UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 Form
10-K
 
 (Mark
      One)þ
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended December 31, 2008oro
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from  to
      _________
 
 Commission
file number: 000-27549
 
 
 
 SKYE INTERNATIONAL,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
                88-0362112(State
      or other jurisdiction of
                  incorporation
      or organization)
                (I.R.S.
      Employer
                  Identification
      No.)
 
 7701
      E. Gray Rd., Suite 104Scottsdale,
      Arizona
                    85260(Address
      of principal executive offices)
                    (Zip
      Code)
 
 Registrant’s
telephone number, including area code:
 (480)
993-2300
 
 Securities
registered pursuant to Section 12(b) of the Act:
 None
 
 Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, $0.001 par value
 (Title
of class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o     No þ
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes þ     No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not 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-K or any amendment to this Form 10-K.  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer
                  o
                  Accelerated
      filer
                  oNon-accelerated
      filer
                  o
                  Smaller
      reporting company
                  þ
 
 1
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).  Yes o     No þ
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter:
$2,040,884 as of June 30, 2008.
 
 As of
December 31, 2008 and March 10, 2009, the registrant had 13,927,915 shares
of common stock outstanding.
   FORWARD-LOOKING
STATEMENTS
 
 This
report contains “forward-looking statements”.  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 Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this document.
 
 Throughout
this Form 10-K, references to “we”, “our”, “us”, “the Company”, and similar
terms refer to SKYE International Inc. and its former 100% owned subsidiaries,
Envirotech Systems Worldwide Inc., Valeo Industries Inc. and ION Tankless
Inc.
 
 
 
 
  2
  SKYE
INTERNATIONAL, INC.
 
 FORM 10-K
 
 FOR
THE FISCAL YEAR ENDED
 DECEMBER
31, 2008
 INDEX
 
 PagePART IItem
      1.
                                      Business
                                      4Item
      1A.
                                      Risk
      Factors
                                      11Item
      1B.
                                      Unresolved
      Staff Comments
                                      11Item
      2.
                                      Properties
                                      11Item
      3.
                                      Legal
      Proceedings
                                      11Item
      4.
                                      Submission
      of Matters to a Vote of Security Holders
                                      13PART IIItem
      5.
                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                      13Item
      6.
                                      Selected
      Financial Data
                                      15Item
      7.
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      15Item
      7A.
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      19Item
      8.
                                      Financial
      Statements and Supplementary Data.
                                      19Item
      9.
                                      Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                      20Item
      9A(T).
                                      Controls
      and Procedures
                                      20Item
      9B.
                                      Other
      Information
                                      21PART IIIItem
      10.
                                      Directors,
      Executive Officers and Corporate Governance
                                      21Item
      11.
                                      Executive  Compensation
                                      23Item
      12.
                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                      25Item
      13.
                                      Certain
      Relationships and Related Transactions, and Director
      Independence
                                      26Item
      14.
                                      Principal
      Accounting Fees and Services
                                      27PART IVItem
      15.
                                      Exhibits,
      Financial Statement Schedules
                                      28
 
  3
  PART I
 
 ITEM 1.
              BUSINESS
 
 Corporate
Overview
 
 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., and the
commencement of the Company’s current line of business, it changed its name to
Tankless Systems Worldwide, Inc. The Company’s acquisition of Envirotech Systems
Worldwide, Inc. was completed on November 7, 2003, in a share exchange that
resulted in the Company acquiring 100% of the issued and outstanding common
shares of Envirotech Systems Worldwide, Inc.  On October 21,
2005, as part of its overall plan to create a brand name for its revised
business plan and expanded product lines, the Company changed its name to SKYE
International, Inc.
  SKYE had
three subsidiary corporations, all of which were wholly-owned and all of which
were wound-up or administratively dissolved during the fiscal year ended
December 31, 2008:
  ·
              Envirotech
      Systems Worldwide, Inc., an Arizona corporation
      (“Envirotech”);
 ·
              ION
      Tankless, Inc., an Arizona corporation (“ION”);
  and
 ·
              Valeo
      Industries, Inc., a Nevada corporation
  (“Valeo”).
 
 As of the
date of this Report, the Company has no subsidiaries or affiliates.
 
 Except as
otherwise specified, all references herein to the “Company”, “we” our”, “us”
refer to SKYE and its wholly-owned subsidiaries, Envirotech, ION and Valeo. The
business office of the Company is located at 7701 E. Gray Rd., Suite104,
Scottsdale, Arizona 85260. The Company’s fiscal year ends on December
31.
  Envirotech
  Envirotech
was formed December 9, 1998, in Arizona and had a limited history of operations.
The initial period of its existence involved research and development of a line
of electric tankless water heaters. The first sales of its products occurred in
2000.  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”). Envirotech
subsequently withdrew from voluntary bankruptcy protection pursuant to an order
of the Bankruptcy court on February 24, 2006, that granted Envirotech’s motion
to dismiss its voluntary petition in bankruptcy with
prejudice.  Envirotech later filed for bankruptcy under Chapter 7 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Arizona, on June 24, 2008 (the “Chapter 7
Proceedings”).  The filing of the Chapter 7 proceedings stayed all
then-existing litigation, judgments and efforts to collect on judgments entered
against Envirotech. As of the date of the filing of the Chapter 7 Bankruptcy
Petition, Envirotech had liabilities in excess of approximately $1.6 million,
and non-liquidated contingent liabilities in connection with the Seitz Suit (as
defined and explained under “Legal Proceedings” below).  On January 7,
2009, the Bankruptcy Court partially lifted the stay of proceedings to permit
the Seitz Suit to proceed.  On January 20, 2009, S. William Manera,
the Chapter 7 Trustee appointed by the Bankruptcy Court to administer the
bankrupt estate of Envirotech, filed a Notice of Intention to Abandon the
remaining assets of Envirotech comprising US Patent No. 6,389,226 and
miscellaneous inventory to the Company on the grounds that the remaining assets
in the estate were of negligible value to the
estate.  Envirotech’s assets were subsequently abandoned to the
Company.  Envirotech was administratively dissolved by the State of
Arizona in 2008.  As of the date of this Report the Chapter 7
proceedings continue and the Company expects the matter will be concluded in
2009.  All accounting entries to reflect the dissolution of Envirotech
are contained in the Company’s consolidated financial statements.
 
 
 
   4
 
 ITEM 1.
              BUSINESS-
      continued
  ION
  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 had conducted research and
development of alternative heating technologies and products. SKYE invested
heavily through ION in a research and development program to develop new and
innovative methods of heating fluids and such efforts have resulted in the
issuance of several US patents and several more that remain pending as of the
date of this Report. All of the assets of ION were transferred to the Company
during the 2008 fiscal year and ION was dissolved.  All accounting
entries to reflect the dissolution of ION are contained in the Company’s
consolidated financial statements.
  Valeo
  Valeo was
formed by SKYE in January 2005 as a wholly-owned operating subsidiary. It was
intended that Valeo would become the manufacturing entity for the
Company.  Consistent with a Board of Directors decision in 2007, the
Company has elected to pursue a “Fabrication Free” business plan and outsource
all production to qualified contract manufacturers.  As a result Valeo
was wound up and dissolved in the 2008 fiscal period, and all accounting entries
to reflect the dissolution are contained in the Company’s consolidated financial
statements.
  Business
of the Company
 
 The
Company is in the business of designing, developing, and marketing consumer
heating appliance products.  All of the Company’s products are
produced for the Company by third party contract manufacturers.  The
Company entered its current line of business through the acquisition of
Envirotech and its product line - the ESI-2000 electric tankless water
heater.  Though viewed by many to be a significant advancement in
whole house electric tankless, the ESI-2000 product line never achieved critical
sales levels, and thus production of the ESI-2000 product line concluded in late
2005. In response to lackluster ESI-2000 product sales, the Company engaged in a
substantial research and development program to design a line of replacement
heating appliances.  The first product that the Company released to
the market in October 2008 was the FORTISTM electric tankless
whole house water heater. The FORTISTM tankless water heater
is small, easy to install and supplies virtually endless amounts of hot water
with energy savings. The FORTISTM uses advanced
technology and high quality stainless steel components that are expected to
provide increased reliability and longevity. The FORTISTM series heats
water only as long as you require hot water, and only at the temperature you
desire. Electricity is only used when heated water is required, therefore the
cost of heating water can be reduced by as much as 30%. Because the FORTISTM series is compact,
durable, self-contained and safe, it can be easily installed close to where hot
water is being used, and it is ideal for condos, apartments, multifamily
residences and homes where space is at a premium.
 
 Additionally,
the Company has continued to focus development efforts on the commercialization
of its new ParadigmTM technology. The Company has worked hard
to introduce its ParadigmTM line of
point-of-use water heaters.  As of the date of this Report the Company
has completed the engineering phase of the project and has begun preliminary
steps to obtain product certification to the requisite UL 499
standard.  The Company expects that a series of ParadigmTM product will be certified and
commercially available for sale during fiscal 2009.
 
 In late
2008 the Company entered into an Agreement with a supplier to produce the
Company’s HeatwaveTM line of point-of-use water heating
products.  Utilizing revolutionary thin-film on quartz technology the
HeatwaveTM line is an inexpensive commercial point-of-use heating
solution.  Ideally suited for small lavatory and bathroom
applications, the HeatwaveTM provides a commercial building project with an
inexpensive solution to the code requirement for heated water.  The
Company received UL 499 and CSA 22.2 No. 64 certification in January 2009 and
expects to commence commercial sale and distribution of the Heatwave in the
second quarter of fiscal 2009.
 
 We have
expended considerable efforts to develop a sales and distribution network in
North America. We have chosen to sell our products through wholesale
distribution utilizing manufacturer representatives. As of December 31, 2008, we
have appointed a number of manufacturer representatives covering a number of
states, primarily in the southwest and southeast portions of the United States.
We continue to review opportunities for the appointment of additional
manufacturer representatives in territories across the United States, and we
anticipate hiring a VP Sales and Marketing to coordinate all of the Company’s
sales and marketing programs.
  5
 
 ITEM 1.
              BUSINESS-
      continued
  The Marketplace for Tankless Water
Heaters.
 
 Historically,
in the U.S., electric 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 more efficient and reliable than in the past.  As
tankless heaters continue to gain market acceptance in the U.S., management
expects that consumer sentiment will change and become more favorable to
tankless as the “green” cost-saving benefits of the technology become more
widely known to the public.
 
 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 92% market share of residential water
heater sales (Frost &
Sullivan, 2004). Management believes that tankless products comprise
nearly 8% of the U.S. marketplace as of the end of 2008.   Some
contractors are loyal to their favorite brands and are comfortable installing
what they know. 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. Studies
report that sales growth in tankless water heaters will require better tankless
products than in the past and educating both representatives and installers in
the plumbing industry as well as consumers and builders in the advancements in
products.
 
 Until
just a few years ago, there were only a few tankless water heater manufacturers
with a presence in the United States.  Today, there are no electric
water heaters manufactured in Japan. The Japanese have a 40-year history of
using gas-based instant water heaters, and leverage that experience in the U.S.
marketplace. These Japanese manufacturers include Takagi, Noritz, and Rinnai.
The European competitors in the U.S. marketplace in gas, and to a lesser extent
electric-based heaters include Bosch and Steibel Eltron, both of which gained
their market experience in Europe where point-of-use instant use water heaters
are commonplace.
  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. The Company’s FORTISTM product
addresses this problem by incorporating a “multi-pass” serpentine heating
technology that keeps incoming water in contact with a large heating surface for
a longer time period of time when compared to many other electric models. The
greater contact with a larger heating surface results in the ability to produce
greater volumes of heated water because of the added operating efficiency of the
product. Additionally, SKYE’s control algorithms are capable of very precise
temperature control even under fluctuating flow conditions.  This new
level of functionality afforded by the Company’s patented technology we believe
will give SKYE a competitive advantage over many other electrically powered
tankless water heaters, and for the first time provide what SKYE believes to be
a truly viable alternative for the consumer that demands higher flows of heated
water.
 
