season. Our management are currently writing orders for SS 2009.
        The
        planned distribution will encompass independent specialty retailers, national
        retailers and department stores, E-tailers, and some International distribution.
        Management believes that the initial purchase order amount we can expect
        per
        retailer will be a weighted average of 60 pairs per gender at an average
        wholesale price of $70 per combo package. Management further plan on selling
        fill-in orders two to three times as the season progresses.
  24
 
 **RECENT
        EVENTS**
 
 ***April
        2008 Private Placement***
 
 On
        April
        9, 2008, we sold a total of 13,403,225 units to 27 investors and raised
        aggregate gross proceeds of approximately $2,680,645 in a private offering.
        Of the gross proceeds of $2,680,645 raised in the offering,
 
 (i)
              $1,935,000
                  represents cash received by the Company from
                  investors,
  (ii)
              $705,000
                  represents an amount due under six secured promissory notes previously
                  issued by the Company that was invested by five holders into this
                  offering, and
  (iii)
              $40,645
                  represents amounts owed by the Company to three non-employee board
                  members
                  and two advisory board members in lieu of payment for fees due
                  to
                  them.
 
 The
        purpose of the Private Placement was to raise working capital. In addition,
        the Company issued 100,000 units to a financial consultant that provided
        services in connection with the offering in lieu of $20,000 payment in cash
        for
        such services.
 
 The
        offering was made pursuant to a U.S. investor subscription agreement and
        an
        offshore subscription agreement, each dated April 9, 2008, respectively.
        Each
        unit was sold for $0.20 and consists of one share of common stock of the
        Company
        and one share purchase warrant, exercisable at an exercise price of $0.40
        per
        share at any time upon election of the holder during the 24 month period
        following the offering. The Company agreed to register the shares of common
        stock and the shares of common stock underlying the warrants on a registration
        statement. The Company filed the registration statement on Form S-1 on April
        24,
        2008.. The registration statement was declared effective on August 7,
        2008.
 
 In
        an
        effort to preserve cash for Company operations, it agreed to convert the
        $40,645
        in debt owed to the non-employee board members and advisory board members
        into
        the offering in lieu of payment for fees due to them. Similarly, the Company
        agreed to convert the $705,000 in principal debt owed under the secured
        promissory notes into the offering to preserve cash for Company operations.
        Each
        of the secured note holders agreed to waive payment of any and all interest
        due
        under the notes.
  Upon
        execution of the secured notes, the holders received shares of common stock
        in
        an amount that was equal to (x) half of the principal amount of the
        note *divided by* (y) the
        closing trading price of the Company’s common stock on the date of the note. The
        lowest trading price used to calculate the number of shares to be issued
        under
        the secured notes was $0.22 per share. In consideration of the holders investing
        the principal due into private placement in lieu of payment and waiving any
        and
        all interest due, each holder that received shares upon the execution of
        the
        note based on a trading price higher than $0.22 per share were issued additional
        shares of common stock. These additional shares were equal to the number
        of
        shares that would have been received if $0.22 were in the formula, minus
        the
        number of shares actually received upon execution of the secured note. A
        total
        of 316,298 additional shares were issued to these secured note holders. The
        Company has booked a fee expense equal to the fair value of the additional
        common shares issuable at April 9, 2008 or 186,413 in its consolidated statement
        of operations. Our former Chief Financial Officer and Chairman of the Board
        were
        each note holders that converted amounts of $15,000 and $100,000, respectively,
        in the private placement on the same terms and conditions as the rest of
        the
        investors.
 
