**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 June 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 incorporationor
                organization)
            
            **20-4711789**
              (I.R.S.
                Employer IdentificationNo.)**1115
                Broadway, 12th Floor**
              **New
                York, NY**
              (Address
                of principal executive offices)
            
            **10010**
              (Zip
                Code)





**(212)
      710-2712**


(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 filero
            
            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 56,066,793 shares outstanding of registrant's common stock, par value
      $.001
      per share, as of August 14, 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 June 30, 2008 (unaudited) and December 31, 2007
                (audited)
            
            2Consolidated
                Statements of Operations for the Three and Six Months ended June
                30, 2008
                and 2007 and the period from Inception (May 18, 2004) to June 30,
                2008
                (unaudited)
            
            3Consolidated
                Statements of Stockholders' Equity (Deficiency) the period from
                Inception (May 18, 2004) to June 30, 2008 (unaudited)
            
            4Consolidated
                Statements of Cash Flows for the Six Months ended June 30, 2008 and
                2007,
                and the period from Inception (May 18, 2004) to June 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
            
            29ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            
            29ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            29ITEM
                5.
            OTHER
                INFORMATION
            
            29ITEM
                6.
            EXHIBITS
            
            29SIGNATURES
            
            
            30










**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 six months ended June 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**





**June
                30,**
              **2008**
            
            **December
                31,**
              **2007****(unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            110,542
            
            $
            6,186Prepaid
                expenses
            
            
            64,454
            
            
            251,034Inventory
                (Note 5)
            
            
            346,338
            
            
            -**Total
                current assets**
            
            
            521,334
            
            
            257,220Property
                and equipment, net (Note 6)
            
            
            254,981
            
            
            13,209Software
                costs, net (Note 7)
            
            
            6,117
            
            
            16,634Capitalized
                production molds (Note 8)
            
            
            128,780
            
            
            10,660Patent
                costs, net (Note 9)
            
            
            177,849
            
            
            159,400Other
                intangibles, net (Note 10)
            
            
            4,427
            
            
            1,378**Total
                Assets**
            
            $
            1,093,488
            
            $
            458,501**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIENCY)**Current
                liabilities:Accounts
                payable and accrued liabilities (Note 11)
            
            $
            891,842
            
            $
            750,425Liquidated
                damages
            
            
            21,988
            
            
            21,988Notes
                Payable, net of discounts (Note 12)
            
            
            -
            
            
            95,777**Total
                current liabilities**
            
            
            913,830
            
            
            868,190**Commitments
                and contingencies****(Note
                13)**Stockholders'
                Equity (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 June 30, 2008 and December
                31,
                2007, respectively
            
            
            56,067
            
            
            40,961Additional
                paid in capital
            
            
            13,638,921
            
            
            10,570,983Deficit
                accumulated in the development stage
            
            
            (13,515,330
            )
            
            (11,021,633
            )**Total
                stockholders' equity (deficiency)**
            
            
            179,658
            
            
            (409,689
            )**Total
                Liabilities and Stockholders' Equity (Deficiency)**
            
            $
            1,093,488
            
            $
            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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,**
            
            **Period
                from Inception (May 18, 2004) to**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008****Operating
                expenses:**Design
                and development
            
            $
            189,913
            
            $
            550,495
            
            $
            299,166
            
            $
            885,131
            
            $
            2,634,010Selling,
                general and administrative
            
            
            1,168,367
            
            
            993,669
            
            
            2,086,322
            
            
            2,136,187
            
            
            9,865,022Total
                operating expenses
            
            
            (1,358,280
            )
            
            (1,544,164
            )
            
            (2,385,488
            )
            
            (3,021,318
            )
            
            (12,499,032
            )Operating
                loss
            
            
            (1,358,280
            )
            
            (1,544,164
            )
            
            (2,385,488
            )
            
            (3,021,318
            )
            
            (12,499,032
            )Unrealized
                (loss) on derivative instruments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,306,754
            )Liquidated
                damages
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21,988
            )Interest
                income
            
