**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





(Mark
      One)


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


**For
      the fiscal year ended December 31, 2005**





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




For
      the
      transition period from ____ to _____





Commission
      File Number: **000-28083**







**SKYE
      INTERNATIONAL, INC.**


(Exact
      name of small business issuer in its charter)





**Nevada**
              (State
                or other jurisdiction ofincorporation
                or organization)
            **88-0362112**
              (I.R.S.
                Employer Identification No.)








**7150
      W. Erie Street, Chandler, AZ 85226**


(Address
      of principal executive offices) (Zip Code)





Issuer’s
      telephone number: **(480)
      609-7575**





Securities
      registered under Section 12(b) of the Exchange Act: **None**





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


**Common
      Stock, $0.001 Par Value**





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 [ ]





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





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











1





State
      issuer’s revenues for its most recent fiscal year. **$** 172,424





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the average bid and asked price of
      the
      issuer’s common stock as of June 22, 2006 was $ 8,955,994.





There
      were approximately 20,588,493 shares of the issuer’s common stock outstanding as
      of June 30, 2006 and the Company had approximately 250 shareholders of record
      on
      that date.





If
      the
      following documents are incorporated by reference, briefly describe them and
      identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
      the document is incorporated: (1) any annual report to security holders; (2)
      any
      proxy or information statement; and (3) any prospectus filed pursuant to Rule
      424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed
      documents should be clearly described for identification purposes (e.g., annual
      report to security holders for fiscal year ended December 24, 1990).
      None





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





2








**SKYE
      INTERNATIONAL INC.**


**FOR
      THE FISCAL YEAR ENDED**


**December
      31, 2005**




**Index
      to Report**


**on
      Form 10-KSB**




PART
                  I
              Page(s)
 
 Item
                  1.
              Description
                  of Business
              5Item
                  2.
              Description
                  of Property
              15Item
                  3.
              Legal
                  Proceedings
              16Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              19
 
 PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              20Item
                  6.
              Managements
                  Discussion and Analysis of Financial Conditions and Result of
                  Operations
              22Item
                  7.
              Financial
                  Statements
              46Item
                  8.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              46Item
                  8A.
              Controls
                  and Procedures
              48Item
                  8B
              Other
                  Information
              49PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance With
                  Section
                  16(a) of the Exchange Act
              50Item
                  10.
              Executive
                  Compensation
              53Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              54Item
                  12.
              Certain
                  Relationships and Related Transactions
              56Item
                  13.
              Exhibits
              57Item
                  14.
              Principal
                  Accountant Fees and Services
              58Signatures
              60









3





**Forward-Looking
      Statements**





This
      report contains “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995. All statements, other than statements
      of historical fact, are “forward-looking statements” for purposes of federal and
      state securities laws, including statements regarding, among other items, the
      Company’s business strategies, continued growth in the Company’s markets,
      projections, and anticipated trends in the Company’s business and the industry
      in which it operates. Forward-looking statements generally can be identified
      by
      phrases such as the Company or its management “believes,” “expects,”
“anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of
      similar import. Similarly, statements in this report describe the Company’s
      business strategy, outlook, objectives, plans, intentions or goals also are
      forward-looking statements. Although we believe that the expectations reflected
      in any of our forward-looking statements are reasonable, actual results could
      differ materially from those projected or assumed in any of our forward-looking
      statements. Our future financial condition and results of operations, as well
      as
      any forward-looking statements, are subject to change and subject to inherent
      risks and uncertainties. The factors impacting these risks and uncertainties
      include, but are not limited to:  the
      substantial losses the Company has incurred to date; demand for and market
      acceptance of new products; successful development of new products; the timing
      of new product introductions and product quality; the Company’s ability to
      anticipate trends and develop products for which there will be market demand;
      the availability of manufacturing capacity; pricing pressures and other
      competitive factors; changes in product mix; product obsolescence; the ability
      of our customers to manage inventory; the ability to develop and implement
      new
      technologies and to obtain protection for the related intellectual property;
      the
      uncertainties of litigation and the demands it may place on the time and
      attention of company management, general economic conditions and conditions
      in
      the markets addressed by the Company; as well as other risks and uncertainties,
      including those detailed from time to time in our other Securities and Exchange
      Commission filings. The forward-looking statements are made only as of the
      date
      hereof. The Company does not undertake any obligation to update or revise the
      forward-looking statements, whether as a result of new information, future
      events or otherwise .





For
      a
      detailed description of these and other factors that could cause actual results
      to differ materially from those expressed in any forward-looking statement,
      please see “Factors That May Affect Our Results of Operation” in this
      document.




Throughout
        this Form 10-KSB, references to “we”, “our”, “us”, or “the Company”, and similar
        terms refer to SKYE International Inc. and its 100% owned subsidiaries,
        Envirotech Systems Worldwide Inc., Valeo Industries Inc. and ION Tankless
        Inc.





4





**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**Business
      Development**





Skye
      International, Inc., a Nevada corporation (“Skye”), was originally organized on
      November 23, 1993 as Amexan, Inc. The name was changed on June 1, 1998 to
      Nostalgia Motorcars, Inc. Prior to the name change, Amexan was an inactive
      company from the date of incorporation. On June 11, 2002, the name was changed
      to Elution Technologies, Inc. On June 4, 2003, in connection with the pending
      acquisition of Envirotech Systems Worldwide, Inc., it changed its name to
      Tankless Systems Worldwide, Inc. On October 21, 2005, it changed its name to
      Skye International, Inc., as part of its overall plan to create a brand name
      for
      its revised business plan and expanded product lines.





Skye
      has
      three subsidiary corporations, all wholly-owned:




·
            Envirotech
                Systems Worldwide, Inc., an Arizona corporation
                (“Envirotech”);


·
            ION
                Tankless, Inc., an Arizona corporation (“ION”);
                and


·
            Valeo
                Industries, Inc., a Nevada corporation
                (“Valeo”).





On
      November 7, 2003, Skye acquired Envirotech in a one-for-one share exchange.
      On
      that date, Skye issued 8,366,778 shares of its common stock to the Envirotech
      shareholders. Subsequently, in December 2004, 2,075,000 of those shares were
      returned to Skye by the former principals of Envirotech and cancelled, and
      the
      number of Skye’s issued and outstanding shares was correspondingly reduced,
      pursuant to a settlement of litigation brought by Skye.





In
      January 2004, Skye formed ION to perform research, development and marketing
      of
      new heating technologies. In January 2005, formed created Valeo to license
      ION
      technologies and to manufacture products using those technologies.




**Envirotech**





Envirotech
      was organized December 9, 1998 and has a limited history of operations. The
      initial period of its existence involved research and development of a line
      of
      electronic tankless water heaters. The first sales of its products occurred
      in
      calendar year 2000.





The
      United States Patent and Trademark Office granted a patent to Envirotech for
      its
      Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
      Proprietary rights to the design of the ETWH were Envirotech’s principal assets.
      The existing patent and intellectual property of Envirotech were assigned as
      collateral security for debts owed by Envirotech for legal services arising
      prior to the acquisition of Envirotech by Skye.





5




ITEM
      1. DESCRIPTION OF BUSINESS - continued




Business Development - continued




In
      2002,
      Envirotech was named as a defendant in a patent infringement suit alleging
      that
      Envirotech’s product infringed upon a patent owned by David Seitz and
      Microtherm, Inc. (the “Seitz Suit”) ,
      discussed more fully in “Item 3. Legal Proceedings, Seitz Suit” below.





As
      a
      result of several lawsuits and adverse judgments obtained by third party
      creditors against Envirotech, including the possibility of a default judgment
      in
      the Seitz suit, Envirotech filed for relief under Chapter 11 of the United
      States Bankruptcy Code in the United States Bankruptcy Court for the District
      of
      Arizona, on August 6, 2004 (the “Chapter 11 Proceedings”).





The
      Seitz
      Suit was initially stayed pending the disposition of the Chapter 11 Proceedings,
      but on September 30, 2005, the Court allowed the plaintiff to re-open the
      suit .
      On
      December 5, 2005, the Court issued a preliminary injunction against Envirotech
      and its affiliated entities, including Skye, enjoining them from further
      marketing, advertising or offering for sale, or accepting any orders for (i)
      the
      Envirotech ESI 2000 heater, (ii) any other heater, regardless of its model,
      using parts of the Model ESI 2000 heater, and (iii) any other heater, regardless
      of model number, utilizing in whole any part (sic) any technology embodied
      in
      the Model ESI 2000 heater. The Company does not consider this injunction
      detrimental to its ongoing business activities, as it had already discontinued
      production of the alleged offending product and the new products have been
      developed with specific attention to avoiding infringement on any existing
      patents of third parties. At a hearing on May 17, 2006 the Judge issued a
      direction to Skye requiring it to engage in the discovery process relative
      to
      the FORTISTM and ParadigmTM products developed by Skye and Ion Tankless. Skye has
      complied with this direction for additional discovery. On May 16, 2006 the
      U.S.
      Patent and Trademark Office issued patent no. 7,046,922 to Ion Tankless, Inc.
      in
      connection with its modular tankless water heater technology. Skye believes
      that
      this patent forms the basis for the FORTISTM line of products that are currently
      entering production.


The
        Seitz
        Suit was initially stayed pending the disposition of the Chapter 11 Proceedings,
        but on September 30, 2005, the Bankruptcy Court allowed the plaintiff to
        re-open
        the suit. On December 5, 2005, the Houston Court issued a preliminary injunction
        against Envirotech and its affiliated entities, including Skye, enjoining
        them
        from further marketing, advertising or offering for sale, or accepting any
        orders for (i) the Envirotech ESI 2000 heater, (ii) any other heater, regardless
        of its model, using parts of the Model ESI 2000 heater, and (iii) any other
        heater, regardless of model number, utilizing in whole any part (sic) any
        technology embodied in the Model ESI 2000 heater. The Company does not consider
        this injunction detrimental to its ongoing business activities, as it had
        already discontinued production of the alleged offending product and the
        new
        products have been developed with specific attention to avoiding infringement
        on
        any existing patents of third parties. At a hearing on May 17, 2006 the Houston
        Court issued a direction to Skye requiring it to engage in the discovery
        process
        relative to the *FORTIS* TM
and *Paradigm* TM
        products developed by Skye and Ion Tankless. Skye has complied with this
        direction for additional discovery. On May 16, 2006 the U.S. Patent and
        Trademark Office issued patent no. 7,046,922 to Ion Tankless, Inc. in connection
        with its modular tankless water heater technology. Skye believes that this
        patent forms the basis for the *FORTIS* TM
line
        of
        products that are currently entering production.


After
        Envirotech filed for bankruptcy as noted above, JSS sold its claim and the
        related security interests to Sundance Financial Corporation, an entity
        controlled by Larry Ryckman, who is a shareholder of Skye. On June 1, 2006
        Sundance Financial Corporation entered into an agreement with the Company’s
        subsidiary, ION Tankless, Inc. in which it assigned the Envirotech Security
        to
        Ion Tankless, Inc. Because Envirotech has ceased operations, its only asset
        of
        any anticipated value is its intellectual property, including the patent
        as
        discussed above. The patent is being contested in the Seitz suit.


ION
  Recognizing
        the dynamic state of the industry and the need for an improved product line,
        Skye made a decision in early 2004 to pursue its own research and development
        for new water heating technologies, out of which it could develop a completely
        new line of products. In January 2004, Skye formed a wholly-owned, non-operating
        subsidiary, ION Tankless, Inc., through which it has since conducted
        research and development of alternative heating technologies and products.
        Skye
        has invested heavily in a research and development program to develop new
        and
        innovative methods of heating water, which has resulted in the filing of
        several
        applications for patents with the U.S. Patent and Trademark Office involving
        dozens of claims. In November 2005, the Company received notice from the
        USPTO
        that the first such patent request had been allowed, which was issued after
        year-end on May 16, 2006 as US Patent No. 7,046,922. While there can be no
        assurances that the other patents sought will be granted or that the technology
        will be considered proprietary to Skye or ION, the Company believes that
        its
        applications are meritorious and will be granted at least in
        part.





6




ITEM
          1.   DESCRIPTION
          OF BUSINESS - continued
  Business
          Development - continued
  With
          the
          exception of one patent held by Envirotech (discussed above), ION holds
          all
          patents and intellectual property of the Company and may license that property
          to an affiliated or unrelated entity for manufacturing and distribution.
          The
          assets of ION are included in the consolidated financial statements for
          the
          Company.
 
 **Valeo**
  Valeo
          was
          formed by Skye in January 2005 as a wholly-owned operating subsidiary.
          Valeo
          will license technology from ION and manufacture or contract for the manufacture
          of several lines of water heating products, as well as other products embodying
          ION patent technology. Valeo has leased approximately 28,000 square feet
          of
          industrial space and has begun to oversee the production and distribution
          of our
          two new product lines, *FORTIS* TM
and *Paradigm* TM,
          that
          incorporate innovative technology not previously used in the water heating
          market. These new products, based on proprietary technology, are expected
          to
          serve as the foundation for the future growth of the Company.
 
 **Financing**
  The
          Company, after the acquisition of Envirotech, has met its financial needs
          through its limited operations, debt financing and through the sales and
          issuances of its securities. Since January, 2004, the Company has undertaken
          the
          following sales of non-registered securities in a series of private investment
          transactions:


·
            For
                the year ended December 31, 2004, the Company sold $1,075,000 principal
                amount of 10% senior notes due one year from date of issue and 537,500
                unregistered common shares of common stock in private placements
                in
                connection with such Notes.  The shares were restricted pursuant to
                the provisions of Section 144 of the Securities Exchange Act of 1933.
                 The securities were sold only to persons who met the Accredited
                Investor requirements and other requirements set forth in the offering
                memorandum.  In addition, in 2004 the Company issued 172,354
                unregistered shares to retire $990,911 in debt and associated interest;
                695,000 shares for services rendered valued at $146,330, and 2,250,000
                shares for prepaid services to consultants valued at
                $112,500.·
            On
                January 14, 2005 the Company closed the sale of $100,000 principal
                amount
                of 10% senior notes due one year from date of issue and 50,000
                unregistered common shares of common stock in private placements
                in
                connection with such Notes.  The shares were restricted pursuant to
                the provisions of Section 144 of the Securities Exchange Act of 1933.
                 The securities were sold only to persons who met the Accredited
                Investor requirements and other requirements set forth in the offering
                memorandum.·
            Between
                June 1, 2005 and July 28, 2005, the Company issued 1,999,819 shares
                of
                common stock at $0.55 per common share in private placements for
                total
                gross proceeds of $1,099,900. The shares were restricted pursuant
                to the
                provisions of Section 144 of the Securities Exchange Act of 1933.
                 The securities were sold only to persons who met the Accredited
                Investor requirements and other requirements set forth in the offering
                memorandum.·
            Between
                July 29, 2005 and August 15, 2005, the Company issued 565,000 shares
                of
                common stock at $0.55 per common share in private placements for
                total
                gross proceeds of $310,750. The shares were restricted pursuant to
                the
                provisions of Section 144 of the Securities Exchange Act of 1933.
                The
                securities were sold only to persons who met the Accredited Investor
                requirements and other requirements set forth in the offering
                memorandum.·
            During
                  2005, the Company also issued 50,000 shares in connection with
                  Bridge Loan
                  Financing arranged in January 2005, 252,357 registered shares and
                  400,000
                  unregistered shares for consulting, legal and other services rendered
                  valued at $651,943, 524,500 unregistered shares as employee stock
                  awards
                  valued at $536,170, and 920,578 unregistered shares to retire $515,725
                  in
                  debt and associated interest. In addition, between September 7
                  and
                  December 15, 2005, the Company accepted subscriptions for 470,000
                  unregistered shares at an average price of $0.54 per share for
                  a total of
                  $275,000 and agreed to issue 20,000 shares for outside services
                  rendered
                  valued at $11,000. With the exception of the registered shares,
                  all shares
                  issued were subject to the restrictions set forth in Section 144
                  of the
                  Securities Exchange Act of 1933.





7





ITEM 1.  DESCRIPTION
        OF BUSINESS - continued
  Financing - continued




·
            On
                March 22, 2006, the company issued 100,000 shares of common stock
                at $0.55
                per common share in a non-brokered direct private placement for total
                net
                proceeds of $55,000. The shares were restricted pursuant to the provisions
                of Section 144 of the Securities Exchange Act of 1933. The securities
                were
                sold only to persons who met the Accredited Investor requirements
                and
                other requirements set forth in the offering memorandum.·
            Between
                  April 10, 2006 and April 25, 2006, the Company issued 1,714,260
                  shares of
                  common stock at $0.35 per common share in a non-brokered direct
                  private
                  placements for total net proceeds of $600,000. The shares were
                  restricted
                  pursuant to the provisions of Section 144 of the Securities Exchange
                  Act
                  of 1933. The securities were sold only to persons who met the Accredited
                  Investor requirements and other requirements set forth in the offering
                  memorandum. No commissions or other fees were payable in connection
                  with
                  this private placement. The funds were allocated for general working
                  capital purposes, as well as to fund the initial production of
                  the*FORTIS*TM
                  product by Jabil Circuit, Inc. pursuant to Skye’s Manufacturing Services
                  Agreement with Jabil of January
                  2006.


**Business
      of the Company**


As
        a
        result of the completion of the acquisition of Envirotech and the formation
        of
        ION and Valeo, the Company is in the business of designing and marketing
        innovative consumer appliances and products incorporating leading edge
        technologies and delivering unparalleled functionality. Skye’s first products
        are the *FORTIS* TM
series
        of tankless water heaters expected in 2006 and the *Paradigm* TM
series
        of point-of-use fluid heaters expected in late 2006 or early
        2007.




**Market
      Overview; Competition**





Extensive
      study of the tankless water heater market and strategies for penetrating that
      market show that:




•
            The
                water heater replacement market in the U. S. is 9 to 10 million units
                annually.


•
            Government
                tax credits and sale incentives for energy efficiency are
                increasing.


•
            New
                home sales and home improvement spending are
                increasing.


•
                As
                    incentives from energy companies beginning to enter the competitive
                    market
                    place, utility de-regulation offers an opportunity for manufacturers
                    of
                    energy saving
                    appliances.


•
            The
                market for tankless water heaters is expected to grow in excess of
                60% in
                2006.





The
      Company believes that recent increases in energy costs are sensitizing consumers
      to energy efficiency, which is expected to help promote sales of the Company’s
      products, due to their anticipated ability to more than offset their cost in
      energy savings over their useful lives.





Historically,
      in the U.S., tankless water heaters have suffered from poor design and had
      problems such as water flow limits, overheating at low flow, shut downs, and
      burnout of elements at low flow rates. As a result, some plumbing contractors
      and specifying engineers believe tankless heaters do not perform well, and
      they
      discourage consumers from buying tankless systems. There is a common perception
      that tankless heaters are expensive, more complicated and more time consuming
      to
      install. In the past, tankless water heaters have not provided a viable option
      for heating water for a whole house. In addition, conventional tank water
      heaters today are somewhat more efficient and reliable than in the
      past.





The
      conventional water heater market is highly competitive, highly concentrated,
      and
      mature, and dominated by a small number of manufacturers. Conventional tank
      water heaters maintain approximately 97% market share of residential water
      heater sales. Steep discounts and rebates as high as 20% or more are standard.
      Some contractors are loyal to their favorite brands and are opposed to tankless
      systems. The five dominant U.S. manufacturers have substantial resources, well
      known brand names, established distribution networks, worldwide manufacturing
      capabilities, and sizeable engineering, research and development resources
      to
      protect and increase their market share and profitability. Further, price
      competition has increased in recent years, and major manufacturers have been
      increasing research and development activities. Contractors do not want to
      lose
      the “guaranteed” replacement business provided by the shorter life of tank
      heaters, and the plumbing industry is somewhat resistant to tankless
      heaters.





Studies
      show that most consumers are not aware of tankless systems or their benefits,
      and do not evaluate whether to change from tank water heaters. Studies report
      that sales growth in tankless water heaters will require extensive education
      to
      change opinions in the plumbing industry, better tankless products than in
      the
      past, and a major consumer education campaign to increase awareness and motivate
      them to change.





8




ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Business
        of the Company**** - continued


Until
      just a few years ago, there were only a few tankless water heater manufacturers
      with a presence i n
      the
      United States. But that has changed. Now, all the major players from Japan,
      as
      well as many European manufacturers, are all in the United States, and they
      all
      are experiencing dramatic growth. The differences between Japanese and American
      products vary in the way they heat the water. Demand for space savings and
      efficiency has driven the Japanese market, while in America, the additional
      functionality of endless hot water, particularly driven by the custom home
      market, continues to increase demand for instant water heaters. Today, there
      are
      no electric water heaters manufactured in Japan. The Japanese have a 40-year
      history of using gas-based instant water heaters, primarily in the Ofuro tub
      market, and they are now leveraging that experience in the US marketplace.
      These
      Japanese manufactures include Takagi, Noritz, and Rinnai. The European
      competitors in the US marketplace in gas, and to a lesser extent, electric-based
      heaters, include Bosch and Steibel, both of which gained their market experience
      in Europe where point-of-use instant use water heaters are
      commonplace.





Currently
      in the US, American manufacturers actually source their gas-based heaters from
      Japanese suppliers and there are only a few electric manufacturers in the US,
      none of whom have any significant sales. The gas-based market is dominated
      by
      large Japanese manufacturers, but on the electric side, there are no dominant
      manufacturers.




One
      of
      the significant barriers to the entry of an electric tankless unit has been
      the
      inability of an electrically powered unit to generate enough heated water flow
      for the average U.S. household. Skye’s*FORTIS*TMproduct addresses this problem by incorporating its patented “multi-pass”
heating technology that keeps incoming water in contact with the heating
      surface
      for a longer time when compared to other electric models. The
      greater contact with a heating surface results in
      the
      ability to produce greater volumes of heated water. This new level of
      functionality afforded by Skye’s patented technology we believe will give Skye a
      competitive advantage over other electrically powered tankless water heaters,
      and for the first time provide a viable
      alternative to the consumer that demands higher flows of heated
      water.




**Description
      of the Business, Its Products and Services.**


Advantages
        of the*FORTIS*TM
and*Paradigm*TM
        Products
 
 The *FORTIS* TM
and *Paradigm* TM
designs
        seek to achieve several advantages over conventional tank water heaters and
        other tankless water heaters, including low cost of production (based on
        short
        assembly time, mass production capability and design versatility), reasonable
        purchase price, enhanced performance (emphasizing safety, dependability and
        convenience), operating and energy cost savings, space savings, environmental
        friendliness and the ability to deliver greater quantities of heated
        water.
 
 Skye’s
        business is to design and market innovative appliances that deliver industry
        leading functionality to consumers. Skye’s first products to be introduced to
        the market place are the *FORTIS* TM
whole
        house tankless water heater and the *Paradigm* TM
        point-of-use water (fluid) heater. The *FORTIS* TM
will
        be
        the first product to enter the market place. The *FORTIS* TM
has
        many key features designed to:





9




ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Description
        of the Business, Its Products and Services - continued


•
      maintain a pre-determined water temperature, which will not exceed the set
      point;


•
      conserve water (by eliminating the need to blend over-heated hot water with
      cold
      water until the desired temperature is achieved);


•
      conserve energy (by heating water only when needed and/or heating it at the
      point of use);


•
have
      a
      greater life span than other tank-based water heaters;


•
be
      competitive with the purchase price and operating cost of other water heaters,
      particularly when offset by anticipated energy savings;


•
save
      space (by making the unit 22” high x 12” wide x 4.5” deep, which is small enough
      to fit in a wall cavity or be surface mounted inside a closet or under a
      cabinet).





Skye’s
      products incorporate leading edge components of the highest quality, including
      backlit color LCD screens, avionic grade solid-state relays, 316 series surgical
      grade stainless steel components, extruded aluminum heating chamber coated
      with
      xylan to reduce the effects of mineralization and incoloy heating elements
      for
      long life. FORTISTM
      also incorporates many new features, including automatic self-cleaning option,
      auto-shut-off option to prevent flooding, child scald protection, as well as
      multiple redundant mechanical and software safety mechanisms.





**For
      hotel owners, commercial building managers and apartment
      tenants** ,
      this
      means lower operating costs for water and power, longer water heater life,
      very
      limited maintenance costs and valuable space saving advantages.





**For
      homeowners and other users** ,
      this
      means safety, lower operating costs for water and power, longer water heater
      life, and the convenience of many power saving settings and the convenience
      of a
      color LCD screen display. Environmental friendliness is likely to appeal to
      many
      owners and users.





**For
      distributors** ,
      this
      means competitive pricing, state of the art technology and less warehouse space
      needed for inventory. Distributors will also be provided with support materials,
      such as a sales manual, a technical manual, a cooperative marketing plan and
      promotional materials.




**For
      plumbers and installers** ,
      this
      means less labor cost to install, the ability to carry several models as stock
      items on vehicles, product advantages to offer customers and ease of
      installation.





**Product
      Overview**


The
        Company has developed two series of what it believes to be the world’s most
        advanced, efficient and reliable electric tankless water heaters: *FORTIS* TM
and *Paradigm* TM.
        The *FORTIS* TM
and *Paradigm* TM
series
        have substantially all metal construction and feature a bright LCD display
        for
        ease of use. The units also offer up to 6 remote controls for home automation,
        programmable processor to allow easy installation of the latest software,
        a
        modular design for ease of expansion of heating capacity, easy replacement
        of
        immersion elements, and industry-standard non-proprietary components for
        cost-effective part replacement.


Safety
      features include mechanical power breakers (included within the heater
      eliminating the need for an external sub-panel), wet sensor-leak detection,
      a
      valve to flush any sediment that may have accumulated in the system, an optional
      self-cleaning mode, and mechanical over temp switch that will shut off the
      unit
      in the event other safety devices fail. The units also feature a function that
      allows the consumer to program time-of-day energy savings modes, and even limit
      how long a user can get hot water in the shower.





10




ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Product
        Overview - continued




***FORTISTM.*** Skye
      expects to offer five power models of the *FORTIS*TM
      unit, with different combinations of heating elements. The Company believes
      all
      models have the following characteristics:





•  304
      series stainless steel housing


•  paddle
      wheel flow sensor that can be cleaned if necessary


•  solid
      aluminum heating chamber coated with xylan to prevent mineralization
      build-up


•  Incoloy
      sheathed immersion heating elements for longevity


•  Surgical
      grade stainless steel end-caps to move heated water within heating
      chamber


•  Custom
      microprocessor controller with backlit color LCD interface


•  Avionic
      grade solid state relays


•  Breaker
      sub-panel included inside each appliance


•  Redundant
      mechanical power breakers


•  Wet
      sensor


•  Optional
      automatic flush cleaning system





The *FORTISTM* is a
        durable tank-replacement product that is capable of meeting the needs of
        most
        U.S. households. Endless hot water, energy savings, compact design and redundant
        safety systems make this tankless water heater a viable choice for most
        residential applications.
  ***ParadigmTM.*** The *Paradigm* TM
series
        water heaters heat water using new and patented technology never before used
        in
        heating water. Essentially, instead of putting the heater in the water, the *Paradigm* TM
series
        water heaters put the water through the heater.
 
 The *ParadigmTM* technology offers virtually instantaneous hot water and is extremely efficient.
        The *Paradigm* TM
series
        can heat water over 100° F in only seconds. The *Paradigm* TM
        technology is even more energy efficient than *FORTISTM* .
        Like *FORTIS* TM, *ParadigmTM* requires
        no tank. In *Paradigm* TM,
        there
        is no impediment in the water flow, whatsoever, so it does not need an external
        cleaning system. *Paradigm* TM
        technology provides virtually instantaneous heat response upon
        demand.
  Included
        in the *ParadigmTM* series
        of heaters is a whole house, point-of-use and under-the-sink tankless water
        heater. Moreover, the Company believes that this smaller unit will find a
        market
        much larger than the whole-house unit and that the volume of smaller units
        will
        likely exceed the whole-house units.
  ***FORTISTM***  **and** ***ParadigmTM***  **Status**
 
 ***FORTIS*** **TM.**  As
          of May
          30, 2006 Skye expects that it will commence initial production of the *FORTIS* TM
series
          of products in 2006. Jabil Circuit has agreed to manufacture the first
          run of
          product at its Tempe, Arizona facility and later larger volumes of product
          are
          expected to be manufactured at Jabil Circuits, Poway, California facility.
          Skye
          expects to grow production and inventory levels of the *FORTIS* TM
product
          over the balance of 2006 and beyond.




***Paradigm*** **TM.** ** Skye
      is
      completing the engineering for manufacturing phase for a line of point-of-use
      and whole-house water heaters. Once this engineering phase is complete, expected in
      late
      third-quarter of 2006, Skye intends to seek the approvals noted below and
      anticipates that initial production will commence in late 2006 for an
      early
      2007 market introduction. Skye is currently in negotiations with key
      suppliersto
      establish strategic relationships with certain component vendors that may be
      able to assist in reducing the time to market.