 ***April
        2008 Option Repricing***
 
 On
        April
        2, 2008, we repriced a total of 2,794,625 options that we had previously
        granted
        to certain of our employees, directors and consultants. The options, all
        of
        which had been previously issued pursuant to our Amended And Restated 2005
        Incentive Plan (the “Plan”), were repriced to be $0.40 per share, which is
        greater than the $0.33 closing trading price of our common stock on the date
        the
        Board of Directors approved the transaction. The Board of Directors resolved
        that an exercise of $0.40 per share would provide an incentive to the recipients
        of the repriced options to continue to work in the best interests of our
        company. The other terms of the options, including the vesting schedules,
        remained unchanged as a result of the repricing. Total additional compensation
        expense on non vested options relating to the April 2, 2008 repricing is
        approximately $26,000 which will be expensed ratably over the 7 to 29 months
        service period that remain. The Company recorded $2,000 and $4,916 compensation
        expense for the three and nine months ended September 30, 2008 related to
        the
        amortization of the unvested repriced options. Additional compensation expense
        on vested options relating to the April 2, 2008 repricing of $73,422
        was fully expensed on April 2, 2008. The repriced options had originally
        been issued with $0.80 to $1.37 per share option exercise prices, which prices
        reflected the then current market prices of our stock on the dates of original
        grant. As a result of the recent sharp reduction in our stock price, our
        Board
        of Directors believed that such options no longer would properly incentivize
        our
        employees, officers, directors and consultants who held such options to work
        in
        the best interests of our company and stockholders.
  25
  ***December
        2007 through March 2008 Promissory Notes***
 
 From
        December 2007 through March 2008, we issued secured promissory notes in a
        total
        amount of $705,000 to various lenders. The notes bore interest at the rate
        of 5%
        per annum compounded annually and were secured by the grant of a security
        interest by us to the lenders in all of our intellectual property rights,
        patents, copyrights, trademarks which we now have or acquire and all proceeds
        and products thereof. We agreed to repay the loan upon our completion
        of a financing, and in no event later than six months from each of the notes’
date of issuance. Pursuant to the notes, and in consideration of entering
        into
        the notes, the lenders received a total of 1,285,976 shares of our common
        stock.
        In addition, the lenders received piggy-back registration rights with respect
        to
        the shares. In April 2008, we conducted a private placement and the lenders
        invested the principal amounts due under the notes into the placement and
        waived
        interest due under the notes. As part of the consideration, we issued an
        additional 316,298 shares of common stock to the lenders as part of the
        transaction. The Company booked a fee expense equal to the fair value of
        the
        additional common shares issuable at April 9, 2008 or $186,413 in its
        consolidated statement of operations.
 
 ***Private
        Placements September 2008 and November 2008***
 
 In
        September 2008 the Company received $245,000 of gross proceeds from the sale
        of
        4,900,000 private placement units for $0.05 per unit. In November 2008 the
        Company received $220,000 of gross proceeds from the sale of 4,400,000 private
        placement units for $0.05 per unit. All of the proceeds from the sales were
        used
        for working capital purposes. Each unit consisted of one share of Common
        Stock
        and one Common Stock warrant which entitles the purchaser to buy one and
        one-half shares of Common Stock at $0.05 per share for a period of 30 months
        from the date the units were purchased.
 
 ***Letter
        of Credit and Accounts Receivable Financing Agreement***
 
 On
        November 11, 2008 the Company closed on a Revolving Loan and Security Agreement
        (the “Loan Agreement) which included a September 12, 2008 Facility Letter signed
        with Ashford Finance, LLC (“Ashford”), their terms of which provide for a $3
        million Letter of Credit and Accounts Receivable financing facility. The
        Loan
        Agreement, as more fully described in Note 13 Commitments and Contingencies,
        terminates on November 30, 2009. All financings by Ashford are subject to
        Ashford’s sole discretion. All Letters of Credit funded for inventory production
        will be based upon purchase orders from customers acceptable to Ashford.
        In
        addition Ashford will finance up to 75% of eligible accounts receivable,
        as
        defined. This agreement is collateralized by a first priority security interest
        in all Company assets, as defined. In addition all borrowings under the terms
        of
        the Facility are personally guaranteed by Mark Klein, the Company’s Chief
        Executive Officer. To date the Company has not made any borrowings under
        the
        Loan Agreement.
 
 **Results
        of Operations and Financial Condition**
 
 **Three
        and Nine Months Ended September 30, 2008 Compared with Three and Nine Months
        Ended September 30, 2007**
 
 There
        were no earned revenues during the three and nine months ended September
        30, 2008 and 2007.
 
 Design
        and development expenses for the three and nine months ended September 30,
        2008
        and 2007 were $72,793 and $965,878 and $371,959 and $1,851,009, respectively.
        These changes of $893,085 and $1,479,050 were primarily attributable to a
        decrease in the amount of design and development costs from the prior year
        needed to bring the product to market in 2008.
 