 Product
Overview
 
 TheFORTISTMseries.
 
 The
Company has developed what it believes will be the world’s most advanced,
efficient, reliable, safe and durable electric tankless whole house water
heater. The FORTISTM series has
substantially all stainless steel metal construction and features a backlit LCD
display for ease of use. The units offer 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 replacement parts.
 
 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 built-in USB port to ease
troubleshooting and allow the user to download performance logs or updated
firmware.  The sophisticated FORTISTM controller provides
functionality not included in many other electric tankless products including
remote bath fill, remote temperature set point, auto shut-off leak detection,
remote wireless communication, real-time voltage and current detection, usage
data logging, as well as communication with other ZigBeeTM enabled devices
operating on the IEEE 802.15.4 standard so as to allow whole house electric load
controlling and other energy-saving functions.  The FORTISTM has been designed
with both energy efficiency and ease of use in mind.  The controller
allows the user to program “time of day” or demand-based savings programs so as
to reduce day to day operating costs.
   6
 ITEM 1.
                BUSINESS-
      continued
  Product Overview-
continued
  The FORTISTM is a durable
tank-replacement product that is capable of meeting the needs of most whole
house applications.  The Company believes that endless hot water,
energy savings, compact design and redundant safety systems make this tankless
water heater one of the “best in class”.
  TheParadigmTMSeries.
 
 The ParadigmTM series
point-of-use water heaters heat water using new innovative thick-film on steel
technology. Essentially, instead of putting the heater in the water, the ParadigmTM series water
heaters pass the water through the heater.   As a result, the
ParadigmTM technology
provides virtually instantaneous hot water and is nearly 100% efficient in
operation.  The ParadigmTM series can heat
water to over 100°F in only seconds and, like the FORTISTM, does not require a
tank.  With a standard point-of-use heating element weighing less than
10 ounces, there is little thermal mass to heat or cool, so that a 30-amp
version of this heater can provide up to 3.0 gallons per minute of heated flow
under the average sink.  The ParadigmTM series is a
complement to the FORTISTM in that it provides
the “instant” hot water, and the FORTISTM provides the
“endless” hot water.
 
 Included
in the ParadigmTM series of
heaters are planned whole house boost and under-the-sink versions of tankless
water heaters. Moreover, the Company believes that this ParadigmTM technology will
likely find a significant market owing to its small size, low cost and efficient
operation.  Management believes that the ParadigmTM will do
particularly well in the multi-family and condo market where space is a
premium.  Additionally, given its overall efficiency, management
believes that homes and building products that seek LEEDS or other “green”
certifications will likely be consumers of this new product line.
 
 The HeatwaveTM
Series.
 
 The
Company’s HeatwaveTM line of commercial point-of-use water heaters incorporates
revolutionary thin-film on quartz technology to provide compact, inexpensive and
practical heating solutions for commercial installations.  Wherever
local codes require heated water, the HeatwaveTM is capable of providing heated
water to meet code.  Additionally, given its compact size, commercial
builders are expected to benefit from space savings, low install costs and
industry leading product longevity.  The HeatwaveTM product line is
currently in 5.5Kw and 8.7Kw versions suitable for most small sized commercial
applications.  The Company expects to expand this product line by
fiscal 2010 to include smaller 120V versions, as well as larger 11.0Kw – 14.4Kw
version for larger commercial installations.
 
 On-Going Product
Research.
 
 The
Company intends to continue to research and develop new products that either
incorporate existing SKYE technologies, or that complement existing product
lines.  Current development efforts include, to name a few, a
fully-integrated load controller to work in tandem with the FORTISTM series, a new small space hydronic
heating mechanism, and a whole house electric monitoring system capable of
detecting household appliance failures or service needs.
  Warranty and Right of
Return
 
 In
connection with the sale of each product, we provide a limited 30-day money back
guarantee less a 6% restocking charge.  After the 30 days, we provide
a five-year warranty on replacement of parts.  The tank chamber is
warranted not to leak for 10 years.
  7
 
 ITEM 1.
              BUSINESS-
      continued
  Governmental
Approvals, Effect of Regulations
 
 SKYE’s
products are tested to ensure compliance with applicable code requirements.
Additionally, SKYE submits many of its products to other agencies for
certifications, including:
 
 ·
              NSF
      (National Sanitation Foundation – for compliance with NSF standard
      61
 ·
              IAPMO
      (International Association of Plumbing and Mechanical Officers – for UPC
      certification)
 ·
              Intertek
      Testing – for CE (European Standards Certification
  Mark)
 ·
              Intertek
      Testing for UL499 and CSA 22.2 No.
64
 
 On
September 4, 2007, the Company opened an investigation of its proposed FORTISTMline of water heating
product with Intertek Testing Services NA, Inc. (“Intertek”) in order to
determine its compliance with ANSI/UL standard 499 for Electric Heating
Devices.  On October 12, 2007, the Company was advised that Intertek
had issued its Listing Report in connection with the investigation and approval
for listing of the FORTISTMproduct
series.  The testing confirmed compliance with UL standard 499 and
received “Approval to Mark” the trademarked “ETL” certification mark on the
FORTISTM product
series.
 
 On
January 13, 2009, the Company was advised that Intertek had completed testing of
its HeatwaveTM product series and found that it complied with the requirements of
UL standard 499 for electric heating appliances, and CSA standard 22.2 No. 64
for instantaneous water heaters.  The Listing Report in connection
with such investigation was issued on March 6, 2009, and the HeatwaveTM product
line is currently in production for expected delivery in the early second
quarter of 2009.
 
 Consumer
safety, building, electric and plumbing codes are in a constant state of change
and thus SKYE is always subject to the potentially negative impacts of any
adverse legislation, including legislation that could require changes, including
significant changes, to existing product specifications and components. SKYE is
not currently aware of any pending legislation that will adversely affect the
ability of SKYE to conduct its business.
 
 Cost 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.
  Sales
and Distribution
  Because
tankless water heaters are still relatively new in the U.S., SKYE will use
wholesale distribution through appointed manufacturer 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. SKYE has appointed manufacturer representatives in
many states and expects that it will continue to appoint more representatives
over the balance of 2009 and 2010, including manufacturer representatives in
Canada, Mexico and Europe.
  Although
existing agreements are currently under review by management, the current major
terms of the contracts are: (a) distributors receive a graduated discount
based on volume with the greatest discount being 37%, and 7% commissions to
manufacturer representatives; (b) exclusive territories;
(c) termination upon 30 days’ notice and; (d) no maximum purchase
requirements and sales goals to be mutually agreed, or in default, $1,000,000
per territory.
 
 In
addition, the Company is also hiring and appointing “factory sales managers” to
deal with sales territories across the U.S.  As of the date of this
Report the Company has hired three factory sales managers covering the following
states: CA, OR, WA, ID, AK. HI, AZ, NV, NM, CO, MT, WY, UT, TX, OK, AR, LA, TN,
KY, NC, SC, MS, AL, GA, FL.  The Company expects to hire additional
managers as sales and revenues warrant. Factory sales managers are responsible
for supporting the wholesale channel, as well as installer and service
technician training for all wholesalers and retailers of the Company’s
products.  In order to accelerate training of installers in the U.S.
the Company has created “SKYE University” that conducts both in-house training
at its facilities in AZ, as well as remote field
training across the U.S.  The Company plans to hire a Vice President
of Sales and Marketing with overall responsibility to oversee the sales, service
and training functions of the Company.
   8
 ITEM 1.
                BUSINESS-
      continued
  Sales and
Distribution-
continued
  The
wholesale distribution model is favored by SKYE because, among other reasons,
according to Frost & Sullivan 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
local sales they also work closely with the trades that install the product as
well. As awareness of tankless grows, a local presence is essential to convert
home building, architects and other key decision makers to adopt tankless
technology.
  The
Company is currently undertaking a review of its current distribution plans with
a view to increasing sales through the addition of a comprehensive direct
marketing and product branding campaign to generate pull through sales from
homeowners and installers.  The Company considers the addition of this
program to be complementary to its wholesale channel as all sales will continue
to be sold and serviced through the wholesale channel.  The Company is
currently developing its product branding and awareness campaign and hopes to
retain nationally recognized talent to be a keystone of the
campaign.  As no such campaign has been fully-developed or
implemented, there can be no assurance that the campaign will be implemented, or
if implemented, that it will be effective in generating sufficient sales of
product to off-set the significant costs of such a campaign.
 
 Manufacturing
 
 FORTISTM
 
 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 FORTISTM tankless water heater product.
Although the Company commenced early prototype production of the FORTISTM in 2006 and 2007, the Company was
unable to commence full scale commercial production due to re-engineering
required to reduce manufacturing costs and reduce the likelihood of field
failures of certain components.  As a result of such engineering
efforts, the FORTISTM
design was not sufficiently stable to warrant continued efforts with Jabil at
such time.  As a result the Company engaged Electrosem, LLC of Tempe,
AZ (“Electrosem”) to complete further engineering for manufacturing steps,
design stabilization and first run commercial production.  By January
2009 the Company achieved an annualized production rate of 12,000 units and
issued a press release on February 26, 2009, announcing such production
milestone and further stating that production volumes of the FORTISTM are expected to reach
the target annualized rate of 20,000 units by the end of fiscal
2009.
 
 ParadigmTM
 
 As the
design of the ParadigmTM
is still awaiting final safety certification from Intertek Testing Labs, the
Company cannot, as of the date of this Report, advise when production of ParadigmTM product will commence, though it is
likely that such production will be during the 2009 fiscal year.  All
such product will be entirely outsourced to third party contract manufacturers
qualified by the Company.
 
 HeatwaveTM
 
 The
Company’s original equipment manufactured HeatwaveTM product line gained UL/CSA
standard certification in early 2009.  Production and first shipments
of HeatwaveTM product to the Company is expected during the second quarter of
2009.
 
 Materials and Principal
Suppliers.
 
 All of
the Company’s products are manufactured by third party contract manufacturers in
keeping with the Company’s fabrication-free business
strategy.  Although the company currently sources some critical
components directly from suppliers, it is expected that all such procurement
will be transferred to the contract manufacturers in 2009. The Company maintains
a policy of having at least two suppliers for all critical or long-lead
components.  The Company’s current list of critical suppliers includes
Siemens, AG (electrical components), Tru-Heat (heating elements), and Arnold
Bros. (stainless steel sheet metal and components), Electrosem, LLC and IRC/TT
Electronics (ParadigmTM heating
components and Zhijiang Riches Electric Appliance Co. Ltd.
(HeatwaveTM).
  9
 
 ITEM 1.
              BUSINESS-
      continued
  Research
and Development
 
 From 2004
through 2006, the Company conducted all of its research and development
activities through ION.  During the 2007 year, research and
development activities were conducted through the Company
directly.  All employees, contractors and consultants engaged in the
research and development were required to execute non-disclosure,
non-competition agreements covering the subject, scope and work product of the
program. The Company expended $231,624 in 2008 and $629,299 in 2007 on research
and development.
 