            
            2,182
            
            
            19,801
            
            
            2,182
            
            
            29,803
            
            
            77,757Loss
                on disposal of property and equipment
            
            
            -
            
            
            -
            
            
            (1,993
            )
            
            -
            
            
            (24,172
            )Amortization
                of discount on notes payable
            
            
            (14,283
            )
            
            -
            
            
            (100,873
            )
            
            -
            
            
            (104,003
            )Interest
                expense
            
            
            (1,200
            )
            
            -
            
            
            (7,525
            )
            
            -
            
            
            (12,996
            )**Net
                loss**
            
            $
            (1,371,581
            )
            $
            (1,524,363
            )
            $
            (2,493,697
            )
            $
            (2,991,515
            )
            $
            (13,891,188
            )**Basic
                and diluted loss per share**
            
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.05
            )
            $
            (0.08
            )**Weighted
                average number of common shares outstanding, basic and
                diluted**
            
            
            53,447,890
            
            
            37,190,070
            
            
            46,832,630
            
            
            36,211,762




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**
              **Paid-in**
            
            **Accumulated**
              **Total**
            
            **Total**
              **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 andaccrued
                interest of $6,114 for privateplacement
                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 three months ended June 30, 2008
            
            
            
            
            
            
            
            
            78,977
            
            
            
            
            
            78,977Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (2,493,697
            )
            
            (2,493,697
            )Balances
                at June 30, 2008 (unaudited)
            
            
            56,066,793
            
            $
            56,067
            
            $
            13,638,921
            
            $
            (13,515,330
            )
            $
            179,658




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)**




**Six
                Months Ended**
              **June
                30,**
            
            **Period
                from**
              **Inception**
              **(May
                18, 2004) to**
              **June
                30,****2008**
            
            **2007**
            
            **2008**Cash
                flows used in operating activities:Net
                loss
            
            $
            (2,493,697
            )
            $
            (2,991,515
            )
            $
            (13,891,188
            )Adjustments
                to reconcile net loss from operations to net cash used in operating
                activities:Depreciation
            
            
            25,113
            
            
            1,964
            
            
            45,082Amortization
            
            
            15,268
            
            
            12,984
            
            
            44,601Issuance
                of common stock for services
            
            
            18,140
            
            
            36,295
            
            
            145,186Share
                based compensation expense
            
            
            229,769
            
            
            351,519
            
            
            1,772,269Loss
                on write down of molds
            
            
            -
            
            
            105,635
            
            
            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
            
            
            168,440
            
            
            (85,913
            )
            
            (63,363
            )Inventory
            
            
            (346,338
            )
            
            (480,467
            )
            
            (346,338
            )Accounts
                payable and accrued liabilities
            
            
            188,176
            
            
            257,252
            
            
            922,784Liquidated
                Damages
            
            
            -
            
            
            -
            
            
            21,988Net
                cash used in operating activities
            
            
            (1,905,850
            )
            
            (2,792,246
            )
            
            (9,613,261
            )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
            
            
            (268,877
            )
            
            (32,801
            )
            
            (322,256
            )Patent
                Costs
            
            
            (23,052
            )
            
            (13,775
            )
            
            (188,405
            )Other
                intangibles
            
            
            (3,198
            )
            
            -
            
            
            (4,588
            )


Cash
                used in investing activities
            
            
            (413,247
            )
            
            (190,552
            )
            
            (789,956
            )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 direct costs of $66,547 for
                the six
                months ended June 30, 2008
            
            
            1,868,453
            
            
            3,571,475
            
            
            7,454,666Proceeds
                from notes payable
            
            
            555,000
            
            
            -
            
            
            855,000Repurchase
                of options (Note 14)
            
            
            -
            
            
            (30,445
            )
            