 Selling,
        general and administrative expenses (SG&A) for the three and nine months
        ended September 30, 2008 and 2007 were $768,904 and $1,285,600 and $2,855,226
        and $3,421,787 respectively.
 
 For
        the
        three months ended September 30, 2008 the decrease in SG&A expenses are
        primarily attributable to an increases in depreciation expense of approximately
        $85,000, and an increase in insurance expense and other administration costs
        of
        approximately $17,000 which were offset by reductions in marketing and
        advertising of approximately $262,000, travel expenses of approximately $41,000,
        professional and recruiting fees of approximately $69,000, salaries of
        approximately $86,000, warehouse and shipping expenses of approximately $47,000
        and share based compensation of approximately $113,000.
 
 For
        the
        nine months ended September 30, 2008 the decrease in SG&A expenses are
        primarily attributable to increases in employee compensation and benefits
        of
        approximately $75,000 to staff the business in anticipation of bringing the
        product to market, increased warehouse and operating expenses of $15,000,
        increases in non-cash and other charges such as additional non cash fees
        paid to
        promissory note holders totaling approximately $187,000, and an increase
        in
        depreciation of approximately $109,000, which were offset by reductions in
        travel of approximately $106,000, marketing and advertising expenses of
        approximately $363,000, professional and other expenses of approximately
        $170,000, share-based compensation of approximately $190,000, termination
        expenses for a previous employee of $173,000, and non recurring income of
        $49,000.
  Our
        net
        loss for the three and nine months ended September 30, 2008 was $843,061
        or
        $0.02 per share and $3,336,758 or $0.07 per share, respectively as compared
        to a
        net loss of $2,235,664, or $.06 per share and $5,227,179 or $.14 per share,
        for
        the same respective periods in 2007.
 
 **Liquidity
        and Capital Resources**
 
 At
        September 30, 2008, we had $5,644 in cash and cash equivalents. We earned
        no
        revenues since our inception in May 2004.
 
 Generally,
        we have primarily financed operations to date through the proceeds of the
        private placement of equity securities, the proceeds of warrants exercised,
        and
        the issuance of promissory notes.
 
 We
        received net proceeds of $2,261,462 from the private placements that were
        conducted in connection with the share exchange transaction during the fiscal
        quarter ended March 31, 2006. During the fourth quarter of fiscal 2006 and
        the
        first quarter of fiscal 2007 we received cash proceeds from warrant exercises
        totaling $1,680,763 and $609,462, respectively.
 
 On
        May
        21, 2007, we closed a financing transaction pursuant to which we sold a total
        of
        4,000,000 units to seven investors and raised an aggregate of $3,000,000.
        Each
        unit consists of one share of our common stock and one share purchase warrant
        that is exercisable at an exercise price of $1.00 per share at any time upon
        election of the holder during the 30 months after the offering. Net proceeds
        from the private offering were $2,962,013 (net of issuance costs of
        $37,987). ****
 
 From
        December 2007 through March 2008, we issued secured promissory notes in a
        total
        amount of $705,000 to various lenders. The notes bore interest at the rate
        of 5%
        per annum compounded annually and were secured by the grant of a security
        interest by us to the lenders in all of our intellectual property rights,
        patents, copyrights, trademarks which we now have or acquire and all proceeds
        and products thereof. We agreed to repay the Loan upon our completion of
        a
        financing, and in no event later than six months from each of the notes’ date of
        issuance. Pursuant to the notes, and in consideration of entering into the
        notes, the lenders received a total of 1,285,976 shares of our common stock.
        In
        addition, the lenders received piggy-back registration rights with respect
        to
        the shares. In April 2008, we conducted a private placement and the lenders
        invested the principal amounts due under the notes into the placement and
        waived
        interest due under the notes. As part of the consideration, we issued an
        additional 316,298 shares of common stock to the lenders as part of the
        transaction.
  26
  On
        April
        9, 2008, we sold a total of 13,403,225 units to 27 investors and raised
        aggregate gross proceeds of approximately $2,680,645 in a private offering.
        Of the gross proceeds of $2,680,645 raised in the offering,
 
 (i)
              $1,935,000
                  represents cash received by the Company from
                  investors,
  (ii)
              $705,000
                  represents an amount due under six secured promissory notes previously
                  issued by the Company that was invested by five holders into this
                  offering, and
  (iii)
              $40,645
                  represents amounts owed by the Company to three non-employee board
                  members
                  and two advisory board members in lieu of payment for fees due
                  to
                  them.
 