 Intellectual
Property
 
 The
Company currently holds a number of patents:
 
 ·
              US
      Patent No. 6,389,226 issued May 14,
2002;
 ·
              US
      Patent No. 7,088,915 issued August 8,
2006;
 ·
              US
      Patent No. 7,046,922 issued May 16,
2006;
 ·
              US
      Patent No. 7,164,851 issued January 16, 2007;
  and
 ·
              US
      Patent No. 7,206,506 issued April 17,
2007
 
 Additionally,
the Company has both provisional patent applications and other patent
applications pending.  While there can be no assurances that the other
patents sought will be granted or that the technology will be considered
proprietary to the Company, the Company believes that is applications are
meritorious and will be granted at least in part.
 
 On
September 16, 2008, we were advised that the United States Patent and Trademark
Office registered the trademark “SKYE and logo” as a registered
trademark.
 
 Competition
 
 The water
heater market is mature, highly concentrated and highly
competitive.  Steep discounts and rebates to builders and installers
are standard. Some contractors are loyal to favorite brands and on occasion
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 more efficient and
reliable than conventional tank water heaters in the past. 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 it is likely this competition will increase as
consumers continue to adopt tankless products.  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 also with third parties to enhance their products and services in this
market segment. 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.
   10
 ITEM 1.
                BUSINESS-
      continued
  Competition-
continued
  The
Company believes that future competition may come from the manufacturers of
conventional tank water heaters who are firmly established within 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
92% 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 its tankless product
line. 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.  The Company competes
directly with several manufacturers of electric tankless water heaters
including, among others, Steibel Eltron, Bosch AG, Eemax Inc., Seisco
International Limited, Dolphin Industries Inc. and Titan Tankless Inc., many of
whom have been selling electric tankless product in greater volumes and for
longer periods of time than the Company.  Although the Company
believes it has a competitive product offering, there can be no assurance that
it will be successful in shifting market share away from the larger established
electric tankless manufacturers or that third party manufacturers may seek to
improperly utilize certain of the Company's proprietary technologies that
provide such competitive advantages.  In the event that the Company is
unwilling or unable to adequately protect its intellectual property it is likely
it will lose competitive advantages associated with such
property.
 
 Employees
 
 As of the
date of this Report the Company has 8 full-time and 5 part-time contract
employees, The Company retains 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, sales and technical
support.  Additional employees are expected to be engaged as revenues
from operations permit.
 
 
 ITEM 1A.
              RISK
      FACTORS
 
 Not
required by Form 10-K for smaller reporting companies.
 
 
 ITEM 1B.
              UNRESOLVED STAFF
      COMMENTS
 
 Not
required by Form 10-K for smaller reporting companies.
 
 
 ITEM 2.
              DESCRIPTION OF
      PROPERTY
 
 The
Company leases offices comprising a total of approximately 2,180 square feet
located at 7701 E. Gray Rd., Suite 104, Scottsdale, AZ 85260.  The
Company entered into a one-year lease effective April 11, 2007, at a monthly
lease cost of approximately $3,118, with a one year option at a reduced monthly
cost of $2,672 per month through April 30, 2009.  In January 2009, the
Company amended the lease with a three-year option to extend through April 30,
2011, with the option for the Company to provide 90 days notice of its
intention to vacate.  Given the recent expansion of operations the
Company intends to move to larger premises at some point during fiscal
2009.
 
 
 ITEM 3.
              LEGAL
      PROCEEDINGS
 
 Distributor Claim.
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 Envirotech
except 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
recorded unless there was a default. On May 3, 2004, the distributor claimed a
breach and filed the Stipulated Judgment. In June 2007, the trustee and
beneficiary of the estate of the deceased plaintiff and Larry M. Reynolds (the
“Reynolds Trustee”) made written demand for payment of the sums owed under the
Stipulated Judgment.  With the filing of the Chapter 7 Bankruptcy
Petition by Envirotech in late 2008 (see
below), this action was stayed.   On January 22, 2009, the Reynolds
Trustee filed a motion with the Maricopa County, AZ Court to “Re-Order the
Judgment on case CV2001-021277”.  That motion is also stayed pending
the Chapter 7 Bankruptcy Proceedings discussed below.
   11
 ITEM 3.
                LEGAL
      PROCEEDINGS-
      continued
  Seitz Suit. In 2002,
Envirotech was named as a Defendant in a lawsuit 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”). Envirotech of Texas,
Inc. was an independent distributor of the Envirotech ESI-2000 product line not
affiliated with Envirotech. 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. On December 5, 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
[sic] any technology embodied in the Model ESI 2000 heater. The injunction was
dissolved.  SKYE is not a party to this case.  Envirotech
filed a motion to enforce a settlement that was reached between the parties and
a hearing regarding this matter is pending.
 
 Chapter 11 and Chapter 7
Bankruptcy Proceedings.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. All claims and judgments of creditors of Envirotech may be
renewed in the future.  The Bankruptcy Court retained jurisdiction to
rule on a pending sanctions motion against Envirotech wherein David Seitz and
Microtherm are claiming approximately $70,000 in legal fees.  Prior to
the Bankruptcy Court ruling on the sanctions motion, Envirotech and Microtherm
reached a settlement, the confidential terms of which were read into the record
with the Federal Court in Houston.  Unable to complete the settlement
with Microtherm, Envirotech filed a motion to enforce the settlement and later
filed for Chapter 7 bankruptcy with the Bankruptcy Court for the District of
Arizona when progress in concluding a settlement with Microtherm became
impossible to further pursue. The Bankruptcy Court later issued a Minute Entry
awarding sanctions against Envirotech and its principals in the amount of
$40,000.  Envirotech and several individuals objected to the Minute
Entry and a hearing proceeded in the Arizona Bankruptcy Court to determine
whether such sanctions would be reduced to a final Order.  The Arizona
Bankruptcy Court, in the face of objections from multiple parties quashed the
Minute Entry assessing such sanctions and granted additional time to Microtherm
to serve certain individuals that Microtherm believed ought to form a part of
the sanctions.  As of the date of this Report no individuals were
served in the matter.   In January 2009, the Trustee in the
Envirotech Chapter 7 proceedings filed a “Notice of Intention to Abandon” all of
Envirotech’s assets to the Company.  No objection to the abandonment
was received from any parties and the assets of Envirotech were abandoned to the
Company.  The sanctions matter and the remaining Chapter 7 proceedings
are pending.
 
 Shareholder Derivative
Suit. 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 (Stebbins v. Johnson, et al.Case No. CV06-1291-PHX-ROS) as a derivative action seeking injunctive and
declaratory relief. The Company was named as a nominal defendant although there
are no claims for monetary damages against the Company. The primary claims
involve the prior issuance of the Company’s common stock to one former member of
management and to former consultants to the Company. Plaintiffs sought to
prevent these individuals from using their stock and related voting rights to
solicit proxies and notice shareholder meetings, and have demanded return of the
shares to the Company. On May 2, 2007, the Court issued an Order rejecting the
Plaintiffs’ requested Preliminary Injunction dissolving all
restrictions imposed by a prior Temporary Restraining Order and Stipulated
Order, which permitted the Company to conduct its corporate business without any
further interference or restraint by the Court or the Plaintiffs.  The
original claims asserted by plaintiffs are moot and dismissal of those claims is
pending.After an
investigation into the matter following the filing of the lawsuit, the Company
and its counsel determined that counterclaims against the plaintiffs and
third-party claims against one of the Company’s former directors should be
asserted.  Those claims were added to the lawsuit and motions to
dismiss were submitted by all of the Counter defendants and third-party
defendants.  The motions were granted (in part), resulting in the
refilling of those claims.  Additional motions for dismissal
followed.  In mid-January 2009, a stipulation for Dismissal of all
remaining claims by and against all named parties with prejudice was filed with
the Court and subsequently the Court granted the dismissal with
prejudice.
   12
 ITEM 3.
                LEGAL
      PROCEEDINGS-
      continued
  Papazian Suit. The
Company is a party to an action seeking to require SKYE to both “defend” and
“indemnify” Director William Papazian from and against costs and liabilities
associated with a counterclaim filed by SKYE against Mr. Papazian with the
Shareholder Derivative Action described above.  The Company settled
the matter with Mr. Papazian.
 
 Promissory Note Suit.
In August 2007, three former consultants to the Company purporting to have
loaned $75,000 to the Company filed a lawsuit in the Maricopa County Superior
Court (Stebbins, Jones and
DeSade v. Skye,Case No. CV 2007-014972).  The case was
dismissed with prejudice concomitant with the Federal Court Shareholder
Derivative Suit.
 
 Except as
noted above, to the best knowledge of the officers and directors of the Company,
neither the Company nor its subsidiaries, nor any of their respective officers
or directors is a party to any material legal proceeding or
litigation.
 
 
 ITEM 4.
              SUBMISSION OF MATTERS TO A
      VOTE OF SECURITY HOLDERS
 
 None.
 
 PART II
 
 ITEM 5.
              MARKET FOR
      REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY
SECURITIES
 
 Market
Information.
 
 Except as
otherwise disclosed, SKYE’s common stock has been traded on the NASD Over the
Counter Bulletin Board since 1998 under various symbols, including:
 
 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
-June 5, 2006 to January 8, 2007 (as traded on the Pink Sheets)
 SKYI -
January 8, 2007 to present
 
 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.
 
  13
 
 ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES-
      continued
 Per
Share Common Stock Bid Prices by Quarter
  For
      the Fiscal Year Ending on December 31, 2008
                    
                    High
                    
                    
                    LowQuarter
      ended December 31, 2008
                    
                    $
                    0.30
                    
                    
                    $
                    0.07Quarter
      ended September 30, 2008
                    
                    
                    0.40
                    
                    
                    
                    0.15Quarter
      ended June 30, 2008
                    
                    
                    0.60
                    
                    
                    
                    0.22Quarter
      ended March 31, 2008
                    
                    
                    0.60
                    
                    
                    
                    0.27For
      the Fiscal Year Ending on December 31, 2007
                    
                    High
                    
                    
                    LowQuarter
      Ended December 31, 2007
                    
                    $
                    0.29
                    
                    
                    $
                    0.08Quarter
      Ended September 30, 2007
                    
                    
                    0.37
                    
                    
                    
                    0.20Quarter
      Ended June 30, 2007
                    
                    
                    0.37
                    
                    
                    
                    0.11Quarter
      Ended March 31, 2007
                    
                    
                    0.38
                    
                    
                    
                    0.18
 
 Holders
of Common Equity
 
 As of
February 18, 2009, there were 243 shareholders of record of the Registrant’s
Common Stock and there were 13,927,915 shares of Common Stock issued and
outstanding after giving effect to the 4 to 1 reverse split that was affected on
the common stock on May 16, 2008.
 
 Dividends
 
 SKYE has
not declared or paid a cash dividend to stockholders since it became a “C”
corporation. 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.
 