            (30,445
            )Net
                cash provided by financing activities
            
            
            2,423,453
            
            
            3,541,030
            
            
            10,513,759Net
                increase in cash and cash equivalents
            
            
            104,356
            
            
            558,232
            
            
            110,542Cash
                and cash equivalents at beginning of period
            
            
            6,186
            
            
            1,754,926
            
            
            -Cash
                and cash equivalents at end of period
            
            $
            110,542
            
            $
            2,313,158
            
            $
            110,542




Supplemental
                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 andAdvisory
                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 New York City, 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 June 30, 2008 will not agree with the total
      loss from May 18, 2004 (inception date) to June 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 June 30, 2008, the Company had no
      established source of revenues and has accumulated losses of $13,891,188 since
      its inception. As
      of
      July 31, 2008, management estimates that the Company has exhausted its cash
      on
      hand and if it is unable to obtain additional financing or enter into a merger
      or acquisition, it may not have sufficient cash to continue operations beyond
      August 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 currently do not have
      commitments from third parties for 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 August 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.





**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 six months ended June 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 six
      -months ended June 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**
            
            **Six
                Months ended****June
                30,**
            
            **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**Numerator:Net
                loss - basic and diluted
            
            $
            (1,371,581
            )
            $
            (1,524,363
            )
            $
            (2,493,697
            )
            $
            (2,991,515
            )Denominator:Weighted
                average shares - basic
            
            
            53,447,890
            
            
            37,190,070
            
            
            46,832,630
            
            
            36,211,762Effect
                of dilutive stock options and warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -Denominator
                for diluted earnings per share
            
            
            53,447,890
            
            
            37,190,070
            
            
            46,832,630
            
            
            36,211,762Loss
                per share:Basic
            
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.05
            )
            $
            (0.08
            )Diluted
            
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.05
            )
            $
            (0.08
            )





At
      June
      30, 2008 and 2007 the Company’s stock options outstanding totaled 3,548,643 and
      3,509,375, respectively. In addition, at June 30, 2008 and 2007, the Company’s
      warrants outstanding were 18,217,939 and 4,707,939, respectively. Inclusion
      of
      the Company’s options and warrants in diluted loss per share for the three
      months ended June 30, 2008 and 2007 have an anti-dilutive effect because the
      Company incurred a loss from continuing 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
      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 combinations 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.





9




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE 5: INVENTORY**




Inventory
      at June 30, 2008 (unaudited) and December 31, 2007 consisted of the
      following:





**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Raw
                Materials
            
            $
            247,017
            
            $
            -Finished
                Goods
            
            
            99,321
            
            
            -$
            346,338
            
            $
            -




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 June 30, 2008 and December 31, 2007 consist of the
      following:




**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Sewing
                equipment
            
            $
            1,882
            
            $
            1,882Computer
                equipment
            
            
            18,624
            
            
            19,652Store
                displays
            
            
            267,343
            
            
            -287,849
            
            
            21,534Less
                accumulated depreciation
            
            
            32,868
            
            
            8,325$
            254,981
            
            $
            13,209





Depreciation
      expense related to property and equipment was $23,438 and $1,166 for the three
      months ended June 30, 2008 and 2007 and $25,113 and $1,964 for the six months
      ended June 30, 2008 and 2007, respectively.




**NOTE
      7: SOFTWARE COSTS**





Software
      costs, net at June 30, 2008 and December 31, 2007 consist of the
      following:




**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Website
                design costs
            
            $
            31,551
            
            $
            31,551Less
                accumulated amortization
            
            
            25,434
            
            
            14,917$
            6,117
            
            $
            16,634





Amortization
      expense related to software costs was $5,259 and $9,866 for the three months
      ended June 30, 2008 and 2007 and $10,517 and $9,866 for the six months ended
      June 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 six months ended June 30, 2008, and the year ended December 31, 2007,
      respectively, the Company purchased $118,120 and $125,036 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 June 30, 2008 and $10,660
      at December 31, 2007, respectively.