 In
        addition, the Company issued 100,000 units to a financial consultant that
        provided services in connection with the offering in lieu of $20,000 payment
        in
        cash for such services.
 
 Each
        unit
        was sold for $0.20 and consists of one share of common stock of the Company
        and
        one share purchase warrant, exercisable at an exercise price of $0.40 per
        share
        at any time upon election of the holder during the 24 month period following
        the
        offering.
  Net
        cash
        used in operating activities for the nine months ended September 30, 2008
        was
        $2,150,673 as compared to net cash used of $4,302,024 in the same period
        in
        2007. The decrease in net cash used was primarily attributable to a decrease
        in
        net loss from operations during the nine months ended September 30, 2008
        as
        compared to the same period in 2007, which was primarily attributable to
        a
        decrease in operating expenditures compared to the nine months ended September
        30, 2007. Operating expenditures consisted principally of design and
        development, advertising and promotion, legal and accounting fees and salaries
        and costs to bring the product to market.
 
 Cash
        used
        in investing activities for the nine months ended September 30, 2008 was
        $518,322, as compared to $213,457 during the same period in 2007. The increase
        in net cash used was primarily attributable to an increase in our purchase
        of
        molds, store displays and property and equipment.
 
 Net
        cash
        provided by financing activities for the nine months ended September 30,
        2008
        was $2,668,453, as compared to $3,686,005 for the same period in 2007. The
        decrease was primarily attributable to the Company receiving $555,000 from
        the
        issuance of secured promissory notes to various lenders, the raising of
        $1,868,453 (net of direct costs of $66,547) from the April 9, 2008 private
        placement, and raising $245,000 from the September 2008 private placement
        while
        the Company raised a net $3,571,445 in the May 21, 2007 financing
        transaction.
  At
        September 30, 2008, we had 3,509,092 stock options and 23,117,939 common
        stock purchase warrants outstanding. The outstanding stock options have a
        weighted average exercise price of $0.45 per share as adjusted for the April
        2,
        2008 option repricing. The outstanding warrants have a weighted average exercise
        price of $0.45 per share. Accordingly, at September 30, 2008, the outstanding
        options and warrants represented a total of 29,077,031 shares issuable for
        a
        maximum of $11,791,034 if these options and warrants were exercised in full.
        The
        exercise of these options and warrants is completely at the discretion of
        the
        holders. There is no assurance that any of these options or any additional
        warrants will be exercised.
  On
        June
        16, 2008 the Company appointed Michael Solomon as its new Chief Financial
        Officer and executed an employment letter on July 9, 2008.. Mr. Solomon will
        be
        paid $175,000 base salary per year which will be increased to $200,000 per
        year
        after the Company completes a financing transaction or series of financing
        transactions cumulatively totaling in excess of $1 million. Mr. Solomon also
        was
        granted 150,000 shares of the Company’s common stock to be issued upon his
        appointment and will receive an additional 250,000 shares of common stock
        three
        months from the commencement of his employment. On July 30, 2008, the Company
        and Mr. Solomon, entered into an amendment (the “Amendment”) to the employment
        letter agreement dated July 9, 2008. Pursuant to the terms of the Amendment,
        the
        150,000 restricted shares of the Company’s Common Stock granted to Mr. Solomon
        and the 250,000 restricted shares to be to Mr. Solomon under his agreement
        will
        be subject to certain additional restrictions and subject to forfeiture,
        as set
        forth in the Amendment.
 
 We
        had a
        factoring agreement in place which enabled us to borrow up to $500,000 related
        to purchasing finished goods inventory. Per the terms of the agreement, we
        were
        able to factor and receive advance proceeds of up to 85% of our future accounts
        receivable, if any, upon the date of shipment of product from our United
        States
        inventory warehouse to customers. This agreement expired in October 2008.
 