 Sale
of Unregistered Securities
 
 During
2008, we issued shares of our common stock in transactions that were not
registered under the Securities Act of 1933 as follows:
 
 Persons
      or Class of Persons
                                                    Date
      of Issue
                                                    Securities
                                                    ConsiderationArnold
      Weintraub,
                                                    4/20/2008
                                                    6,712
      shares
                                                    Legal
      services valued at $ 5,370O’Connor
      & Campbell
                                                    6/30/2006
                                                    12,500
      shares
                                                    Legal
      services valued at $24,963D.
      Scott Hemingway, Jennings, Strouss & Salmon, Mark D.
      Chester
                                                    6/30/2008
                                                    511,713
      shares
                                                    Legal
      services valued at $379,920Arnold
      Weintraub
                                                    8/18/2008
                                                    39,454
      shares
                                                    Legal
      services valued at $31,563Directors
      of  the Company
                                                    4/9/2008
                                                    187,500
      shares
                                                    Directors’
      fees for 3rd
      & 4th
      Quarter2007
      and 1st
      Quarter 2008 valued at$150,000Directors
      of  the Company
                                                    6/30/2008
                                                    62,500
      shares
                                                    Directors’
      fees for 2nd
      Quarter 2008 valued at $50,000Wesley
      G. Sprunk, Ted Marek, Perry Logan
                                                    4/9/2008
                                                    2,939,750
      shares
                                                    Compensation
      for payment of  loans made to the Company valued at
      $940,720Gregg
      Johnson
                                                    7/3/2008
                                                    448,500
      shares
                                                    Compensation
      for payment of loans made to the Company valued at
  $143,520
   14
 ITEM 5.
                  MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES-
      continued
  Sale of Unregistered
Securities-
continued
 Ted
      Marek and Perry Logan
                                                        11/1/2008
                                                        250,000
      shares
                                                        Compensation
      under services agreement valued at $ 80,000Ted
      Marek and Perry Logan
                                                        12/1/2008
                                                        250,000
      shares
                                                        Compensation
      under services agreement valued at $80,000Richard
      Ankrom,
                                                        4/30/2008
                                                        19,174
      shares
                                                        Engineering
      services valued at $ 15,335Kenneth
      McRobbie
                                                        10/23/2008
                                                        35,706
      shares
                                                        Promotional
      material services valued at $11,426Ronald
      Stultz
                                                        12/4/2008
                                                        10,000
      shares
                                                        Research
      and development services valued at $2,000Stephen
      D. Neale
                                                        5/12/2008
                                                        31,250
      shares
                                                        Private
      Placement of $10,000Leslie
      W. Griffith
                                                        6/27/2008
                                                        250,000
      shares
                                                        Private
      Placement of $80,000Ted
      Marek Real Estate Defined Benefit Plan
                                                        6/27/2008
                                                        316,406
      shares
                                                        Private
      Placement of $101,250Stephen
      D. Mihaylo
                                                        9/17/2008
                                                        1,000,000
      shares
                                                        Private
      Placement of $320,000Robert
      Berry
                                                        11/18/2008
                                                        75,000
      shares
                                                        Private
      Placement of
$24,000
 
 No
underwriters were used in the above stock transactions.  The
registrant relied upon the exemption from registration contained in Section 4(2)
as to both of the transactions, as the investors were either deemed to be
sophisticated with respect to the investment in the securities due to their
financial condition and involvement in the Company’s business or accredited
investors.  Restrictive legends were placed on the certificates
evidencing the securities issued in all of the above transactions.
 
 
 ITEM 6.
              SELECTED FINANCIAL
      DATA
 
 Not
required by Form 10-K for smaller reporting companies
 
 
 ITEM 7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The
following discussion should be read in conjunction with the financial statements
and accompanying notes included in this Form 10-K.
 
 Executive
Summary
 
 The
Company’s business is the design, production, marketing and sale of consumer
appliances. SKYE’s premier consumer product is the FORTIS TM a new series of
electric tankless water heater. SKYE markets the FORTIS TM through an
established and growing list of manufacturer representatives located in many
states across the United States. On the heels of FORTISTM will be a new
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 water heating market. Having recently received
Intertek safety certification to the UL 499 and CSA C22.2 No. 64 standards, SKYE
expects to commence sales of its HeatwaveTM product line during the second
quarter of 2009.  The HeatwaveTM product utilizes the Company’s
proprietary heating technology to provide an innovative, powerful and
inexpensive commercial point-of-use solution for local hot water code compliance
in commercial buildings.
 
 The
Company has established relationships with contract manufacturers Electrosem,
LLC. to produce its FORTISTM  line of
products and Zhijiang Riches Electric Appliance Co. Ltd. to produce its
HeatwaveTM product line.  With respect the ParadigmTM product line, the Company expects
that it will appoint a contract manufacturer during the second quarter of 2009
upon completion of current due-diligence investigations.  The Company
expects that it may take up to one year for the production design and processes
to stabilize for each product line.  Once such processes
and designs have stabilized the Company will seek and implement product cost
reductions accordingly.
  15
 ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS-
      continued
  Executive
Summary-
continued
  Now that
the Company is able to manufacture and inventory saleable product, much of the
Company’s focus has shifted to building and growing our sales, service and
training networks.  The Company sells its products exclusively through
the wholesale distribution channel via manufacturer representatives appointed to
sales territories across the U.S.  In addition, the Company is also
hiring and appointing “factory sales managers” to deal with sales territories
across the U.S.  As of the date of this Report the Company has hired
three factory sales managers covering the following states: CA, OR, WA, ID, AK.
HI, AZ, NV, NM, CO, MT, WY, UT, TX, OK, AR, LA, TN, KY, NC, SC, MS, AL, GA,
FL.  The Company expects to hire additional managers as sales and
revenues warrant. Factory sales managers are responsible for supporting the
wholesale channel as well as installer and service technician training for all
wholesalers and retailers of the Company’s products.  In order to
accelerate training of installers in the U.S., the Company has created “SKYE
University” that conducts both in-house training at its facilities in AZ as well
as remote field training across the U.S.  The Company plans to hire a
Vice President of Sales and Marketing with overall responsibility to oversee the
sales, service and training functions of the Company.  Current
interviews and due-diligence investigations are pending and the Company expects
to fill the position in the near future.
 
 Access to
capital remains one of the most pressing considerations for the Company. The
Company has continued to fund operations with loans from, and equity private
placements made to, the Company’s directors, as well as certain accredited
investors.  In order to execute our business strategy, the Company
must raise in excess of $3 million over the next 12-month period in order to
fully execute our current business plan. Given the current business climate,
and, in particular, the poor state of the credit and equity markets in the U.S.
and worldwide, 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. In order to build a successful sales and marketing organization, it is
necessary for the Company to be positioned not only as a quality supplier of
product but also as a trusted and timely supplier as well.  As such,
management believes that the Company must be in a position to carry product
inventory levels necessary to ensure timely delivery in its
markets.  Additionally, as further support in the markets, the Company
must also be seen as having broad customer service and technical support for its
products.  All of these needs have associated cash requirements as the
Company grows its business.  These goals 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 2009 we will continue to focus our efforts on expanding production of
the FORTISTM and adding the availability
of the ParadigmTM and HeatwaveTM brands in
our markets.  Additionally, we will also work to build our sales and
customer service infrastructure to support product sales and revenue for the
Company. This is no small task and it will require a significant investment of
capital as well as a greatly expanded staff in order to execute the business
plan.  The economic outlook globally is challenging for every business
and we are no exception.  Since late 2007, the new home building
market has seen unprecedented declines in new home starts and recent credit
squeezes and lack of available credit has all but choked off a great portion of
new commercial construction as well.  Recent U.S. government efforts
to add liquidity and overall economic stimulus into the broader economy have not
yet created expanded opportunities for the Company and thus we expect sales
opportunities to continue to be challenging for all of 2009 and likely into 2010
as well.
 
 Results of
Operations
 
 Comparison
of the Years Ended December 31, 2008 and 2007 Revenues
 For
      the Twelve months ended December 31:
                    2008
                    2007
                    Increase/(decrease)$
                    %Revenue
                    $
      73,203
                    $
      -
                    $
      73,203
                    100%
  Revenues
for the year ended December 31, 2008 were $73,203 compared to revenues of
$NIL in the year ended December 31, 2007, as we commenced sales of our
FORTISTM product during the 2008 fiscal
year.
   16
 
 ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS-
      continued
  General and Administrative
expenses
 For
      the Twelve months ended December 31:
                  2008
                  2007
                  Increase/(decrease)$
                  %General
      & Administrative expenses
                  $428,010
                  $
      341,635
                  $
      86,375
                  26%
 
 General
and administrative expenses increased by 26% reflecting the fact that
the Company began to add more operational and administrative personnel and
continue professional assistance with our continued efforts to execute our
business plan and market our products during fiscal 2008.
 
 Total
Operating Expenses
 For
      the Twelve months ended December 31:
                  2008
                  2007
                  Increase/(decrease)$
                  %Total
      operating expenses
                  $
      2,234,557
                  $
      1,935,902
                  $298,655
                  15%
  Overall
operating expenses increased by approximately 15% as a result of increased
legal, professional, and general and administrative costs.  Legal and
professional fees increased $545,559 or 57% from the prior year, whereas
research and development expenses decreased $397,675 or 64% from the prior year
ended December 31, 2007.
 
 Other
Income (Expense)
 For
      the Twelve months ended December 31:
                  2008
                  2007
                  Increase/(decrease)$
                  %Total
      other income (expense)
                  $
      1,686,024
                  $
      (72,768)
                  $1,758,792
                  N/A
  The
Company dissolved several of its subsidiaries during 2008. These subsidiaries
had no assets and $1,228,761 of liabilities. When the subsidiaries were
dissolved the Company ceased to consolidate them. Accordingly, the Company
recognized a gain for the liabilities that were relieved from the financial
statements upon the deconsolidation of the subsidiaries.  The
remaining gain on extinguishment of debt was through related
parties.
  Net
Loss
 For
      the Twelve months ended December 31:
                  2008
                  2007
                  Increase/(decrease)$Net
      (Loss)
                  $
      (529,500)
                  $
      (2,008,670)
                  $1,479,170
  The net
loss for the year ended December 31, 2008 improved (reduced) by $1,479,170 or
74%, primarily due to the non-recurring Other Income of $1,823,955 for gain on
extinguishment of debt.
 
 Liquidity
and Capital Resources
 
 A
critical component of our operating plan impacting our continued existence is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements primarily through
issuances of common stock and debt. As we continue our activities, we may
continue to experience net negative cash flows from operations, pending receipt
of significant revenues.  Throughout the entire fiscal year 2008, all
of the Company’s cash needs were met through loans advanced to the Company by
certain of its related party directors and some private placement
purchases.
 
 The
Company expects that additional operating losses will occur until revenue is
sufficient to offset the costs incurred for marketing, sales and product
development. 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 working capital
for general operations as well as to build commercial inventories of FORTISTMproduct, to purchase
inventory of its HeatwaveTM product line, to continue the certification and
subsequent production of the ParadigmTM
product line and otherwise to implement its sales and marketing
plans.  We anticipate obtaining additional financing to fund
operations through common stock offerings, debt offerings and bank borrowings,
to the extent available, or to obtain additional financing to the extent
necessary to augment our working capital.  In the event we cannot
obtain the necessary capital to pursue our strategic plan, we may have
to significantly curtail our operations.  This would materially impact
our ability to continue operations. 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.
   17
  ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS-
      continued
  Liquidity and Capital
Resources-
continued
  As of
December 31, 2008, the existing capital and anticipated funds from operations
were not sufficient to sustain Company operations or the business plan over the
next twelve months. Although the Company commenced full commercial sales of
FORTISTM product during the first quarter
of 2009, it is unlikely that cash flow from such sales will be sufficient to
fund continuing operations in the near term.  As such, we anticipate
substantial increases in our cash requirements as we build our sales and
distribution network which will require additional capital generated from either
the sale of common stock, the sale of preferred stock, or debt financing. No
assurance can be made that such financing would be available and, if available,
it may take either the form of debt or equity. In either case, the financing
will likely have a negative impact on our financial condition and our
stockholders.
 