11





ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Product
        Overview - continued
 ***Other*** .
          Skye
          intends to conduct further research and development to design other value-added
          consumer products to incorporate the *Paradigm* TM
          thick-film resistive technology. Current efforts include an ultra-efficient
          space heater, as well as a new generation ceiling fan to cool in the summer
          and
          provide heat in the winter. Using the *FORTISTM* and *Paradigm* TM
          technology, along with other proprietary technology, the Company seeks
          to
          develop additional products for recreational vehicles, marine applications
          and
          swimming pools and spas. ***Governmental
          Approvals,
          Effect of Regulations***. All of Skye’s products are currently being
          tested to ensure compliance with applicable code requirements. Additionally,
          Skye is submitting its products for testing and/or approval by the following
          agencies:




•  UL/CUL


•  NSF


•  IAPMO/UPC




Skye
      intends to obtain all those certifications
      but there can be no assurance that any of
      these
      certifications will be obtained or, if obtained, that the certifications
      will be maintained.




Other
      than compliance with the certifications listed above, Skye believes it need not obtain
      significant other
      governmental approvals to
      market is products , although
      consumer safety, building and plumbing codes are in a constant state of
      chang e.
      Nevertheless, Skye is not aware that it needs to obtain individual approval
      of
      its units pursuant to general industry standard codes. Skye
      is
      not of any pending legislation that will adversely affect the ability of Skye
      to
      conduct business.




**Target
      Markets and Distributors**





According
      to the Appliance Manufacturers Association, 10 million tank water heaters were
      sold in the United States in 1997, at an average cost per unit of $210, for
      total gross sales of $3.15 billion. Annual tankless water heater sales in the
      United States exceed $100 million in gross sales, as of 2004. The worldwide
      market for tankless water heaters is more than $10 billion in gross annual
      sales.





Skye
      believes that the U.S. market for tankless water heaters, that comprised less
      than 2% of total water heater sales in 2004, is poised for significant growth.
      According to a 2003 Frost & Sullivan report, tankless water heater sales
      were experiencing a significant growth rate exceeding 57% per year, as compared
      to only a 2% growth rate for traditional tank-based water heaters.




Because
      tankless water heaters are still relatively new in the U.S., Skye has determined
      it will use wholesale distribution through appointed manufacturer’s
      representatives to
      enter
      the market place. As consumer knowledge of tankless is still quite low, Skye
      believes that a “push” style distribution through wholesale distribution is
      needed. Utilizing the resources of wholesalers to make sales calls and stock
      inventory locally will help to reduce initial capital needs and expedite a
      broader distribution network. To date , Skye has
      appointed manufacturer’s representatives in 22 states and expects that it will
      continue to appoint more representatives over the balance of 2006, including
      manufacturer’s representatives in Canada and Mexico.





12





ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Target
        Markets and Distributors - continued


The
      wholesale distribution model is favored by Skye because, among other reasons,
      according to the 2003 Frost & Sullivan report, over 60% of plumbing sales
      are made by wholesale distributors. Many of the wholesale distributors add
      value
      to Skye’s distribution because, in addition to providing the local sales and
      installation force, they also are able to inventory both units and parts. As
      awareness of tankless grows, a local presence is essential to convert home
      building, architects and other key decision makers to adopt tankless
      technology.


Over
        time
        Skye believes that certain of its products, particularly the *Paradigm* TM
        point-of-use water heaters will likely be sold through traditional and “big-box”
retailers. Although retailers typically drive somewhat higher margins for
        Skye
        as compared to wholesale distribution, the infrastructure necessary to support
        this sales channel is significantly higher and Skye is not currently staffed
        or
        capitalized to do this. We will continue to monitor our distribution and
        determine on a product-by-product basis, which method of distribution or
        sales
        channel best serves Skye’s interests.
  Skye
        has
        also established a relationship with Siemens, AG, our supplier of certain
        critical electrical components. Skye is currently working with Siemens, AG
        to
        develop critical electrical components to enhance the safety and functionality
        of Skye’s products, as well as to develop the necessary component to
        commercialize the *Paradigm* TM
product
        lines.
  **Manufacturing**
 
 On
        February 15, 2006, Skye entered into a Manufacturing Services Agreement with
        Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
        certain components and to assemble Skye’s tankless water heater products as
        specified by Skye from time to time. The agreement has an effective date
        of
        January 30, 2006. Skye anticipates that Jabil will become Skye’s primary
        manufacturer and is currently completing the engineering for manufacturing.
        Additionally, Skye is also actively negotiating with critical
        suppliers  to
        quality them to supply *Paradigm* TM
        components, as well as potentially expedite the earlier market availability
        of *Paradigm* TM
        product.
 
 **Intellectual
        Property**
 
 In
        May
        2002, Envirotech was granted a patent by the United States Patent Office
        for its
        Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
        Each
        of the contractors or consultants who have performed research and development
        services for and on behalf of Envirotech made written assignments to Envirotech
        of proprietary and intellectual property rights relating to the ETWH and
        that
        research and development, and have signed non-disclosure, non-competition
        agreements with Envirotech.




Over
      time
      Skye believes that certain of its products, particularly the ParadigmTM
point-of-use water heaters will likely be sold through traditional and
      “big-box” retailers.
      Although retailers typically drive somewhat higher margins for Skye as compared
      to wholesale distribution, the infrastructure necessary to support this sales
      channel is significantly higher and Skye is not currently staffed or capitalized
      to do this. We will continue to monitor our distribution and determine on a
      product-by-product basis, which method of distribution or sales channel best
      serves Skye’s interests.




Skye
      has
      also established a relationship with Siemens, AG, our supplier of
      certain critical
      electrical components. Skye is currently working with Siemens, AG to develop
      critical electrical components to enhance the safety and functionality of Skye’s
      products, as well as to develop the necessary component to commercialize the
      ParadigmTM product lines.




13


ITEM 1.  DESCRIPTION
          OF BUSINESS - continued
 Target
        Markets and Distributors - continued


**Manufacturing**





On
      February 15, 2006, Skye entered into a Manufacturing Services Agreement with
      Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
      certain components and to assemble Skye’s tankless water heater products as
      specified by Skye from time to time. The agreement has an effective date of
      January 30, 2006. Skye anticipates that Jabil will become Skye’s primary
      manufacturer and is currently completing the engineering for manufacturing.
      Additionally, Skye is also actively negotiating with critical
      suppliers  to
      quality them to supply ParadigmTM components, as well as potentially expedite the
      earlier market availability of ParadigmTM product.





**Intellectual
      Property**





In
      May
      2002, Envirotech was granted a patent by the United States Patent Office for
      its
      Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
      The
      Founders of Envirotech and Steve Onder, and each of the contractors or
      consultants who have performed research and development services for and on
      behalf of Envirotech made written assignments to Envirotech of proprietary
      and
      intellectual property rights relating to the ETWH and that research and
      development, and have signed non-disclosure, non-competition agreements with
      Envirotech.





During
      the past two years, based on newly developed technology, ION has filed several
      applications for patents with the United States Patent and Trademark Office,
      and
      expects the products offered using this new technology to replace the products
      previously manufactured by Envirotech. All persons deemed inventors have
      executed written assignments to ION of proprietary and intellectual property
      rights relating to the inventions forming the basis of the various applications
      for patents and the attendant research and development. In November 2005, the
      Company received notice from the USPTO that the first such patent request has
      been allowed, which was issued on May 16, 2006 as US Patent No. 7,046,922.
      While
      there can be no assurances that the other patents sought will be granted or
      that
      the technology will be considered proprietary to Skye or ION, the Company
      believes that its applications are meritorious and will be granted at least
      in
      part.





In
          addition to the applications of patents filed by the Company, Skye has
          also
          registered its name and graphics art logo with the U.S. Patent and Trademark
          Office. Effective protection may not be available for our service marks.
          Although we have registered our service marks in the United States and
          in
          certain countries in which we do business or expect to do business, we
          cannot
          assure you that we will be able to secure significant protection for these
          marks. Our competitors or others may adopt product or service names similar
          to
“Skye”, thereby impeding our ability to build brand identity and possibly
          leading to client confusion. Our inability to adequately protect the name
“Skye”
could adversely affect our business, but would not detract from the Company’s
          proprietary ownership of its other intellectual property.





**Research
      and Development**





The
      Company conducts all of its research and development activities through ION.
      All
      employees, contractors and consultants engaged in the research and development
      process by ION were required to execute non-disclosure, non-competition
      agreements covering the subject, scope and work product of the program. The
      Company expended approximately $450,000 in 2005 and $285,000 in 2004 on research
      and development.


**Employees**


At
        December 31, 2005, Skye had two part time employees, both of whom served
        with
        nominal compensation, and Valeo had six full-time employees. Additionally,
        the
        Company retained the services of consulting professionals to provide on-going
        management, legal, accounting and engineering research and development work.
        The
        Company anticipates adding several full time employees in the near future
        in
        management and for administrative and technical support. Additional employees
        are expected to be engaged as revenues from operations
        permit.


**Dependence
      on Major Custome** **r**


Skye
        is
        just beginning the wholesale introduction of its products. It has not developed
        a dependence upon any single customer or group of customers. By necessity,
        initial sales of Skye’s products may be concentrated with certain distributors
        or retailers until a broader distribution network can be achieved. Skye will
        monitor its sales and distribution activities closely to avoid such
        reliances.










14





ITEM 1.  DESCRIPTION
            OF BUSINESS - continued
  **Costs
              of Environmental Compliance**
 
 Because
              Skye does not manufacture any of its products, it does not anticipate
              incurring
              material costs related to environmental compliance, which is the responsibility
              of the manufacturer.
 **Materials
          and Principal Suppliers** .
 
 Sky
        has
        retained Jabil Circuit, Inc. to manufacture its products, and, as such, is
        heavily dependent upon Jabil to perform satisfactorily so as to ensure the
        availability of product for sale. Jabil is required to buy components for
        Skye’s
        products from the market at large, as well as an approved list of suppliers,
        including Siemans, AG (electrical components), Lake Monitors (flow sensors),
        Tru Heat (heating elements), Hydro Aluminum (extruded heating chamber), and
        Arnold Bros. (stainless steel sheet metal and components). Although limited
        production experience has been obtained, Skye is satisfied that Jabil has
        the
        necessary experience to avoid supplier delivery problems. In order to avoid
        losses associated with lack of production components, Skye has worked closely
        with Jabil to identify suppliers that have traditionally performed well in
        addition to ensuring that multiple suppliers for most components are available.
        With the exception of certain proprietary components manufactured by Jabil,
        and
        the preferred vendors noted above, the balance of components are readily
        available from a variety of sources both domestically and internationally.
        Skye
        is satisfied that it and Jabil have adequately planned to avoid production
        disruption resulting from a breakdown in its supply
        chain.


**Recent
      Developments**


On
          May
          16, 2006, the USPTO issued a patent to ION on the modular tankless water
          heater,
          the core technology of the *FORTISTM* tankless
          water heater. The Company completed engineering on the *FORTISTM* series
          of products in October 2005. Initial samples were produced in December
          2005. On
          February 15, 2006, the Company entered into a Manufacturing Services Agreement
          with Jabil Circuit, Inc., pursuant to which Jabil will manufacture certain
          parts
          and assemble the Company’s products. A copy of that agreement was filed with the
          Company’s current report on Form 8-K dated February 23,
          2006.





Meanwhile,
      in November 2005, the Company completed the ParadigmTM proof of concept and has
      commenced preparation of certain patent applications to protect the related
      inventions. It has produced sample models of the ParadigmTM for testing and is
      currently completing engineering for manufacturing. Additionally, Skye is also
      actively negotiating with critical suppliers to qualify them to supply *ParadigmTM* components, as well as potentially expedite the earlier market availability
      of *ParadigmTM* products.





Certain
      litigation commenced after year-end is discussed in “Item 3. Legal Proceedings”
below.







**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**


At
        December 31, 2005, the Company owned no real property. The Company leases
        space
        at 7150 West Erie Street, Chandler Arizona 85226. These offices are leased
        by
        the Company pursuant to a lease agreement which operates month-to-month.
        The
        monthly lease obligation is approximately $20,000. There is no option to
        renew
        or extend the term of the lease. This facility consists of approximately
        28,000
        square feet and includes both 8,000 square feet of office space and 20,000
        square feet of warehouse space. The Company has entered into a conditional
        purchase agreement for the building it currently occupies. Under the terms
        of
        the agreement the Company may, at its option prior to August 2, 2006, proceed
        to
        purchase the real estate for the full purchase amount of $2,800,000. On August
        18, 2005, the Company paid a non-refundable deposit of $50,000 towards the
        purchase of the building to be applied to the purchase price if Skye elects
        to
        purchase the building or to be forfeited if it chooses not to purchase the
        building. Skye believes that the value of the building may exceed the purchase
        option price. Skye is determining whether or not to proceed with the purchase
        and is examining the possibility of selling the current option to a third
        party
        and relocating to a smaller facility.


15




ITEM
      2. DESCRIPTION OF PROPERTY - continued





**Investments**





The
      Company uses available capital to fund its current operating expense and product
      research and development. Accordingly, it does not have a long-term investment
      plan. Short-term investments are invested in bank deposits and other liquid
      secure investments.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS** .





Distributor
      Suit.
      Prior
      to the acquisition of Envirotech, by the Company, Envirotech was the defendant
      in a lawsuit filed by a former distributor alleging a breach of a Distributor
      Agreement entered into with Envirotech in May, 1998. On August 13, 2003,
      Envirotech entered into a Settlement Agreement and Release pursuant to which
      Envirotech agreed to pay the distributor the sum of $520,500 in installments
      over a period of ten years. The obligations under this Settlement Agreement
      are
      secured by a Security Agreement covering all assets of Envirotechexcept
      its intellectual properties, as defined therein, subordinated, however, to
      a
      first lien on all assets of Envirotech, tangible and intangible, granted to
      the
      Senior Secured Creditor in 2001 and 2002 by Envirotech to secure two promissory
      notes given in satisfaction of legal fees. As part of the settlement, Envirotech
      granted the distributor a Stipulated Judgment which was not to be filed of
      record so long as no default existed. On May 3, 2004, the distributor claimed
      a
      breach and filed the Stipulated Judgment. Management believes no default existed
      to warrant the filing of the judgment. With the filing of the Bankruptcy
      Petition by Envirotech (see below), this action was stayed. However, with the
      dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment
      is
      once again a claim against the assets of Envirotech, subject, however, to the
      claims and rights of the Senior Secured Creditor. The promissory notes and
      security interests of the Senior Secured Creditor were purchased by and assigned
      to Sundance Financial Corporation in 2005.





Seitz
        Suit .
        In
        2002, Envirotech was named as a Defendant in a law suit filed in the U.S.
        District Court for the Southern District of Texas, Houston, Texas (Civil
        Action
        No. H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems
        Worldwide, Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”). The Company
        is not affiliated with Envirotech of Texas, Inc. The suit alleges that
        Envirotech has infringed upon patent rights of others and seeks damages and
        an
        order to cease and desist. Management believes the suit is without merit.
        The
        suit was stayed pending the disposition of the Chapter 11 Bankruptcy Petition
        filed by Envirotech in August 2004. On September 30, 2005, however, the
        Bankruptcy Court allowed the plaintiff to re-open the Seitz Suit and he has
        done
        so. The suit is in the discovery stage and the Company is vigorously engaged
        in
        the process. On December 5, 2005, the Houston Court issued an injunction
        against
        Envirotech and its affiliated entities, including Skye, enjoining them from
        further marketing, advertising or offering for sale, or accepting any orders
        for
        (i) the Envirotech ESI 2000 heater, (ii) any other heater, regardless of
        its
        model, using parts of the Model ESI 2000 heater, and (iii) any other heater,
        regardless of model number, utilizing in whole any part any technology embodied
        in the Model ESI 2000 heater. The Company does not consider this injunction
        detrimental to its ongoing business activities, as it had already discontinued
        production of the alleged offending product and the new products have been
        developed with specific attention to avoiding infringement on any existing
        patents of third parties. Trial in the Seitz Suit has been scheduled for
        November 2006. At a hearing on May 18, 2006, the Court directed that discovery
        be expanded to include the technology and products of Skye, including,
        specifically the *FORTIS* TM
and *Paradigm* TM
        technologies. Envirotech and Skye intend to aggressively pursue this litigation
        to conclusion. On June 28, 2006 counsel for Envirotech withdrew from the
        action.
        As a result, Envirotech is currently seeking new counsel to pursue the
        litigation.


16




ITEM 3.  LEGAL
      PROCEEDINGS - continued




Unpaid
      Legal Fees. Subsequent to December 31, 2003, Envirotech has been named in
      four separate lawsuits for unpaid legal and consulting fees totaling $268,000.
      These include the Myers and Jenkins Suit and the Sensor Technologies Suit
      discussed below. On May 3, 2004, Envirotech settled one of these suits claiming
      fees of $112,500. In connection with that settlement, Envirotech reimbursed
      the
      plaintiff for alleged out-of-pocket expenses and the Company issued 10,000
      shares of common stock, restricted under SEC Rule 144, to the plaintiff on
      the
      basis of a loan from the Company to Envirotech. The settlement, and any
      settlements of the other suits, will be reflected as a charge in the year of
      the
      settlement. In two of the other three suits judgments have been granted in
      the
      aggregate amount of approximately $155,500, both of which were stayed by the
      bankruptcy filing discussed above. The fourth suit is on behalf of a law firm
      that served as a contract arbitrator in Envirotech’s dispute with the
      Distributor noted above. With the dismissal of the Chapter 11 proceedings,
      the
      Company has received notice from the plaintiff that it intends to resume the
      suit, which seeks approximately $3,500 in fees.




Myers
      and Jenkins Suit .
      On May
      24, 2006, Envirotech was served with a Motion for Entry of Default in connection
      with an action filed in Arizona Superior Court, case number CV-2006-003671
      by
      Envirotech’s prior legal counsel, Myers and Jenkins. The motion seeks judgment
      for the payment of the principal sum of $103,830, together with interest and
      costs. Envirotech has not defended the action.





Sensor
      Technologies Suit .
      On May
      24, 2006, Envirotech was served with an Application for Entry of Default in
      connection with an action filed in the Arizona Superior Court, case number
      CV-2006-0060632, by Sensor Technologies & Systems, Inc., an engineering firm
      that provided engineering consulting services in connection with Envirotech’s
      ESI-2000 product. The application seeks judgment for the payment of $72,391,
      together with interest and costs. Envirotech has not defended the
      action.





Bankruptcy
      Proceedings .
      As a
      result of several claims arising out of decisions by Envirotech’s management
      prior to its acquisition by Skye that resulted in a number of lawsuits and
      judgments (see above), on August 6, 2004, Envirotech filed a Voluntary Petition
      for protection under Chapter 11 of the United States Bankruptcy Code in Phoenix,
      Arizona. The filing of this Petition with the Bankruptcy Court stayed all
      existing litigation, judgments and efforts to collect on the judgments.
      Envirotech was acquired by the Company in November 2003 in a stock-for-stock
      transaction and has been held and operated by the Company as an operating
      subsidiary. With the exception of a guarantee to one critical supplier in the
      current amount of approximately $42,500, Skye has not assumed any liability
      for
      the obligations of Envirotech. As of the date of the filing of the Chapter
      11
      Bankruptcy Petition, Envirotech had liabilities of approximately $1.6 million.
      Several creditors, not related to the supply of parts or the assembly of
      products, have obtained judgments against Envirotech and an action was pending
      in the U.S. District Court, Southern District of Texas, alleging patent
      infringement (see above). All claims of creditors, including the above-mentioned
      judgments, and efforts to collect same, together with the litigation pending
      in
      the U.S. District Court in Houston, were stayed during the pendency of the
      Bankruptcy Proceedings. Envirotech filed a Disclosure Statement and Plan of
      Reorganization on November 7, 2004 and the Court approved its request to submit
      the plan to the creditors for approval. The Plan, however, did not receive
      approval of the Court and Envirotech subsequently filed a Motion to Dismiss
      the
      Chapter 11 proceedings which was granted, with prejudice, on February 28, 2006.
      As a result of this dismissal, all claims and judgments of creditors of
      Envirotech may be renewed.





17




ITEM 3.  LEGAL
      PROCEEDINGS - continued




Claims
        by the Company Against Former Executives. On August 13, 2004, Skye filed a
        verified complaint in the United States District Court in and for the District
        of Arizona against three former officers, directors and principal shareholders
        of Envirotech, and Ronald Jay Edwin, a/k/a Ryan Edelstein, and others (Case
        No.:
        CV04-1682-PHX-EHC). The suit alleged, against various defendants, Breach of
        Fiduciary Duty, Aiding and Abetting Breach of Fiduciary Duty, Breach of
        Contract, Breach of Implied Covenant of Good Faith and Fair Dealing, Fraud
        and
        Intentional Misrepresentation, Conspiracy to Defraud, Arizona Securities
        Fraud,
        Federal Securities Fraud, Negligent Misrepresentation, Misappropriation of
        Trade
        Secrets and Confidential Business Information, Conversion/Embezzlement,
        Intentional Interference with Business Relations and Prospective Economic
        Advantage, Unjust Enrichment, and Promissory Estoppel. The Company sought
        various forms of relief including, but not limited to, Damages, Constructive
        Trust, Rescission and Injunctive Relief. A copy of this Complaint is available
        upon request made to the Company. Subsequently, the suit was voluntarily
        dismissed by the Company to facilitate settlement negotiations with each
        of the
        defendant parties. A settlement was signed with Ronald J. Edwin the terms
        of
        which include, among other things, a permanent injunction against Mr. Edwin
        for
        the actions alleged. Settlements with each of the remaining defendants were
        achieved in the fourth quarter of 2004, resulting in the return and cancellation
        of 2,075,000 shares of common stock of the Company that had been issued in
        connection with the acquisition of Envirotech. In addition, all three defendants
        entered into non-compete agreements with the Company and agreed to various
        other
        terms sought by the Company. In connection with one of the settlements where
        the
        defendant returned a substantial block of his shares, the defendant was granted
        an option by the Company to acquire up to 100,000 shares of common stock
        at a
        price of $0.55, for a period of one year. The option expired December 31,
        2005.





Shareholder
        Inspection Claim .
        In April 2006 a shareholder purporting to have obtained consent from at least
        15% of the Company’s shareholders filed a lawsuit in the United States District
        Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF) seeking
        inspection of the Company’s books and records pursuant to Nevada corporate law.
        The Court denied plaintiff’s initial request. The Company has asserted several
        counterclaims against the plaintiff for tortious conduct and for abuse of
        the
        legal process in connection with the lawsuit. The matter is currently pending.
  Shareholder
        Derivative Action .
        In May 2006 a small group of dissident shareholders (including the plaintiff
        from the Shareholder Inspection Claim) filed a lawsuit in the United States
        District Court for the District of Arizona (Case No. CV06-1291-PHX-ROS) as
        a
        derivative action seeking injunctive and declaratory relief. The Company
        was
        named only as a nominal defendant and there are no claims for monetary damages
        against the Company. The primary claims involve the prior issuance of the
        Company’s common stock to former consultants to the Company, as well as prior
        issuances of stock to certain members of current management. Plaintiffs seek
        to
        prevent these individuals from using their stock and related voting rights
        to
        solicit proxies and notice shareholder meetings, and have demanded that they
        return the shares to the Company. The parties have entered into a “standstill”
arrangement in which the parties agreed to refrain from using their stock
        and
        voting rights in connection with proxy solicitations, shareholder consents,
        and
        the noticing of special shareholder meetings. The matter is currently pending.
        In addition to the foregoing claims, three of the defendants have demanded
        that
        the Company defend and indemnify them from the plaintiffs’ claims.


Delisting .
      Because
      the Company has been unable to file this report and its Quarterly Report on
      form
      10-QSB for the quarter ended March 31, 2006, on a timely basis, including the
      grace period permitted by the NASD Over the Counter Bulletin Board (“OTCBB”), it
      has been delisted from the OTC:BB. As a result, the Company’s securities now
      trade on the pink sheets until all reports are current. There is no assurance
      that the Company will be admitted to trade again on the OTC:BB. Due to past
      delinquencies in its filings, the Company may be restricted from applying for
      listing on the OTC:BB for at least a year.





18




ITEM
      3.  LEGAL
      PROCEEDINGS - continued




Berry-Shino
      Claim .
      The
      Company has on several occasions during the past three years utilized the
      services of Berry-Shino Securities, Inc., Scottsdale, Arizona, in raising
      various forms of financing to further its business plan and operations. In
      the
      course of each of these engagements, the Company has paid Berry-Shino various
      fees and expenses and has issued a certain number of shares of its Common Stock
      to Berry-Shino. The Company has recently received correspondence from
      Berry-Shino stating that it believes it is entitled to be issued an additional
      456,500 shares of Common Stock as additional consideration for its services.
      The
      Company is currently reviewing of validity of the entitlement.





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





On
      October 21, 2005, through a written consent without a meeting, a majority of the
      shareholders approved a change in
      the
      name of Tankless Systems Worldwide, Inc. to SKYE International, Inc.





In
      March
      2006, the Company was served with a demand by Dan DeSade, acting on behalf
      of
      himself and certain other shareholders, purporting to represent shareholders
      of
      record holding in excess of 15% of the outstanding shares of the Company
      (collectively, the “Demand Shareholders”). The Demand Shareholders had signed
      authorizations giving Mr. DeSade the authority to demand that the Company permit
      an inspection of its books and records pursuant to relevant provisions of Nevada
      law. The Company’s Board of Directors denied such demand and took the position
      that the actions of Mr. DeSade, specifically, the solicitation of proxies,
      were
      in contravention of Federal Securities laws, and further, that the demand itself
      could not be supported under applicable Nevada law. Subsequently, in April
      2006,
      Mr. DeSade, representing the Demand Shareholders, filed a petition in the U.S.
      District Court for the District of Nevada, case number 2:06-cv-00541-RLH-GWE,
      seeking an inspection of the Company’s financial and other records pursuant to
      Nevada corporate law. The Company believes the request was not properly made
      and
      contested that request. The complaint was dismissed on May 22, 2006, but the
      plaintiffs were granted leave to re-file the complaint if certain technical
      deficiencies are corrected.





On
      April
      20, 2006, the President of the Company, acting pursuant to Article II section
      2
      of the Company’s By-laws, having received a demand of shareholders holding in
      excess of 15% of the issued and outstanding shares of the Registrant, called
      a
      Special Meeting of the common shareholders of the company that was to be held
      on
      May 31, 2006. The purpose of the special meeting was to:





a.
            To
                elect directors of Skye to hold office until the succeeding Annual
                General
                Meeting of Shareholders.





b.
            To
                transact such other business as may properly come before the Meeting
                or
                any adjournment or adjournments
                thereof.





At
      its
      meeting on May 11, 2006, the Board of Directors postponed the special
      shareholders’ meeting until a future date to be established after the Company
      has brought its SEC filings current. The Board did not evaluate whether the
      meeting was duly called.





19


**PART
      II**




**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





**Market
      Information.**





Skye’s
      common stock has been
      traded on the Over the Counter Bulletin Board since 1998 under various
      symbols:





CRRZ
      - 1998
      to December 12, 2002


ELUT
      -
      December 12, 2002 to July 25, 2003


TSYW
      - July
      25, 2003 to November 11, 2005


SKYY
      -
      November 11, 2005 to May 19, 2006


SKYYE
      - May
      19, 2006 to June 5, 2006


SKYY.PK
      -
      Since June 5, 2006





The
      following table sets forth the range of high and low bid quotations for each
      fiscal quarter for the last two fiscal years. These quotations reflect
      inter-dealer prices without retail mark-up, markdown, or commissions and may
      not
      necessarily represent actual transactions.





**Per
      Share Common Stock Bid Prices by Quarter**




For
              the Fiscal Year Ending on December 31, 2005
            High
            LowQuarter Ended December 31,
              2005
            1.12
            0.62Quarter Ended September 30,
              2005
            1.40
            0.66Quarter Ended June 30, 2005
            1.05
            0.57Quarter Ended March 31, 2005
            1.40
            0.75For
              the Fiscal Year Ending on December 31, 2004
            High
            LowQuarter Ended December 31,
              2004
            0.91
            0.88Quarter Ended September 30,
              2004
            0.73
            0.73Quarter Ended June 30, 2004
            0.80
            0.65Quarter Ended March 31, 2004
            1.05
            1.20




**Holders
      of Common Equity**





As
      of
      June 22, 2006, there were approximately 254
      shareholders of record of the Registrant’s Common Stock and there were
      approximately 20,588,493 shares of Common Stock issued and outstanding.





**Dividends**





Skye
      has never declared or paid a cash dividend to stockholders. The Board of
      Directors presently intends to retain any earnings to finance the Company’s
      operations and does not expect to authorize cash dividends in the foreseeable
      future. Any payment of cash dividends in the future will depend upon the
      Company’s earnings, capital requirements and other factors.