 On
        November 11, 2008 the Company closed on a Revolving Loan and Security Agreement,
        which included a September 12, 2008 Facility Letter with Ashford Finance,
        LLC.
        The agreement provides for a $3 million Letter of Credit and accounts receivable
        financing facility as more further described in Note 13 Commitments and
        Contingencies. To date the Company has not made any borrowings under this
        agreement.
  The
        Company has accepted subscription agreements for private placement
        units totaling $773,218 of which $465,000 cash proceeds have been
        received, $83,218 is derived from offsets against Board fees and consulting
        fees
        payable to members of the Board of Directors and Board of Advisors,
        and anticipated, but not received, cash proceeds of $225,000 . Each private
        placement unit has a subscription price of $0.05 per unit and consists of
        one
        share of Company Common Stock and a one and one-half share purchase Warrant
        at
        an exercise price of $0.05.  The Warrants would expire 30 months from the
        date of issuance. There cannot be any assurances that the anticipated cash
        proceeds not yet received from the accepted subscription agreements will
        ultimately be received and the underlying securities issued.
  If
        we are
        unable to obtain additional financing or enter into a merger or acquisition,
        we
        may not have sufficient cash to continue operations for beyond December 31,
        2008.. We anticipate raising additional funds through public or private
        financing, strategic relationships or other arrangements in the near future
        to
        support our business operations; however we currently may not have commitments
        from third parties for sufficient additional capital. We cannot be certain
        that
        any such financing will be available on acceptable terms, or at all, and
        our
        failure to raise capital when needed could limit our ability to continue
        our
        operations. Our ability to obtain additional funding prior to December 31,
        2008,
        and thereafter, will determine our ability to continue as a going concern.
        Failure to secure additional financing in a timely manner and on favorable
        terms
        would have a material adverse effect on our financial performance, results
        of
        operations and stock price and require us to curtail or cease operations,
        sell
        off our assets, seek protection from our creditors through bankruptcy
        proceedings, or otherwise. Furthermore, additional equity financing may be
        dilutive to the holders of our common stock, and debt financing, if available,
        may involve restrictive covenants, and strategic relationships, if necessary
        to
        raise additional funds, may require that we relinquish valuable
        rights.
 
 **Off
        Balance Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements.
  27
 
 **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 Not
        applicable to smaller reporting companies.
 
 **ITEM
        4. CONTROLS AND PROCEDURES**
  *(a)
        Evaluation of disclosure controls and procedures*
  The
        Company's management evaluated, with the participation of its Chief Executive
        Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the
        design/operation of its disclosure controls and procedures (as defined in
        Rules
        13a-15(c) and 15d-15(c) under the Securities Exchange Act of 1934, as amended
        (“Exchange Act”)) as of September 30, 2008.
 
 Disclosure
        controls and procedures refer to controls and other procedures designed to
        ensure that information required to be disclosed in the reports we file or
        submit under the Exchange Act, is recorded, processed, summarized and reported
        within the time periods specified in the rules and forms of the SEC and that
        such information is accumulated and communicated to our management, including
        our chief executive officer and chief financial officer, as appropriate,
        to
        allow timely decisions regarding required disclosure. In designing and
        evaluating our disclosure controls and procedures, management recognizes
        that
        any controls and procedures, no matter how well designed and operated, can
        provide only reasonable assurance of achieving the desired control objectives,
        and management is required to apply its judgment in evaluating and implementing
        possible controls and procedures.
 
 Management
        conducted its evaluation of disclosure controls and procedures under the
        supervision of our principal executive officer and our principal financial
        officer. Based on that evaluation, management concluded that our financial
        disclosure controls and procedures were not effective related to the preparation
        of the Form 10-Q filing as of September 30, 2008.
 
 The
        controls designed were adequate for financial disclosures required for the
        preparation of the Form 10-Q filing; however, due to lack of resources in
        the
        company’s accounting department the controls were not operating effectively. The
        remediation plan for improving the effectiveness over financial disclosure
        controls, which caused the material weakness over financial disclosures,
        will
        include creating a financial disclosures roll-forward model in accordance
        with
        the disclosures required for each periodic filing with the SEC. This model
        will
        be maintained and updated by Skins staff and management as new business
        transactions require additional financial disclosures.
 