No
      amortization of production molds is included in the June 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 June 30, 2008 and December 31, 2007 consists
      of:





**June
                30,**
              **2008**
            
            **December
                31,**
              **2007**Patent
                costs
            
            $
            196,856
            
            $
            173,804Less
                accumulated amortization
            
            
            19,007
            
            
            14,404$
            177,849
            
            $
            159,400




Amortization
      expense related to patents was $2,384 and $1,637 for the three months ended
      June
      30, 2008 and 2007 and $4,603 and $3,118 for the six months ended June 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 June 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 June 30, 2008 and December 31, 2007 is $161 and $12, respectively.
      Amortization expense related to other intangibles was $115 and $0 for the three
      months ended June 30, 2008 and 2007 and $149 and $0 for the six months ended
      June 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 June 30, 2008 and December 31,
      2007
      consist of the following:




**June
                30,**
              **2008**
            
            **December
                31,**
              **2007**Trade
                payables
            
            $
            583,952
            
            $
            590,556Professional
                fees
            
            
            155,886
            
            
            87,943Commissions
                payable
            
            
            38,000
            
            
            28,000Board
                Fees and Director Fees
            
            
            46,250
            
            
            18,750Recruiting
                fees payable
            
            
            44,000
            
            
            -Other
                accrued liabilities
            
            
            23,754
            
            
            25,176$
            891,842
            
            $
            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 June 30, 2008 and December 31, 2007 is $0 and $54,223,
      respectively. 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 $14,283 and $0 for the three months ended June 30, 2008 and
      2007 and $100,873 and $0 for the six months ended June 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.





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
      May 4,
      2007, the Company entered into an agreement to lease new corporate office space
      effective June 1, 2007. The agreement requires the Company to pay approximately
      $95,000 through May 31, 2008, but the Company may terminate this agreement
      and
      vacate the premise upon 60 days’ written notification. On May 31, 2008, the
      lease expired. The Company and lessor agreed to continue the lease on a month
      to
      month basis until a new lease agreement is executed.





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
      February 12, 2008, the Company entered into an office space lease agreement
      (the
“Lease”) with Summit Office Suites. Pursuant to the terms of the Lease, the
      Company will pay a base monthly rent of $1,430 (including utilities,
      maintenance, and a rate abatement) for a room located at 1115 Broadway, 12th
      Floor, New York, NY 10010. Other one-time and continuing fees are due and
      payable. The Company terminated the lease effective May 31, 2008.





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
      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 June 30, 2008 and 2007
      and for the six months ended June 30, 2008 and 2007, the Company recorded
      compensation expense of $10,009 and $18,447 and $12,245 and $36,894,
      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.




·
            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 June 30, 2008 and 2007 and for the six months
                ended
                June 30, 2008 and 2007, the Company recorded compensation expense
                of
                $6,828 and $72,057 and $19,548 and $164,434,
                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:





**June
                30,**
              **2008**
            
            **June
                30,**
              **2007**Expected
                volatility
            
            
            135.82
            %
            
            100.23
            %Expected
                dividends
            
            
            None
            
            
            NoneExpected
                term (in years)
            
            
            2.3
            
            
            2Risk-free
                interest rate
            
            
            2.87
            %
            
            4.5
            %





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 June
      30, 2008 is $38,075. For the three months ended June 30, 2008 and 2007 and
      for
      the six months ended June 30, 2008 and 2007, the Company recorded compensation
      expense of $12,811 and $7,614 and $15,228 and $24,206, 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 June 30, 2008 and 2007 and for the six months ended June 30, 2008 and
      2007, the Company recorded compensation expense of $0 and $29,451 and $35 and
      $97,416, 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 June 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 June 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 June 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 June 30, 2008 is $121,283. For the three months ended June 30,
      2008
      and 2007 and for the six months ended June 30, 2008 and 2007, the Company
      recorded compensation expense of $40,202 and $28,569 and $96,779 and $28,569,
      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 th ,
      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 six
      months ended June 30, 2008 the Company recognized $60,002 of expense relating
      to
      this grant.