20




ITEM
        5.  MARKET
        FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - continued




**Equity
      Compensation Plans**





As
      of
      December 31, 2005, our equity compensation plans were as follows:





**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted
                average exercise price of outstanding options, warrants and
                rights**
            **Number
                of securities remaining available for future issuance****(1)******Equity
                compensation plans approved by security holders
            None
            N/A
            NoneEquity
                compensation plans not approved by security holders
            700,000
            $0.51
            247,643Total
            700,000
            $0.51
            247,643


(1)
      Excluding securities reflected in column (a)





The
      Company has granted options to Sundance Financial Corp., and Digital Crossing,
      LLC, to
      purchase 600,000 shares of common stock at an exercise price of $0.50 per share.
      The option may be exercised, in whole or in part, at any time within a ten-year
      period beginning February 11, 2004 and ending February 11, 2014. The options
      are
      fully exercisable as of the grant date, February 11, 2004, and require that
      the
      exercise price be paid in cash. The number of shares purchasable upon exercise
      of the option are subject to certain adjustments, and in certain circumstances
      the price per share may also be adjusted. The grantees have unlimited piggy-back
      registration rights to have shares purchased pursuant to the option included
      in
      any registration statement filed by the Company. Copies of the Option Agreements
      with Sundance and Digital Crossing, and amendments thereto, are attached as
      Exhibits 10.7 and 10.8, respectively, of this Report.





In
      connection with the settlement of claims asserted against one of the principal
      officers and directors of Envirotech, the Company and granted a one-year option
      to purchase up to 100,000 shares of common stock of the Company at a price
      of
      $0.50 per share. The option did not grant any registration rights to the grantee
      and there were no provisions for adjustments either in number of shares or
      price. This option expired on December 31, 2005 and was not exercised.





The
      Company also granted its web site developer the option, for a period of one
      year, to purchase up to 100,000 shares of common stock of the Company at a
      purchase price equal to the 50 day moving average as of the Effective Date,
      August 24, 2005. The option did not grant any registration rights to the grantee
      and there were no provisions for adjustments either in number of shares or
      price. As of December 31, 2005, and
      as of
      the date of this Report, this option has not been exercised.




**Changes
      in Control**





The
      Company is not aware of any arrangements which may result in a change in control
      of the Company. While it would not necessarily constitute a change in control,
      the Company is in receipt of a shareholder consent that would purport to elect
      five directors and to ratify the appointment of Semple & Cooper. Two of the
      directors to be appointed have already been appointed to the Board by the
      existing directors on May 11, 2006. They are Messrs. Cannerelli and Sprunk.
      The
      stipulated agreement among the parties noted in “Item 3. Legal Proceedings,
      Shareholder Derivative Action” above prevents the Company from implementing that
      consent, and the Board of Skye has not had an opportunity to evaluate the
      efficacy of that shareholder consent.





21




ITEM
        5.
 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -
        continued




**Sale
      of Unregistered Securities**





Information
      on the sales of unregistered securities is noted in “Item 1. Description of
      Business, Financing” above. Information on purchases of the Company’s securities
      in connection with the settlement of litigation against certain former
      executives of the Company is discussed more fully in “Item 3. Legal Proceedings”
above.





**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following discussion should be read in conjunction with the financial statements
      and accompanying notes included in this Form 10-KSB.





**Plan
      of Operation.**





Skye
      has
      three subsidiary corporations. On November 7, 2003, the Company acquired
      Envirotech Systems Worldwide, Inc. (Envirotech), a private Arizona corporation,
      as a wholly owned subsidiary. In January 2004, Skye formed ION Tankless,
      Inc.(ION), an Arizona corporation, to do research, development and marketing
      of
      new tankless heating technologies. In January, 2005, it created Valeo
      Industries, Inc. (Valeo), a Nevada corporation, to license ION technologies
      and
      to manufacture and distribute products using those technologies.





In
      2004,
      the Company initiated its management transition plan as a result of its
      acquisition of Envirotech. The Company entered into several consulting
      agreements to assist in day-to-day operations and provide financial, management
      and other consulting services to the Company and its subsidiaries. Certain
      of
      those agreements have been completed and others have been entered into with
      the
      same objective in mind. [See Exhibits 10.5, 10.6 and 10.9 to this Report.]
      These
      persons serve as part of the management team during the periods of their
      engagement and will perform a variety of services to include:





1.
            The
                evaluation of potential business
                opportunities


2.
            The
                business operations and management


3.
            The
                development of business strategies


4.
            Raising
                public and private capital





The
      Company is in the business of designing, developing, manufacturing and marketing
      consumer lifestyle products, including, initially, several models of electronic,
      tankless water heaters. Management feels that the industry trends are
      encouraging and it expects increased sales each year of operation. Advertising
      will continue through the printed media, cable television and the Internet.
      As
      new homebuilders become aware of the product it will be included in original
      house plans.





Previously
        the Company produced, marketed and sold its electronic tankless water heater
        products directly through the internet. The *FORTIS* TM
and *Paradigm* TM
units,
        and future products, however, will be sold primarily through distributors.
        It
        also has established its own sales team that handles retail sales generated
        by
        advertising and Internet marketing. The *FORTIS* TM
design
        seeks to achieve several advantages over tank water heaters and other tankless
        water heaters, including low cost of production (based on short assembly
        time,
        mass production capability and design versatility), reasonable purchase price,
        enhanced performance (emphasizing safety, dependability and convenience),
        operating cost savings, space savings and environmental friendliness. For
        more
        information, see Description of Business, Part I, Item I above .





22





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued




**Summary
      of Products**





***FORTISTM.*** Skye
      expects to offer five power models of the *FORTISTM* unit,
      with different combinations of heating elements. The Company believes all models
      have the following characteristics:





•  304
      series stainless steel housing


•  paddle
      wheel flow sensor that can be cleaned if necessary


•  solid
      aluminum heating chamber coated with xylan to prevent mineralization
      build-up


•  Incoloy
      sheathed immersion heating elements for longevity


•  Surgical
      grade stainless steel end-caps to move heated water within heating
      chamber


•  Custom
      microprocessor controller with backlit color LCD interface


•  Avionic
      grade solid state relays


•  Breaker
      sub-panel included inside each appliance


•  Redundant
      mechanical power breakers


•  Wet
      sensor


•  Optional
      automatic flush cleaning system


•  Wall
      brackets for easy installation





The
      Manufacturer’s Suggested Retail Price for the units will average approximately
      $1,499.00.





Using
      the *FORTIS* TM
      technology or other proprietary technology, the Company expects to develop
      additional products for recreational vehicle and marine applications and for
      swimming pools and spas.




**Revenue
      Generation Strategy and Potential**





Initial
      manufacturing will focus on the *FORTIS* TM
series.
      Each model will be capable of five different configurations, ranging in power
      output from 40 Amps to 120 Amps. Later this year, the Company expects to bring
      the ParadigmTM
      product line to the market.





The
      Company expects to market its products through established wholesale
      distribution channels, direct retail market through large national retailers
      such as Home Depot and Lowes, and through Company based internet
      sales.


The
        Company anticipates pre tax gross profit margins from the sale of the *FORTISTM* in a
        range of 25% to 30%. The Company believes that the quality, safety and other
        characteristics of the *FORTIS* TM
and *Paradigm* TM
will
        make them attractive to distributors and buyers. Margins are expected to
        improve
        as production and sales volumes increase, and as the higher margin *Paradigm* TM
product
        line is added in 2007.










23





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




Liquidity
      and Capital
      Resources




As
      of
      December 31, 2005 the Company’s only source of established revenue was from the
      sales of product through its subsidiary, Envirotech. That product line was
      discontinued in 2005. Future revenues are expected to derive from the
      manufacture and marketing of the *FORTISTM* and *ParadigmTM* series
      of products. The consolidated financial statements for the Company disclosed
      that the Company has working capital deficiency of $2,411,601, and has
      accumulated losses of $10,064,513. Without realization of additional capital,
      it
      would be unlikely for the Company to continue as a going concern.





On
      March
      22, 2006, the company issued 100,000 shares of common stock at $0.55 per common
      share in a non-brokered direct private placement for total net proceeds of
      $55,000. The shares were restricted pursuant to the provisions of Section 144
      of
      the Securities Exchange Act of 1933. The securities were sold only to persons
      who met the Accredited Investor requirements and other requirements set forth
      in
      the offering memorandum.





Between
      April 10, 2006 and April 25, 2006, the Company issued 1,714,260 shares of common
      stock at $0.35 per common share in a non-brokered direct private placements
      for
      total net proceeds of $600,000. The shares were restricted pursuant to the
      provisions of Section 144 of the Securities Exchange Act of 1933. The securities
      were sold only to persons who met the Accredited Investor requirements and
      other
      requirements set forth in the offering memorandum. No commissions or other
      fees
      were payable in connection with this private placement. The funds were allocated
      for general working capital purposes, as well as to fund the initial production
      of the *FORTISTM* product
      by Jabil Circuit, Inc. pursuant to Skye’s Manufacturing Services Agreement of
      January 2006.





Except
      as
      set forth above, the Company has not received any additional financing
      subsequent to the date of the issuance of the Financial Statements for the
      year
      ended December 31, 2005. For more information concerning financing received
      in
      2005, see Part I, Item I, Financing, above.




**Executive
      Summary**





The
      Company’s business is the design production, marketing and sale of value-added
      consumer appliances that integrate leading technologies to deliver increased
      functionality and energy efficiency to appliances and commercial products used
      by consumers. Skye’s premier consumer product is the *FORTIS TM*, a new
      patented series of electric instantaneous water heater. Skye will market the
      *FORTIS TM* tankless water heater which it believes: (i) maintains a
      pre-determined water temperature which will not exceed the set point (ii)
      conserves water (by installing the electronic tankless water heater close to
      the
      use point or by heating water at the tap, rather than drawing cold water before
      the hot water travels from a tank to the tap) (iii) conserves energy (by heating
      water only when it is needed) (iv) have a greater life span than other water
      heaters (v) be competitive with the purchase price of other water heaters,
      (vi)
      saves space, and (vii) is powerful and versatile (for example, making the heater
      able to heat water for an entire house in any climate). The electronic tankless
      water heater is microprocessor controlled with a color backlit LCD display,
      allowing for programmable settings and a variety of convenience features not
      widely available on other water heaters. An extruded aluminum housing for the
      heating chamber, together with stainless steel patented end-caps to efficiently
      move the heated water through the device is expected to provide the versatility
      and dependability needed for a durable consumer application. Other features
      of
      the design include the use of solid state relays, redundant mechanical relays,
      embodying the power breakers inside the device thus eliminating the need to
      install a separate electrical sub-panel, as well as a host of convenience
      features such as energy saving modes, automatic clean functions (optional),
      automatic flood prevention (optional), use limiter and remote temperature reset
      functions. On the heels of *FORTISTM* will be a new patent pending
      technology that Skye refers to as *ParadigmTM*. This technology ushers in
      an entirely new method of heating water that is both fast and extremely
      efficient. The primary application for the*ParadigmTM*
      technology will be for the point-of-use instantaneous heating market. Skye
      is
      currently working to commercialize this technology into a suite of products
      that
      can be used in homes across America.





24




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued




Executive Summary-
      continued





As
      the
      initial focus of Skye’s research and development was the creation of improved
      fluid heating devices. Skye has currently focused its initial efforts to produce
      and market a line of water heating products. Skye’s success is largely dependant
      upon its ability to commercialize the products resulting from the research
      and
      design initiative, such as *FORTISTM* and *ParadigmTM* .
      Additionally, since Skye has no other source of revenue currently, the success
      of the Company will depend upon the ability of Skye to market and sell its
      products.





After
      acquiring Envirotech in November 2004, Skye was engaged in the business of
      producing and selling a line of electric tankless water heaters called the
      “ESI-2000”. In October 2004 Skye resolved to discontinue Envirotech’s further
      production of the ESI-2000 in favor of a new line of products then being
      developed by Skye’s subsidiary, Ion Tankless, Inc. Having been voluntarily
      petitioned into Chapter 11 bankruptcy on August 6, 2004, Envirotech sought
      to
      prepare a plan of reorganization to rehabilitate itself. A Plan of
      Reorganization (the “Plan”) was timely filed in December of 2004. The key
      aspects of the Plan called for Envirotech to (i) deplete remaining parts
      inventories and deliver ESI-2000 product that had been pre-sold (ii) engage
      in a
      final production run of 250 to 300 units, and (iii) reposition itself as the
      manufacturing arm for Skye so as to produce the technologies that resulted
      from
      the research then being conducted by Ion Tankless. The Plan was predicated
      on
      receiving working capital from Skye pursuant to the terms of the Plan.





Envirotech
      was riddled with financial troubles as it awaited approval of the Plan. Monies
      were not readily available to complete the final production run of the ESI-2000
      product line and sales of the ESI-2000 were not sufficient to sustain
      Envirotech. Hence, in March 2004 Envirotech granted a limited license (the
      “License”) to a newly formed entity, Valeo Industries Inc. (“Valeo”) that would
      then be responsible for producing the final run of ESI-2000 product. In exchange
      for the limited license from Envirotech to produce up to 300 units, Valeo
      assumed the obligation to supply ESI-2000 to all persons who had purchased
      the
      ESI-2000 from Envirotech.





Valeo
      had
      a difficult time completing the production of the ESI-2000 product. Creditors
      of
      Envirotech had repossessed certain key components or were simply unwilling
      to do
      any further component production runs associated with the ESI-2000. Valeo slowly
      began to produce the ESI-2000 as monies were available from the margin generated
      from sales of the ESI-2000 that were not otherwise bound to be delivered in
      accordance with the License. Deliveries of ESI-2000 product were made both
      to
      persons that ordered product from Valeo, as well as those persons that had
      ordered product previously from Envirotech. On December 5, 2005 by order of
      Judge Lee Rosenthal of the US District Court for the Southern District of Texas
      in Houston a preliminary injunction against Envirotech and Skye was issued
      in
      connection with the Seitz Patent Suit ( **See
      Legal Proceedings** )
      enjoining Skye and its affiliates from manufacturing, assembling, selling or
      offering for sale, any Product (as defined in the order) including the
      Envirotech ESI-2000 heater, any other heater regardless of its model number
      utilizing parts from the ESI-2000 or any other heater, regardless of its model
      number, utilizing in whole any part any technology embodied in the ESI-2000
      heater (sic). Production and distribution of the ESI-2000 was immediately
      stopped and no further deliveries of completed product were made. Since December
      5, 2005 the only source of revenue was in connection with the sale of ESI-2000
      parts and the provision of certain paid repair services.





25





ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION - continued
  Executive Summary-
        continued


Having
      engaged in a significant research and development program commencing initially
      from March to May 2004, then recommencing in late October 2004, and continuing
      through November 2005, Skye expended a total of $285,544 in fiscal 2004 and
      $447,657 in fiscal 2005 on research and development activities through its
      subsidiary, Ion Tankless to develop new and innovative heating technologies.
      Research and Development activities were contracted to Alliance Engineered
      Systems of Mesa, AZ and were overseen by a consultant to Ion Tankless. After
      producing numerous versions of the *FORTISTM* whole
      house tankless water heater and concept prototypes of the *ParadigmTM* point-of-use water heater, Skye resolved to introduce *FORTISTM* as the
      first product to market. In late October 2005 the Board of Skye determined
      that
      in order to ensure larger production volumes and consistent quality that it
      would amend its business plan, and instead of manufacturing its own products
      at
      its new facility in Chandler, AZ, that it would instead contract out the
      manufacture of all products to a third party manufacturer. Skye then engaged
      in
      a rigorous review in order to find a suitable third party manufacturer. In
      February, 2006 Skye announced that it entered into a Manufacturing Services
      Agreement with Jabil Circuit, Inc. (“Jabil”) pursuant to the terms of which
      Jabil will manufacture certain product lines, including the *FORTISTM,* on
      behalf of Skye.





A
      limited
      production of 250 units of the *FORTISTM* whole
      house tankless water heater commenced in late April 2006 and is currently
      underway as of the date of this filing. Skye expects to begin volume commercial
      production and shipment of the *FORTISTM* during
      the third quarter of 2006. The Company’s ability to generate future revenues is
      dependent upon the overall market reception of the *FORTISTM* product
      (and *ParadigmTM* when
      introduced) and the volume of production and sales that the Company is able
      to
      generate. However, additional engineering and testing is required and final
      testing of the product can only be conducted once production commences. The
      Company also expects to incur significant marketing costs over the next twelve
      months. It is possible that the *FORTISTM* (and *ParadigmTM* when
      introduced) will require further modifications before commercial shipments
      are
      possible. As a result, the Company can give no definitive assurances that it
      will be able to achieve commercial production of the *FORTISTM* or
*ParadigmTM* on the anticipated timeline.





The
      Company plans to use third parties to manufacture certain components for its
      products, and Jabil to assemble the final products. The Company is under
      contractual obligations with certain critical component suppliers, as well
      as
      with Jabil. While Skye hopes to manufacture its completed products and the
      majority of its components in the United States, there can be no assurances
      that
      it will be able to do so. The Company believes that electronics and metal
      components are easily sourced throughout the world and the Company will
      continually seek best pricing and highest quality components for its products.
      The Company expects to continue handling the shipment of its products.





Once *FORTISTM* (and
      later *ParadigmTM* )
      is
      ready for commercial production and distribution is likely to begin during
      the
      third quarter of 2006, the Company’s success will be dependent upon its ability
      to attract high quality distributors and manufacturer’s representatives to
      market its products. To date, the Company has been able to attract distributors
      and manufacturer’s representative groups with a solid track record selling
      tankless water heating devices to home builders and the wholesale plumbing
      trade. The Company is unable to provide forecasts as to the amount of product
      it
      anticipates selling. As of June 30, 2006, the Company has contracts with twelve
      (12) U.S. manufacturers’ representative groups with operations in 22
      States. The major terms of the contracts are: (a) distributors receive a
      graduated discount based on volume with the greatest discount being 35%, and
      10%
      commissions to manufacturer’s representatives; (b) non-exclusive
      territories; (c) termination upon 30 day notice and; (d) no
      maximum purchase requirements and sales goals to be mutually agreed, or in
      default, $1,000,000 per territory. The Company is currently training all its
      U.S. distributors and manufacturers representatives in the use of its products.





26




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION - continued
  Executive Summary-
        continued




Due
      to
      the limited sales volume of its existing products, the Company reported a net
      loss of $ 4,051,870 ,
      including in that amount a non-recurring non-cash charge of $2,441,869 related
      to depreciation and the issuance of stock for consulting services rendered,
      for
      the year ending December 31, 2005 (net loss of $ 0.27 per
      share) and a net loss of $ 1,893,331 for
      the
      year ending December 31, 2004 (net loss of $0.16 per share).





At
      the
      present time, the Company does not generate sufficient revenues from its
      operations to pay its operating costs. Management believes that the Company
      will
      need additional outside sources of funding in the future to continue the
      production and promotion of its products.


The
        Company has ceased to manufacture the ESI-2000 water heater line of products
        developed by Envirotech. Our *FORTISTM* brand
        product line, which is expected to be delivered to the market during the
        third
        quarter of 2006, is the result of the R&D program discussed above. Skye’s *FORTISTM* series
        is scalable from 40 to 120 amps of heating power and is a
        microprocessor-controlled electric water heater contained in a compact unit,
        which is designed to operate in most any climate. Skye’s new and innovative way
        of heating water for home and business is contained in a small and easy to
        install unit. Not only does it supply endless amounts of hot water but it
        also
        offers substantial energy savings. The *FORTISTM* series
        saves energy, space, water, and is suitable for all areas of the world. Skye
        uses advanced technology and high quality parts in the construction of the *FORTISTM* series,
        which provides reliability and longevity in the unit. Anywhere hot water
        is now
        being used or generated, Skye’s electric instantaneous water heaters can perform
        the task more effectively than conventional tank-based systems. The *FORTISTM* series
        will heat the water only as long as you require and at the temperature you
        desire, and will continue to maintain a precise temperature even if other
        hot
        water faucets are opened. Electricity is only used when water is required,
        therefore the cost of heating water is reduced by 20% - 40%. Because the *FORTISTM* series
        is compact it can be easily installed close to where hot water is being used
        and
        is ideal for hotels, motels, apartments, and homes where space is at a premium.
        Skye believes its *FORTISTM* series
        heaters offers one of the most efficient solutions for on-demand endless
        hot
        water available today.


**Going
      Forward**





The
      Company has expended considerable efforts in working with its contract
      manufacturer, Jabil Circuit, Inc., in order to begin the production of the *FORTISTM* line of
      products. As of June 30, 2006, much of the prepatory work to commence production
      has been completed and Jabil has begun to develop the manufacturing work cell
      to
      commence production. The Company expects that the first *FORTISTM* units
      will be produced in the early third quarter of 2006 with sales and delivery
      to
      also commence during such period. Despite commencing production, the Company
      expects that it may take up to one year for the production design and processes
      to stabilize. During this initial period of production the Company has been
      advised by Jabil Circuit that it is likely that changes will be made to the *FORTISTM* product
      in order to improve either the product itself or the manufacturability of the
      product. Once the production and processes have stabilized the Company
      anticipates that it will seek to move production of the *FORTISTM* to
      a
      lower cost center in Mexico or China in order to gain additional
      margin.





27





ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION - continued
  Executive Summary-
        continued


The
      Company has continued to focus development efforts on the commercialization
      of
      its patent pending *ParadigmTM* technology.
      Although we have been very excited about the functionality that the *ParadigmTM* technology offers, we have not been successful in developing a cost effective
      means to commercialize the technology into a consumer product line. We are
      currently in final negotiations with a critical supplier to jointly complete
      the
      engineering and commercialization process and then subsequently engage in an
      engineering for manufacturing phase. In the event we are successful in
      concluding a strategic relationship in this regard, the Company expects that
      it
      will have first delivery of product utilizing the *ParadigmTM* technology
      by the end of 2006 or early 2007. As we have not yet completed our negotiations
      there can be no assurance that we will finalize any such agreement, or if we
      do
      finalize the agreement, that we will be successful in developing a
      commercialized product for distribution within a reasonable period of
      time.





Access
      to
      capital remains one of the most pressing considerations for the Company.
      Although we were successful in concluding a $600,000 non-brokered private
      placement in April 2006, such funds were not sufficient to provide adequate
      working capital to meet the needs of the Company beyond the beginning of the
      third quarter 2006. As such, the Company expects to be working diligently to
      access additional funding likely by way of further private placements of equity.
      We have commenced negotiations with several broker-dealers with a view to
      completing further private placements to fund our business strategy, but to
      date
      we have not yet concluded any such arrangement. Our business strategy will
      require us to raise in excess of $3 million over the next 12 month period in
      order to fully execute our current business plan. There can be no assurance
      that
      we will be able to raise such additional funding by way of either new debt
      or
      equity, and in the event we are unable to raise the funds necessary to fund
      our
      business plan it will be necessary to curtail such plans and this could have
      a
      detrimental impact on our business. Management believes that, in order to
      properly exploit the introduction of both the *FORTISTM* and *ParadigmTM* technologies, it will be necessary that we be positioned not only as a quality
      supplier of products, but that we also be able to supply a sufficient volume
      of
      product to meet wholesale demand. We believe that, relative to the wholesale
      market, there is a very high expectation that product be available in a timely
      fashion when ordered. In order to meet this expectation we must be capable
      of
      not only producing our products in sufficient volume, but holding quantities
      of
      product in inventory as well. These things all require capital and we must
      be
      successful in our efforts to obtain this funding if we are to be successful
      in
      the wholesale sales and distribution channel.





Over
      the
      balance of the year we will continue to focus our efforts on producing the *FORTISTM* product
      line and in getting such product into the market to be sold. We will continue
      to
      develop our markets and train installers and field service personnel in
      cooperation with our appointed manufacturer’s representatives. This is no small
      task and it will require a significant effort on the part of our existing staff,
      as well as new staff that must be hired in order to provide sales and customer
      service to the field. We will also focus our efforts on completing the *ParadigmTM* technology
      and we are challenged by the opportunity to introduce this powerful technology
      to the US marketplace. While *ParadigmTM* will
      require a significant investment of time and capital in order to yield a line
      of
      marketable products, we are confident that products based on this technology
      will be amongst the most efficient and technologically advanced in the market.
      Many challenges remain and our staff is committed to the challenge.

















28





ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION - continued


**Equity
      Issuances**





The
      Company, after the acquisition of Envirotech, required funds to support current
      operations and to provide future working capital. The Company has met its
      financial needs through its limited operations, debt financing and through
      the
      sales of its securities. Since January, 2004, the Company has undertaken the
      following sales of non-registered securities in a series of private
      transactions:





·
            For
                the year ended December 31, 2004, the Company sold $1,075,000 principal
                amount of 10% senior notes due one year from date of issue and 537,500
                unregistered common shares of common stock in private placements
                in
                connection with such Notes.  The shares were restricted pursuant to
                the provisions of Section 144 of the Securities Exchange Act of 1933.
                 The securities were sold only to persons who met the Accredited
                Investor requirements and other requirements set forth in the offering
                memorandum.  In addition, in 2004 the Company issued 172,354
                unregistered shares to retire $990,911 in debt and associated interest;
                695,000 shares for services rendered valued at $146,330, and 2,250,000
                shares for services rendered and prepaid services to consultants
                valued at
                $112,500.·
            On
                January 14, 2005 the Company closed the sale of $100,000 principal
                amount
                of 10% senior notesdue
                one year from date of issue and 50,000 unregistered common shares
                of
                common stock in private placements in connection with such Notes.
                 The shares were restricted pursuant to the provisions of Section
                144
                of the Securities Exchange Act of 1933.  The securities were sold
                only to persons who met the Accredited Investor requirements and
                other
                requirements set forth in the offering memorandum.·
            Between
                June 1, 2005 and July 28, 2005, the Company issued 1,998,819 shares
                of
                common stock at $0.55 per common share in private placements for
                total
                gross proceeds of $1,099,900.The
                shares were restricted pursuant to the provisions of Section 144
                of the
                Securities Exchange Act of 1933.  The securities were sold only to
                persons who met the Accredited Investor requirements and other
                requirements set forth in the offering memorandum.·
            Between
                July 29, 2005 and August 15, 2005, the Company issued 565,000 shares
                of
                common stock at $0.55 per common share in private placements for
                total
                gross proceeds of $310,750.The
                shares were restricted pursuant to the provisions of Section 144
                of the
                Securities Exchange Act of 1933. The securities were sold only to
                persons
                who met the Accredited Investor requirements and other requirements
                set
                forth in the offering memorandum.·
            During
                2005, the Company also issued 50,000 shares in connection with Bridge
                Loan
                Financing arranged in January 2005, 252,357 registered shares and
                400,000
                unregistered shares for consulting, legal and other services rendered
                valued at $651,943, 524,500 unregistered shares as employee stock
                awards
                valued at $536,170, 920,578 unregistered shares to retire $515,725
                in debt
                and associated interest. In addition, between September 7 and December
                15,
                2005, the Company accepted subscriptions for 470,000 unregistered
                shares
                at an average price of $.54 per share for a total of $275,000 and
                agreed
                to issue 20,000 shares for outside services rendered valued at $11,000.
                With the exception of the registered shares, all shares issued were
                subject to the restrictions set forth in Section 144 of the Securities
                Exchange Act of 1933.·
            On
                March 22, 2006, the company issued 100,000 shares of common
                stock at $0.55 per common share in a non-brokered direct private
                placement
                for total net proceeds of $55,000. The
                shares were restricted pursuant to the provisions of Section 144
                of the
                Securities Exchange Act of 1933. The securities were sold only to
                persons
                who met the Accredited Investor requirements and other requirements
                set
                forth in the offering memorandum.·
            Between
                April 10, 2006 and April 25, 2006, the Company issued 1,714,260 shares
                of
                common stock at $0.55 per common share in a non-brokered direct private
                placements for total net proceeds of $600,000.The
                shares were restricted pursuant to the provisions of Section 144
                of the
                Securities Exchange Act of 1933. The securities were sold only to
                persons
                who met the Accredited Investor requirements and other requirements
                set
                forth in the offering memorandum.





**Results
      of Operations**





The
      following discussion and analysis of the financial condition and results of
      our
      operations should be read in conjunction with the financial statements and
      the
      notes to those statements included elsewhere in this document. This discussion
      contains forward-looking statements that are based on our current expectations
      and involve risks and uncertainties. Skye’s actual results could differ
      materially from those discussed below. Factors that could cause or contribute
      to
      such differences include, but are not limited to, those identified below, and
      those discussed in the section titled “Risk Factors” included elsewhere in this
      Annual Report on Form 10-KSB.




29




ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      continued




**Comparison
        of the Years Ended December 31, 2005 and 2004**
 
 *Revenues.* **
 
 Revenue
        decreased by $33,467 or 16% to $172,424 for 2005 compared to $205,891 for
        2004.
        We believe the decrease was attributable to a number of management changes
        during the year, as well as a suspension of product sales due to the
        unavailability of product arising from both the lack of working capital,
        as well
        as the preliminary injunction granted in December 2005 prohibiting the further
        sales of the Envirotech ESI-2000 product line.
  *Cost
        of Goods Sold and Gross Margin.* **
 
 Cost
        of
        Goods Sold decreased by $29,837 to $172,651 for 2005 compared to $205,488
        for
        2004. Gross margin decreased to $(226) for 2005 compared to $403 for 2004.
        The
        gross margin variance is related to smaller production volumes and added
        costs
        in obtaining component parts from suppliers as a result of the Envirotech
        Chapter 11 proceedings.