 *(b)
        Changes in internal control over financial reporting*
 
 During
        the quarter ended September 30, 2008 we took remediation steps to remedy
        the
        material weaknesses identified in our Form 10-KSB for the year ended December
        31, 2007 to enhance internal control over financial reporting. As noted in
        4(a)
        above, we noted a material weakness in our financial disclosure controls
        at
        September 30, 2008. We are in the process of updating our remediation process
        as
        noted in Item 4(a). Based on the evaluation of our management as required
        by
        paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that,
        except as stated above, there were no changes in our internal control over
        financial reporting that occurred during the second quarter of 2008 that
        have
        materially affected, or are reasonably likely to materially affect, our internal
        control over financial reporting.
  **PART
        II-OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 We
        are
        not currently a party to any material legal proceedings.
 
 **ITEM
        1A. RISK FACTORS**
 
 Other
        than as set forth below, there have been no material changes from the risk
        factors disclosed in the “Risk Factors” section of our 2007 Form 10-KSB, as
        filed with the Securities and Exchange Commission on April 14,
        2008.
  28
  **If
        we are unable to obtain additional financing or enter into a merger or
        acquisition, we may not have sufficient cash to continue operations beyond
        December 31, 2008.**
 
 In
        May
        2007 the Company sold a total of 4,000,000 units in a private offering for
        aggregate proceeds of $3,000,000, and in April 2008, the Company conducted
        another private placement that raised approximately $2,680,645 in gross
        proceeds. The Company has also raised approximately $705,000 by issuing secured
        promissory notes entered into from December 2007 through March 2008, all
        of
        which were invested in the April 2008 private placement in lieu of repayment.
  The
        Company has accepted subscription agreements for private placement
        units totaling $773,218 of which $465,000 cash proceeds have been
        received, $83,218 is derived from offsets against Board fees and consulting
        fees
        payable to members of the Board of Directors and Board of Advisors,
        and anticipated, but not received, cash proceeds of $225,000 . Each private
        placement unit has a subscription price of $0.05 per unit and consists of
        one
        share of Company Common Stock and a one and one-half share purchase Warrant
        at
        an exercise price of $0.05.  The Warrants would expire 30 months from the
        date of issuance.  There cannot be any assurances that the anticipated cash
        proceeds not yet received from the accepted subscription agreements will
        ultimately be received and the underlying securities issued.
  On
        November 11, 2008 the Company closed on a Revolving Loan and Security Agreement,
        which included a September 12, 2008 Facility Letter with Ashford Finance,
        LLC,
        which provides for a $3 million Letter of Credit and accounts receivable
        financing facility. All Letters of Credit funded for inventory production
        will
        be based upon purchase orders from customers acceptable to Ashford. Ashford
        will
        also finance up to 75% of accounts receivable from eligible customers. Ashford
        required, and the Company has obtained, credit insurance on such customers.
        All
        financings by Ashford are subject to Ashford’s sole discretion. Accordingly,
        there is no assurance that Ashford will make any financing available to the
        Company.
 