The
      total
      compensation expense related to the non-vested options on 2008 awards to
      employees at June 30, 2008 is $74,146. For the three months ended June 30,
      2008
      and 2007 and for the six months ended June 30, 2008 and 2007, the Company
      recorded compensation expense of $6,252 and $0 and $6,721 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 $2,916, respectively, is included in selling,
      general and administrative expenses for the three and six months ended June
      30,
      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 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 June 30, 2008 and changes
      during the six 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
            
            
            (470,000
            )
            
            .40Outstanding,
                June 30, 2008
            
            
            3,548,643
            
            $
            .39
            
            
            2.96
            
            $
            -Exercisable,
                June 30, 2008
            
            
            2,679,164
            
            $
            .39
            
            
            2.69
            
            $
            -




A
      summary
      of the status of the Company's non-vested shares as of June 30, 2008, and
      changes during the six months ended June 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
            
            
            .35Cancelled
            
            
            (470,000
            )
            
            1.10Vested
            
            
            (653,889
            )
            
            .54Non-vested,
                June 30, 2008
            
            
            869,479
            
            $
            .59




20




**Skins
      Inc. and Subsidiary**


**(A
      Development Stage Company)**


**Notes
      to Condensed Consolidated Interim Financial Statements**


**(Unaudited)**





**NOTE
      15: STOCKHOLDERS’ EQUITY (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’ EQUITY (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 three and six months ended June 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 $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 six months ended June 30, 2008 the Company recognized $2,875
      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.


**NOTE
        16: SUBSEQUENT EVENT**
 
 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.




22





**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





*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. 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.*





**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
      June 30, 2008, we had no established source of revenues and had accumulated
      losses of $13,891,188 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 Holiday 2008 and SS 2009. These collections 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 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
          Consumer Partnership 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 will be introduced to consumers in our Winter and
          Holiday 08 deliveries. All participants in our consumer partnership program
          and
          all of 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 the 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. Approximately 45% of our finished goods inventory
          are
          located at retail partner locations.
 
 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.
          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 will be assembled with the newly updated
          Bone.
 
 **Sourcing**
 
 On
          November 28, 2007, the Company executed a Buying Agency and Sourcing Agreement
          with Atsco Footwear, LLC. Pursuant to the agreement, Atsco will serve as
          the
          Company’s non-exclusive buying and sourcing agent and will be responsible for
          sourcing, commercialization and product line review. The Company will pay
          Atsco
          a commission of 7% of the $5 million 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.
 
 **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.
 
 We
          will
          consider the children's market and more mainstream middle-market retailers
          once
          our brand is more established. We may also consider 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 beginning 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. We are currently taking orders for Winter-Holiday 2008
          and
          Spring-Summer 2009. The planned distribution will encompass independent
          specialty retailers, national retailers and department stores, E-tailers,
          and
          some International distribution. We believe 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 $57 per pair of Skins. We 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 $25,923 which will be expensed ratably over the 7 to 29 months
      service period that remain. The Company recorded $2,916 compensation expense
      for
      the three and six months ended June 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.





**Results
      of Operations and Financial Condition**





**Three
      and Six Months Ended June 30, 2008 Compared with Three and Six Months Ended
      June
      30, 2007**





There
      were no earned revenues during the three and six months ended June 30, 2008
      and
      2007.





Design
      and development expenses for the three and six months ended June 30, 2008 and
      2007 were $189,913 and $550,495 and $299,166 and $885,131, respectively. These
      changes of $360,582 and $585,965 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 six months
      ended June 30, 2008 and 2007 were $1,168,367 and $993,669 and $2,086,322 and
      $2,136,187 respectively.





For
      the
      three months ended June 30, 2008 the increase in SG&A expenses are primarily
      attributable to increases in employee compensation of approximately $17,000
      to
      staff the business in anticipation of bringing the product to market, increased
      warehouse and operating expenses of approximately $51,000, and increases in
      non-cash charges such as share-based compensation of $43,000 and additional
      non-cash fees paid to promissory note holder totaling approximately $187,000
      which were offset by reductions in advertising of approximately $94,000,
      termination expenses for a previous employee of $29,000.