*General
      and Administrative Expenses.* **


Legal
        and
        Professional costs, which includes fees paid to outside consultants for
        management services, increased significantly in 2005 to $2,032,825 as compared
        to $711,916 in 2004. The increase is mostly attributable to the valuation
        accounting relative to shares paid to certain consultants for services rendered
        during 2005, expenses incurred in connection an accelerated research &
development campaign to complete the *FORTISTM* and *ParadigmTM* technologies, the Chapter 11 proceedings of Envirotech, SKYE patent fees
        and
        on-going patent litigation costs. Advertising/Marketing Expenses increased
        to
        $44,147 in 2005 as compared to $27,431 in 2004 as a result of management
        engaging in test marketing using print media and direct response promotions.
        General and Administrative (G&A) expenses increased by $748,963 to
        $1,253,029 for 2005 compared to $504,066 for 2004. The majority of the increases
        reflect additional expenses incurred in connection with developing a new
        business for the company as a result of the Chapter 11 proceedings of
        Envirotech. The Company incurred non-cash charges in the amount of $2,408,114
        for the value of stock grants to employees, key consultants and for the value
        of
        stock granted to a new consultant which became fully vested in 2005.





*Research
      and Development Expenses.* **


Research
        and Development (R&D) expenses increased to $447,657 for 2005 compared to
        $285,544 for 2004. The Company’s increase in R&D expenses is attributable to
        engineering costs associated with the betterment of the *FORTIS* TM
design,
        as well as prototype costs associated with *Paradigm* TM
and
        the
        costs of developing new controller technology.





*Net
      Loss.* **





Net
      loss
      increased $2,097,767 to $(4,051,870) or $(0.27) per common share for 2005
      compared to a net loss of $(1,893,331) or $(0.16) per common share for 2004.
      This increased loss was due primarily to the increased R&D costs invested in
      bringing the *FORTISTM* to the
      market, the ramp up in G&A expenses in preparation for the anticipated
      growth of the Company’s operations, litigation costs in 2005 and the non-cash
      expense in connection with shares issued to consultants as prepaid services
      during 2005.





**Liquidity
      and Capital Resources**





Based
      on
      the Company’s current plans and market conditions, management does not believe
      that the Company’s existing cash and current operations will be sufficient to
      satisfy its anticipated cash requirements for the next twelve months. In
      addition, the Company is unable to provide assurance that its planned levels
      of
      revenue, costs and expenses will be achieved. If the Company’s operating results
      fail to meet its expectations or if the Company fails to manage its inventory,
      accounts receivable or other assets, it will have a negative impact on the
      Company’s liquidity and the Company will be required to seek additional funding
      through public or private financings or other arrangements. In addition, due
      to
      the planned expansion of its product offerings, marketing efforts, channels
      and
      geographic presence, the Company may require additional working capital. If
      this
      were to occur, it is possible that adequate funds may not be available when
      needed or may not be available on favorable or commercially acceptable terms,
      which could have a negative effect on the Company’s business and results of
      operations.




30





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




Liquidity and Capital Resources - continued





At
      December 31, 2005 the Company had total current assets of $31,310,
      including a cash balance of $2,711. These funds are not sufficient to meet
      the
      Company’s operational and liquidity needs for the next twelve months and thus
      additional debt or equity financing will be required. The Company’s working
      capital at December 31, 2005 was $2,411,601. This represents a increase in
      working capital of approximately $266,507 from working capital of $2,678,108
      at
      December 31, 2004. This increase is attributed to the receipt of $1,410,650
      in proceeds from the sale of shares of common stock during 2005 and from the
      conversion of $528,226 in principal and interest to equity by various
      noteholders. Operating activities used cash of $1,383,896 and $1,025,039 during
      2005 and 2004, respectively.





The
      Company reported negative operating cash flows from operations of $1,383,896
      for
      the twelve months ended December 31, 2005. The net loss of $3,806,439 was
      offset by non-cash charges of $2,936,340 which represented the value of stock
      issuances and stock options exchanged for services rendered and $33,755 in
      depreciation and amortization expenses. At December 31, 2005, the Company
      had no inventory purchase commitments.





The
      long-term continuation of the Company’s business plans is dependent upon
      generation of sufficient revenues from its products to offset expenses. Until
      the
      Company has achieved a sales level sufficient to break even, it will not be
      self-sustaining or be competitive in the areas in which it intends to
      operate.  The Company will require additional funding for continued
      operations, and will therefore be dependent upon its ability to raise additional
      funds through bank borrowings, equity or debt financing, or asset sales.
 We expect to need to access the public and private equity or debt markets
      periodically to obtain the funds we need to support our operations and continued
      growth. There is no assurance that the Company will be able to obtain additional
      funding when needed, or that such funding, if available, can be obtained on
      terms acceptable to the Company.  If we require, but are unable to obtain,
      additional financing in the future on acceptable terms, or at all, we will
      not
      be able to continue our business strategy, respond to changing business or
      economic conditions, withstand adverse operating results or compete effectively.
        If the Company cannot obtain needed funds, the Company may be forced to
      curtail or cease its activities.  If additional shares are issued to obtain
      financing, current shareholders may suffer a dilutive effect on their percentage
      of stock ownership in the Company and this dilutive effect may be substantial. The
      Company has no commitments or plans for any additional funding at the present
      time. Insufficient financial resources may require the Company to delay or
      eliminate all or some of its development, marketing and sales plans, which
      could
      have a material adverse effect on the Company's business, financial condition
      and results of operations. There
      is
      no certainty that the expenditures to be made by the Company will result in
      a
      profitable business.





**Contractual
      Obligations**





The
      Company has entered into leases for office and warehouse space, which runs
      through August 2006. Future lease payments under operating leases are
      approximately $140,000 in 2006. There are no commitments for office and
      warehouse space beyond August 2006, and, accordingly the Company must either
      purchase the facility in which it currently operates for the total sum of
      $2,800,000 (less the $50,000 non-refundable deposit paid in August 2005), or
      locate other leased facilities from which to operate.





**Intangible
      Assets**





The
      Company’s intangible assets consist of two pending patents and two patents for
      tankless water heater technology with a carrying value of $NIL. Generally a
      patent has a life of 17
      to
      20 years. The Envirotech patent for a modular tankless water heater, Patent
      No. 6,389,226 was granted on May 14, 2004 (the “Envirotech Patent”), and the Ion
      Tankless Patent No. 7,046,922 for a modular tankless water heater was granted
      on
      May 16, 2006 (the “Ion Patent”).





31





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




Intangible Assets - continued





The
      Company performed an impairment test in accordance with the guidance provided
      in
      SFAS 142, “Goodwill and Other Intangible Assets”, and has determined that, as of
      December 31, 2005 no impairment exists on any of the Company’s assets based on
      the present value of future cash flows generated from Company assets. The
      Company recognized an impairment of $39,778 related to the Envirotech Patent
      in
      2004.





The
      Envirotech Patent is subject to a lien registered against it by the Law Firm
      of
      Jennings, Strouss & Salmon (“JSS”) relating to an outstanding claim against
      Envirotech for unpaid legal services. In 2001, JSS obtained security from
      Envirotech in the form of a U.C.C 1 registration over all the tangible and
      intangible assets and receivables of Envirotech. In 2002 the security was
      amended to include a specific lien against the Envirotech Patent that was
      subsequently registered by JSS with the U.S. Patent & Trademark Office
      (collectively, the JSS Security”). After the filing for Chapter 11 bankruptcy
      protection by Envirotech on August 6, 2004, Envirotech commenced negotiations
      with JSS, as Envirotech’s sole secured creditor, to acquire the JSS security.
      Envirotech was unable to reach an agreement with JSS. Subsequently the JSS
      Security was purchased by Sundance Financial Corp. (“Sundance”). Envirotech was
      successful in reaching a verbal agreement to acquire the JSS Security by way
      of
      the payment of Sundance’s actual costs to acquire the JSS Security, together
      with an amount of $2,000, an amount reflective of Sundance’s legal fees and
      expenses in connection with acquiring the JSS Security. Between July and October
      2005, the Company made a series of payments to Sundance totaling $83,000 in
      order to acquire the JSS Security. By way of an agreement dated and effective
      as
      of June 1, 2006, between Sundance and Ion Tankless, Inc. we acquired the JSS
      Security. By way of the conclusion of this agreement, Sundance acknowledged
      the
      prior repayment to it of $83,000 by the Company, and with the payment of the
      sum
      of $2,000 reflective of Sundance’s legal expenses and fees, Ion Tankless, Inc.
      acquired all of the JSS Security.




**Critical
      Accounting Policies**





We
      have
      identified the following policies as critical to our business operations and
      the
      understanding of our results of operations. The preparation of these financial
      statements require us to make estimates and assumptions that effect the reported
      amount of assets and liabilities, disclosure of contingent assets and
      liabilities at the date of our financial statements, and the reported amounts
      of
      revenue and expenses during the reporting period. There can be no assurance
      that
      actual results will not differ from those estimates. The effect of these
      policies on our business operations is discussed below where such policies
      affect our reported and expected financial results.





Revenue
      Recognition. Our
      revenue recognition policy is significant because our revenue is a key component
      of our results of operations. We recognize revenue when delivery of the product
      has occurred or services have been rendered, title has been transferred, the
      price is fixed and collectability is reasonably assured. Sales of goods are
      final with no right of return.





Warranty
      Costs. We
      warrant our products against manufacturing defects for a period of five years
      on
      electrical components and 10 years on other components. As of December 31,
      2005, we have had no significant warranty claims on ESI-2000 products sold.
      Once
      sales of our new products commence, we expect to make an accrual for warranty
      claims based on our sales.





32





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




Critical
      Accounting Policies - continued




Intangible
      Assets. We have
      intangible assets in the form of patents issued and pending. Our estimate of
      the
      remaining useful life of these assets and the amortization of these assets
      will
      affect our gain from operations. Since we do not have a method of quantifying
      the estimated number of units that may be sold we have elected to amortize
      these
      intangibles over a seven year period beginning in the first quarter of 2006.





Purchase
      Accounting. Our
      purchase accounting policy is to record any acquisitions in accordance with
      current accounting pronouncements and allocate the purchase price to the net
      assets. The Company evaluates the fair market values of tangible and intangible
      assets based on current market conditions, and financial and economic factors.
      Intangible assets are valued using several cash flow projection models and
      financial models to establish a baseline for their respective valuations. The
      Company’s policy is to expense in-process research and development costs at
      acquisition.





Stock
      Options. We have
      a stock option plan under which options to purchase shares of our common stock
      may be granted to employees, consultants and directors at a price no less than
      the fair market value on the date of grant. We account for grants to employees
      in accordance with the provisions of APB No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      No. 25”). Under APB No. 25, compensation expense is based on the
      difference, if any, on the date of the grant between the fair value of our
      stock
      and the exercise price of the option and is recognized ratably over the vesting
      period of the option. Because our options must be granted with an exercise
      price
      equal to the quoted market value of our common stock at the date of grant,
      we
      recognize no stock compensation expense at the time of the grant in accordance
      with APB No. 25. On January 1, 2006 we adopted the fair value based method
      set forth in Statement of Financial Accounting Standards (“SFAS”) No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”), we would recognize compensation expense based upon the fair
      value at the grant date for awards under the plans. The amount of compensation
      expense recognized using the fair value method requires us to exercise judgment
      and make assumptions relating to the factors that determine the fair value
      of
      our stock option grants. We account for equity instruments issued to
      non-employees in accordance with SFAS No. 123 and Emerging Issues Task
      Force Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling Goods or Services* .





**FACTORS
      THAT MAY AFFECT OUR RESULTS OF OPERATIONS**





Risks
      Relating To Our Business and Our Marketplace





**History
      of Operations and Dependence on Future Development.**





Skye
      International, Inc. (“Skye”) was organized November 23, 1993 and existed as a
      development stage company until its acquisition of Envirotech Systems Worldwide,
      Inc. (“Envirotech”), on November 7, 2003. Envirotech was organized December 9,
      1998. Envirotech has a limited history of operations. The first sales of its
      products occurred in calendar year 2000. Subsequent to its formation, the
      Company has generated approximately $4,043,572 in losses through November 7,
      2003, the date of acquisition by Skye. However, $489,658 of this loss occurring
      in 2003 was attributable to a re-purchase of a distributorship in a major market
      where Envirotech believed the distributor was not performing as well as the
      market would justify. The Company on an operating and consolidated basis has
      continued to incur losses from operations since the date of acquisition. The
      Company has yet to generate significant revenue from sales of product and has
      not generated any revenues yet from the sale of the products from its research
      and development initiatives.





33




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued




History of Operations and Dependence on Future Development
      -
      continued





Prior
      to
      the development of new technology, the Company was dependent upon the operations
      of Envirotech for its revenue. The Company expects that additional operating
      losses will occur until revenue is sufficient to offset the level of costs
      to be
      incurred for marketing, sales and product development. The Company is subject
      to
      all of the risks inherent in establishing a new business enterprise. Since
      the
      Company has a very limited record of operations, there can be no assurance
      that
      its business plan will be successful. The potential for success of the Company
      must be considered in light of the problems, expenses, difficulties,
      complications and delays frequently encountered with the start-up of new
      businesses and the competitive environment in which the Company will operate.
      A
      prospective investor should be aware that if the Company is not successful
      in
      achieving its goals and achieving profitability, any money invested in the
      Company might be lost. The Company’s management team believes that its potential
      near-term success depends on the Company’s success in completing product
      development, then in manufacturing, marketing and selling its products and
      in
      developing new products.





The
      Company has not had sufficient funds to date with which to fully implement
      its
      marketing plans. We cannot be certain that our business strategy will be
      successful because these strategies are unproven. There can be no assurance
      that
      the Company will generate sufficient revenues to the extent necessary to render
      it profitable. Many of Envirotech’s activities during its early years have
      involved research and development concerning tankless water heaters. This has
      required the investment of substantial capital with no period in which to
      realize the benefits of such activities. There can be no assurance that
      Management has accurately forecast the Company's performance or that planned
      operations will lead to profits in the future. In addition, outside of product
      know-how, intellectual property and contractual relationships, the Company
      has
      only limited hard assets. If the Company is unable to develop marketable
      products, obtain customers and/or generate sufficient revenues so that it can
      profitably operate, the Company's business will not succeed. We will be
      particularly susceptible to the risks and uncertainties described in these
      risk
      factors and will be more likely to incur the expenses associated with addressing
      them. Our business and prospects must be considered in light of the risks,
      expenses and difficulties frequently encountered by companies in early stages
      of
      development. These risks are particularly severe among companies in new and
      rapidly evolving markets such as those that we expect will serve as our target
      markets. Accordingly, purchasers of Units will bear the risk of loss of their
      entire investment in the Company.





**Awaiting
      SEC Response to Amended Financial Filings for the Year Ended December 31,
      2004**





On
      September 15, 2005 the Company received a letter from the U.S. Securities and
      Exchange Commission (“SEC”) relating to information provided by the Company in
      its financial filings for the year ended December 31, 2004 (the “2004 10KSB”),
      as well as the interim quarterly filings preceding such date. The SEC requested,
      among other things, that we clarify and restate certain disclosures in the
      2004
      10KSB and possibly some related quarterly disclosures on form 10QSB during
      such
      year. On June 14, 2006 the Company filed an amended and restated 10KSB/A for
      the
      year ended December 31, 2004, and, to date, we have not received any comments
      thereon from the SEC.





**Company’s
      Shares Quoted on the Pink Sheets**





Because
      the Company did not file its 2005 10KSB within such grace period it did not
      maintain its quotation on the NASD OTC Bulletin Board. On June 5, 2006 the
      Company’s shares began trading on the largely unregulated Pink Sheet market.
      Although the Company has committed to rectifying its regulatory compliance
      so as
      to qualify for quotation on the OTC Bulleting Board there can be no assurance
      that the Company’s shares will resume quotation on the OTC Bulletin Board, or if
      they resume, that such quotation can be maintained.





34




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued




**Limited
      Capital and Need for Additional Financing.**





Until
      the
      Company has achieved a sales level sufficient to break even, it will not be
      self-sustaining or be competitive in the areas in which it intends to
      operate.  The Company will require additional funding for continued
      operations, and will therefore be dependent upon its ability to raise additional
      funds through bank borrowings, equity or debt financing, or asset sales.
 We expect to need to access the public and private equity or debt markets
      periodically to obtain the funds we need to support our operations and continued
      growth. There is no assurance that the Company will be able to obtain additional
      funding when needed, or that such funding, if available, can be obtained on
      terms acceptable to the Company.  If we require, but are unable to obtain,
      additional financing in the future on acceptable terms, or at all, we will
      not
      be able to continue our business strategy, respond to changing business or
      economic conditions, withstand adverse operating results or compete effectively.
        If the Company cannot obtain needed funds, the Company may be forced to
      curtail or cease its activities.  If additional shares were issued to
      obtain financing, current shareholders may suffer a dilutive effect on their
      percentage of stock ownership in the Company and this dilutive effect may be
      substantial. The
      Company has no commitments or plans for any additional funding at the present
      time. Insufficient financial resources may require the Company to delay or
      eliminate all or some of its development, marketing and sales plans, which
      could
      have a material adverse effect on the Company's business, financial condition
      and results of operations. There
      is
      no certainty that the expenditures to be made by the Company will result in
      a
      profitable business.





**On-Going
      Litigation**





The
      Company is currently engaged in a significant amount of litigation. For a
      discussion of these items of litigation, see **“Item
      3. Legal Proceedings”** above.
      The cost of this litigation is significant and it is expected that associated
      costs will continued to be incurred until such matters are concluded. The
      Company expects that such continuing costs could be significant if all matters
      proceed to trial. Although management is attempting to settle or otherwise
      expeditiously resolve such matters there can be no assurance that such early
      resolution can be achieved, and, if not expeditiously resolved, substantial
      costs and a diversion of our management’s attention and resources will likely
      occur and this could hurt our business.





**Lack
      of Diversification.**





The
      size
      of the Company makes it unlikely that the Company will be able to commit its
      funds to diversify the business until it has a proven track record, and the
      Company may not be able to achieve the same level of diversification as larger
      entities engaged in this type of business.





























35




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued





**Competition.**





The
      water
      heater market is mature, highly concentrated and highly competitive. Steep
      discounts and rebates as high as 20% or more are standard. Some contractors
      are
      loyal to favorite brands and on occasion resistant to tankless systems, and
      the
      plumbing industry is on occasion also resistant to tankless systems. Pricing
      competition has increased in recent years, and major manufacturers are
      increasing their expenditures on research and development. Conventional water
      heaters (tank heaters) are slightly more efficient and reliable than
      conventional tank water heaters in previous years. There are several companies
      around the world who manufacture water heaters, conventional and tankless.
      It is
      reasonable to expect to encounter intense competition in all aspects of our
      business and that such competition would increase. Substantial competition
      could
      emerge at any time. Many of our competitors and potential competitors have
      longer operating histories and significantly greater experience, resources,
      and
      managerial, financial, technical, and marketing capabilities than us. In
      addition, many of these competitors offer a wider range of products and services
      than we contemplate offering. Many current and potential competitors also have
      greater name recognition, industry contacts and more extensive customer bases
      that could be leveraged to accelerate their competitive activity. Moreover,
      current and potential competitors have established and may establish future
      cooperative relationships among themselves and with third parties to enhance
      their products and services in this space. Consequently, new competitors or
      alliances may emerge and rapidly acquire significant market share. We cannot
      assure you that we will be able to compete effectively with current or future
      competitors or that the competitive pressures faced by us will not harm our
      business. This
      intense competition, and the impact it has on the valuation of companies of
      this
      nature, could limit our opportunities and have a materially adverse effect
      on
      the Company’s profitability or viability.





The
      Company believes that its primary competition will be the manufacturers of
      conventional tank water heaters, who are firmly established with the plumbing
      industry. There are a large number of manufacturers of tank water heaters,
      both
      domestic and foreign. The dominant manufacturers are five large, multinational,
      established companies with significantly more resources than the Company
      (Bradford-White, Rheem, A. O. Smith, State Industries and American Standard).
      Manufacturers of tank water heaters dominate the U.S. market, maintaining over
      99% market share of residential water heater sales. The Company cannot predict
      the likelihood that it will take market share away from those manufacturers,
      or
      whether or how long it will take the Company to build up sales of the ETWH.
      In
      addition, there can be no assurance that larger, more established companies
      with
      significantly more financial, technical, research, engineering, development
      and
      marketing resources; with established distribution networks and worldwide
      manufacturing capabilities; and with greater revenues and greater name
      recognition than the Company; will not develop competing systems and products
      which will surpass the Company’s business.





To
      the
      Company's knowledge, the competition in electric tankless water heaters in
      the
      United States consists primarily of five companies that have done business
      mostly in North America, Central America and South America, with combined annual
      revenue in excess of $10 million. The Company expects it will encounter greater
      competition from tankless manufacturers in other countries, where tankless
      water
      heaters have a longer history of sales and greater acceptance in the
      marketplace. Competitive factors, including competitors entering the tankless
      water heater market, could have a material adverse effect on the Company's
      business, results of operations, financial condition and forecasted financial
      results **.**





36





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued





**Performance;
      Market Acceptance.**





The
      quality of the Company’s products, manufacturing capability, and marketing and
      sales ability, and the quality and abilities of its personnel, are among the
      operational keys to the Company’s success. A primary management challenge will
      be to penetrate the market for water heaters, a mature, highly competitive
      and
      concentrated market. Also, distributors and users of water heaters may resist
      or
      be slow to accept a tankless water heater. Other important factors to the
      success of the Company will be the ability to complete the development process
      for new products in a timely manner and the ability to attract an adequate
      number of buyers, distributors and investors. There can be no assurance that
      the
      Company can complete development of new technology so that other companies
      possessing greater resources will not surpass it. There can be no assurance
      that
      the Company can achieve its planned levels of performance, or can be successful
      in establishing relationships with the number and quality of distributors it
      needs to be successful, in a timely way. If the Company is unsuccessful in
      these
      areas, it could have a material adverse effect on the Company's business,
      results of operations, financial condition and forecasted financial
      results.





**Dependence
      on Intellectual Property - Design and Proprietary Rights.**





Our
      success and ability to compete depend to a significant degree on our
      intellectual property. Others could use our intellectual property without our
      consent because we may not be able to protect our intellectual property
      adequately. We will rely on copyright and trademark law, as well as
      confidentiality arrangements, to protect our intellectual property.





Envirotech
      was granted a patent by the United States Patent and Trademark Office for its
      Modular Skye Electronic Water Heater (ETWH) (Patent No. US 6,389,226 B1).
      Proprietary rights to the design of the ETWH were Envirotech’s principal assets.
      The existing patent and intellectual property of Envirotech were assigned as
      collateral for debts owed by Envirotech for legal services arising prior to
      the
      acquisition of Envirotech by Skye. Envirotech, in 2005, discontinued production
      of all models of the ESI-2000 tankless water heater previously manufactured
      by
      it. On December 5, 2005 by order of Judge Lee Rosenthal of the US District
      Court
      for the Southern District of Texas in Houston a preliminary injunction against
      the Company was issued in connection with the civil action H-02-4782 between
      David Seitz and Microtherm (as Plaintiff) and Envirotech (as Defendant and
      Plaintiff by counterclaim) enjoining the Company and others from manufacturing,
      assembling, selling or offering for sale, any Product (as defined in the order)
      including the Envirotech ESI-2000 heater, any other heater regardless of its
      model number utilizing parts from the ESI-2000 or any other heater, regardless
      of its model number, utilizing in whole any part any technology embodied in
      the
      ESI-2000 heater (sic).





The
      new
      line of tankless water heaters designed by the Company do not utilize the
      Envirotech patent or technology related to the ESI-2000 product, and are
      constructed entirely using parts and operational methodologies distinct from
      the
      Envirotech ESI-2000 heater. The Company does not intend to produce any further
      ESI-2000 heaters and believes all future water heaters will embody designs
      and
      technologies related to newly developed intellectual property of the Company’s
      research and design subsidiary Ion Tankless, Inc.

















37





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




Dependence on Intellectual Property - Design and Proprietary
      Rights - continued








During
      the past year, based on newly developed technology, Skye has filed several
      applications for patents with the United States Patent and Trademark Office,
      and
      expects that a range of products using this new technology will replace the
      products previously manufactured by Envirotech. On May 16, 2006, the Company’s
      subsidiary, ION Tankless, Inc. received notice from the USPTO that the first
      such patent had been published as Patent No. 7,046,922 for a Modular Tankless
      Water Heater. While there can be no assurances that the other patents sought
      will be granted or that the technology will be considered proprietary to Skye
      or
      ION, the Company believes that its applications are meritorious and will be
      granted at least in part. It is expected that further research and development
      undertaken by the Company through its subsidiary, ION Tankless, Inc., will
      result in the issuance of more patents. However, the concepts and technologies
      we use in the future may not be patentable.





**Effective
      Protection may not be available for our Trademarks.**





Although
      we have applied to register our trade marks in the United States, we cannot
      assure you that we will be able to secure significant protection for these
      marks. Our competitors or others may adopt product or service names similar
      to
      "Skye", thereby impeding our ability to build brand identity and possibly
      leading to client confusion. Our inability to adequately protect the name "Skye”
could seriously harm our business.





Policing
      unauthorized use of our intellectual property is made especially difficult
      by
      the global nature of the high technology industry and difficulty in controlling
      hardware and software. The laws of other countries may afford us little or
      no
      effective protection for our intellectual property. We cannot assure you that
      the steps we take will prevent misappropriation of our intellectual property
      or
      that agreements entered into for that purpose will be enforceable. In addition,
      litigation may be necessary in the future to: enforce our intellectual property
      rights; determine the validity and scope of the proprietary rights of others;
      or
      defend against claims of infringement or invalidity. Such litigation, whether
      successful or unsuccessful, could result in substantial costs and diversions
      of
      resources, either of which could seriously harm our business. There can be
      no
      assurance that competitors of the Company, some of which have substantially
      greater resources, will not obtain patents or other intellectual property
      protection that will restrict the Company’s ability to make and sell its
      products. If the Company were unsuccessful in protection of proprietary and
      intellectual property rights to the ETWH, it could have a material adverse
      effect on the Company's business, results of operations, financial condition
      and
      value, and forecasted financial results.




**Some
      of our markets are cyclical, and a decline in any of these markets could have
      a
      material adverse effect on our operating performance.**




Our
      business is cyclical and dependent on consumer spending and is therefore
      impacted by the strength of the economy generally, interest rates, and other
      factors, including
      national, regional and local slowdowns in economic activity and job markets,
      which can result in a general decrease in product demand from professional
      contractors and specialty distributors. For example, a slowdown in economic
      activity that results in less home renovations can have an adverse effect on
      the
      demand for some of our products . In
      addition, unforeseen events, such as terrorist attacks or armed hostilities,
      could negatively affect our industry or the industries in which our customers
      operate, resulting in a material adverse effect on our business, results of
      operations and financial condition.




**Disaster.**





A
      disaster that disables the Company’s operations will negatively impact the
      Company’s ability to perform for a period of time. The Company’s disaster
      recovery plan includes future multiple-site storage of inventory and the
      possibility of multiple manufacturing facilities.





38




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued




**We
      increasingly manufacture and/or source critical components for our products
      outside the United States, which may present additional risks to our business.**




A
      significant portion of our future production will likely be manufactured outside
      of the United States, principally in China, and expanding international
      manufacturing capacity in China and Mexico is part of our strategy to reduce
      costs. International operations generally are subject to various risks,
      including political, religious and economic instability, local labor market
      conditions, the imposition of foreign tariffs and other trade restrictions,
      the
      impact of foreign government regulations, and the effects of income and
      withholding tax, governmental expropriation, and differences in business
      practices. We may incur increased costs and experience delays or disruptions
      in
      product deliveries and payments in connection with international manufacturing
      and sales that could cause loss of revenue. Unfavorable changes in the
      political, regulatory, and business climate could have a material adverse effect
      on our financial condition, results of operations, and cash flows.




**Our
      operations will suffer if we are unable to complete our internal cost reduction
      programs.**




We
      are
      implementing a cost reduction program in our water heating products business,
      which includes a transfer of portions of our manufacturing and assembly work
      from of existing United States operations to proposed operations in China or
      Mexico. In implementing this program, we may not be able to successfully
      consolidate management, operations, product lines, distribution networks, and
      manufacturing facilities, and we could experience a disruption in our inventory
      and product supply or in administrative services. In addition, we may not be
      able to complete this program without unexpected costs or delays, or the need
      for increased management time and effort. If we do not successfully implement
      this program on a timely basis, we will not achieve the planned operational
      efficiencies and cost savings, and there could be an adverse impact on ongoing
      relationships with our customers, all of which would impact our profitability.