 At
December 31, 2008, we had cash and a working capital deficit of $37,822 and
$411,214, respectively, as compared to cash of $35,331 and a working capital
deficit of $3,316,616 at December 31, 2007.  The primary reason for
the improvement in working capital is the reduction in accounts payable and
notes payable to related parties.  As described above, debt of
$1,823,955 was extinguished through the deconsolidation of our dissolved former
subsidiaries.  We also issued 3,388,250 shares of our common stock to
retire related party debt in the amount of $1,084,290.  We sold
1,672,656 shares for proceeds of $511,250.  We issued a total for
1,267,405 shares for $743,795 of services, thereby conserving cash.
 
 Net cash
change for the twelve months ending December 31, 2008, was an increase of $2,491
as compared to an increase of $26,659 for 2007.  Net cash used in
operating activities was $1,703,195 for 2008 as compared to $1,239,107 for
2007.  The largest adjustment to reconcile cash used for operating
activities was $1,823,955 for the gain on extinguishment of
debt.  Operations were financed primarily by proceeds from borrowing
and from the sale of common stock in the aggregate amount of $1,755,662 in
2008 as compared to $1,271,360 in 2007.
  Going
Concern
 
 The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2008, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern.  We have an accumulated deficit of $15,065,970 and working
capital deficit of $411,214 as of December 31, 2008.  We have not
generated meaningful revenues in the last two fiscal years.  Our
ability to establish the Company as a going concern is dependent upon our
ability to obtain additional financing in order to fund our planned operations
and ultimately to achieve profitable operations.
 
 Intangible
Assets
 
 The
Company’s intangible assets consist of two pending patents and four patents for
tankless water heater technology. Generally a patent has a life of 17 to
20 years.
  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, 2007, no impairment exists on any of the Company’s assets based on
the present value of future cash flows generated from Company
assets.
 
 Off-Balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
 
 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.
  18
  ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS-
      continued
  Critical Accounting
Policies-
continued
  Revenue Recognition. We record sales
when revenue is earned.  We sell on credit to our distributors and
manufacturer representatives.  Due to our Warranty and Right to Return
policy, 6% of the sales are recognized immediately and the balance is recognized
25 – 40 days after shipment of the product to the customer.  All
shipments are FOB shipping point.  Sales to distributors and
manufacturer representatives are sold FOB shipping point with receivables
recorded 25 to 40 days post shipping.  We no longer manufacture the
ESI-2000 product lines.  Accordingly, we plan to refund the purchase
price paid for undelivered heaters or, alternatively, to ship new heaters to
those customers that did not receive delivery of an ESI-2000
heater.  We had $72,949 in revenue from sales of products during
2008.
  Warranty and Right of
Return. In connection with the sale of each product, we provide a limited
30-day money back guarantee less a 6% restocking charge.  After the 30
days, we provide a five-year warranty on replacement of parts.  The
tank chamber is warranted not to leak for 10 years.  We have limited
history with claims against our warranty.  We defer a portion of the
revenue as would generally be required for post-contract customer support
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, 2008, a total of $43,486 in
refunds and warranty allowances were recorded against product
sales.
 
 PatentsWe
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. Patent and software
costs include direct costs of obtaining patents. Costs for new patents are
either expensed as they are incurred or capitalized and amortized over the
estimated useful lives of seventeen years and software over five
years.
 
 Research and
Development.Our research and development efforts concentrate
on new product development, improving product durability and expanding technical
expertise in the manufacturing process. We expense product research and
development costs as they are incurred.  We incurred research and
development expense of $231,624 and $629,299 during the years ended December 31,
2008 and 2007, respectively.
 
 Stock Based
Compensation.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.” 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. We use the
Black-Scholes pricing model for determining the fair value of stock based
compensation.
 
 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.
 
 
 ITEM 7A.
              QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK
 
 Not
required by Form 10-K for smaller reporting companies
 
 
 ITEM 8.
              FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA
 
 Financial
statements as of and for the years ended December 31, 2008 and 2007 are
presented in a separate section of this report following Part IV.
 
  19
  ITEM 9.
              CHANGES IN
      AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 None.
 
 
 ITEM 9A
      (T).
              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
15d-15(e)) as of the end of the period 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, 2008, our disclosure
controls and procedures were effective 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.
During the 2008 fiscal year, the Company implemented a new secure accounting
system, separated internal responsibilities for accounting, record keeping,
check writing and reconciliation between different parties with the Company and
also adopted various policies and procedures designed to implement the
Integrated Framework issued by COSO.  These actions constituted
changes in the Company’s internal control over financial reporting that are
reasonably likely to affect the Company’s internal control over financial
reporting.
 
 Internal
Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company. Our internal control system is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
 
 Management
has assessed the effectiveness of the Company’s internal controls over financial
reporting as of December 31, 2008.  In making this assessment,
management used the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).  Based on this evaluation, management has concluded
that the Company’s internal control over financial reporting was effective as of
December 31, 2008.
 
 As of
December 31, 2007, the Company determined that it had a deficiency in internal
controls over the application of current U.S. GAAP principles originating in
2004 when 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 concluded that this and other control deficiencies constituted a
material weakness that continued throughout 2005, 2006 and 2007.
 
 During
the 2008 fiscal year, the Company implemented a new secure accounting system,
separated internal responsibilities for accounting, record keeping, check
writing and reconciliation between different parties with the Company and also
adopted various policies and procedures designed to implement the Integrated
Framework issued by COSO.  These actions constituted changes in the
Company’s internal control over financial reporting that are reasonably likely
to affect the Company’s internal control over financial reporting.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
 
  20
  ITEM
      9B.
              OTHER
      INFORMATION
 
 None.
 
 
 PART III
 
 ITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE
 
 Executive
Officers and Directors
 
 Our
officers, directors and key employees are as follows:
 Name
                Age
                PositionPerry
      D. Logan
                80
                Chief
      Executive Officer, President,  and DirectorSteven
      G. Mihaylo
                67
                Chairman
      of the Board of DirectorsWesley
      G. Sprunk
                73
                DirectorThaddeus
      (Ted) F. Marek
                67
                Director,
      Secretary/Treasurer, CFO & CAOGregg
      C. Johnson
                44
                Executive
      VP and COO
 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 Company’s affairs.
 
 Perry
D. Logan, President and CEO, Director and Member of Corporate Governance
Committee
  Perry
Logan has been a director of the Company since January 2007 and became an
officer of the Company in May 2007. His business career is centered
predominantly in the automotive industry as an owner of several major
dealerships in the greater Phoenix area, as well as interests in dealerships in
other regions since 1965.
 
 Steven
G. Mihaylo, Chairman of the Board and ad-hoc member of all Board
Committees
  Mr.
Mihaylo has been a director of the Company since October 2008.  He was
the founder, Chairman and CEO of Inter-Tel, Incorporated and served in such
capacity from inception in 1969 through February 2006, and then as a director of
Inter-Tel Incorporated until its sale to a private equity group in
2007.  Mr. Mihaylo holds a Bachelor of Business Administration from
Cal State Fullerton 1969.
 
 Wesley
G. Sprunk, Director, Member of Corporate Governance and Audit
Committees
 
 Wes
Sprunk has been a director of the Company since May 2006.  He has been
the President of Tire Service Equipment Mfg., Inc. and Saf-Tee Siping &
Grooving, Inc. since September 1998. 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.
 
 Thaddeus
(Ted) F. Marek, Secretary/Treasurer, CFO, CAO, Director and Member of Audit
Committee and chair of Corporate Governance Committee
  Ted Marek
has been a director of the Company since January 2007 and became an officer of
the Company in October 2007.  He is the currently the Principal and
Designated Broker of Ted Marek Real Estate Co., Inc. in Scottsdale,
Arizona.  Mr. Marek has been active in the Phoenix commercial real
estate market for over 30 years. He has been
very instrumental in the movement and placement of automotive dealerships, site
selection, sales and acquisition in the Phoenix Metro area.
   21
 ITEM 10.
                DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE GOVERNANCE-
      continued
  Executive Officers and
Directors-
continued
  Gregg
C. Johnson, Executive Vice President & C.O.O.
  Gregg
Johnson has been with SKYE since late 2004 and has been responsible for many
functions, including the development of the FortisTM and ParadigmTMproducts and
technologies.  Mr. Johnson is also a lawyer (not admitted in AZ) with
extensive experience in management of entrepreneurial companies. He received his
law degree in 1988 from Osgoode Hall Law School in Toronto, Canada and was
admitted as a lawyer in Alberta in 1989. His extensive legal career has included
private practice in Tokyo, Japan with Aoki, Christensen & Nomoto (now Baker
& McKenzie), where his practice focused on Japanese securities regulation
and international debt instruments, and in Jeddah, Saudi Arabia, with the Law
Offices of Dr. Mujahid M. Al-Sawwaf, 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 and the United States. 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. Additionally Mr. Johnson was
elected as a Councilor and later Mayor of Red Deer County, AB from October 1998
to October 2004. In October 2004 Mr. Johnson was appointed as an Appeals
Commissioner (Administrative Law Judge) with the Alberta Appeals Commission
where he served part-time until April 2007.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Officers
and directors, and persons who own more than 10% of a registered class of the
Company’s equity securities, are required to file reports of ownership and
changes in ownership with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934.  The following
table sets forth reports that were not filed on a timely basis during the most
recently completed fiscal year:
 
 Reporting
      Person
                                                        Date
      Report Due
                                                        Date
      Report FiledPerry
      D. Logan
                                                        Form
      4 due July 2, 2008
                                                        July
      3, 2008Perry
      D. Logan
                                                        Form
      4 due October 3, 2008
                                                        October
      23, 2008Perry
      D. Logan
                                                        Form
      4 due November 18, 2008
                                                        December
      1, 2008Ted
      Marek
                                                        Form
      4 due March 5, 2008
                                                        March
      10, 2008Ted
      Marek
                                                        Form
      4 due March 13, 2008
                                                        March
      20, 2008Ted
      Marek
                                                        Form
      4 due March 13, 2008
                                                        March
      26, 2008Ted
      Marek
                                                        Form
      4 due June 2, 2008
                                                        June
      9, 2008Ted
      Marek
                                                        Form
      4 due June 6, 2008
                                                        June
      12, 2008Ted
      Marek
                                                        Form
      4 due June 18, 2008
                                                        June
      24, 2008Ted
      Marek
                                                        Form
      4 due July 2, 2008
                                                        July
      3, 2008Ted
      Marek
                                                        Form
      4 due August 1, 2008
                                                        August
      4, 2008Ted
      Marek
                                                        Form
      4 due August 20, 2008
                                                        August
      21, 2008Ted
      Marek
                                                        Form
      4 due September 29, 2008
                                                        October
      2, 2008Ted
      Marek
                                                        Form
      4 due October 3, 2008
                                                        October
      23, 2008Ted
      Marek
                                                        Form
      4 due November 3, 2008
                                                        November
      12, 2008Ted
      Marek
                                                        Form
      4 due November 18, 2008
                                                        December
      1, 2008Ted
      Marek
                                                        Form
      4 due December 5, 2008
                                                        December
      11, 2008Ted
      Marek
                                                        Form
      4 due December 18, 2008
                                                        December
      22, 2008Ted
      Marek
                                                        Form
      4 due December 30, 2008
                                                        January
      6, 2009Wesley
      G. Sprunk
                                                        Form
      4 due July 2, 2008
                                                        July
      3,
2008
 
 Code
of Ethics
 
 The
Company maintains a Code of Ethics that was filed with its Annual Report on Form
10-KSB for the financial year ended December 31, 2007. That code applies to the
chief executive, senior management, directors, financial and accounting
officers, controller and persons performing similar functions.
  22
  ITEM 10.
              DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE GOVERNANCE-
      continued
  Audit
Committee
 
 The
Company’s Audit Committee consists of Directors: Logan (Chairman), Sprunk and
Marek. Mr. Marek has been designated by the Audit Committee as an “audit
committee financial expert.”  As Mr. Marek is an officer of the
Company, he is not independent.
 