For
      the
      six months ended June 30, 2008 the decrease in SG&A expenses are primarily
      attributable to increases in employee compensation and benefits of approximately
      $155,000 to staff the business in anticipation of bringing the product to
      market, increased warehouse and operating expenses of $50,000, and increases
      in
      non-cash and other charges such as additional non cash fees paid to promissory
      note holders totaling approximately $187,000 which were offset by reductions
      in
      travel of approximately $66,000, advertising expenses of approximately $68,000,
      professional and other expenses of approximately $106,000, share-based
      compensation of approximately $78,000, termination expenses for a previous
      employee of $173,000, and non recurring income of $49,000.




Our
      net
      loss for the three and six months ended June 30, 2008 was $1,371,581 or $0.03
      per share and $2,493,697 or $0.05 per share, respectively as compared to a
      net
      loss of $1,524,363, or $.04 per share and $2,991,515 or $ .08 per share, for
      the
      same respective periods in 2007.





**Liquidity
      and Capital Resources**





At
      June
      30, 2008, we had $110,542 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 six months ended June 30, 2008 was
      $1,905,850 as compared to net cash used of $2,792,246 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 six months ended June 30, 2008 as compared
      to the same period in 2007, which was primarily attributable to a decrease
      in
      operating expenditures compared to the six months ended June 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 six months ended June 30, 2008 was $413,247,
      as
      compared to $190,552 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 six months ended June 30, 2008 was
      $2,423,453, as compared to $3,541,030 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 and raising $1,868,453 (net
      of
      direct costs of $66,547) from the April 9, 2008 private placement while the
      Company raised a net $3,571,445 in the May 21, 2007 financing
      transaction.




At
      June 30, 2008, we had 3,548,643 stock options and 18,217,939 common stock
      purchase warrants outstanding. The outstanding stock options have a weighted
      average exercise price of $0.39 per share as adjusted for the April 2, 2008
      option repricing. The outstanding warrants have a weighted average exercise
      price of $0.56 per share. Accordingly, at June 30, 2008, the outstanding options
      and warrants represented a total of 21,766,582 shares issuable for a maximum
      of
      $11,558,604 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
      presently have a factoring agreement in place which currently will enable us
      to
      borrow up to $500,000 related to purchasing finished goods inventory. Per the
      terms of the agreement, we will also be 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.





At
      July
      31, 2008, our management estimates that we have exhausted our cash on hand.
      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
      August 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 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 August 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 June 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 June 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. These financial
      disclosures will be reviewed by an outside financial disclosure expert for
      completeness and accuracy earlier in the financial statement closing process
      cycle in order to help ensure completeness and accuracy for reporting financial
      disclosures.





*(b)
      Changes in internal control over financial reporting*





D uring
      the
      quarter ended June 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 June 30,
      2008.
      We are in the process of updating our remediation process as noted in Item
      4(a).
      In addition, and as disclosed in the Form 8-K filing filed with the Securities
      and Exchange Commission on May 29, 2008, our CFO resigned her position effective
      May 22, 2008. A new CFO was appointed on June 16, 2008 and has assumed the
      internal control duties of the CFO. 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
      August 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.
      As
      of July 31, 2008, our management estimates that we have exhausted our cash
      on
      hand. 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
      August 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 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 August 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.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





None.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None.




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





None.





**ITEM
      5. OTHER INFORMATION**





None.





**ITEM
      6. EXHIBITS**




31.1
            Certification
                of Principal Executive Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Principal Financial and Accounting Officer pursuant to Section
                302(a)
                of the Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Principal Executive Officer and Principal Financial and Accounting
                Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.*




*
            This
                exhibit shall not be deemed “filed” for purposes of Section 18 of the
                Securities Exchange Act of 1934 or otherwise subject to the liabilities
                of
                that section, nor shall it be deemed incorporated by reference in
                any
                filing under the Securities Act of 1933 or the Securities Exchange
                Act of
                1934, whether made before or after the date hereof and irrespective
                of any
                general incorporation language in any
                filings.




29




**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)August
                18, 2008
            By:
            /s/ Mark
                KleinMark
                KleinChief
                Executive Officer, President and Director
              (Principal
                Executive Officer)




30