**Our
      results of operations may be negatively impacted by product liability lawsuits.**




Our
      residential water heater business exposes us to potential product liability
      risks that are inherent in the design, manufacture, and sale of our products
      in
      that business. While we currently maintain what we believe to be suitable
      product liability insurance, we cannot assure you that we will be able to
      maintain this insurance on acceptable terms or that this insurance will provide
      adequate protection against potential liabilities. In addition, we self-insure
      a
      portion of product liability claims. A series of successful claims against
      us
      could materially and adversely affect our reputation and our financial
      condition, results of operations, and cash flows.




**Loss
      of key suppliers, lack of product availability or loss of delivery sources
      could
      decrease sales and earnings.**




Our
      ability to manufacture a variety of products is dependent upon our ability
      to
      obtain adequate product supply from manufacturers or other suppliers. While
      in
      many instances we have agreements, including supply agreements, with our
      suppliers, these agreements are generally terminable by either party on limited
      notice. The loss of, or a substantial decrease in the availability of, products
      from certain of our suppliers, or the loss of key supplier agreements, could
      have a material adverse effect on our business, results of operations and
      financial condition. In addition, supply interruptions could arise from
      shortages of raw materials, labor disputes or weather conditions affecting
      products or shipments, transportation disruptions or other factors beyond our
      control. Furthermore, since we acquire a portion of our supply from foreign
      manufacturers, our ability to obtain supply is subject to the risks inherent
      in
      dealing with foreign suppliers, such as potential adverse changes in laws and
      regulatory practices, including trade barriers and tariffs, and the general
      economic and political conditions in these foreign markets.







39





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




**Our
      ability to both maintain our existing customer base and to attract new customers
      is dependent in many cases upon our ability to deliver products and fulfill
      orders in a timely and cost-effective manner.**




To
      ensure
      timely delivery of our products to our customers, we frequently rely on third
      parties, including couriers such as UPS, DHL and other national shippers as
      well
      as various local and regional trucking contractors. Outsourcing this activity
      generates a number of risks, including decreased control over the delivery
      process and service timeliness and quality. Any sustained inability of these
      third parties to deliver our products to our customers could result in the
      loss
      of customers or require us to seek alternative delivery sources, if they are
      available, which may result in significantly increased costs and delivery
      delays. Furthermore, the need to identify and qualify substitute service
      providers or increase our internal capacity could result in unforeseen
      operations problems and additional costs. Moreover, if customer demands for
      our
      products increases, we may be unable to secure sufficient additional capacity
      from our current service providers, or others, on commercially reasonable terms,
      if at all.




**In
      some cases we are dependent on long supply chains, which may subject us to
      interruptions in the supply of many of the products that we distribute.**




An
      increasing portion of the products that we manufacture and distribute are
      imported from foreign countries, including China and Mexico. We are thus
      dependent on long supply chains for the successful delivery of many of our
      products. The length and complexity of these supply chains make them vulnerable
      to numerous risks, many of which are beyond our control, which could cause
      significant interruptions or delays in delivery of our products. Factors such
      as
      labor disputes, changes in tariff or import policies, severe weather or
      terrorist attacks or armed hostilities may disrupt these supply chains. We
      expect more of our name brand and private label products will be imported in
      the
      future, which will further increase these risks. A significant interruption
      in
      our supply chains caused by any of the above factors could result in increased
      costs or delivery delays and have a material adverse effect on our business,
      results of operations and financial condition.




**Our
      results of operations could be adversely affected by fluctuations in the cost
      of
      raw materials.**




As
      a
      manufacturer we are subject to world commodity pricing for many of the raw
      materials used in the manufacture of our products. Such raw materials are often
      subject to price fluctuations, frequently due to factors beyond our control,
      including changes in supply and demand, general U.S. and international economic
      conditions, labor costs, competition, and government regulation. Inflationary
      and other increases in the costs of raw materials have occurred in the past
      and
      may recur in the future. Any significant increase in the cost of raw materials
      could reduce our profitability and have a material adverse effect on our
      business, results of operations and financial condition.




**Dilution.**


The
      Company presently has 20,588,493 shares issued and outstanding. If the Company
      issues additional shares either outright or through any future options or
      warrants programs or requires additional financing, further dilution in value
      and in the percentage ownership represented by the purchaser’s Units or Shares
      will occur and the dilutive effect could be significant.








40





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued





**Expect
      to Incur Losses for the Foreseeable Future.**


We
      expect
      to incur losses for the foreseeable future **** and
      we
      may never become profitable. Although our current revenue model contemplates
      revenues from sale of products sufficient to break-even within nine to twelve
      months, there is no assurance that these revenues will occur. Because technology
      companies, even if successful, typically generate significant losses while
      they
      grow, we do not expect to generate profits for the foreseeable future, and
      we
      may never generate profits. In addition, we expect our expenses to increase
      significantly as we develop the infrastructure necessary to implement our
      business strategy. Our expenses will continue to increase as we:  hire
      additional employees; pursue research and development; expand our information
      technology systems; and lease and purchase more space to accommodate our
      operations.





Costs
      associated with designing, developing, manufacturing and marketing products
      to
      our target markets and developing the infrastructure we will need to support
      our
      customers will depend upon many factors, including the number of customers,
      and
      the size, nature, market, and financial capabilities of each. Therefore, we
      cannot now determine the amount by which our expenses will increase as we
      grow.





**Possible
      Claims That the Company Has Violated Intellectual Property Rights of
      Others.**




Envirotech
      has been named as a Defendant in a law suit filed in the U.S. District Court
      for
      the Southern District of Texas, Houston, Texas (Civil Action No. H-02-4782,
      David Seitz and Microtherm, Inc., vs. Envirotech Systems Worldwide, Inc., and
      Envirotech of Texas, Inc., referred to herein as the “Seitz Patent Suit”). The
      Company is not affiliated with Envirotech of Texas, Inc. The suit alleges that
      Envirotech has infringed upon patent rights of others and seeks damages and
      an
      order to cease and desist. Envirotech has engaged counsel to represent it in
      the
      matter. Management believes the suit is without merit and that Envirotech will
      prevail in the matter. The suit was stayed pending the disposition of the
      Chapter 11 Bankruptcy Petition filed by Envirotech in August 2004, but the
      Court
      has allowed the plaintiff to re-open the Houston suit and a motion to that
      effect has been filed by the Plaintiff. The Company has engaged the law firm
      of
      Susman Godfrey, LLP, Dallas, Texas to represent it in defending this matter
      and
      in prosecuting its counterclaim. The suit is in the discovery stage and the
      Company is vigorously engaged in the process. On December 05, 2005, the Court
      issued an injunction against Envirotech and its affiliated entities, including
      Skye, enjoining them from further marketing, advertising or offering for sale,
      or accepting any orders for (i) the Envirotech ESI 2000 heater, (ii) any other
      heater, regardless of its model, using parts of the Model ESI 2000 heater,
      and
      (iii) any other heater, regardless of model number, utilizing in whole any
      part
      any technology embodied in the Model ESI 2000 heater. The Company does not
      consider this injunction detrimental to its ongoing business activities, as
      it
      had already discontinued production of the alleged offending product and the
      new
      products have been developed with specific attention to avoiding infringement
      on
      any existing patents of third parties. The Seitz Patent Suit involves Envirotech
      and, except to the limited extent covered by the injunction and the discovery
      matters in connection with technology used in connection with *FORTIS*TM
and*Paradigm*TM,
      neither Skye nor any of its others subsidiaries are
      defendants/counter-plaintiffs in the matter.














41




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued




Possible Claims That the Company Has Violated Intellectual
      Property Rights of Others - continued





Except
      as
      described above, neither Skye nor Envirotech is the subject of any other
      dispute, claim or lawsuit or threatened law suit alleging the violation of
      intellectual property rights of a third party. With respect to the
*FORTIS*TM
      and other new products the Company expects to bring to the market, management
      believes they are not in violation of any patents claimed by others. To the
      extent that the Company is alleged to have violated a patent or other
      intellectual property right of a third party, it may be prevented from operating
      its business as planned, and it may be required to pay damages, to obtain a
      license, if available, to use the patent or other right or to use a
      non-infringing method, if possible, to accomplish its objectives. Any of these
      claims, with or without merit, could subject the Company to costly litigation
      and the diversion of their technical and management personnel. If the Company
      incurs costly litigation and its personnel are not effectively deployed, the
      expenses and losses incurred by them will increase, and their profits, if any,
      will decrease.





**Business
      Plans and Operational Structure May Change.**





We
      will
      continually analyze our business plans and internal operations in light of
      market developments. As a result of this ongoing analysis, we may decide to
      make
      substantial changes in our business plan and organization. In the future, as
      we
      continue our internal analysis and as market conditions and our available
      capital change, we may decide to make organizational changes and/or alter some
      of our overall business plans.





**Reliance
      on Management.**





The
      Company believes that it has management in-place, capable of executing its
      business plan. It has also undertaken to recruit additional persons to key
      management positions, including engineering and finance. Should the Company
      be
      unsuccessful in recruiting persons to fill the key management positions or
      in
      the event any of these individuals should cease to be affiliated with the
      Company for any reason before qualified replacements could be found, there
      could
      be material adverse effects on the Company's business and prospects. Each of
      the
      officers and other key personnel, has an employment agreement with the Company,
      which contains provisions dealing with confidentiality of trade secrets,
      ownership of patents, copyrights and other work product, and non-competition.
      Nonetheless, there can be no assurance that these personnel will remain employed
      for the entire duration of the respective terms of such agreements or that
      any
      employee will not breach covenants and obligations owed to the Company.





In
      addition, all decisions with respect to the management of the Company will
      be
      made exclusively by the officers and directors of the Company. Investors will
      only have rights associated with minority ownership interest rights to make
      decision that affect the Company. The success of the Company, to a large extent,
      will depend on the quality of the directors and officers of the Company.
      Accordingly, no person should invest in the Units unless he is willing to
      entrust all aspects of the management of the Company to the officers and
      directors.





**Inability
      to Attract and Retain Qualified Personnel.**





The
      future success of the Company depends in significant part on its ability to
      attract and retain key management, technical and marketing personnel. As
      we
      grow, we will also need to continue to hire additional technical, marketing,
      financial and other key personnel. Competition
      for highly qualified professional, technical, business development, and
      management and marketing personnel is intense. We may experience difficulty
      in
      attracting new personnel, may not be able to hire the necessary personnel to
      implement our business strategy, or we may need to pay higher compensation
      for
      employees than we currently expect. A
      shortage in the availability of required personnel could limit the ability
      of
      the Company to grow, sell its existing products and services and launch new
      products and services.We
      cannot assure you that we will succeed in attracting and retaining the personnel
      we need to grow.





42




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued





**Inability
      to Manage Rapid Growth** **.**





The
      Company expects to grow very rapidly. Rapid growth often places considerable
      operational, managerial and financial strain on a business. To successfully
      manage rapid growth, the Company must accurately project its rate of growth
      and:





·
                rapidly
                    improve, upgrade and expand its business
                    infrastructures;


·
            deliver
                products and services on a timely
                basis;


·
            maintain
                levels of service expected by clients and
                customers;


·
            maintain
                appropriate levels of staffing;


·
            maintain
                adequate levels of liquidity; and


·
                expand
                    and upgrade its technology, transaction processing systems and
                    network
                    hardware or software or find third parties to provide these
                    services.





Our
      business will suffer if the Company is unable to successfully manage its growth.





**Regulatory
      Factors.**





The
      Federal Government, a State Government or any Local Government could at any
      time
      enact, repeal or change law in such a way as to eliminate, reduce or postpone
      certain advantages available to the water heater industry. In addition, possible
      future consumer legislation, regulations and actions could cause additional
      expense, capital expenditures, restrictions and delays in the activities
      undertaken in connection with the business, the extent of which cannot be
      predicted. The exact affect of such legislation cannot be predicted until it
      is
      proposed. **** Additionally, **** much
      of
      the Company’s business is regulated by National, State and Municipal codes that
      affect the manner in which the Company’s products are installed and used.
      Although the Company believes it is aware of existing practices around the
      United States, there can be no assurance that one or more governing
      jurisdictions could make changes to such codes, the effect of which could be
      detrimental to the Company and its business in such jurisdictions.





**Effects
      of Amortization Charges.**





Our
      losses will be increased, or our earnings, if we have them in the future, will
      be reduced, by charges associated with our issuances of options. We have adopted
      the 2005 Stock Incentive for the benefit of our directors and employees. The
      options and restricted stock granted under this plan, as amended, may have
      exercise prices lower than the fair value of our common stock at the dates
      of
      grant. The total unearned stock-based compensation will be amortized as
      stock-based compensation expense in our consolidated financial statements over
      the vesting period of the applicable options or shares, generally five years
      in
      the case of options granted to employees and one year in the case of options
      granted to non-employee directors and restricted stock issued to employees.
      These types of charges may increase in the future.  Future
      unearned stock-based compensation charges may also include potential additional
      charges associated with options granted to consultants. The future value of
      these potential charges cannot be estimated at this time because the charges
      will be based on the future value of our stock.





43




ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION - continued





**Dividend
      Policy**





There
      can
      be no assurance that the proposed operations of the Company will result in
      significant revenues or any level of profitability. We
      do not
      anticipate paying cash dividends on our capital stock in the foreseeable future.
      We plan to retain all future earnings, if any, to finance our operations and
      the
      acquisitions of interests in other companies and for general corporate purposes.
      Any future determination as to the payment of dividends will be at our Board
      of
      Directors’ discretion and will depend on our financial condition, operating
      results, current and anticipated cash needs, plans for expansion and other
      factors that our Board of Directors considers relevant. No
      dividends have been declared or paid by the Company, and the Company does not
      contemplate paying dividends in the foreseeable future.





**Conflicts
      of Interest.**





Existing
      and future officers and directors may have other interests to which they devote
      time, either individually or through partnerships and corporations in which
      they
      have an interest, hold an office, or serve on boards of directors, and each
      may
      continue to do so. As a result, certain conflicts of interest may exist between
      the Company and its officers and/or directors that may not be susceptible to
      resolution. All potential conflicts of interest will be resolved only through
      exercise by the directors of such judgment as is consistent with their fiduciary
      duties to the Company and it is the intention of management to minimize any
      potential conflicts of interest.








**Terms
      of subsequent financings may adversely impact your
      investment.**


We
        may
        have to engage in common equity, debt, or preferred stock financings in the
        future. In such an event, rights of the then-existing shareholders and the
        value
        of their investment in the common stock could be reduced. Interest on debt
        securities could increase costs and negatively impacts operating results.
        Shares
        of our preferred stock are likely to be issued in series from time to time
        with
        such designations, rights, preferences, and limitations as needed to raise
        capital. The terms of preferred stock could be more advantageous to those
        investors than to the holders of common stock. In addition, if we need to
        raise
        more equity capital from sale of common stock, institutional or other investors
        may negotiate terms at least as, and likely more, favorable than the terms
        of
        your investment. Shares of common stock which we sell will, at some point,
        be
        sold into the market, which could adversely affect market
        price.


**The
      industry in which we operate is characterized by rapid technological change
      that
      requires us to develop new technologies and products** ***.***





Our
      future will depend upon our ability to successfully develop and market
      innovative products in a rapidly changing technological environment. We will
      likely require significant capital to develop new technologies and products
      to
      meet changing customer demands that, in turn, may result in shortened product
      lifecycles. Moreover, expenditures for technology and product
      development are generally made before the commercial viability for such
      developments can be assured. As a result, we cannot assure that we will
      successfully develop and market these new products that the products we do
      develop and market will be well received by customers, or that we will realize
      a
      return on the capital expended to develop such products.





44





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




**Our
      future operating results may fluctuate and cause the price of our common stock
      to decline, which could result in substantial losses for
      investors.**





Our
      limited operating history and the lack of established products make it difficult
      to predict accurately our future operations. We expect that our operating
      results will fluctuate significantly from quarter to quarter, due to a variety
      of factors, many of which are beyond our control. If our operating results
      fall
      below the expectations of investors or securities analysts, the price of our
      common stock could decline significantly. The factors that could cause our
      operating results to fluctuate include, but are not limited to:




·
            ability
                to commercialize new products from ongoing research and development
                activities;


·
            developments
                in tankless water heating
                technology;


·
            price
                and availability of alternative solutions for water heating systems;


·
            availability
                and cost of technology and marketing
                personnel;


·
            our
                ability to establish and maintain key relationships with industry
                partners;


·
            the
                amount and timing of operating costs and capital expenditures relating
                to
                maintaining our business, operations, and infrastructure;


·
            general
                economic conditions and economic conditions specific to the cost
                of
                electricity and water; and


·
            the
                ability to maintain a product margin on sales, given the early stage
                of
                our market for our products.





These
      and
      other external factors have caused and may continue to cause the market price
      and demand for our common stock to fluctuate substantially, which may limit
      or
      prevent investors from readily selling their shares of common stock and may
      otherwise negatively affect the liquidity of our common stock. In the past,
      securities class action litigation has often been brought against companies
      following periods of volatility in the market price of their securities. If
      securities class action litigation were to be brought against us it could result
      in substantial costs and a diversion of our management’s attention and
      resources, which could hurt our business.





**Our
      common stock is subject to penny stock regulation that may affect the liquidity
      for our common stock.**




Our
      common stock is subject to regulations of the Securities and Exchange Commission
      relating to the market for penny stocks. These regulations generally require
      that a disclosure schedule explaining the penny stock market and the risks
      associated therewith be delivered to purchasers of penny stocks and impose
      various sales practice requirements on broker-dealers who sell penny stocks
      to
      persons other than established customers and accredited investors. The
      regulations applicable to penny stocks may severely affect the market liquidity
      for our common stock and could limit your ability to sell your securities in
      the
      secondary market.





**Future
      equity transactions, including exercise of options or warrants, could result
      in
      dilution.**





From
      time
      to time, we sell restricted stock, warrants, and convertible debt to investors
      in other private placements. Because the stock is restricted, the stock is
      sold
      at a greater discount to market prices compared to a public stock offering,
      and
      the exercise price of the warrants sometimes
      is at or even lower than market prices. These transactions cause dilution to
      existing stockholders. Also, from time to time, options are issued to officers,
      directors, or employees, with exercise prices equal to market. Exercise of
      in-the-money options and warrants will result in dilution to existing
      stockholders. The amount of dilution will depend on the spread between the
      market and exercise price, and the number of shares involved but this dilution
      could be significant.





45





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
      PLAN OF OPERATION - continued




**We
      have incurred losses and may continue to incur losses in the
      future.**





At
      December 31, 2005, our accumulated deficit was $ 10,064,513 .
      We have
      not been able to generate enough sales to cover our expenses and have survived
      only by raising funds through the sale of debt and equity securities. We must
      continue to raise funds in the near future to survive. While management has
      been
      successful in the past in raising these funds, there is no assurance that
      management can continue to find investors to fund operations.





**Our
      future existence remains uncertain and the report of our auditors on our
      December 31, 2004 and 2005 financial statements contains a “going concern”
qualification.**





The
      report of the independent auditors on our financial statements for the years
      ended December 31, 2004 and 2005, includes an explanatory paragraph relating
      to
      our ability to continue as a going concern. We have suffered substantial losses
      from operations, require additional financing, and need to continue the
      development and marketing of our products. Ultimately we need to generate
      additional revenues and attain profitable operations. These factors raise
      substantial doubt about our ability to continue as a going concern. There can
      be
      no assurance that we will be able to develop commercially viable products or
      an
      effective marketing system. Even if we are able to develop commercially viable
      products, there is no assurance that we will be able to attain profitable
      operations.





**Our
      results of operations may be negatively impacted by product liability lawsuits.**




Our
      residential water heater business exposes us to potential product liability
      risks that are inherent in the design, manufacture, and sale of our products
      in
      that business. While we currently maintain what we believe to be suitable
      product liability insurance, we cannot assure you that we will be able to
      maintain this insurance on acceptable terms or that this insurance will provide
      adequate protection against potential liabilities. In addition, we self-insure
      a
      portion of product liability claims. A series of successful claims against
      us
      could materially and adversely affect our reputation and our financial
      condition, results of operations, and cash flows.







**ITEM
      7.**  **FINANCIAL
      STATEMENTS**




Financial
        statements as of and for the year ended December 31, 2005, and for the year
        ended December 31, 2004 are presented in a separate section of this report
        following Part IV.
  
 **ITEM
        8.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 On
        February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
        Company’s independent registered public accounting firm. The reason for the
        withdrawal was the retirement of the firm’s principal. Shelley had audited the
        registrant’s financial statements for the fiscal years ended December 31, 2004
        and 2003.
 
 On
        February 24, 2006, the registrant engaged Semple & Cooper, LLP to serve as
        the Company’s independent registered public accountants for the fiscal year
        ending December 31, 2005. The Company’s board of directors approved the
        engagement of Semple & Cooper.
 
 46
  ITEM
        8.  CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        -
        continued
 
 On
        June
        2, 2006, Semple and Cooper resigned as auditors for the Company and on the
        same
        date the Board of Directors approved the engagement of Moore & Associates,
        Chartered, Las Vegas, Nevada to be its independent registered public accountants
        for the fiscal year ending December 31, 2005. During the short time that
        Semple
        and Cooper were the Company’s auditors, there were disagreements on certain
        matters. Semple and Cooper furnish the Company a letter addressed to the
        Commission setting forth its understanding of such matters. A copy of that
        letter was filed as an exhibit to the report on Form 8-K/A dated June 15,
        2006.
 
 Moore
        and
        Associates, Chartered, audited the restatement of the 2004 financial
        statements  filed
        in
        connection with the Amended Annual Report on SEC Form 10-KSB/A which was
        filed
        by the Company on June 14, 2006 (as amended, the “2004 10-KSB/A”). In connection
        with that restatement, Moore filed a consent with the 2004
        10-KSB/A.
 
 During
        the registrant’s two most recent fiscal years and through June 2, 2006, the date
        prior to the engagement of Moore and Associates, neither the Company nor
        anyone
        on its behalf consulted Moore and Associates regarding the application of
        accounting principles to a specified transaction, either completed or proposed,
        or the type of audit opinion that might be rendered on the registrant’s
        consolidated financial statements.
 
 The
        resignation of Semple & Cooper was accepted, but was not encouraged or
        recommended, by Skye’s Board of Directors and Audit Committee. As noted above,
        the engagement of Moore and Associates has been approved by both the Skye
        Board
        and Audit Committee.
 
 On
        June
        13, 2006, Semple & Cooper provided the Company with a letter to the SEC
        dated June 9, 2006. A copy of that letter is filed with this Current Report
        as
        Exhibit 16.2. That letter noted certain issues that if further investigated
        might materially impact the fairness or reliability of the financial statements
        of the Company for 2004 and 2005. In particular, the auditors noted the receipt
        of a letter from an attorney representing certain shareholders that contained
        allegations of financial and accounting improprieties and accusations of
        possible bankruptcy and securities fraud. The Board of Directors had not
        concluded its investigation of those allegations at the time Semple & Cooper
        resigned.
 The
          matters noted in that letter are the subject of the Shareholder Derivative
          Action discussed in “Item 3, Legal Proceedings”, above
 
 47
  ITEM
        8.  CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        -
        continued
  Semple
        & Cooper also noted that it had questions regarding the propriety of certain
        arrangements relating to a patent owned by a subsidiary of the Company that
        were
        not addressed to the auditor’s satisfaction before it resigned. Documentation of
        those arrangements was completed after the firm’s resignation. The Board has not
        concluded its investigation of the propriety of the transactions and the
        related
        disclosures.
 
 The
        audit
        reports of Shelley on the financial statements for each of the past two years
        as
        of December 31, 2004 and December 31, 2003 contained a separate paragraph
        stating: “The accompanying financial statements have been prepared assuming that
        the company will continue as a going concern. The Company has experienced
        losses
        since inception. This raises substantial doubt about the Company’s ability to
        continue as a going concern. The financial statements do not include any
        adjustments that might result from this uncertainty.” There were no other
        adverse opinions, disclaimers of opinions, or qualifications or modifications
        as
        to uncertainty, audit scope, or accounting principles.
 
 During
        the two most recent fiscal years and the subsequent interim period through
        February 24, 2006, there were no disagreements with Shelley on any matter
        of
        accounting principles or practices, financial statement disclosure, or auditing
        scope or procedure which, if not resolved to the satisfaction of Shelley,
        would
        have caused it to make reference to the subject matter of the disagreement
        in
        connection with its report. The registrant requested Shelley to furnish it
        a
        letter addressed to the Commission stating whether it agrees with the above
        statements. A copy of that letter was filed as an exhibit to the report on
        Form
        8-K dated February 24, 2006.
 
 There
        were no other “reportable events” as that term is described in Item
        304(a)(1)(iv) of Regulation S-B occurring within the registrant’s two most
        recent fiscal years and the subsequent interim period ending February 24,
        2006.
 
 During
        the registrant’s two most recent fiscal years and through February 24, 2006, the
        date prior to the engagement of Semple & Cooper, LLP, neither the registrant
        nor anyone on its behalf consulted Semple & Cooper, LLP regarding the
        application of accounting principles to a specified transaction, either
        completed or proposed, or the type of audit opinion that might be rendered
        on
        the registrant’s consolidated financial statements.
  **ITEM
        8A.**  **CONTROLS
        AND PROCEDURES**
 
 **Evaluation
        of disclosure controls and procedures**
 
 Management,
        with the participation of our Chief Executive Officer and the Chief Financial
        Officer, carried out an evaluation of the effectiveness of our “disclosure
        controls and procedures” (as defined
        in the Exchange Act, Rules 13a-15(e) and 15-d-15(e)) as of the end of each
        of
        the periods covered by this report (the “Evaluation Date”). Based upon that
        evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
        concluded that, as of December 31, 2004, our disclosure controls and procedures
        were ineffective to ensure that the information we were required to disclose
        in
        reports that we file or submit under the Securities and Exchange Act of 1934
        is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms. More specifically,
        the
        company identified a material weakness due to a lack of sufficient personnel
        with appropriate knowledge in U.S. GAAP and lack of sufficient analysis and
        documentation of the application of U.S. GAAP to transactions, including
        but not
        limited to equity transactions. During either of the years ended December
        31,
        2004 and December 31, 2005, there was no change in our internal control over
        financial reporting identified in connection with the evaluation that has
        materially affected, or is reasonably likely to materially affect, our internal
        control over financial reporting.
 
 48
 ITEM
        8A.  CONTROLS
        AND PROCEDURES - continued
  **Internal
        Control over Financial Reporting**
 
 Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for the Company. Management used the framework
        of conducting an extensive review of existing documentation and transactions
        to
        make that evaluation. As of December 31, 2004, the Company had a deficiency
        in
        internal controls over the application of current US GAAP principles.
        Specifically, an effective review of the Balance Sheet was not performed.
        As a
        result of the ineffective review, errors in the year-end 2004 were not detected
        prior to the issuance of the annual 2004 consolidated financial statements.
        This
        control deficiency resulted in the restatement of our annual 2004 consolidated
        financial statements as set forth in Form 10-KSB/A filed June 14, 2006.
        Management has concluded that this control deficiency constituted a material
        weakness that continued throughout 2005.
 There
          were changes in our internal controls implemented during the first quarter
          of
          2006, including, specifically, a process to review the balance sheet of
          the
          company by persons with significant experience with US GAAP principles.
          Additionally, internal controls were adopted to separate accounting tasks
          within
          the company so as to ensure the separation of duties between those persons
          who
          approve and issue payment from those persons who are responsible to record
          and
          reconcile such transactions within the Company’s accounting system. Such
          internal controls were implemented during the first quarter period ending
          March
          31, 2006, and, accordingly, as of the end of the first quarter 2006, management
          found the internal control over financial reporting to be effective, with
          no
          material weaknesses. There were no changes in our internal control over
          financial reporting that occurred during our most recent fiscal quarter
          that
          have materially affected, or are reasonably likely to materially affect,
          internal control over financial reporting.
 The
        Company’s management is reviewing the Company’s internal controls over financial
        reporting to determine the most suitable recognized control framework. The
        Company will give great weight and deference to the product of the discussions
        of the SEC’s Advisory Committee on Smaller Public Companies (the “Advisory
        Committee”) and the Committee of Sponsoring Organizations’ task force entitled
        Implementing the COSO Control Framework in Smaller Businesses (the “Task
        Force”). Both the Advisory Committee and the Task Force are expected to provide
        practical, needed guidance regarding the applicability of Section 404 of
        the
        Sarbanes-Oxley Act to small business issuers. The Company’s management intends
        to perform the evaluation required by Section 404 of the Sarbanes-Oxley Act
        at
        such time as the Company adopts a framework. For the same reason, the Company’s
        independent registered public accounting firm has not issued an “attestation
        report” on the Company management’s assessment of internal controls.
 
 
 **ITEM
        8B.**  **OTHER
        INFORMATION**
 
 None.
 