 The
Company adopted a Corporate Governance Charter and Code of Ethics on March 1,
2007.  The Corporate Governance Committee consists of: Logan
(Chairman), Sprunk and Marek. The Corporate Governance Charter adopted a
procedure whereby the Corporate Governance Committee of the Board must consider
nominations of potential directors to its board from shareholders and interested
parties alike.
 
 
 ITEM 11.
              EXECUTIVE
      COMPENSATION
 
 The table
below sets forth the remuneration of our chief executive officer during our last
two completed fiscal years (the years ended December 31, 2008 and December 31,
2007), as well as other executive officers whose total annual compensation
equaled or exceeded $100,000.
 
 Summary
Compensation Table
 Name
      and Principal Position
                          Year
                          Salary
      ($)
                          Bonus
      ($)
                          Stock
      Awards ($)
                          Option
      Awards
                            ($)
                          Non-Equity
      Incentive Plan Compensation ($)
                          Nonqualified
      Deferred Compensation Earnings ($)
                          All
      Other Compensation ($)
                          Total
      ($)Perry
      Logan, Chief Executive Officer, President (1)
                          2008
                            2007
                          -0-
                            -0-
                          -0-
                            -0-
                          120,000(2)
                            27,400
                          77,192(3)
                            -0-
                          -0-
                            -0-
                          -0-
                            -0-
                          -0-
                            -0-
                          197,192
                            27,400Thaddeus
      (Ted) F. Marek, Chief Financial Officer, Secretary-Treasurer, Chief
      Accounting Office (4)
                          2008
                            2007
                          -0-
                            -0-
                          -0-
                            -0-
                          120,000(2)
                            27,400
                          77,192(3)
                            -0-
                          -0-
                            -0-
                          -0-
                            -0-
                          -0-
                            -0-
                          197,192
                            27,400Gregg
      C. Johnson, Executive Vice
                            President
                          2008
                            2007
                          135,074
                            95,500
                          5,073
                            -0-
                          -0-
                            -0-
                          77,192(3)
                            -0-
                          -0-
                            -0-
                          -0-
                            -0-
                          847
                            -0-
                          218,186
                            95,500
 
 (1)
                    Mr.
      Logan became our Chief Executive Officer and President on May 3,
      2007.(2)
                    Mr.
      Marek and Mr. Logan received 50,000 shares each for service as director
      and 250,000 shares each for consulting services.(3)
                    On
      October 1, 2008, each officer received an option to purchase 500,000
      shares at $0.50 per share which is exercisable through October 1,
      2013.  The options were valued using the Black-Scholes model
      with the following assumptions:  a discounted stock price of
      $0.18, exercise price of $0.50, 5-year option, risk-free rate of 3.3 and a
      volatility rate of
149%.
 (4)
              Mr.
      Marek became Secretary-Treasurer on May 3, 2007 and assumed the additional
      roles as Chief Financial Officer and Chief Accounting Officer on October
      28, 2008.
 
 We
entered into Personal Services Agreements with Perry Logan and Ted Marek dated
May 15, 2008, that ended on December 31, 2008, and provided for automatic
renewals for successive 12-month periods unless earlier
terminated.  Under the terms of the agreements, we are obligated to
pay each of them annual cash compensation of $120,000 and reimburse them for
vehicle operating and insurance costs.  At the discretion of Mr. Logan
or Mr. Marek, the cash compensation may be paid in the form of shares of our
common stock priced at the lowest closing bid price of the stock over the ten
trading days prior to the issuance of the shares.  Each received
options to purchase 500,000 shares of common stock exercisable at $0.50 per
share for a period of five years and piggy-back registration rights with respect
to the shares.  The agreement may be terminated by us for cause or in
the event of death or disability or by Mr. Logan or Mr. Marek upon 90 days prior
written notice.  The agreements include a two-year non-compete
provision.
   23
  ITEM 11.
                EXECUTIVE
      COMPENSATION-
      continued
  For the
2009 fiscal year, we pay Gregg Johnson annual cash compensation of $150,000 and
provide a monthly car allowance of $500 per month, as well as reimbursement of
vehicle operating and insurance costs.  At our discretion, we may pay
up to $30,000 of the cash compensation in the form of shares of our common
stock, priced at the lowest closing bid price of the stock over the ten trading
days prior to the issuance of the shares. Mr. Johnson received options to
purchase 500,000 shares of common stock, exercisable at $0.50 per share for a
period of five years, and piggy-back registration rights with respect to the
shares.  The agreement may be terminated by us for cause or in the
event of death or disability, or by Mr. Johnson upon 90 days prior written
notice.  The agreement includes a two-year non-compete
provision.
 
 Outstanding
Equity Awards at Fiscal Year-End
 Name
                        OPTION
      AWARDS
                        STOCK
      AWARDSNumber
      of Securities Underlying Unexercised Options (#)
    Exercisable
                        Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                        Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
                        Option
      Exercise Price ($)
                        Option
      Expiration  Date
                        Number
      of Shares or Units of Stock that have not Vested(#)
                        Market
      Value of Shares or Units of Stock that have not Vested($)
                        Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      that have not Vested (#)
                        Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights that have not Vested ($)Perry
      Logan
                        500,000
                        -0-
                        -0-
                        0.50
                        10/1/2013
                        -0-
                        -0-
                        -0-
                        -0-Thaddeus
      (Ted) Marek
                        500,000
                        -0-
                        -0-
                        0.50
                        10/1/2013
                        -0-
                        -0-
                        -0-
                        -0-Gregg
      C. Johnson
                        500,000
                        -0-
                        -0-
                        0.50
                        10/1/2013
                        -0-
                        -0-
                        -0-
                        -0-
 
 Compensation of Directors
 
 Each of
our non-employee directors receives reimbursement for expenses of attendance for
each scheduled meeting that requires physical attendance.
 
 Compensation
for our directors for our last completed fiscal year is set forth below, with
the exception of Perry Logan and Ted Marek, whose compensation is disclosed
above.
 
 Director
Compensation
 Name
                          Fees
      Earned or Paid in Cash ($)
                          Stock
      Awards ($)
                          Option
      Awards ($)
                          Non-Equity
      Incentive Plan Compensation ($)
                          Non-qualified
      Deferred
                            Compensation
                            Earnings
      ($)
                          All
      Other Compensation ($)
                          Total
      ($)Mark
      D. Chester
                          -0-
                          40,000(1)
                          -0-
                          -0-
                          -0-
                          -0-
                          40,000Barry
      M. Goldwater, Jr.
                          -0-
                          40,000
                          -0-
                          -0-
                          -0-
                          -0-
                          40,000Steven
      G. Mihaylo
                          -0-
                          -0-
      (2)
                          -0-
                          -0-
                          -0-
                          -0-
                          -0-Wesley
      G. Sprunk
                          -0-
                          40,000
                          -0-
                          -0-
                          -0-
                          -0-
                          40,000
 
 (1)
                Mr.
      Chester’s awards do not include shares issued for legal services performed
      for the Company.
 (2)
              Mr.
      Mihaylo joined the Board in October, 2008 but did not serve long enough to
      warrant payment at year end December 31,
2008.
 
 Each
Director is entitled to receive 50,000 restricted common shares for each quarter
year of service to the Company.
    24
 
 ITEM 12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 The
following table sets forth certain information, as of March 10, 2009, 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:
 
 Name
      and Address of Beneficial Owner (1)
                                              Amount
      and Nature of Beneficial Ownership
                                              Percent
      of Class (2)Ted
      F. Marek
                                                9977
      N. 90th Street,
      Suite 220
                                                Scottsdale,
      AZ 85258
                                              3,837,906
      (3,5)
                                              25.71%Perry
      D. Logan
                                                PO
      Box 35080
                                                Las
      Vegas, NV 89144
                                              2,856,416
      (4,5)
                                              19.13%D.
      Scott Hemingway
                                                1717
      Main Street, Suite 2500
                                                Dallas,
      TX 75201
                                              880,596
                                              6.32%Gregg
      C. Johnson
                                                7701
      E. Gray Rd., Ste 104
                                                Scottsdale,
      AZ 85260
                                              1,708,639
      (5)
                                              11.45%Wesley
      G. Sprunk
                                                3451
      S. 40th
      Street
                                                Phoenix,
      AZ 85040
                                              320,463
                                              2.30%Steven
      G. Mihaylo
                                                7701
      E. Gray Rd., Ste 104
                                                Scottsdale,
      AZ 85260
                                              6,100,000
      (6)
                                              32.06%Barry
      M. Goldwater, Jr.
                                                3104
      E. Camelback Road, Suite 274
                                                Phoenix,
      AZ  85106
                                              134,027(7)
                                              0.96%Mark
      D. Chester
                                                8777
      N. Gainey Ctr. Dr. Suite 191
                                                Scottsdale,
      AZ 85258
                                              550,151(8)
                                              3.94%All
      officers and directors as a group (7 persons)
                                              15,507,602
      (9)
                                              70.40%
 
 (1)
              To
      our 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 such person’s name.
 (2)
              This
      table is based on 13,927,915 shares of Common Stock outstanding as of
      March 10, 2009.  If a person listed on this table has the right
      to obtain additional shares of Common Stock within sixty (60) days from
      March 10, 2009, the additional shares are deemed to be outstanding for the
      purpose of computing the percentage of class owned by such person, but are
      not deemed to be outstanding for the purpose of computing the percentage
      of any other person.
 (3)
              Includes
      shares held of record by Ted Marek Family Trust and shares held of record
      by Ted Marek Real Estate Defined Benefit Pension
  Plan,
 (4)
              Includes
      shares held of record by Perry and Rose Logan as Joint
      Tenants.
 (5)
              Includes
      1,000,000 shares issuable upon exercise of vested stock
      options.
 (6)
              Includes
      5,100,000 shares issuable upon conversion of amounts owed under the
      Convertible Debenture between the Company and the Steven G. Mihaylo, Trust
      (beneficially owned by Steven G.
Mihaylo).
 (7)
              Mr.
      Goldwater ceased to be a Director on June 23,
  2008.
 (8)
              Mr.
      Chester ceased to be a Director on December 30,
  2008.
 (9)
              Includes
      8,100,000 shares issuable upon exercise of vested options or upon
      conversion of debt to common shares under existing
    debentures.
  Changes
in Control
 
 The
Company is not aware of any arrangements which may result in a change in control
of the Company, other than the possible issuance of shares upon conversion of
amounts owed under the convertible debenture between the Company and the Steven
G. Mihaylo Trust.
 