 We
        anticipate raising additional funds through public or private financing,
        strategic relationships or other arrangements in the near future to support
        our
        business operations; however we currently do not have commitments from third
        parties for additional capital. We cannot be certain that any such financing
        will be available on acceptable terms, or at all, and our failure to raise
        capital when needed could limit our ability to continue our operations. Our
        ability to obtain additional funding prior to December 31, 2008, and thereafter,
        will determine our ability to continue as a going concern. Failure to secure
        additional financing in a timely manner and on favorable terms would have
        a
        material adverse effect on our financial performance, results of operations
        and
        stock price and require us to curtail or cease operations, sell off our assets,
        seek protection from our creditors through bankruptcy proceedings, or otherwise.
        Furthermore, additional equity financing may be dilutive to the holders of
        our
        common stock, and debt financing, if available, may involve restrictive
        covenants, and strategic relationships, if necessary to raise additional
        funds,
        may require that we relinquish valuable rights.
  *Failure
        to achieve and maintain effective internal controls in accordance
        with section 404 of the Sarbanes-Oxley Act could have a material
        adverse effect on our business and operating results.*
  It
        may be
        time consuming, difficult and costly for us to develop and implement the
        additional internal controls, processes and reporting procedures required
        by the
        Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal
        auditing and other finance staff in order to develop and implement appropriate
        additional internal controls, processes and reporting procedures. If we are
        unable to comply with these requirements of the Sarbanes-Oxley Act, we may
        not
        be able to obtain the independent accountant certifications that the
        Sarbanes-Oxley Act requires of publicly traded companies.
  If
        we
        fail to comply in a timely manner with the requirements of Section 404 of
        the Sarbanes-Oxley Act regarding internal control over financial reporting
        or to
        remedy any material weaknesses in our internal controls that we may identify,
        such failure could result in material misstatements in our financial statements,
        cause investors to lose confidence in our reported financial information
        and
        have a negative effect on the trading price of our common stock.
  Pursuant
        to Section 404 of the Sarbanes-Oxley Act and current SEC regulations,
        beginning with our annual report on Form 10-KSB for our fiscal period ending
        December 31, 2007, we will be required to prepare assessments regarding
        internal controls over financial reporting and beginning with our annual
        report
        on Form 10-K for our fiscal period ending December 31, 2008, furnish a
        report by our management on our internal control over financial reporting.
        We
        have begun the process of documenting and testing our internal control
        procedures in order to satisfy these requirements, which is likely to result
        in
        increased general and administrative expenses and may shift management time
        and
        attention from revenue-generating activities to compliance activities. While
        our
        management is expending significant resources in an effort to complete this
        important project, there can be no assurance that we will be able to achieve
        our
        objective on a timely basis. There also can be no assurance that our auditors
        will be able to issue an unqualified opinion on management’s assessment of the
        effectiveness of our internal control over financial reporting. Failure to
        achieve and maintain an effective internal control environment or complete
        our
        Section 404 certifications could have a material adverse effect on our
        stock price.
  In
        addition, in connection with our on-going assessment of the effectiveness
        of our
        internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public
        Company Accounting Oversight Board, or the PCAOB. A material weakness is
        a
        significant deficiency, or combination of significant deficiencies, that
        results
        in more than a remote likelihood that a material misstatement of the annual
        or
        interim financial statements will not be prevented or detected. The PCAOB
        defines “significant deficiency” as a deficiency that results in more
        than a remote likelihood that a misstatement of the financial statements
        that is more than inconsequential will not be prevented or detected.
  29
  In
        the
        event that a material weakness is identified, we will employ qualified personnel
        and adopt and implement policies and procedures to address any material
        weaknesses that we identify. However, the process of designing and implementing
        effective internal controls is a continuous effort that requires us to
        anticipate and react to changes in our business and the economic and regulatory
        environments and to expend significant resources to maintain a system of
        internal controls that is adequate to satisfy our reporting obligations as
        a
        public company. We cannot assure you that the measures we will take will
        remediate any material weaknesses that we may identify or that we will implement
        and maintain adequate controls over our financial process and reporting in
        the
        future.
  Any
        failure to complete our assessment of our internal control over financial
        reporting, to remediate any material weaknesses that we may identify or to
        implement new or improved controls, or difficulties encountered in their
        implementation, could harm our operating results, cause us to fail to meet
        our
        reporting obligations or result in material misstatements in our financial
        statements. Any such failure could also adversely affect the results of the
        periodic management evaluations of our internal controls and, in the case
        of a
        failure to remediate any material weaknesses that we may identify, would
        adversely affect the annual auditor attestation reports regarding the
        effectiveness of our internal control over financial reporting that are required
        under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls
        could also cause investors to  lose
        confidence in our reported financial information, which could have a negative
        effect on the trading price of our common stock.
 
 **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
  
 In
        the
        quarter ended September 30, 2008, the Company received $245,000 of gross
        proceeds from the sale of 4,900,000 private placement units for $0.05 per
        unit.
        Each unit consisted of one share of Common Stock and one Common Stock warrant
        which entitles the purchaser to buy one and one-half shares of Common Stock
        at
        $0.05 per share for a period of 30 months from the date the units were
        purchased. Such units were sold to U.S. citizens or entities and non-U.S.
        U.S.
        citizens or entities.
 