 
 
 
 
 
 49
 
 **PART
        III**
  **ITEM
        9.**  **DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE EXCHANGE ACT**
 
 **Executive
        Officers and Directors**
 
 As
        of the
        date of this filing, the Skye Board of Directors consists of the following
        members:
 
 Mark
        D.
        Chester, Chairman.
 Kenneth
        A. Cannerelli, Director
 Gregg
        C.
        Johnson, Director and Secretary
 William
        S. Papazian, Director
 Wesley
        G.
        Sprunk, Director
 
 Mr.
        Thomas Kreitzer serves as Skye’s Chief Executive Officer ,
        Treasurer and Chief Financial Officer. He
        has
        held his respective positions since June 13, 2002. Mark Chester and Kenneth
        Pinckard became directors on September
        19, 2005. David Kreitzer, who had served as a director since July 25,
        2002, resigned on September 19, 2005.
 
 Gregg
        Johnson and William Papazian were appointed directors on February 13, 2006
        to
        fill vacant position s.
        On
        February 16, 2006, Kenneth Pinckard resigned as a director and on February
        24,
        2006, Thomas Kreitzer resigned as director, but he retained his positions
        as an
        officer noted above. Kenneth Cannerelli and Wesley Sprunk were appointed
        as
        directors on May 11, 2006.
 
 Directors
        are elected to serve for a one-year term. Officers hold their positions at
        the
        will of the board of directors. There are no arrangements, agreements or
        understandings between non-management shareholders and management under which
        non-management shareholders may directly or indirectly participate in or
        influence the management of the Registrant’s affairs.
 
 The
        names, ages, and respective positions of the directors and executive officers
        of the Company as of June 30, 2006 are set forth below.
  Thomas Kreitzer
              39
              Chief Executive Officer, Treasurer,
                and Chief
                Financial Officer,Director
                of EnvirotechMark D. Chester
              45
              Director of SkyeGregg C. Johnson
              41
              Director of Skye, Valeo, ION and Envirotech,
                Chief Executive
                Officer of Envirotech, Valeo and ION andDirector
                and Secretary of SkyeWesley G. Sprunk
              70
              Director of SkyeKenneth A. Cannerelli
              58
              Director of SkyeWilliam S. Papazian
              48
              Director of
                Skye
 
 
 
 50
  ITEM
        9.  DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE EXCHANGE ACT - continued
 Thomas
        Kreitzer
 
 Thomas
        Kreitzer, age 39, graduated from Indiana University in 1989. In 1993 he
        co-founded Enanti Software Ltd., a software development company geared toward
        the development of customized application specific software. In 1996 Mr.
        Kreitzer along with his brother David Kreitzer acquired fifty percent interest
        in Designer Products, a Phoenix based industrial design firm, which has grown
        to
        be well known in the hardware industry for its revolutionary product designs.
        Designer Products develops and patents innovative products, then coordinates
        manufacturing of the products overseas for distribution through industry
        recognized corporations. Key accounts include Stanley Tool Company, 3M
        Corporation, Bondex International, American Tool Company/Irwin, RPM Group,
        Ames,
        Bay Mills Company, BreathRight, DAP and numerous others. In 2003 the Kreitzer’s
        sold their equity in Designer Products and formed a new company Hause Products
        Ltd. of which they are the majority shareholders. Hause provides product
        design
        and contract manufacturing services. Thomas Kreitzer also is a stockholder
        and
        Director of Gold Coast Holding, Inc. a Delaware company that does celebrity
        licensing to promote various products. The company currently holds the rights
        to
        Darrell Waltrip’s meat line.
 
 *Mark
        D. Chester*
 
 Mark
        Chester, age 45, is a licensed attorney in the State of Arizona and former
        Chairman of the State Bar’s Securities Regulation Section and its Executive
        Council. He practices in Scottsdale at the law firm of Chester & Shein,
        P.C., which focuses on business and real estate transactions and litigation.
        Mr.
        Chester was formerly a shareholder at the Phoenix law firm of Gallagher and
        Kennedy where he represented local businesses, broker-dealers and homebuilders
        in arbitration, state and federal court, and administrative agency cases.
        He is
        a member of the Board of Arbitrators for the National Association of Securities
        Dealers and has served on numerous arbitration panels in a variety of securities
        industry disputes. Mr. Chester currently has matters before the SEC, NASD,
        the
        Arizona Securities Division and the NYSE. He received his B.S. in commerce
        at
        the University of Virginia and his J.D. from the Arizona State College of
        Law
        with honors.
  *Gregg
        C. Johnson*
 
 Gregg
        Johnson is a lawyer with extensive experience in management of entrepreneurial
        companies. He received his law degree in 1988 from Osgoode Hall Law School
        in
        Toronto and was admitted as a lawyer in Alberta in 1989. His extensive legal
        career has included practice in Tokyo, Japan, where his practice focused
        on
        Japanese securities regulation and international debt instruments, and in
        Jeddah, Saudi Arabia, where he acted as Outside Middle East Counsel to many
        fortune 500 companies. His career has included experience in corporate finance
        and venture capital for emerging growth companies across Canada. He was
        instrumental in building and growing many successful companies and he has
        been
        an officer and director of numerous Canadian and U.S. public companies over
        his
        career.
  *Wes
        Sprunk*
 
 Wes
        Sprunk resides in Scottsdale, Arizona and is President of Tire Service Equipment
        Mfg., Inc. and Saf-Tee Siping & Grooving, Inc. The main office for these
        companies is in Phoenix, Arizona with manufacturing plants in Alamogordo,
        New
        Mexico and Monticello, Minnesota. Tire Service Equipment Mfg., Inc./Saf-Tee
        Siping & Grooving, Inc. manufactures automotive wheel service equipment and
        recycling equipment. It markets these products in the U.S. and foreign countries
        and presently has 300+ distributors. Wes Sprunk is also a board member with
        Amerityre Corporation, a NASDAQ public company (Nasdaq: AMTY) located in
        Boulder
        City, Nevada. Amerityre specializes in urethane polycomposites and the company’s
        mission is to replace rubber in most applications, including tires. Wes Sprunk
        is married to Jody Ann Zadra, and has three children.
 
 51
  ITEM
        9.  DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE EXCHANGE ACT - continued
  *Kenneth
        A. Cannerelli*
 
 Ken
        Cannerelli has been with The Dial Corporation for over 33 years holding several
        key management positions. Dial is a Fortune 500 Company in the consumer package
        goods industry with household names like Dial Soap, Purex Detergent, Renuzit
        Air
        Fresheners, and Armour Canned Meats. His experience covers sales, marketing,
        business development, training, and sales planning. Here is a brief list
        of
        positions held:
 
 *
        Key
        Account Sales Manager
 *
        Region
        Business Development Manager
 *
        District Sales Manager
 *
        Zone
        Sales Manager
 *
        Director of National Accounts
 *
        Vice
        President of Sales Non-Food Accounts
 *
        Vice
        President and General Manager Central Division
 *
        Vice
        President of Sales Specialty Channels (Current Position)
 
 Sales
        and
        Management experience covers all channels — i.e. Drug, Grocery, Mass, Wholesale
        Clubs, Home/Hardware, and Dollar Stores. Ken has extensive experience in
        managing a direct sales force, brokers, manufacturer reps, and distributors
        along with direct involvement in mergers and acquisitions. In addition to
        attending several key business seminars i.e. Sales and Marketing Executives
        International at the Graduate School of Syracuse University, he holds a BSBA
        from the University of Phoenix. He also served in the United States Air Force
        as
        an Accounting and Finance NCO from 1969 through 1973.
 
 *William
        S. Papazian*
 
 William
        Papazian has been practicing law since 1986, specifically in the areas of
        corporate securities, regulatory and transactional work. In addition, since
        2001, he has been the President, Chief Executive Officer and General Counsel
        of
        Spinelli Corporation, a privately-held litigation support and investigative
        firm
        located in Scottsdale, Arizona. Prior to that, he spent seven years as a
        Board
        Director, Executive Vice President and General Counsel of a public company
        that
        developed and managed projects in the hospitality and gaming sectors. Mr.
        Papazian received his Juris Doctor degree from McGeorge School of Law,
        University of Pacific in 1986 and his Bachelor of Arts degree from New York
        University in 1983. He has been backgrounded and licensed by several federal
        and
        state regulatory agencies.
 
 **Compliance
        with Section 16(a) of the Exchange Act.**
 
 Section
        16(a) of the Securities Exchange Act of 1934 requires executive officers
        and
        directors, and persons who beneficially own more than 10% of any class of
        the
        Registrant’s equity securities to file initial reports of ownership and reports
        of changes in ownership with the Securities and Exchange Commission (“SEC”).
        Executive officers, directors and beneficial owners of more than 10% of any
        class of the Registrant’s equity securities are required by SEC regulations to
        furnish the Registrant with copies of all Section 16(a) forms they
        file.
  Based
          solely on a review of the copies of such forms furnished to the Registrant
          during or with respect to fiscal 2005, and certain written representations
          from
          executive officers and directors, the Registrant is aware that Messrs
          Chester and
          Papazian inadvertently failed to file a Form 3 at the time of their election to
          the
          Board. They are in the process of preparing those forms and obtaining the
          required EDGAR ID’s.
 
 52
  ITEM
        9.  DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE EXCHANGE ACT - continued
  **Code
        of Ethics**
 
 The
        Company maintains a Code of Ethics that was filed with its Annual Report
        on Form
        10-KSB for 2003 filed on April 22, 2004. That code applies to the chief
        executive, financial and accounting officers, controller and persons performing
        similar functions. If the Company amends the code or grants a waive from
        the
        code with respect to the foregoing persons, it will post that amendment or
        waiver on its website, www.skye-betterliving.com .
 
 **Audit
        Committee**
 
 The
        Company’s Audit Committee consists of Messrs. Chester, Johnson and Papazian.
        None of those members has been designated by the Board or the Audit Committee
        as
        an “audit committee financial expert.” The Board is seeking to fill a board seat
        with a member that will fulfill that qualification and is currently engaged
        in a
        director search.
 
 
 **ITEM
        10.****EXECUTIVE
        COMPENSATION**
 
 The
        following table sets forth information about the remuneration of the Company’s
        officers.
 
 **SUMMARY
        COMPENSATION TABLE**
 **Name
                  and Principal Position**
              **Annual
                  Compensation**
              **Long
                  Term Compensation**
              **All
                  Other Compensa-tion($)****Awards**
              **Payouts****Fiscal**
                **Year**
              **Salary
                  ($)**
              **Bonus
                  ($)**
              **Other
                  Annual Compensation ($)**
              **Restricted
                  Stock Award(s)**
                **($)**
              **Securities
                  Underlying Options/**
                **SARs
                  (#)**
              **LTIP**
                **Payouts**
                **($)**Thomas
                  Kreitzer,
                Chief
                  Executive Officer, Treasurer and
                Chief
                  Financial Officer
              2004
                2005
              -0-
                -0-
              -0-
                -0-
              -0-
                -0-
              $5,000
                $17,550
              -0-
                -0-
              -0-
                -0-
              $9,100
                $6,000David
                Kreitzer, President
              2004
                2005
              -0-
                -0-
              -0-
                -0-
              -0-
                -0-
              -0-
                $7,000
              -0-
                -0-
              -0-
                -0-
              $11,700
                $6,000Gregg
                Johnson,
                Secretary
              2004
                2005
              -0-
                -0-
              -0-
                -0-
              -0-
                -0-
              $37,500
                $80,000
              -0-
                -0-
              -0-
                -0-
              $51,150
                $48,150Kenneth
                Pickard,
                Vice
                  President, Valeo (1)
              2004
                2005
              -0-
                -0-
              -0-
                -0-
              -0-
                -0-
              $43,500,(1)
                $109,900
                  (1)
              -0-
                -0-
              -0-
                -0-
              $51,500,(1)
                $72,000
                  (1)
 (1)
        Kenneth Pinckard became a vice president of Valeo in February 2005. He was
        not
        compensated directly as an executive. All payments reflected in this table
        were
        made to Digital Crossing, LLC, pursuant to a consulting agreement. Kenneth
        Pinckard is an employee or consultant of Digital Crossing. The Company has
        no
        information concerning how much compensation Mr. Pinckard received from Digital
        Crossing relating to the services rendered by him to the Company.
 
 53
  ITEM
        10.EXECUTIVE
        COMPENSATION - continued
  **Employment** **and Consulting** **Agreements**
 
 There
        are
        no employment agreements with any of the executive officers.
 
 The
        Company has entered into consulting agreements with Sundance Financial Corp.,
        Digital Crossing, LLC, and Gregg C. Johnson. Copies of those agreements,
        together with any amendments thereto, are attached as Exhibits 10.5, 10.6
        and
        10.9, respectively, to this Report.
 The
          consulting agreements with Sundance and Digital Crossing commenced February
          1,
          2004 and will terminate on January 31, 2008. As amended, each provides
          for
          payments in the amount of $10,000 per month, with the Company having the
          option
          to pay any fee in excess of $5,000 per month, in the form of common stock
          of the
          Company. In addition, each of the agreements provides for the issuance
          of shares
          of common stock as additional compensation, including 750,000 shares issued
          pursuant to amendments dated September 6, 2005, and grants options to purchase
          300,000 shares of common stock at any time prior to February 11, 2014 at
          a price
          of $0.50 (See Exhibits 10.7 and 10.8 attached to this Report). At December
          31,
          2005, Sundance and Digital allege that the Company was delinquent with
          respect
          to payments owing under these agreements and the Company has accrued the
          following amounts as of that date: Sundance, $87,100; Digital Crossing,
          $46,170.
 The
          consulting agreement with Gregg C. Johnson, who is a director, secretary
          and
          acting general counsel for the Company, provides for the payment of a monthly
          fee in the amount of $10,000. As additional compensation, Mr. Johnson has
          been
          issued 750,000 shares of common stock of the Company. The agreement with
          Mr.
          Johnson commenced August 2004 and continues until July 31, 2007 (See Exhibit
          10.9 to this Report). Mr. Johnson alleges that he has provided services
          on a
          full-time basis in a timely and efficient manner and the contract remains
          in
          full force and effect.
 The
            plaintiff’s in the Shareholder Derivative Action (see Item 3, Legal Proceedings,
            above) contest, among other things, the validity of the consulting agreements
            discussed above.
  **Compensation
        of Directors**
 
 There
        are
        no compensation arrangements in place.
  **ITEM
          11.**  **SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
          MATTERS**
  The
          following table sets forth certain information, as of June 30, 2006, concerning
          shares of the Company’s common stock, the only class of securities that are
          issued and outstanding, held by (1) each stockholder known to own beneficially
          more than five percent of the common stock, (2) each of the directors,
          (3) each
          of the executive officers, and (4) all of the directors and executive officers
          as a group:
 54
  **Name
                  and Address of Beneficial Owner (1)**
              **Amount
                  and Nature of****Beneficial
                  Ownership**
              **Percent
                  of Class (2)**Sundance
                  Financial Corp.
                13470
                  N. 85th Place
                Scottsdale,
                  AZ 85260
              1,380,000
                  (3) direct
              6.71%Digital
                  Crossing, LLC
                13835
                  N. Tatum Blvd., Ste. 9-170
                Phoenix,
                  AZ 85032
              1,370,000
                  (4) direct
              6.65%Thomas
                  Kreitzer
                7904
                  E. Chaparral Rd., #A110-490
                Scottsdale,
                  AZ 85253
              5,000
                  direct
              N/AMark
                  D. Chester
                8777
                  N. Gainey Center Dr., Suite 191
                Scottsdale,
                  AZ 85258
              200,000
                  direct
              0.97%Gregg
                  C. Johnson
                6081
                  West Park Ave.
                Chandler,
                  AZ 85226
              796,000
                  direct
              3.84%William
                  S. Papazian
                4901
                  E. Calle Del Medio
                Phoenix,
                  AZ 85018
              -0-
              -0-Kenneth
                  A. Cannerelli
                4618
                  East Tumbleweed Dr.
                Cave
                  Creek, AZ 85331
              -0-
              -0-Wesley
                  G. Sprunk
                3451
                  S. 40thSt.
                Phoenix,
                  Az 85040
              142,855
                  direct
              0.69%Officers
                  and Directors as a group (6 persons)
              1,138,855
              5.53%
 
 (1)
              To
                  the Company’s knowledge, except as set forth in the footnotes to this
                  table and subject to applicable community property laws, each person
                  named
                  in the table has sole voting and investment power with respect
                  to the
                  shares set forth opposite the person’s name.
  (2)
              This
                  table is based on 20,588,493 shares of Common Stock outstanding
                  as of June
                  30, 2006. If a person listed on this table has the right to obtain
                  additional shares of Common Stock within sixty (60) days from June
                  30,
                  2006, the additional shares are deemed to be outstanding for the
                  purpose
                  of computing the percentage of class owned by that person, but
                  are not
                  deemed to be outstanding for the purpose of computing the percentage
                  of
                  any other person.
  (3)
              Sundance
                  Financial Corp., and affiliated persons own 1,080,000 shares of
                  Common
                  Stock of the Company. Lawrence G. Ryckman is a director of Sundance
                  Financial Corp. Sundance has the right to acquire up to 300,000
                  shares of
                  common stock pursuant to Options granted February 2004 at any time
                  prior
                  to February 11, 2009, at an exercise price of $0.55 per
                  share.
  (4)
              Digital
                  Crossing LLC, a Delaware limited liability company, owns 1,070,000
                  shares
                  of Common Stock of the Company. Digital Crossing has the right
                  to acquire
                  up to 300,000 shares of common stock pursuant to Options granted
                  February
                  2004 at any time prior to February 11, 2009, at an exercise price
                  of $0.55
                  per share.
  Information
        on Equity Compensation Plans is noted in “Item 5. Equity Compensation Plans”
above.
 
  
 55
  **ITEM
          12.**  **CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 Other
          than as disclosed below, none of the Company’s present directors, officers or
          principal shareholders, nor any family member of the foregoing, nor, to
          the best
          of the Company’s information and belief, any of its former directors, senior
          officers or principal shareholders, nor any family member of such former
          directors, officers or principal shareholders, has or had any material
          interest,
          direct or indirect, in any transaction, or in any proposed transaction
          which has
          materially affected or will materially affect the Company.
 **Accrued
        Salaries and other Expenses to Officers and Directors**
  During
        the year ended December 31, 2005 and 2004, the Company had incurred the
        following charges with directors and officers of the Company or companies
        with
        common directors:
 
 2005
              
              
              2004General
                  and Administrative
              
              
              $
              
              
              $AccountingConsulting
              
              
              260,950
              (1)
              
              235,650
              (1)RentSalaries$
              260,950
              
              $
              235,650
  (1)
                  Includes payments made to Digital Crossing, LLC, pursuant to consulting
                  agreement. Kenneth Pinckard is an employee or consultant of Digital
                  Crossing. The Company has no information concerning how much compensation
                  Mr. Pinckard received from Digital Crossing relating to the services
                  rendered by him to the Company.
 
 These
        charges were measured by the exchange amount, which is the amount agreed
        upon by
        the transacting parties and include amounts paid to persons who were officers
        or
        directors of the Company or any of its affiliates at any time during the
        respective fiscal years, even amounts paid prior to the time when they may
        have
        taken office.
 **Related
          Party Transactions**
 
 During
          2005, Studio One Entertainment, Inc. whose President is Lawrence Ryckman,
          transferred a paid credit of $150,000 to ION Tankless, Inc., to enable
          ION to
          continue research and development work contracted by Ion with Alliance
          Engineered Services, Inc. At December 31, 2005, only $30,000 of this loan
          had
          been repaid by the Company. The balance is carried in related party
          payables.
 
 During
          2005, Sundance Financial Corp., advanced a total of $93,000 to the Company
          to
          enable it to meet short term obligations. At December 31, only $10,000
          of this
          loan had been repaid. The balance is carried in related party
          payables
  **Future
        Transactions**
 
 All
        future affiliated transactions are expected to be made or entered into on
        terms
        that are no less favorable to the Company than those that can be obtained
        from
        any unaffiliated third party. A majority of the independent, disinterested
        members of the Company’s board of directors are asked to approve future
        affiliated transactions. The Company believes that of the transactions described
        above have been on terms as favorable to it as could have been obtained from
        unaffiliated third parties as a result of arm’s length negotiations.
 
 **Conflicts
        of Interest**
 
 In
        accordance with the laws applicable to the Company, its directors are required
        to act honestly and in good faith with a view to the Company’s best interests.
        In the event that a conflict of interest arises at a meeting of the board
        of
        directors, a director who has such a conflict is expected to disclose the
        nature
        and extent of his interest to those present at the meeting and to abstain
        from
        voting for or against the approval of the matter in which he has a
        conflict.
 
 
 
 56
 
 **ITEM
        13.**  **EXHIBITS.**
 
  **Regulation**
 **S-B
        Number**  **Exhibit**
 
 2.1
              Agreement
                  of Share Exchange and Plan of Reorganization dated November 4,
                  2003
                  (1)
 
 3.1
              Articles
                  of Incorporation of Amexan, Inc (2)
 
 3.2
              Articles
                  of Amendment of Articles of Incorporation of Amexan, Inc.
                  (2)
 
 3.3
              Articles
                  of Amendment of Articles of Incorporation of Nostalgia Motors,
                  Inc.
                  (3)
 
 3.4
              Articles
                  of Amendment of Articles of Incorporation of Elution Technologies,
                  Inc.
                  (4)
 
 3.5
              Articles
                  of Amendment of Articles of Incorporation of Tankless Systems Worldwide,
                  Inc. *
 
 3.6
              Bylaws,
                  as Amended (5)
 
 4.1
              Form
                  of Notes issued in 2004 and 2005 Private Placement Offerings
                  *
 
 10.1
              2003
                  Stock Incentive Plan (6)
 
 10.2
              2003
                  Stock Incentive Plan #2 (7)
 
 10.3
              2005
                  Stock Incentive Plan (8)
 
 10.4
              Manufacturing
                  Services Agreement between Jabil Circuit, Inc., and Skye International,
                  Inc. (9)
 
 10.5
              Consulting
                  Agreement between Skye International, Inc., and Sundance Financial
                  Corp,
                  including amendments *
 
 10.6
              Consulting
                  Agreement between Skye International, Inc., and Digital Crossing,
                  LLC,
                  including amendments *
 
 10.7
              Stock
                  Option Agreement between Skye International, Inc., and Sundance
                  Financial
                  Corp., including amendments *
 
 10.8
              Stock
                  Option Agreement between Skye International, Inc., and Digital
                  Crossing,
                  LLC, including amendments *
 
 10.9
              Personal
                  Services Consulting Agreement between Skye International, Inc.,
                  and Gregg
                  C. Johnson *#
 
 10.10
              Employment
                  Agreement between Eric Stebbins and Skye International, Inc.
                  *
 
 10.11
              Separation
                  Agreement between Michael Stebbins and Skye International, Inc.
                  *
 
 14.1
              Code
                  of Ethics (10)
 
 57
  ITEM
        13.  EXHIBITS
        - continued
 
 16.1
                Letterfrom
                    Shelley International, CPA
                    (11)
 
 16.2
              Letter
                  from Semple & Cooper, CPA (12)
 
 21.1
              Subsidiaries
                  of Skye International, Inc. *
 
 23.1
              Consents
                  of Moore and Associates, Chartered
                  *
 
 31.1
              Rule
                  13a-14(a) Certification of Chief Executive Officer and Chief Financial
                  Officer *
 
 32.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and Chief
                  Financial Officer *
 
 *
        Filed
        with this Annual Report
 #
        Relates
        to executive compensation
  ________________________
  (1)
              Incorporated
                  by reference to the exhibits to the registrant’s current report on Form
                  8-K, filed November 7, 2003.
 (2)
              Incorporated
                  by reference to the exhibits to the registrant’s registration statement on
                  Form 10-SB, filed October 5, 1999.
 (3)
              Incorporated
                  by reference to the exhibits to the registrant’s annual report on Form
                  10-KSB for the fiscal year ended December 31, 2002, filed May 15,
                  2003
 (4)
              Incorporated
                  by reference to the exhibits to the registrant’s quarterly report on Form
                  10-QSB for the fiscal quarter ended June 30, 2003, filed August
                  21,
                  2003.
 (5)
              Incorporated
                  by reference to the exhibits to the registrant’s annual report on Form
                  10-KSB for the fiscal year ended December 31,
                  2002.
 (5)
              Incorporated
                  by reference to the exhibits to the registrant’s current report on Form
                  8-K, filed February 24, 2006.
 (6)
              Incorporated
                  by reference to the exhibits to the registrant’s registration statement on
                  Form S-8, file number 333-108728, filed September 12,
                  2003.
 (7)
              Incorporated
                  by reference to the exhibits to the registrant’s registration statement on
                  Form S-8, file number 333-111348, filed December 19,
                  2003.
 (8)
              Incorporated
                  by reference to the exhibits to the registrant’s registration statement on
                  Form S-8, file number 333-123663, filed March 30,
                  2005.
 (9)
              Incorporated
                  by reference to the exhibits to the registrant’s current report on Form
                  8-K, filed February 23, 2006
 (10)
              Incorporated
                  by reference to the exhibits to the registrant’s annual report on Form
                  10-KSB for the fiscal year ended December 31, 2003, filed April
                  22,
                  2004.
 (11)
              Incorporated
                  by reference to the exhibits to the registrant’s current report on Form
                  8-K/A, filed March 7, 2006.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES.**
 
 On
        February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
        registrant’s independent registered public accounting firm, since the firm’s
        principal retired. Shelley had audited the Company’s financial statements for
        the fiscal years ended December 31, 2004 and 2003. On February 24, 2006,
        Semple
& Cooper, LLP was engaged to serve as the Company’s independent public
        accountants for the fiscal year ending December 31, 2005. On June 2, 2006,
        Semple and Cooper, LLP, withdrew as auditor for the Company and Moore and
        Associates, Chartered was engaged to serve as the Company’s independent public
        accountants for the fiscal year ended December 31, 2005 and with respect
        to the
        restatement of financial statements for the fiscal year ended December 31,
        2004.
 
 58
 
 ITEM
        14.  PRINCIPAL
        ACCOUNTANT FEES AND SERVICES - continued
  **Audit
        Fees**
 
 Moore
        and
        Associates, Chartered, is expected to bill $10,000 for the audit of the 2005
        annual financial statements and the audit of the restated financial statements
        for the year ended December 31, 2004. Semple & Cooper, LLC, has been paid
        $21,761 for the work it performed on the audit of the 2005 annual financial
        statements prior to its resignation and the Company has deposited an additional
        $10,000 as a retainer which it expects to be refunded. For the fiscal years
        ended December 31, 2005 and 2004, Shelley billed $10,000 and $18,000,
        respectively, for the audit of the annual financial statements and review
        of
        Form 10-QSB filings and $5,200 in connection with the restatement of the
        financial statements for the fiscal year ended 12-31-04.
 
 **Audit-Related
        Fees**
 
 There
        were no fees billed for services reasonably related to the performance of
        the
        audit or review of our financial statements outside of those fees disclosed
        above under “Audit Fees” for fiscal years 2005 and 2004.
  **Tax
        Fees**
 
 There
        were no fees billed for tax compliance, tax advice, and tax planning services
        for the fiscal years ended December 31, 2005 and 2004.
 
 **All
        Other Fees**
 
 There
        were no fees billed for other services for the fiscal years ended December
        31,
        2005 and 2004.
 
 **Pre-Approval
        Policies and Procedures**
 
 Prior
        to
        engaging the accountants to perform a particular service, the Company’s board of
        directors obtains an estimate for the service to be performed. The board
        in
        accordance with procedures for the Company approved all of the services
        described above.
 
 
  
 
 
 59
 
 **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **SKYE
                INTERNATIONAL, INC.**Date: June
                30, 2006
              By:
              /s/ Thomas
                KreitzerThomas
                KreitzerTitle Chief
                Executive Officer
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 **Signature**
              **Title**
              **Date**/s/ John
                  Thomas Kreitzer
                John
                  Thomas Kreitzer
              Chief
                  Executive Officer, Treasurer and Chief Financial Officer
              June
                  30, 2006/s/
Mark
                  D. Chester
                Mark
                  D. Chester
              Director
              June
                  30, 2006/s/ KennethA.
                  Cannerelli
                KennethA.
                  Cannerelli
              Director
              June
                  30, 2006/s/
Gregg
                  C. Johnson
                Gregg
                  C. Johnson
              Director
                  and Corporate Secretary
              June
                  30, 2006/s/ Wesley
                  G. Sprunk
                Wesley
                  G. Sprunk
              Director
              June
                  30, 2006
 
 
 60
 
 Part
        IV


**FINANCIAL
        STATEMENTS**


**ANNEX
        A**
 
 **SKYE
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **INDEX
        TO FINANCIAL STATEMENTS**
 
   
 **Page
                  No.**REPORTS OF INDEPENDENT REGISTERED
                PUBLIC ACCOUNTING FIRMS
              F-2
                  - F-3CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED
                BALANCE SHEETS
              F-4CONSOLIDATED
                STATEMENTS OF OPERATIONS
              F-5CONSOLIDATED
                STATEMENTS OF STOCKHOLDER’S DEFICIT
              F-6CONSOLIDATED
                STATEMENTS OF CASH FLOWS
              F-7NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
              F-8
                  -
                  F-19
 
 
 
 
 
 
 
 
 
 61
 
 
 **MOORE
            & ASSOCIATES, CHARTERED**
 ***ACCOUNTANTS
            AND ADVISORS*
 ***PCAOB
            REGISTERED***
 
 
 **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
            the
            Board of Directors
 Skye
            International Inc (Formerly Tankless Systems Worldwide Inc)
 Las
            Vegas, Nevada
 
 We
            have
            audited the accompanying balance sheet of Skye International Inc (Formerly
            Tankless Systems Worldwide Inc) as of December 31, 2004, and the related
            statements of operations, stockholders’ equity and cash flows for the year then
            ended. These financial statements are the responsibility of the Company’s
            management. Our responsibility is to express an opinion on these financial
            statements based on our audits.
 