 Equity
Compensation Plans
 
 As of
December 31, 2008 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 under equity
      compensation plansEquity
      compensation plans approved by security holders
                                  None
                                  N/A
                                  NoneEquity
      compensation plans not approved by security holders
                                  1,700,000
                                  $0.5294
                                  N/ATotal
                                  1,700,000
                                  $0.5294
                                  N/A
   25
 ITEM 12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS-
      continued
  Equity Compensation
Plans-
continued
  The
Company has granted options to (1) Sundance Financial Corp. and Digital
Crossing, LLC, to purchase 75,000 shares each of common stock at an exercise
price of $2.00 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; and to (2) Ted Marek, Perry Logan and Gregg Johnson to
purchase 500,000 shares each 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
five-year period beginning October 1, 2008, and ending October 1, 2013; and to
(3)  Ted Marek, Perry Logan and Gregg Johnson to purchase 500,000
shares each 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 five-year period
beginning March, 2009, and ending February 28, 2014; and to
(4)  Ronald O. Abernathy to purchase 12,500 shares of common
stock at an exercise price of $2.00 per share.  The option may be
exercised, in whole or in part, at any time within a five-year period beginning
September 8, 2006, and ending September 7, 2011; and to (5) Mark D. Chester to
purchase 37,500 shares at an exercise price of $2.00 per share. The options may
be exercised, in whole or in part, at any time within a five-year period
beginning September 8, 2006 and ending September 7, 2011. All outstanding
options are fully exercisable as of the grant date, and require that the
exercise price be paid in cash. The number of shares purchasable upon exercise
of such 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.
 
 
 ITEM 13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 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.
  Professional
Fee Retainer Agreements
 
 The
Company entered into professional fee retainer agreement with Chester &
Schein, PLLC, a law firm partnership among Mark Chester and
others.  Mark Chester was a director of the Company from September
2006 until his resignation on December 30, 2008.  Mr. Chester’s firm
provided outside legal counsel services to the Company during the year until the
termination of the agreement effective November 1, 2008.  During
the duration of the agreement Chester & Schein, PLLC was compensated at
a variable rate of $10,000 per month and $7,500 per month, with all such fees
paid in the Company’s common stock at the rate of $0.80 per common
share.
 
 During
the year ended December 31, 2008, the Company issued 137,500 shares to Mark D.
Chester, the director, for legal services valued at $110,000.
 
 Other
Amounts Owed to Related Parties
 
 At
December 31, 2008, the following amounts were owed to related
parties:
 
 Name
                    Relationship
                    Amount
                    Factual
      BackgroundSteven
      D. Mihaylo
                    Chairman
      and director
                    $900,000
                    Unsecured
      convertible debenture issued in 2008 that accrues interest at 10% per
      annum(1)Ted
      F. Marek
                    Officer
      anddirector
                    $140,000
                    Short
      Term note issued in 2008 that accrues interest at 15% per
      annum.
 
 (1)
              As
      of March 10, 2009 the debenture indebtedness was
    $1,275,000.
 (2)
              As
      of March 10, 2009 the principal balance of the short term note was
      $120,000.
 
 On
September 17, 2008, we executed a convertible debenture in favor of the Steven
G. Mihaylo Trust, as restated, dated December 13, 2001  the (“Mihaylo
Trust”), pursuant to which we received a working capital facility of up to
$1,500,000.  We have been using the working capital facility for
general working capital purposes including, specifically, funds to enable us to
commence the commercial production and sale of our patented FORTISTMline of electric
tankless water heaters, as well as the certification and commercialization of a
suite of products utilizing our patented ParadigmTM
technology.
 
 We may
draw up to $1,500,000 during the term of the Debenture that expires on September
16, 2013 (the “Maturity Date”).  We have agreed to pay interest on any
outstanding principal amount under the Debenture at the rate of 10% per annum,
compounded annually from the date of each draw, and payable on the Maturity
Date.  We have reserved the right to prepay the Debenture without
penalty upon the giving of Notice.  The Mihaylo Trust has the right to
convert, at any time, all or any portion of the Debenture into shares of our
common stock at the conversion rate of $0.25 per share (subject to adjustment in
the event of certain corporate restructuring events as described in the terms of
the Debenture).  All such shares of common stock to be issued pursuant
to such conversion shall be restricted securities and thus will not be
registered under the Securities Act of 1933.
 
 The
entire unpaid and unredeemed balance of the Debenture and all interest accrued
and unpaid shall, at the election of the Mihaylo Trust, be and become
immediately due and payable upon the occurrence of  certain events of
default including: (a) the non-payment when due of principal and interest or of
any other payment as provided in the Debenture; (b) if we, excluding any
subsidiary or affiliate of ours (i) applies for or consents to the appointment
of, or if there shall be a taking of possession by, a receiver, custodian,
trustee or liquidator for us or any of our property; (ii) become generally
unable to pay our debts as they become due; (iii) make a general assignment for
the benefit of creditors or becomes insolvent; (iv) file or are served with any
petition for relief under the Bankruptcy Code or any
similar federal or state statute; or (v) default with respect to any evidence of
indebtedness or liability for borrowed money, or any such indebtedness shall not
be paid as and when due and payable, and (c) any failure us issue and deliver
shares of common stock as provided in the Debenture.
  Mr.
Mihaylo was not a director at the time of this transaction.  He became
a director on October 24, 2008.
  26
 
 ITEM 13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE-
      continued
  Purchase
of Common Stock
 
 During
the year ended December 31, 2008, Ted Marek and Steven Mihaylo purchased 316,400
and 1,000,000 shares, respectively, for total cash consideration of
$421,250.
  Issuance
of Common Stock to Repay Debt
 
 During
the year ended December 31, 2008, we issued shares of our common stock to the
following for the repayment of debt:
  Name
                                                
                                                Number
      of Shares Issued
                                                
                                                
                                                Amount
      of Debt RepaidWesley
      G. Sprunk
                                                
                                                196,000
                                                
                                                
                                                $
                                                62,720Ted
      Marek
                                                
                                                1,371,875
                                                
                                                
                                                $
                                                439,000Perry
      Logan
                                                
                                                1,371,875
                                                
                                                
                                                $
                                                439,000Gregg
      Johnson
                                                
                                                
                                                448,500
                                                
                                                
                                                $
                                                143,520
 
 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.
 
 Director
Independence
 
 Our
common stock trades in the OTC Bulletin Board.  As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent.
 
 Since we
are not currently subject to corporate governance standards relating to the
independence of our directors, we choose to define an “independent” director in
accordance with the NASDAQ Global Market’s requirements for independent
directors (NASDAQ Marketplace Rule 4200).  The NASDAQ independence
definition includes a series of objective tests, such as that the director is
not an employee of the company and has not engaged in various types of business
dealings with the company.
 
 Wesley G.
Sprunk and Steven G. Mihaylo are independent directors under the above
definition.  We do not list that definition on our Internet
website.
 
 We
presently do not have a compensation committee, nominating committee, executive
committee of our Board of Directors, stock plan committee or any other
committees, except for an Audit Committee and Corporate Governance Committee
that performs all of the functions of a compensation, nominating, stock plan and
executive committee of the Board of Directors.
 
 
 ITEM 14.
              PRINCIPAL ACCOUNTING FEES AND
      SERVICES
 
 Audit
Fees
 
 Moore and
Associates, Chartered, billed the Company $12,500 for the audit of the 2008
annual financial statement. For the fiscal year ended December 31, 2007, Moore
and Associates, Chartered billed $20,000 for the 2007 annual audit and reviews
of its quarterly financial statements.
 
 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 2008 and 2007.
  Tax
Fees
 There
were no fees billed for tax compliance, tax advice, and tax planning services
for the fiscal years ended December 31, 2008 and 2007.
 
 All
Other Fees
 
 There
were no fees billed for other services for the fiscal years ended December 31,
2008 and 2007.
  27
  ITEM 14.
                PRINCIPAL ACCOUNTING
      FEES AND SERVICES -
      continued
 Pre-Approval
Policies and Procedures
 
 Prior to
engaging the accountants or auditors 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 Company procedures approved all of the
services described above.
 
  PART IV
 
 ITEM
      15.
              EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES
 
 Number
                Exhibit2.1
                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. (5)3.6
                Bylaws,
      as Amended (6)3.7
                Certificate
      of Change Pursuant to NRS 78.209, as corrected
(7)10.1
                2003
      Stock Incentive Plan (8)10.2
                2003
      Stock Incentive Plan #2 (9)10.3
                2005
      Stock Incentive Plan (10)10.4
                Manufacturing
      Services Agreement between Jabil Circuit, Inc., and Skye International,
      Inc. (11)10.5
                Consulting
      Agreement between Skye International, Inc., and Sundance Financial Corp,
      including amendments (5)10.6
                Consulting
      Agreement between Skye International, Inc., and Digital Crossing, LLC,
      including amendments (5)10.7
                Stock
      Option Agreement between Skye International, Inc., and Sundance Financial
      Corp., including amendments (5)10.8
                Stock
      Option Agreement between Skye International, Inc., and Digital Crossing,
      LLC, including amendments (5)10.9
                Steven
      G. Mihaylo Trust Convertible Debenture (12)10.10
                Loan
      Agreement with Thaddeus (Ted) F. Marek dated October 12,
      200710.11
                Loan
      Agreement with Perry Logan dated October 12,
    200710.12
                Security
      Agreement with Thaddeus (Ted) F. Marek dated October 12, 200710.13
                Security
      Agreement with Perry Logan dated October 12, 200710.14
                15%
      Secured Convertible Promissory Note with Thaddeus (Ted) F. Marek
      dated October 12, 200710.15
                15%
      Secured Convertible Promissory Note with Perry Logan dated October
      12, 200710.16
                Personal
      Services Agreement with Perry D. Logan dated May 15,
      200810.17
                Personal
      Services Agreement with Thaddeus (Ted) F. Marek dated May 15,
      200814.1
                Code
      of Ethics (13)16.1
                Letter
      from Shelley International, CPA (14)16.2
                Letter
      from Semple & Cooper, CPA (15)21.1
                Subsidiaries
      of Skye International, Inc. (5)23.1
                Consent
      of Moore & Associates, Chartered31.1
                Rule
      13a-14(a) Certification of Chief Executive
Officer31.2
                Rule
      13a-14(a) Certification of Chief Financial
Officer32.1
                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
      Officer32.2
                Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 of Chief Financial
      Officer




(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,
  2005.(6)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed February 24, 2006.(7)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed May 20, 2008(8)
                Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-108728, filed September 12,
      2003.(9)
                Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-111348, filed December 19,
      2003.(10)
                Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-123663, filed March 30,
    2005.(11)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed February 23, 2006(12)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed September 22, 2008(13)
                Incorporated
      by reference to the exhibits to the registrant's annual report on Form
      10-KSB for the fiscal year ended December 31,
2007(14)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed March 7, 2006.(15)
                Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed June 15,
2006.