 The
        offer
        and sale of such securities to U.S. citizens or entities were effected in
        reliance on the exemptions for sales of securities not involving a public
        offering, as set forth in Rule 506 promulgated under the Securities Act and
        in
        Section 4(2) of the Securities Act, based on the following: (a) the investors
        confirmed to us that they were “accredited investors,” as defined in Rule 501 of
        Regulation D promulgated under the Securities Act and had such background,
        education and experience in financial and business matters as to be able
        to
        evaluate the merits and risks of an investment in the securities; (b) there
        was
        no public offering or general solicitation with respect to the offering;
        (c) the
        investors were provided with certain disclosure materials and all other
        information requested with respect to our company; (d) the investors
        acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities
        only
        in a transaction registered under the Securities Act or exempt from registration
        under the Securities Act; and (e) a legend was placed on the certificated
        representing each such security stating that it was restricted and could
        only be
        transferred if subsequent registered under the Securities Act or transferred
        in
        a transaction exempt from registration under the Securities Act.
  The
        offer
        and sale of such securities to non-U.S. citizens or entities were affected
        in
        reliance on the exemptions for sales of securities not involving a public
        offering, as set forth in Regulation S promulgated under the Securities
        Act.  The Investor acknowledged the following: Subscriber is not a United
        States Person, nor is the Subscriber acquiring the Shares directly or indirectly
        for the account or benefit of a United States Person.  None of the funds
        used by the Subscriber to purchase the Units have been obtained from United
        States Persons. For purposes of this Agreement, “United States Person” within
        the meaning of U.S. tax laws, means a citizen or resident of the United States,
        any former U.S. citizen subject to Section 877 of the Internal Revenue Code,
        any
        corporation, or partnership organized or existing under the laws of the United
        States of America or any state, jurisdiction, territory or possession thereof
        and any estate or trust the income of which is subject to U.S. federal income
        tax irrespective of its source, and within the meaning of U.S. securities
        laws,
        as defined in Rule 902(o) of Regulation S, means:
  (i)
              any
                  natural person resident in the United States; (ii) any partnership
                  or
                  corporation organized or incorporated under the laws of the United
                  States;
                  (iii) any estate of which any executor or administrator is a U.S.
                  person;
                  (iv) any trust of which any trustee is a U.S. person; (v) any agency
                  or
                  branch of a foreign entity located in the United States; (vi) any
                  non-discretionary account or similar account (other than an estate
                  or
                  trust) held by a dealer or other fiduciary for the benefit or account
                  of a
                  U.S. person; (vii) any discretionary account or similar account
                  (other
                  than an estate or trust) held by a dealer or other fiduciary organized,
                  incorporated, or (if an individual) resident in the United States;
                  and
                  (viii) any partnership or corporation if organized under the laws
                  of any
                  foreign jurisdiction, and formed by a U.S. person principally for
                  the
                  purpose of investing in securities not registered under the Securities
                  Act, unless it is organized or incorporated, and owned, by accredited
                  investors (as defined in Rule 501(a)) who are not natural persons,
                  estates
                  or trusts.
  30
  **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
  There
        were no defaults upon senior securities during the period covered by this
        report.


**ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters have been submitted to a vote of security holders during the period
        covered by this report.
  **ITEM
        5. OTHER INFORMATION**
  There
        is
        no information with respect to which information is not otherwise called
        for by
        this form.
  **ITEM
        6. EXHIBITS**
  31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act31.2
              Certification
                  of Principal Financial and Accounting Officer pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act32.1
              Certification
                  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                  Act
  32.2
              Certification
                  of Principal Financial and Accounting Officer Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
  31
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant has
        duly
        caused this report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
 
 **SKINS INC.**(Registrant)November 19, 2008
              By:
              /s/ Mark KleinMark KleinChief Executive Officer, President and Director(Principal Executive Officer)November 19, 2008
              By:
              /s/ Michael SolomonMichael SolomonChief Financial Officer(Principal Financial and Accounting Officer)
  32