 We
            conducted our audits in accordance with standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free of material misstatement. An audit includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements. An audit also includes assessing the accounting
            principles used and significant estimates made by management, as well
            as
            evaluating the overall financial statement presentation. We believe that
            our
            audits provide a reasonable basis for our opinion.
 
 In
            our
            opinion, the financial statements referred to above present fairly, in
            all
            material respects, the financial position of Skye International Inc (Formerly
            Tankless Systems Worldwide Inc) as of December 31, 2004 and the results
            of its
            operations and its cash flows for the year then ended, in conformity
            with
            accounting principles generally accepted in the United States of
            America.
 
 The
            accompanying financial statements have been prepared assuming that the
            Company
            will continue as a going concern. As discussed in Note 9 to the financial
            statements, the Company’s net losses and accumulated deficit of $6,012,643 as of
            December 31, 2004 raise substantial doubt about its ability to continue
            as a
            going concern. Management’s plans concerning these matters are also described in
            Note 9. The financial statements do not include any adjustments that
            might
            result from the outcome of this uncertainty.
 
 */s/
            Moore & Associates Chartered*
 
 Moore
            & Associates Chartered
 Las
            Vegas, Nevada
 June
            9,
            2006
  Except
            as to Note 12 the date is June 23, 2006
 
 
 *2675
            S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7511 Fax (702)
            253-7501*
 F-2
 62
   **MOORE
          & ASSOCIATES, CHARTERED**
 ** *ACCOUNTANTS
          AND ADVISORS*
 *PCAOB
          REGISTERED*
 
 
 REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
          the
          Board of Directors
 Skye
          International Inc (Formerly Tankless Systems Worldwide Inc)
 Las
          Vegas, Nevada
 
 We
          have
          audited the accompanying balance sheets of Skye International Inc (Formerly
          Tankless Systems Worldwide Inc) as of December 31, 2005, and the related
          statements of operations, stockholders’ equity and cash flows for the year then
          ended. These financial statements are the responsibility of the Company’s
          management. Our responsibility is to express an opinion on these financial
          statements based on our audits.
 
 We
          conducted our audits in accordance with standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of Skye International Inc (Formerly
          Tankless Systems Worldwide Inc) as of December 31, 2005 and the results
          of its
          operations and its cash flows for the year then ended, in conformity with
          accounting principles generally accepted in the United States of
          America.
 
 The
          accompanying financial statements have been prepared assuming that the
          Company
          will continue as a going concern. As discussed in Note 9 to the financial
          statements, the Company’s net losses and accumulated deficit of $10,064,513 as
          of December 31, 2005 and working capital deficit of $2,411,601 as of December
          31, 2005 raises substantial doubt about its ability to continue as a going
          concern. Management’s plans concerning these matters are also described in Note
          9. The financial statements do not include any adjustments that might result
          from the outcome of this uncertainty.
 
 
 
 */s/
          Moore & Associates Chartered*
 
 Moore
          & Associates Chartered
 Las
          Vegas, Nevada
 June
          23,
          2006
 
 
 
 *2675
          S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7511 Fax (702)
          253-7501*
    F-3
 63
 
 **Skye
                  International, Inc. and Subsidiaries****CONSOLIDATED
                  BALANCE SHEETS****ASSETS**Years
                  Ended December 31,2005
              
              2004**CURRENT
                  ASSETS**Cash
              2,711
              
              18,690Accounts
                  Receivable, Net
              2,773
              
              111Inventory
                  at Cost
              25,069
              
              54,170Prepaid
                  Expenses
              757
              
              115,000Total
                  Current Assets
              31,310
              
              187,970EQUIPMENT,
                  NET
              56,626
              
              47,648OTHER
                  ASSETSPatents
                  and Software, Net
              -
              
              -Deposits
              20,000
              
              -Total
                  Other Assets
              20,000
              
              -Total
                  Assets
              107,937
              
              235,618**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)**LIABILITIESCURRENT
                  LIABILITIES
                Accounts
                  Payable
              234,190
              
              87,478Other
                  Payables
              870,914
              
              709,389Notes
                  Payable
              1,118,240
              
              1,978,061Accrued
                  Interest Payable
              81,626
              
              75,874Warranty
                  Accrual
              34,570
              
              15,276Customer
                  Deposits
              103,371
              
              -Total Current Liabilities
              2,442,911
              
              2,866,078Non-Current
                  Liabilities
              -
              
              -Total
                  Liabilities
              2,442,911
              
              2,866,078STOCKHOLDERS'
                  EQUITY (DEFICIT)Common
                  Stock authorized is100,000,000
                  shares at $0.001par value.Issued
                  and outstanding on December 31,2005
                  were 17,838,231 shares, December 31,2004
                  were 13,125,977
              17,838
              
              13,126Common
                  Stock Subscribed
              275,000
              
              -Paid
                  in Capital
              7,436,333
              
              3,369,057Accumulated
                  Deficit
              (10,064,513)
              
              (6,012,643)Total
                  Stockholders' Equity (Deficit)
              (2,335,342)
              
              (2,630,460)TOTAL
                  LIABILITIES ANDSTOCKHOLDERS
                  EQUITY (DEFICIT)
              107,937
              
              235,618
 
 **The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.**
 **F-4**
  64
  **Skye
                  International, Inc.****CONSOLIDATED
                  STATEMENTS OF OPERATIONS**Years
                  Ended December 31,2005
              
              
              2004INCOMEProduct
                  Sales
              
              $
              172,169
              
              $
              205,640Other
                  Income
              
              
              255
              
              
              251Total
                  Income
              
              
              172,424
              
              
              205,891Cost
                  of Goods Sold
              
              
              172,651
              
              
              205,488Gross
                  Income (Loss)
              
              
              (226
              )
              
              403EXPENSESLegal
                  and Professional
              
              
              2,032,825
              
              
              711,916General
                  and Administrative
              
              
              1,253,029
              
              
              504,066Research
                  and Development
              
              
              447,657
              
              
              285,544Advertising/Marketing
              
              
              44,147
              
              
              27,431Loss
                  on Disposal of Assets
              
              
              17,253
              
              
              89,076Impairment
                  Loss
              
              
              -
              
              
              39,778Depreciation
              
              
              33,755
              
              
              29,579Amortization
              
              
              -
              
              
              23,685Total
                  Expenses
              
              
              3,879,816
              
              
              1,711,075OTHER
                  INCOME AND (EXPENSE):Interest
                  Income/(Expense)
              
              
              (171,828
              )
              
              (182,659
              )(171,828
              )
              
              (182,659
              )Net
                  (Loss) before Income Taxes
              
              
              (4,051,870
              )
              
              (1,893,331
              )Provision
                  for Income Taxes
              
              
              -
              
              
              -NET
                  (LOSS)
              
              
              (4,051,870
              )
              
              (1,893,331
              )Basic
                  and diluted (loss) per share
              
              $
              (0.27
              )
              $
              (0.16
              )Weighted
                  Average Number of CommonShares
                  Outstanding
              
              
              14,814,630
              
              
              12,016,132
 
 
 
 
 
 
 **The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.**
 
 **F-5**
 
 **Tankless
        Systems Worldwide, Inc. and Subsidiaries**
  65
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDER’S DEFICIT**
 Common
                  Stock
              
              Common
                  Stock
              
              
              Paid
                  in
              
              
              Accumulated
              
              
              TotalShares
              
              
              Amount
              
              
              Subscribed
              
              
              Capital
              
              
              Deficit
              
              
              Equity**Balance
                  December 31, 2000**
              
              
              580,000
              
              $
              580
              
              
              
              
              $
              333,920
              
              $
              (828,006
              )
              $
              (493,506
              )Common
                  Shares issued for Services
              
              
              52,500
              
              
              53
              
              
              
              
              
              52,447
              
              
              
              
              
              52,500Contribution
                  to Capital
              
              
              
              
              
              
              
              
              
              
              
              24,265
              
              
              
              
              
              24,265Common
                  Shares issued to retireConvertible
                  Note and accrued Interest
              
              
              60,000
              
              
              60
              
              
              
              
              
              187,022
              
              
              
              
              
              187,082Net
                  (Loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (120,900
              )
              
              (120,900
              )**Balance
                  December 31, 2001**
              
              
              692,500
              
              $
              693
              
              
              
              
              $
              597,654
              
              $
              (948,906
              )
              $
              (350,559
              )Common
                  Shares issued for cash
              
              
              104,778
              
              
              105
              
              
              
              
              
              96,895
              
              
              
              
              
              97,000Common
                  Shares issued for services
              
              
              455,800
              
              
              455
              
              
              
              
              
              110,045
              
              
              
              
              
              110,500Common
                  Shares issued for prepaidservice
              
              
              162,500
              
              
              163
              
              
              
              
              
              16,087
              
              
              
              
              
              16,250Common
                  Shares issued for proposedbusiness
                  acquisition
              
              
              6,433,406
              
              
              6,433
              
              
              
              
              
              896,997
              
              
              
              
              
              903,430Common
                  Shares issued to retireconvertible
                  note and accrued Interest
              
              
              60,000
              
              
              60
              
              
              
              
              
              200,670
              
              
              
              
              
              200,730Common
                  Shares issued to retire debt
              
              
              22,500
              
              
              22
              
              
              
              
              
              23,272
              
              
              
              
              
              23,294Net
                  (Loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2,798,586
              
              
              (2,798,586
              )**Balance
                  December 31, 2002**
              
              
              7,931,484
              
              
              7,931
              
              
              
              
              
              1,941,620
              
              
              (3,747,492
              )
              
              (1,797,941
              )Common
                  Shares issued for Cash
              
              
              434,894
              
              
              435
              
              
              
              
              
              967,925
              
              
              
              
              
              968,360Common
                  Shares issued in recapitalization
              
              
              3,008,078
              
              
              3,008
              
              
              
              
              
              (166,940
              )
              
              
              
              
              (163,932
              )Net
                  (Loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (371,821
              )
              
              (371,821
              )**Balance
                  December 31, 2003**
              
              
              11,374,456
              
              
              11,374
              
              
              
              
              
              2,742,605
              
              
              (4,119,313
              )
              
              (1,365,334
              )Common
                  Shares issued for services
              
              
              800,000
              
              
              800
              
              
              
              
              
              228,080
              
              
              
              
              
              228,880Common
                  Shares issued to retire Debt and interest of $91,281
              
              
              172,354
              
              
              172
              
              
              
              
              
              91,109
              
              
              
              
              
              91,281Common
                  Shares issued for cash through exercise of warrants
              
              
              66,667
              
              
              67
              
              
              
              
              
              16,600
              
              
              
              
              
              16,667Common
                  Shares cancelled insettlement
              
              
              (2,075,000
              )
              
              -2,075
              
              
              
              
              
              2,075
              
              
              
              
              
              -Common
                  Stock Options issued for services
              
              
              
              
              
              
              
              
              
              
              
              19,000
              
              
              
              
              
              19,000Common
                  Stock issued for prepaid services
              
              
              2,250,000
              
              
              2,250
              
              
              
              
              
              110,250
              
              
              
              
              
              112,500Common
                  Shares valued at $159,876
              
              
              537,500
              
              
              538
              
              
              
              
              
              159,338
              
              
              
              
              
              159,876Issued to obtain $1,075,000 debtNet
                  (Loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,893,330
              )
              
              (1,893,330
              )**Balance
                  December 31, 2004**
              
              
              13,125,977
              
              
              13,126
              
              
              -
              
              
              3,369,057
              
              
              (6,012,643
              )
              
              (2,630,460
              )
  66
  CONSOLIDATED
        STATEMENTS OF STOCKHOLDER’S
        DEFICIT - continued
 Common
                  Stock
              
              Common
                  Stock
              
              
              Paid
                  in
              
              
              Accumulated
              
              
              TotalShares
              
              
              Amount
              
              
              Subscribed
              
              
              Capital
              
              
              Deficit
              
              
              Equity
 Common
                  Stock granted but not issued until 2006
              
              
              
              
              
              
              
              
              275,000
              
              
              
              
              
              
              
              
              275,000Common
                  Stock granted in 2004 but
              
              
              
              
              
              
              
              
              
              
              
              945,000
              
              
              
              
              
              945,000not
                  earned by related partyconsulting
                  agreements until 2005Common
                  Shares issued for consulting
                and
                  outside services
              
              
              260,525
              
              
              261
              
              
              
              
              
              237,162
              
              
              
              
              
              237,423Common
                  Shares issued in conjunction with related party consulting
                  contracts
              
              
              391,832
              
              
              392
              
              
              
              
              
              414,129
              
              
              
              
              
              414,521Issuance
                  of common stock for
                  employee
                    stock Awards
              
              
              524,500
              
              
              525
              
              
              
              
              
              535,646
              
              
              
              
              
              536,170Issuance
                  of common stock to reduce
                  existing
                    debt
              
              
              78,067
              
              
              78
              
              
              
              
              
              52,266
              
              
              
              
              
              52,344Common
                  stock issued in
              
              
              50,000
              
              
              50
              
              
              
              
              
              12,450
              
              
              
              
              
              12,500Connection
                  with debtConversion
                  of convertible bridge
                  notes
                    into common stock
              
              
              842,511
              
              
              843
              
              
              
              
              
              462,539
              
              
              
              
              
              463,382Issuance
                  of common stock in private
                  placements
              
              
              2,564,819
              
              
              2,565
              
              
              
              
              
              1,408,085
              
              
              
              
              
              1,410,650Net
                  (Loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,051,870
              )
              
              (4,051,870
              )**Balance
                  December 31, 2005**
              
              
              17,838,231
              
              
              17,838
              
              
              275,000
              
              
              7,436,333
              
              
              (10,064,513
              )
              
              (2,335,341
              )
 **The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.**
 
 **F-6**
  67
  
 **Skye
                  International, Inc. and Subsidiaries****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**Years
                  Ended December 31,
              
              Years
                  Ended December 31,2005
              
              
              2004Cash
                  Flows from Operating Activities:Net
                  (Loss)
              
              $
              (4,051,870
              )
              $
              (1,893,330
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Common
                  Share Options issued for service
              
              
              
              
              
              19,000Shares
                  issued for services rendered
              
              
              2,408,114
              
              
              388,756Shares
                  issued to retire debt and interest
              
              
              528,226
              
              
              91,281Amortization
                  of intangible assets
              
              
              
              
              
              23,685Depreciation
                  Expense
              
              
              33,755
              
              
              29,579Loss
                  on disposal of capital assets
              
              
              
              
              
              89,076Impairment
                  Loss
              
              
              
              
              
              39,778Changes
                  in operating assets and liabilities:Inventory
              
              
              29,468
              
              
              44,643Accounts
                  Receivable
              
              
              (2,663
              )
              
              58,615Prepaid
                  Expense
              
              
              114,243
              
              
              (64,340
              )Deposits
              
              
              (20,000
              )
              
              7,514Accrued
                  Interest Payable
              
              
              (6,001
              )
              
              8,918Accounts
                  Payable & Other Payables
              
              
              375,344
              
              
              77,369Notes
                  Payable
              
              
              (895,883
              )
              
              (104,668
              )Customer
                  Deposits
              
              
              103,371
              
              
              159,084Net
                  Cash Provided (Used) by Operating Activities
              
              
              (1,383,896
              )
              
              (1,025,039
              )Cash
                  Flow From Investing ActivitiesPurchase
                  of Equipment
              
              
              (42,733
              )
              
              (11,503
              )Option
                  to Purchase JSS Security
              
              
              
              
              
              (37,526
              )Net
                  Cash Provided (Used) by Investing Activities
              
              
              (42,733
              )
              
              (49,029
              )Cash
                  Flow From Financing ActivitiesPrinciple
                  Received on convertible debentures
              
              
              
              
              
              1,075,679Proceeds
                  from sale of Common Stock
              
              
              1,410,650
              
              
              16,667Net
                  Cash Provided by Financing Activities
              
              
              1,410,650
              
              
              1,092,346Net
                  Increase/(Decrease) in Cash and Cash Equivalents
              
              
              (15,979
              )
              
              18,278Cash,
                  Beginning of Period
              
              
              18,690
              
              
              412Cash,
                  End of Year
              
              
              2,711
              
              $
              18,690Supplemental
                  Disclosure of Information:Taxes
              
              
              
              
              $
              -Interest
              
              
              191,093
              
              $
              182,659
 
 The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
 
 **F-7**
   68
 **SKYE
              INTERNATIONAL, INC.**
 NOTES
              TO
              AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2005 and December 31, 2004
  Note
        1.  THE
        COMPANY
 
 The
        Company
 
 Skye
        International, Inc., a Nevada corporation, was originally organized on November
        23, 1993 as Amexan, Inc. On June 1, 1998, the name was changed to Nostalgia
        Motorcars, Inc. On June 11, 2002, the Company changed its name to Elution
        Technologies, Inc. It changed its name to Tankless Systems Worldwide, Inc.
        on
        June 4, 2003 and to Skye International, Inc. on October 21, 2005.
 
 On
        November 7, 2003, the Company acquired Envirotech Systems Worldwide, Inc.
        (Envirotech), a private Arizona corporation, as a wholly owned subsidiary.
        Through this merger, the former shareholders of Envirotech acquired a
        controlling interest in Tankless Systems Worldwide, Inc. (Tankless) and
        accordingly, the Merger is accounted for as a reverse merger with Envirotech
        being the accounting acquirer of Tankless. Accordingly, the Financial Statements
        present the historic financial position, operations and cash flows of Envirotech
        for all periods presented with the December 31, 2003 balance sheet adjusted
        to
        consolidate and reflect the fair values assigned to the acquisition balance
        sheet of Tankless. Refer to Note 4, Acquisition of Subsidiary for additional
        information and disclosures related to the merger.
 
 Envirotech
        was organized December 9, 1998 and has a limited history of operations. The
        initial period of its existence involved research and development of a line
        of
        electronic, tankless water heaters. The first sales of its products occurred
        in
        calendar year 2000.
 
 With
        the
        acquisition of Envirotech, the Company is in the business of designing,
        developing, manufacturing and marketing several models of electronic, tankless
        water heaters.
 
 During
        January 2004 the Company organized ION Tankless, Inc. (Ion) an Arizona
        Corporation as a wholly owned subsidiary. ION is organized to do research,
        development and marketing of new tankless technologies.
 
 Nature
        of Business
 
 The
        Company produces and markets tankless electronic water heaters. The company’s
        products, together with a limited quantity of related parts purchased for
        resale, are sold primarily through Internet and wholesale distributors and
        major
        retailers in the United States and Canada. Based upon the nature of the
        Company’s operations, facilities and management structure, the Company considers
        its business to constitute a single segment for financial reporting
        purposes.
 
 Basis
        of Consolidation
 
 The
        accompanying consolidated financial statements reflect the operations, financial
        position and cash flows of the Company and include the accounts of the Company
        and its subsidiaries after elimination of all significant inter-company
        transactions in consolidation.
 
 Basis
        of Presentation
 
 The
        Consolidated Financial Statements of Skye International include all of its
        wholly owed subsidiaries.
  In
        January 2006, the Company withdrew its Chapter 11 filing without prejudice
        or
        relief from any of its liabilities previously classified as Subject to
        Compromise.
  As
        such
        t he
        accompanying Consolidated Financial Statement for the years ended December
        31,
        2005 and 2004 were not prepared in accordance with Statement of Position
        90-7
        (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the
        Bankruptcy Code” (See Note 2) which requires that all pre-petition liabilities
        subject to compromise are segregated in the consolidated balance sheets as
        of
        end of the respective years and classified as Liabilities Subject to Compromise,
        at the estimated amount of allowable claims with liabilities
        not subject to compromise being separately classified.
  F-8
 69
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        1.  THE
        COMPANY -
        continued
  These
        Consolidated Financial Statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. Accordingly, the financial statements do
        not
        include any adjustments that might be necessary should the Company be unable
        to
        continue as a going concern. As described more fully below, there is substantial
        doubt about the Company's ability to continue as a going concern which is
        predicated upon, among other things, the ability to generate cash flows from
        operations and, when necessary, obtaining financing sources sufficient to
        satisfy the Company’s future obligations.
  The
        accompanying comparative Consolidated Financial Statement for the year ended
        December 31, 2004 has been restated to reflect the Company’s withdrawal of its
        bankruptcy court petition.
  Recently
        Issued Accounting Standards
 
 Below
        is
        a listing of the most recent accounting standards and their effect on the
        Company.
 
 *SFAS
        123(R)* *Share-Based
        Payment*
  In
        December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.”
This statement is a revision to FAS No. 123, “Accounting for Stock-Based
        Compensation,” it supersedes APB Opinion No. 25, “Accounting for Stock Issued to
        Employees,” and amends FAS No. 95, “Statement of Cash Flows.” Generally the
        approach in FAS No. 123R is similar to the approach described in FAS
        No. 123. However, FAS No. 123R requires all share-based payments to
        employees, including grants of employee stock options, to be recognized in
        the
        income statement based on their fair values. Pro forma disclosure is no longer
        an alternative. This statement also provides guidance on valuing and expensing
        these awards, as well as disclosure requirements of these equity arrangements.
  FAS
        No. 123R must be adopted for the year ending December 31, 2006. Early
        adoption will be permitted in periods in which financial statements have
        not yet
        been issued.
  As
        permitted by FAS No. 123, the Company currently accounts for share-based
        payments to employees using the Fair Market Value method and the Company
        recognizes compensation cost for employee stock options at fair market Value.
        Accordingly, the adoption of FAS No. 123R’s fair value method is expected
        to have a material impact on the Company’s results of operations, although it is
        not expected to have an impact on the Company’s overall financial position.
        [However, had the Company adopted FAS No 123R in prior periods using the
        Black-Scholes valuation model, the impact of that standard would have
        approximated the impact of FAS No. 123 as described in the disclosure of
        pro
        forma net loss and net loss per share in Note 3 to our consolidated financial
        statements.]
  FAS
        No. 123R will also require the benefits of tax deductions in excess of
        recognized compensation cost to be reported as a financing cash flow, rather
        than as an operating cash flow as required under current literature. The
        Company
        cannot estimate what those amounts will be in the future (because they depend
        on, among other things, when employees exercise stock options, and whether
        the
        Company will be in a taxable position). There is no tax impact related to
        the
        prior periods since we are in a net loss position.
  *SFAS
        149 Amendment of Statement 133 on Derivative Instruments and Hedging
        Activities*
 
 This
        Statement amends and clarifies financial accounting and reporting for derivative
        instruments, including certain derivative instruments embedded in other
        contracts (collectively referred to as derivatives) and for hedging activities
        under FASB Statement No. 133, *Accounting
        for Derivative Instruments and Hedging Activities.*
 
 *SFAS
        150 Financial Instruments with Characteristics of both Liabilities and
        Equity*
 
 This
        statement requires that such instruments be classified as liabilities in
        the
        balance sheet. SFAS 150 is effective for financial instruments entered into
        or
        modified after May 31, 2003.
 F-9
 
 70
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
  Note 1.  THE
        COMPANY -
        continued
 
 *[FIN
        46 Consolidation of Variable Interest Entities*
 
 Interpretation
        No. 46 (FIN46 *)* In
        January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
        Consolidation of Variable Interest Entities, an Interpretation of ARB No.
        51,
        which addresses consolidation by business enterprises of variable interest
        entities ("VIEs"). In December 2003, the FASB completed deliberations of
        proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
        effective dates based on the nature as well as the creation date of the VIE.
        The
        Revised Interpretations must be applied no later than the second quarter
        of
        fiscal year 2004. The adoption of FIN 46 had no impact on the Company's
        consolidated financial statements as of December 31, 2004.
  The
        adoption of these new Statements is not expected to have a material effect
        on
        the Company’s current financial position, results or operations, or cash flows.
   Note
        2.  SUBSIDIARY’S
        PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
  The
        Company’s wholly-owned subsidiary, Envirotech, filed for reorganization under
        Chapter 11, as it offered the most efficient alternative to restructure the
        Company’s balance sheet and access new working capital while continuing to sells
        its products and work with its parent to explore alternative business objectives
        to become financially viable. On August 6, 2004, Envirotech filed a voluntary
        petition with the United States Bankruptcy Court for the District of Arizona
        (Case No. 2:04-13908-RTB )
        seeking
        relief under Chapter 11 of the Bankruptcy Code as a means to resolve all
        existing litigation, judgments and efforts to collect on judgments entered
        against Envirotech. On December 2004, the Company filed its proposed plan
        of
        reorganization and disclosure statement with the Bankruptcy Court.
  With
        the
        exception of a guarantee to one critical supplier in the approximate amount
        of
        $42,500, the Registrant has not assumed any liability for the obligations
        of
        Envirotech. As of the date of the filing of the Chapter 11 Bankruptcy Petition,
        Envirotech had liabilities of approximately $1.6 million. Several creditors
        not
        related to the supply of parts or the assemblies of products have obtained
        judgments against Envirotech and were seeking to collect such judgments,
        and an
        action was pending in the U.S. District Court, Southern District of Texas,
        alleging patent infringement. The filing of the Bankruptcy Petition temporarily
        stayed all creditors and lawsuits.
  AICPA
        Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
        under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance
        for entities that are reorganizing under the Bankruptcy Code. The Company
        implemented this guidance in the consolidated financial statements for periods
        subsequent to September 30, 2004.
  Pursuant
        to SOP 90-7, companies are required to segregate pre-petition liabilities
        that
        are subject to compromise and report them separately on the balance sheet.
        Liabilities that may be affected by a plan of reorganization are recorded
        at the
        amount of the expected allowed claims, even if they may be settled for lesser
        amounts. Obligations arising post-petition, and pre-petition obligations
        that
        are secured are not classified as liabilities subject to compromise.
  Additional
        pre-petition claims (liabilities subject to compromise) may arise due to
        the
        rejection of executory contracts or unexpired leases, or as a result of the
        allowance of contingent or disputed claims.
  As
        of
        December 31, 2004 and December 31, 2005, Tankless and its subsidiaries
        (including Envirotech the “Debtor”) operated their business as
        debtors-in-position pursuant to the Bankruptcy Code.
  In
        January 2006, the Company withdrew its Chapter 11 filing without prejudice
        or
        relief from any of its liabilities previously classified as Subject to
        Compromise.
  F-10
 
  
 71
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
  Note
        3.   SIGNIFICANT
        ACCOUNTING POLICIES
   Use
        of
        Estimates and Assumptions
 
 The
        discussion and analysis of the Company's financial condition and results
        of
        operations are based upon the Company's consolidated financial statements,
        which
        have been prepared in accordance with accounting principles generally accepted
        in the United States. The preparation of these financial statements requires
        making estimates and assumptions that affect the reported amounts of assets
        and
        liabilities, disclosure of contingent assets and liabilities at the date
        of the
        financial statements, and the reported amounts of revenues and expenses during
        the reporting period. Actual results may differ from these estimates under
        different assumptions or conditions. Critical accounting policies are defined
        as
        those that entail significant judgments and estimates, and could potentially
        result in materially different results under different assumptions and
        conditions.
 
 The
        accompanying balance sheets as of December 31, 2005 and December 31, 2004,
        and
        the related statements of operations, stockholders’ equity, and cash flows for
        the periods ended December 31, 2005, and 2004 reports the activity of its
        subsidiary Envirotech up to the date of purchase November 7, 2003 and
        consolidates the activity of the Company for all reported periods from the
        date
        of purchase to December 31, 2004 and its subsidiary ION from inception (January
        2004) to December 31, 2005.
 
 The
        Consolidated Financial Statements for fiscal 2005 contained herein have been
        prepared in accordance with Statement of Position 90-7, “Financial Reporting by
        Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). The
        Consolidated Financial Statements for fiscal 2003 are not prepared in accordance
        with SOP 90-7 because the Chapter 11 case was filed in fiscal 2005. See Note
        2
        to the Consolidated Financial Statements. The amounts reported in subsequent
        financial statements will materially change due to the restructuring of the
        Company’s assets and liabilities as a result of the Plan and the application of
        the provisions of SOP 90-7 with respect to reporting upon emergence from
        Chapter
        11 (“fresh start” accounting). Financial statements for periods subsequent to
        the Company’s emergence from Chapter 11 will not be comparable with those of
        prior periods.
 
 Cash
        Equivalent
 
 Cash
        and
        Cash Equivalents - All highly liquid debt instruments with a maturity of
        three
        months or less at the time of purchase are considered to be cash equivalents.
        Cash equivalents are stated at cost, which approximates fair value because
        of
        the short-term maturity of these instruments.
 
 Fair
        Value of Financial Instruments
 
 Financial
        instruments consist of cash and cash equivalents, accounts payable, accrued
        expenses and short-term and long-term convertible debt obligations. Including
        promissory notes, and related party liabilities, the fair value of these
        financial instruments approximates their carrying amount as of December 31,
        2005 and 2004 due to the nature of or the short maturity of these instruments.
 
 Research
        and Development
 
 The
        Company's research and development efforts concentrate on new product
        development, improving product durability and expanding technical expertise
        in
        the manufacturing process. The Company expenses product research and development
        costs as they are incurred. With the organization of its new subsidiary ION,
        the
        Company continues to expense research and development costs as incurred in
        developing additional products based on new technologies.
 
 Marketing
        Strategy
 
 The
        Company sells directly to individuals through the Internet, through
        distributors, and through high volume retailers. The Company periodically
        advertises on cable television stations, at trade shows and through trade
        magazines and it maintains an extensive website.
 
 F-11
 
 
 72
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        3.   SIGNIFICANT
        ACCOUNTING POLICIES - continued
 Revenue
        Recognition
 
 The
        Company records sales when revenue is earned. The Company usually sells its
        units through credit card sales to individuals and normally does not maintain
        receivables. However, the Company does sell on credit to distributors. Due
        to
        the company’s Warranty and Right of Return policy, six percent of the sales are
        recognized immediately and the balance is recognized 30 days after shipment
        of
        the product to the customer. All shipments are FOB shipping point. Sales
        to
        distributorships are sold FOB shipping point with 30-day terms on receivables.
        In 2005, substantially all of the Company’s gross revenues of $172,169 were
        generated by the Valeo subsidiary.
 
 Accounts
        Receivable
 
 Accounts
        receivable are recorded when an order is received from a distributor and
        shipped. An allowance for doubtful accounts was set up based on the actual
        rate
        of uncollected accounts. Net accounts receivable is as follows:
 
 Year Ended December 31
              
              
              2005
              
              
              2004Accounts
                Receivable
              
              $
              4,056
              
              $
              111Less
                Allowance for Doubtful
                Accounts
              
              
              (1,283
              )
              
              -Net
                Accounts Receivable
              
              $
              2,773
              
              $
              111
 
  Allowance
        for Doubtful Accounts
 The
          company maintains allowances for doubtful accounts for estimated probable
          losses
          resulting from inability of the company’s customers to make the required
          payments. The company continues to assess the adequacy of the reserves
          for
          doubtful accounts based on the financial condition of the Company’s customers
          and external factors that may impact collectability. As of December 31,
          2005 the
          allowance was $1,283
 Advertising
 
 Advertising
        expense included the cost of sales brochures, print advertising in trade
        publications, displays at trade shows and maintenance of an Internet site.
        Advertising is expensed when incurred. Advertising expense for the years
        ended
        December 31, 2005, and December 31, 2004 and is $44,147, and $27,431
        respectively.
 
 Inventory
 
 The
        Company contracts with a third party to manufacture the units and is neither
        billed for nor obligated for any work-in-process. The Company only supplies
        certain parts and materials and is then billed for completed products. Parts
        and
        material inventory is stated at the lower of cost (first-in, first-out) or
        net
        realizable value.
 
 Property
        and Equipment
 
 Property
        and equipment are depreciated or amortized using the straight-line method
        over
        their estimated useful lives, which range from two to seven years. Fixed
        assets
        consist of the following:
 
  Year Ended December 31
                
                
                2005
                
                
                2004Tooling,
                  machinery, furniture and
                  fixtures
                
                $
                64,457
                
                $
                163,429Less:
                  Accumulated depreciation
                
                
                (7,831
                )
                
                (115,781
                )Net
                  Accounts Receivable
                
                $
                56,626
                
                $
                47,648
 Patents
 
 We
        evaluate potential impairment of long-lived assets in accordance with FAS
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
FAS No. 144 requires that certain long-lived assets be reviewed for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of an asset may not be fully recoverable based on expected
        undiscounted cash flows that result from the use and eventual disposition
        of the
        asset. The amount of any impairment is measured as the difference between
        the
        carrying value and the fair value of the impaired asset.
  F-12
 73
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        3.   SIGNIFICANT
        ACCOUNTING POLICIES - continued   Patent
        and software costs include direct costs of obtaining patents. Costs for new
        patents are capitalized and amortized over the estimated useful lives of
        seventeen years and software over five years. The Company determined that
        the
        current patents and software were impaired due to uncertainty in connection
        with
        the pending patent litigation, as well as the efforts to develop a new product
        line as of December 31, 2004.
 
 Year Ended December 31
                  
                  
                  2005
                  
                  
                  2004Patents
                    and Heater Software
                  
                  $
                  -
                  
                  $
                  132,274Accumulated
                    Amortization
                  
                  
                  -
                  
                  
                  (92,496
                  )Impairment
                    Loss
                  
                  
                  -
                  
                  
                  (39,778
                  )Net
                    Patents and Heater Software
                  
                  $
                  -
                  
                  $
                  -
  Earnings
        per Share
 
 The
        basic
        (loss) per share is calculated by dividing the Company’s net loss available to
        common shareholders by the weighted average number of common shares outstanding
        during the year.
 
 The
        Company has no potentially dilutive securities outstanding at the end of
        the
        statement periods. Therefore, the basic and diluted earnings (loss) per share
        are presented on the face of the statement of operations. There are 700,000
        options at $.50 and $.55 per share available at this time. All outstanding
        warrants were either exercised or cancelled and convertible debt is
        anti-dilutive.
 
 Stock
        Based Compensation
 
 The
        Company accounts for its stock based compensation based upon provisions in
        SFAS
        No. 123, *Accounting
        for Stock-Based Compensation* .
        In this
        statement stock based compensation is divided into two general categories,
        based
        upon who the stock receiver is, namely: employees/directors and
        non-employees/directors. The employees/directors category is further divided
        based upon the particular stock issuance plan, namely compensatory and
        non-compensatory. The employee/directors non-compensatory securities are
        recorded at the sales price when the stock is sold. The compensatory stock
        is
        calculated and recorded at the securities’ fair value at the time the stock is
        given. SFAS 123 also provides that stock compensation paid to non-employees
        be
        recorded with a value which is based upon the fair value of the services
        rendered or the value of the stock given, whichever is more reliable. The
        common
        stock paid to non-employees was valued at the value of the services rendered.
        Because the Company establishes the exercise price based on the fair market
        value of the Company’s stock at the date of grant, the options have no intrinsic
        value upon grant, and therefore no expense is recorded.
 
 Equity
        instruments issued to non-employees for goods or services are accounted for
        at
        fair value and are marked to market until service is complete or a performance
        commitment date is reached.
 
 We
        measure stock-based employee compensation based on FASB Statement No. 123r,
        Accounting for Stock-Based Compensation, therefore, we establish the price
        based
        on the fair market value of our common stock at the date of grant.
 
 In
        December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.”
This statement is a revision to FAS No. 123, “Accounting for Stock-Based
        Compensation,” and it supersedes APB Opinion No. 25, “Accounting for Stock
        Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.”
Generally the approach in FAS No. 123R is similar to the approach described
        in FAS No. 123. However, FAS No. 123R will require all share-based payments
        to employees, including grants of employee stock options, to be recognized
        in
        the income statement based on their fair values.
 
 FAS
        No. 123R must be adopted no later than January 1, 2006. We have
        adopted FAS No. 123R on January 1, 2005. FAS No. 123R permits
        public companies to adopt its requirements using one of two methods, the
        modified prospective or the modified retrospective method. We have chosen
        to
        adopt the modified prospective method in which compensation cost is recognized
        beginning with the effective date (a) based on the requirements of FAS
        No. 123R for all share-based payments granted after the effective date and
        (b) based on the requirements of FAS No. 123 for all awards granted to
        employees before the effective date of FAS No. 123R that remain unvested on
        the effective date.
  F-13
 74
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        3. SIGNIFICANT
        ACCOUNTING POLICIES - continued
 
 Warranty
        and Right of Return
 
 In
        connection with the sale of each product, the Company provides a 30-day money
        back guarantee less a 6% restocking charge. After the 30 days the Company
        provides a five year warranty on replacement of parts. The tank chamber is
        warranted not to leak for 20 years. The Company has limited history with
        claims
        against its warranty. The Company defers a portion of the revenue as would
        generally be required for post-contract customer support ("PCS") arrangements
        under SOP 97-2. Accordingly, the revenue allocated to the warranty portion
        of
        such sales is deferred and recognized ratably over the life of the warranty.
        As
        of December 31, 2005 a total of $15,276 in refunds and warranty allowances
        were
        recorded against Product Sales.
   Balance of Warranty Accrual for
                  2003
              
              $
              3,220Balance
                of Warranty Accrual for
                2004
              
              
              9,725Balance
                of Warranty Accrual for
                2005
              
              
              21,625Total
                Warranty Accrual as of December 31,
                2005
              
              $
              34,570
 
 Note
        4.   ACQUISITION
        OF SUBSIDIARY
 
 On
        November 7, 2003, the Company acquired Envirotech Systems Worldwide, Inc.
        a
        private Arizona corporation (Envirotech), as a wholly owned subsidiary. On
        the
        date of purchase the Company had 3,008,078 common shares issued and outstanding.
        The purchase was made in a one-for-one stock exchange of 8,366,778 shares
        of the
        Company’s common stock for all of the issued and outstanding shares of
        Envirotech. The Statement of Stockholders’ Equity has been retroactively
        restated to reflect the affect of a recapitalization of Envirotech at the
        time
        of purchase.
 
 Note
        5.  NOTES
        PAYABLE AND CAPITAL LEASE OBLIGATIONS
 
 During
        the years ended December 31, 2004 and December 31, 2005, the Company received
        $1,075,000 and $100,000, respectively, through private placements to accredited
        investors. The investor received a one-year debenture with an interest rate
        of
        10% per annum, payable, quarterly. Additionally, the investor received one
        (1)
        share of the Company’s restricted common stock for each Two Dollar ($2.00)
        amount of debentures purchased. The principle and unpaid interest is convertible
        at the option of the Company to common stock at the rate of one share of
        stock
        for every One Dollar ($1.00) outstanding at the due date. Rather than enforcing
        conversion as provided by the language of the notes the Company made offers
        of
        conversion to the note holders to accept conversion based on current stock
        values (i.e., $0.55) or repayment of the note. During 2004 a $30,000 and
        a
        $50,000 note including associated interest were converted to common stock.
        During 2005, $515,725 in notes and accrued interest were converted to common
        stock.
 
 Notes
        payable and capital lease obligations consist of the following:
  
 Year
                Ended December 31
              
              
              2005
              
              
              2004Convertible
                Notes, Unsecured, Matured March2001
                bear 12.5% Interest, principle and interestconvertible
                into one common share and onewarrant
                at 75% of the average closing price overthe
                10-day period prior to conversion.  Warrantshave
                expired and notes have not beenconverted
                and are in default.
              
              $
              70,000
              
              $
              100,000Convertible
                Notes, Unsecured, Matured March2002
                bear 12.5% Interest, principle and interestconvertible
                into one common share and onewarrant
                at 75% of the average closing price over the
                10-day period prior to conversion.  Warrantshave
                expired and note has been converted.
              
              
              ---
              
              $
              30,000
  F-14
 75
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        5.  NOTES
        PAYABLE AND CAPITAL LEASE OBLIGATIONS -
        continued
  Notes
        payable and capital lease obligations - continued
 
 Year
                  Ended December 31
              
              
              2005
              
              
              2004Convertible
                  Notes, Unsecured, Matured one-yearfrom
                  issue date, bear 10% Interest payable quarterly,principle
                  and interest convertible into one commonshare
                  for each outstanding $1.00.  Thirty-six notesthat
                  were issued between January 23 and December14,
                  2004, are outstanding at 12-31-04 and four notesissued
                  between May 6, 2004 and December 14, 2004,are
                  outstanding at December 31, 2005. The four notesoutstanding
                  December 31, 2005, have not been convertedor
                  repaid and are in default.  Aggregate Amount:
              
              
              215,000
              
              
              1,025,000Demand
                  Note with Attorneys, 6% Interest, All Assetsof
                  Subsidiary, Envirotech, pledged as Collateral; Noteis
                  in default
              
              
              194,895
              
              
              194,895Demand
                Note with Former Distributor of Subsidiary,Envirotech,
                in Settlement and Repurchase ofDistributorship
                Territory, 7% Interest; Note is in default.
              
              
              519,074
              
              
              519,074Demand
                  Note Made by Subsidiary, Envirotech,10%
                  Interest, Payable Monthly; Note is in default
              
              
              11,880
              
              
              11,880Demand
                  Note Made by Subsidiary, Envirotech,6%
                  Interest; Note is in default35
              
              
              35,000
              
              
              35,000Demand
                  Note Made by Subsidiary, Envirotech;Note
                  is in default
              
              
              72,391
              
              
              62,212Total
              
              
              1,118,240
              
              
              1,978,061Accrued
                Interest Payable
              
              
              81,626
              
              
              75,874Total
                Notes Payable
              
              $
              1,199,866
              
              $
              2,053,935
  Note
        6.   STOCKHOLDERS’
        EQUITY
 
 On
        December 31, 2005 and 2004 common stock issued and outstanding were 17,838,231
        and 13,125,977 shares respectively.
 
 On
        December 1, 2003, the Company adopted an employee stock incentive plan setting
        aside 165,000 shares of the Company’s common stock for issuance to officers,
        employees, directors and consultants for services rendered or to be rendered.
        The proposed maximum offering price of such shares is $1.00 per share.
 
 A
        compensation committee appointed by the Board of Directors, or, if none,
        the
        entire Board of Directors has the right to grant awards or stock options
        as
        administers the plan.
 
 On
        December 19, 2003, the Company filed a Registration on Form S-8 with the
        Securities Exchange Commission covering the 165,000 shares provided by this
        plan, at a maximum offering price of $1.00 per share.
  F-15
 76
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
  Note
        6.STOCKHOLDERS’
        EQUITY - continued
  As
        of
        March 31, 2004, the Company has issued all of the shares covered by the 2003
        Stock Incentive Plan adopted by the Company on December 1, 2003.
 
 On
        December 23, 2004, the Company accepted the return and cancellation of 2,075,000
        common shares in settlement of action taken by the company against prior
        officers, directors and shareholders of Envirotech in connection with claims
        made during its purchase.
 
 On
        March
        24, 2005, the Company adopted an employee stock incentive plan setting aside
        500,000 shares of the Company’s common stock for issuance to officers,
        employees, directors and consultants for services rendered or to be rendered.
        The proposed maximum offering price of such shares is $1.00 per share.
 
 A
        compensation committee appointed by the Board of Directors who shall have
        the
        right to grant awards or stock options administers the plan.
 On
        March
        30, 2005, the Company filed a Registration on Form S-8 with the Securities
        Exchange Commission covering the 500,000 shares provided by this plan, at
        a
        maximum offering price of $1.00 per share.
 As
          of
          December 31, 2005, the Company has issued 252,357 shares covered by the
          2005
          Stock Incentive Plan adopted by the Company on March 24, 2005, at a total
          amount
          of $247,768
 
 The
        Company was initially capitalized on November 30, 1993 with the issue of
        500,000
        shares for $5,000. During 2004 the Company issued 537,500 common shares valued
        at $159,876 for debenture purchase incentives; 800,000 common shares for
        services valued at $228,880; 66,667 common shares for $16,667 cash in exercise
        of outstanding warrants; 172,354 common shares to retire $80,000 in debt
        and
        11,281 interest; 2,250,000 shares were issued for prepaid expenses of $112,500;
        2,075,000 shares were surrendered and cancelled in settlement of Envirotech
        acquisition dispute; and 537,500 shares were issued to retire $1,075,000
        convertible debt at $159,876. In 2004, the Company also issued 2,250,000
        shares
        as prepayment for services valued at $945,000 which were performed in 2005.
        During 2005 the Company issued 652,357 shares for $651,943 in consulting
        services; 524,500 shares at $536,170 for employee stock awards; 78,067 shares
        for $54,647 in debt reduction; 842,511 shares to retire $881,536 in convertible
        notes; and 2,564,819 shares for $, 296,483 in cash in private placements.
        The
        total common stock issued and outstanding at December 31, 2005 is 17,838,231
        shares.
 
 Warrants
 
 On
        December 31, 2003 there were 66,667 share purchase warrants outstanding
        entitling the holders the right to purchase one common share for each warrant
        held at $0.75 per share. On May 19, 2004, the Company revised the exercise
        price
        to $0.25 per share and accepted $16,667 in exercise of these warrants for
        66,667
        common shares. No additional warrants are outstanding.
 
 Stock
        Options
 In
          connection with the acquisition of Envirotech Systems Worldwide, Inc.,
          the
          Company issued immediately vested stock options on October 29, 2003 to
          one of
          the principal shareholders of Envirotech. He was granted the right to purchase
          300,000 restricted common shares at $0.55 per share until October 29, 2004
          which
          was extended to December 31, 2004. This option expired without exercise
          on
          December 31, 2004.
 
 On
        February 11, 2004 the company granted 5-year stock options to purchase 600,000
        shares of restricted common stock at $0.50 per share to consultants assisting
        in
        company operations. Using a discounted stock price of $0.43, exercise price
        of
        $0.50, 5-year option, risk-free rate of 4.1% and a volatility rate of .038
        the
        value of these options is calculated at $0.03 using the Black-Scholes model.
        The
        aggregate value of 600,000 options is $18,000. By amendment dated September
        6,
        2005, the option period has been extended for an additional 5 years, to expire
        February 11, 2014.
 
 On
        December 31, 2004 options to purchase 100,000 restricted common shares were
        granted as part of a settlement agreement. The options are immediately vested
        and the holder has the right to purchase 100,000 restricted shares at an
        exercise price of $0.55 per share and will expire in one year (December 31,
        2005). Using a discounted stock price of $0.44, exercise price of $0.55,
        1-year
        option, risk-free rate of 4.1% and a volatility rate of .038 the value of
        these
        options is calculated at $0.01 using the Black-Scholes model. The aggregate
        value of 100,000 options is $1,000.
  F-16
 77
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
  Note 6.   STOCKHOLDERS’
        EQUITY - continued
 In
        October 2005, the Company granted an option to its website developer to purchase
        100,000 shares of common stock at a variable price based on market price,
        exercisable within one year.
 
 At
        December 31, 2005, none of the options have been exercised.
 
 Outstanding
        stock options are as follows:
  SharesBalance,
                December 31, 2003
              
              
              300,000Granted
              
              
              600,000Expired
              
              
              (300,000
              )Balance,
                December 31, 2004
              
              
              600,000Granted
              
              
              100,000Expired
              
              
              (100,000
              )Granted
              
              
              100,000Balance,
                December 31, 2005
              
              
              700,000
  Note
        7.  INCOME
        TAXES
 
 The
        Company provides for income taxes under Statement of Financial Accounting
        Standards No. 109, *Accounting
        for Income Taxes* .
        SFAS
        No. 109. Under
        SFAS No. 109, deferred tax assets and liabilities are recognized based on
        temporary differences between the financial statement and tax basis of assets
        and liabilities using enacted tax rates in effect in the years in which the
        differences are expected to reverse. SFAS No. 109 requires current recognition
        of net deferred tax assets to the extent that it is more likely than not
        such
        net assets will be realized. To the extent that the Company believes that
        its
        net deferred tax assets will not be realized, a valuation allowance must
        be
        recorded against those assets.
 
 SFAS
        No.
        109 requires the reduction of deferred tax assets by a valuation allowance
        if,
        based on the weight of available evidence, it is more likely than not that
        some
        or all of the deferred tax assets will not be realized. In the Company’s
        opinion, it is uncertain whether they will generate sufficient taxable income
        in
        the future to fully utilize the net deferred tax asset. Accordingly, a valuation
        allowance equal to the deferred tax asset has been recorded. The total deferred
        tax asset is calculated by multiplying a 35% estimated tax rate by the
        cumulative NOL of $10,064,513. The total valuation allowance is equal to
        the
        total deferred tax asset.
  
 Year
                Ended December 31
              
              
              2005
              
              
              2004Deferred
                Tax Asset
              
              $
              3,522,580
              
              $
              2,104,425Valuation
                Allowance
              
              
              (3,522,580
              )
              
              (2,104,425
              )Current
                Taxes Payable
              
              
              -
              
              
              -Income
                Tax Expense
              
              
              -
              
              
              -
 
  Below
        is
        a chart showing the estimated federal net operating losses and the years
        in
        which they will expire.
 
  Year
              
              
              Amount
              
              
              Expiration1993-2003
              
              
              4,119,312
              
              
              2013-20232004
              
              
              1,893,331
              
              
              20242005
              
              
              4,051,870
              
              
              2025Total
              
              $
              10,064,513
 
 Note
        8.  LEASES
        AND OTHER COMMITMENTS
 
 The
        Company leases certain office facilities and equipment under leases with
        varying
        terms. Certain leases contain rent escalation clauses. These rent expenses
        are
        recognized on a straight-line basis over the respective term of the lease.
        The
        lease is a month-to-month lease costing $20,236 per month.
  F-17
 
 78
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        9.  GOING
        CONCERN
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. The Company has incurred net losses since
        inception with an accumulated deficit of $10,064,513 as of December 31, 2005.
        The Company will probably not generate meaningful revenues in the foreseeable
        future. The Company has a working capital deficit of $2,411,601 as of December
        31, 2005. These factors, among others, raise substantial doubt about the
        Company’s ability to continue as a going concern.
 
 Listed
        below are some of the other factors that contribute to the Company’s assumed
        inability to continue as a going concern. Also described are management’s plans
        for the future of the Company.
 
 Company’s
        Challenges
 
 The
        Company has a substantial deficit in retained earnings from losses for the
        previous years. Its subsidiary, Envirotech has not been able to generate
        enough
        sales to cover annual expenses and has survived only by raising funds. The
        Company must continue to raise funds in the near future to survive. Management
        has been successful in the past in raising these funds. There is no assurance
        that management can continue to find investors to cover the losses
        generated.
 
 Management’s
        Plans
 
 Management
        feels that industry trends are encouraging. Advertising will likely continue
        through the printed media, cable television and the Internet. As new
        homebuilders become aware of the product it will be included in original
        house
        plans.
 
 On
        February 1, 2004, the company initiated its management transition plan as
        a
        result of its acquisition of its subsidiary Envirotech. The Company entered
        into
        several consulting agreements to assist in day-to-day operations and provide
        financial, management and other consulting services to the Company and its
        subsidiaries. These persons will serve as part of the management team during
        the
        periods of their engagement and will perform a variety of services to
        include:
 
 The
        evaluation of potential business opportunities
 The
        business operations and management
 The
        development of business strategies
 Raising
        public and private capital
 
 Pursuant
        to these agreements, the company committed to issue 700,000 shares of common
        stock and has granted options to purchase an additional 600,000 restricted
        shares at a price of $0.50 per share at any time prior to February 1, 2009.
        All
        stock issued or to be issued is subject to the limitations imposed by Rule
        144.
        Management believes these individuals and entities are crucial to the future
        of
        the Company and that the consideration paid for their services is fair and
        reasonable.
 
  Note
        10.  PENDING
        LITIGATION
 
 The
        Company’s subsidiary Envirotech is currently a defendant in a patent
        infringement lawsuit. Management feels that this action is baseless and that
        the
        Company will prevail. No contingent liability has been recorded nor contemplated
        at this point. The action was temporarily stayed through a Bankruptcy Petition.
        However, such action proved futile and the Bankruptcy Petition was withdrawn
        without prejudice.
 
 In
        2004
        Envirotech was named in three separate lawsuits for unpaid legal and consulting
        fees totaling $268,000. Envirotech believed it had meritorious defenses to
        each
        of these suits. On April 14, 2004, Envirotech settled one suit, considering
        it a
        nuisance claim. In connection with that settlement, Envirotech reimbursed
        the
        plaintiff for alleged out-of-pocket expenses and the Company issued 10,000
        shares of common stock, restricted under Rule 144, to the plaintiff on the
        basis
        of a loan from the Company to Envirotech. In the other two suits Envirotech
        elected not to expend funds to defend the actions and judgments were granted
        in
        the aggregate amount of approximately $155,500. These judgments were temporarily
        stayed through a Bankruptcy Petition (see Note 3). Any settlements of these
        suits will be reflected as a charge in the year of the settlement.
  F-18
 
 79
 
 **SKYE
            INTERNATIONAL, INC.**
 NOTES
            TO
            AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
            31, 2005 and December 31, 2004
 
 Note
        10.  PENDING
        LITIGATION - continued
  On
        August
        13, 2004, the Company filed a verified complaint in the United States District
        Court in and for the District of Arizona against certain key individuals
        who
        were principles of Envirotech prior to its acquisition. The action alleged
        against various defendants, Breach of Fiduciary Duty, Aiding and Abetting
        Breach
        of Fiduciary Duty, Breach of Contract, Breach of Implied Covenant of Good
        Faith
        and Fair Dealing, Fraud and Intentional Misrepresentation, Conspiracy to
        Defraud, Arizona Securities Fraud, Federal Securities Fraud, Negligent
        Misrepresentation, Misappropriation of Trade Secrets and Confidential Business
        Information, Conversion/Embezzlement, Intentional Interference with Business
        Relations and Prospective Economic Advantage, Unjust Enrichment, and Promissory
        Estoppel. The Company sought relief, which included, but was not limited
        to,
        Damages, Constructive Trust, Rescission and Injunctive Relief. This action
        has
        been settled with the return and cancellation of 2,075,000 shares of common
        stock and the agreement of the defendants to other conditions, including
        agreements not to compete for specified periods of time.
 
  Note
        11.  COMMON
        STOCK TO BE GRANTED
 
 On
        December 24, 2004 the Company issued 2,250,000 shares of common stock for
        $112,500 in anticipation of executing various consulting agreements for services
        to be performed in 2005. This transaction was recorded in the 2004 financial
        statements as a prepaid expense and subsequently recorded as an operating
        expense in the 2005 financial statements.
 
 Note
        12.  LIABILITIES SUBJECT
        TO COMPROMISE
  As
        a
        result of the Company's Chapter 11 filing (see Notes 1 and 2), pursuant to
        SOP
        90-7, the Company was required to segregate pre-petition liabilities that
        are
        subject to compromise and report them separately on the consolidated balance
        sheet. Liabilities that may be affected by a plan of reorganization are recorded
        at the amount of the expected allowed claims, even if they may be settled
        for
        lesser amounts. Substantially all of the Company's pre-petition debt was
        recorded at face value and was classified liabilities subject to compromise.
        The
        Company’s subsequent withdrawal of its Chapter 11 filing resulting in a
        reclassification of the Company’s liabilities from Subject to Compromise to
        ordinary liabilities. The Company’s 2004 financial statements have been restated
        to reflect this change.
   Note
        13.  CONTROLS
        AND PROCEDURES
  Disclosure
        Controls and Procedures
 
 An
        evaluation was carried out under the supervision and with the participation
        of
        management, including the Chief Executive Officer (“CEO”) and Chief Financial
        Officer (“CFO”), regarding effectiveness of disclosure controls and procedures
        as of December  31,
        2004 .
        Disclosure controls and procedures are procedures that are designed with
        the
        objective of ensuring that information required to be disclosed in reports
        filed
        under the Securities Exchange Act of 1934, such as this Form 10-KSB, is
        recorded, processed, summarized and reported within the time periods specified
        in the Securities and Exchange Commission’s rules and regulations. Based on a
        material weakness in internal control over financial reporting discussed
        below,
        management, including the Chief Executive Officer and Chief Financial Officer,
        concluded that the disclosure controls and procedures were not effective
        as of
        the end of the period covered by that report.
 
 Internal
        Control Over Financial Reporting
 
 The
        Company had a deficiency in internal controls over the accounting treatment
        of
        the reverse merger and subsidiary bankruptcy. Specifically, an effective
        review
        of the documents related to these two events was made. As a result of the
        ineffective initial review, an error in the year-end 2004 calculation was
        not
        detected prior to the issuance of the annual 2004 consolidated financial
        statements. This control deficiency resulted in the restatement of our annual
        2004 consolidated financial statements. Management has concluded that this
        control deficiency constitutes a material weakness.
  Management
        Remediation Plan
 
 The
        Company has undertaken remedial action to address and correct the weakness
        in
        internal controls and disclosure controls identified subsequent to the end
        of
        2004. These actions include adopting an adequate review of the accounting
        treatment of significant events and adding qualified accounting personnel.
        These
        actions were put into place during the quarter beginning January 1,
        2006.
 F-19
 80