28





SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




SKYE INTERNATIONAL
      INC.Date:
      March 26, 2009
              By:
              /s/ 
      Perry D. LoganPerry
      D. LoganChief
      Executive Officer


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





Signature
                    Title
                    Date/s/ Perry D. Logan
                    
                    Chief
      Executive Officer and Director
                    March
      26, 2009Perry
      D. Logan
                    
                    (Principal
      Executive Officer)/s/ Thaddeus (Ted) F. Marek
                    
                    Interim
      Chief Financial Officer
                    March
      26, 2009Thaddeus
      (Ted) F. Marek
                    
                    (Principal
      Financial Officer)/s/ Thaddeus (Ted) F. Marek
                    
                    Chief
      Accounting Officer
                    March
      26, 2009Thaddeus
      (Ted) F. Marek
                    
                    (Principal
      Accounting Officer)/s/ Steven G. Mihaylo
                    
                    Director
                    March
      26, 2009Steven
      G. Mihaylo/s/ Wesley G. Sprunk
                    
                    Director
                    March
      26, 2009Wesley
      G. Sprunk








29







EXHIBIT
INDEX




Number
                Exhibit2.1
                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. (5)3.6
                Bylaws,
      as Amended (6)3.7
                Certificate
      of Change Pursuant to NRS 78.209, as corrected
(7)10.1
                2003
      Stock Incentive Plan (8)10.2
                2003
      Stock Incentive Plan #2 (9)10.3
                2005
      Stock Incentive Plan (10)10.4
                Manufacturing
      Services Agreement between Jabil Circuit, Inc., and Skye International,
      Inc. (11)10.5
                Consulting
      Agreement between Skye International, Inc., and Sundance Financial Corp,
      including amendments (5)10.6
                Consulting
      Agreement between Skye International, Inc., and Digital Crossing, LLC,
      including amendments (5)10.7
                Stock
      Option Agreement between Skye International, Inc., and Sundance Financial
      Corp., including amendments (5)10.8
                Stock
      Option Agreement between Skye International, Inc., and Digital Crossing,
      LLC, including amendments (5)10.9
                Steven
      G. Mihaylo Trust Convertible Debenture (12)10.10
                Loan
      Agreement with Thaddeus (Ted) F. Marek dated October 12,
      200710.11
                Loan
      Agreement with Perry Logan dated October 12,
    200710.12
                Security
      Agreement with Thaddeus (Ted) F. Marek dated October 12, 200710.13
                Security
      Agreement with Perry Logan dated October 12, 200710.14
                15%
      Secured Convertible Promissory Note with Thaddeus (Ted) F. Marek
      dated October 12, 200710.15
                15%
      Secured Convertible Promissory Note with Perry Logan dated October
      12, 200710.16
                Personal
      Services Agreement with Perry D. Logan dated May 15,
      200810.17
                Personal
      Services Agreement with Thaddeus (Ted) F. Marek dated May 15,
      200814.1
                Code
      of Ethics (13)16.1
                Letter
      from Shelley International, CPA (14)16.2
                Letter
      from Semple & Cooper, CPA (15)21.1
                Subsidiaries
      of Skye International, Inc. (5)23.1
                Consent
      of Moore & Associates, Chartered31.1
                Rule
      13a-14(a) Certification of Chief Executive
Officer31.2
                Rule
      13a-14(a) Certification of Chief Financial
Officer32.1
                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
      Officer32.2
                Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 of Chief Financial
      Officer


(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, 2005.(6)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed February 24, 2006.(7)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed May 20, 2008(8)
              Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-108728, filed September 12,
  2003.(9)
              Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-111348, filed December 19,
  2003.(10)
              Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-123663, filed March 30, 2005.(11)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed February 23, 2006(12)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed September 22, 2008(13)
              Incorporated
      by reference to the exhibits to the registrant's annual report on Form
      10-KSB for the fiscal year ended December 31, 2007(14)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed March 7, 2006.(15)
              Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed June 15, 2006.


30








SKYE
INTERNATIONAL, INC., AND SUBSIDIARIES





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS







Page
  No.REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
              F-2CONSOLIDATED
      FINANCIAL STATEMENTS:CONSOLIDATED
      BALANCE SHEETS
              F-3CONSOLIDATED
      STATEMENTS OF OPERATIONS
              F-4CONSOLIDATED
      STATEMENTS OF STOCKHOLDER DEFICIT
              F-5CONSOLIDATED
      STATEMENTS OF CASH FLOW
              F-6NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
              F-7
      to F-15


























F-1




MOORE
& ASSOCIATES, CHARTERED
 ACCOUNTANTS AND
ADVISORS
 PCAOB REGISTERED
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Skye
International, Inc. and Subsidiaries
 
 
 We have
audited the accompanying consolidated balance sheets of SKYE International, Inc.
and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
years 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 audit 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. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
years 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 7 to the
financial statements, the Company has incurred net losses since inception with
an accumulated deficit of $15,065,970 as of December 31, 2008, which raises
substantial doubt about its ability to continue as a going
concern.  Management’s plans concerning these matters are also
described in Note 7.  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
 February
26, 2009
 
 6490 West Desert Inn Rd, Las
Vegas, NV 89146 (702) 253-7499 Fax (702) 253-7501







F-2






SKYE International, Inc. and
      SubsidiariesCONSOLIDATED BALANCE
  SHEETSDecember
      31,
                                                                                        
                                                                                        
                                                                                        December
      312008
                                                                                        
                                                                                        
                                                                                        2007ASSETSCURRENT
      ASSETSCash
                                                                                        
                                                                                        $
                                                                                        37,822
                                                                                        
                                                                                        
                                                                                        
                                                                                        35,331Accounts
      Receivable
                                                                                        
                                                                                        
                                                                                        4,852
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Inventory
                                                                                        
                                                                                        
                                                                                        443,978
                                                                                        
                                                                                        
                                                                                        
                                                                                        119,668Prepaid
      Expenses
                                                                                        
                                                                                        
                                                                                        91,671
                                                                                        
                                                                                        
                                                                                        
                                                                                        82,510Total
      Current Assets
                                                                                        
                                                                                        
                                                                                        578,323
                                                                                        
                                                                                        
                                                                                        
                                                                                        237,509EQUIPMENT,
      NET
                                                                                        
                                                                                        
                                                                                        77,638
                                                                                        
                                                                                        
                                                                                        
                                                                                        46,754OTHER
      ASSETSDeposits
                                                                                        
                                                                                        
                                                                                        2,460
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,460Total
      Other Assets
                                                                                        
                                                                                        
                                                                                        2,460
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,460Total
      Assets
                                                                                        
                                                                                        $
                                                                                        658,421
                                                                                        
                                                                                        
                                                                                        
                                                                                        286,723LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)CURRENT
      LIABILITIESAccounts
      Payable
                                                                                        
                                                                                        $
                                                                                        312,189
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,227,923Accrued
      Expenses
                                                                                        
                                                                                        
                                                                                        82,041
                                                                                        
                                                                                        
                                                                                        
                                                                                        206,231Notes
      Payable - Related Parties
                                                                                        
                                                                                        
                                                                                        413,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,905,763Current
      Portion – Long Term Debt
                                                                                        
                                                                                        
                                                                                        4,407
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Accrued
      Interest Payable
                                                                                        
                                                                                        
                                                                                        134,414
                                                                                        
                                                                                        
                                                                                        
                                                                                        76,267Warranty
      Accrual
                                                                                        
                                                                                        
                                                                                        43,486
                                                                                        
                                                                                        
                                                                                        
                                                                                        34,570Customer
      Deposits
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        103,371Total
      Current Liabilities
                                                                                        
                                                                                        
                                                                                        989,537
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,554,125LONG-TERM
      DEBTNotes
      Payable
                                                                                        
                                                                                        
                                                                                        8,814
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Convertible
      Debt
                                                                                        
                                                                                        
                                                                                        8,055Total
      Liabilities
                                                                                        
                                                                                        
                                                                                        1,006,406
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,554,125STOCKHOLDERS'
      EQUITYCommon
      Stock: 100,000,000 sharesauthorized
      at $0.001par value;Issued
      and outstanding 13,927,915 and7,481,813
      shares, respectively
                                                                                        
                                                                                        
                                                                                        13,928
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,482Common
      Stock Subscribed
                                                                                        
                                                                                        
                                                                                        (24,000
                                                                                        )
                                                                                        
                                                                                        
                                                                                        108,675Paid
      in Capital
                                                                                        
                                                                                        
                                                                                        14,728,057
                                                                                        
                                                                                        
                                                                                        
                                                                                        11,152,911Accumulated
      Deficit
                                                                                        
                                                                                        
                                                                                        (15,065,970
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (14,536,470
                                                                                        )Total
      Stockholders' Equity (Deficit)
                                                                                        
                                                                                        
                                                                                        (347,985
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (3,267,402
                                                                                        )TOTAL
      LIABILITIES ANDSTOCKHOLDERS
      EQUITY (DEFICIT)
                                                                                        
                                                                                        $
                                                                                        658,421
                                                                                        
                                                                                        
                                                                                        
                                                                                        286,723




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





F-3


SKYE
      International, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF
      OPERATIONSYears
      Ended December 31,2008
                                              
                                              
                                              2007REVENUESProduct
      Sales
                                              
                                              $
                                              72,949
                                              
                                              
                                              $
                                              -Other
      Income
                                              
                                              
                                              254
                                              
                                              
                                              
                                              -Total
      Revenues
                                              
                                              
                                              73,203
                                              
                                              
                                              
                                              -Cost
      of Goods Sold
                                              
                                              
                                              54,170
                                              
                                              
                                              
                                              -Gross
      Profit
                                              
                                              
                                              19,033
                                              
                                              
                                              
                                              -EXPENSESLegal
      and Professional
                                              
                                              
                                              1,507,766
                                              
                                              
                                              
                                              962,207General
      and Administrative
                                              
                                              
                                              428,010
                                              
                                              
                                              
                                              341,635Research
      and Development
                                              
                                              
                                              231,624
                                              
                                              
                                              
                                              629,299Advertising
      and Marketing
                                              
                                              
                                              48,065
                                              
                                              
                                              
                                              -Depreciation
                                              
                                              
                                              19,092
                                              
                                              
                                              
                                              2,761Total
      Expenses
                                              
                                              
                                              2,234,557
                                              
                                              
                                              
                                              1,935,902Net
      (Loss) from Operations
                                              
                                              
                                              (2,215,524)
                                              
                                              
                                              
                                              (1,935,902
                                              )OTHER
      INCOME AND (EXPENSE)Gain
      on Extinguishment of Debt
                                              
                                              
                                              1,823,955
                                              
                                              
                                              
                                              2,152Interest
      Expense
                                              
                                              
                                              (137,931)
                                              
                                              
                                              
                                              (74,920
                                              )Total
      Other Income (Expense)
                                              
                                              
                                              1,686,024
                                              
                                              
                                              
                                              (72,768
                                              )Net
      (Loss) before Income Taxes
                                              
                                              
                                              (529,500
                                              )
                                              
                                              
                                              (2,008,670
                                              )Income
      Tax Expense
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -NET
      (LOSS)
                                              
                                              $
                                              (529,500
                                              )
                                              
                                              $
                                              (2,008,670
                                              )Basic
      and diluted (loss) per share
                                              
                                              $
                                              (0.05
                                              )
                                              
                                              $
                                              (0.34
                                              )Weighted
      Average Number of CommonShares
      Outstanding
                                              
                                              
                                              10,704,864
                                              
                                              
                                              
                                              5,954,584
  The
accompanying notes are an integral part of these financial
statements.
  
 F-4
  SKYE
      International, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
      (DEFICIT)Common
      Stock
                              
                              
                              Common
      Stock
                              
                              
                              Paid
      in
                              
                              
                              Accumulated
                              
                              
                              TotalShares
                              
                              
                              Amount
                              
                              
                              Subscribed
                              
                              
                              Capital
                              
                              
                              Deficit
                              
                              
                              DeficitBalance
      December 31, 2006
                              
                              
                              5,405,561
                              
                              
                              
                              5,406
                              
                              
                              
                              108,675
                              
                              
                              
                              9,272,525
                              
                              
                              
                              (12,527,800
                              )
                              
                              
                              (3,141,194
                              )Common
      stock issued for related party services
                              
                              
                              147,750
                              
                              
                              
                              148
                              
                              
                              
                              
                              
                              
                              
                              154,562
                              
                              
                              
                              
                              
                              
                              
                              154,710Common
      stock issued for consulting services
                              
                              
                              1,635,752
                              
                              
                              
                              1,636
                              
                              
                              
                              
                              
                              
                              
                              1,421,186
                              
                              
                              
                              
                              
                              
                              
                              1,422,822Common
      stock issued for debt
                              
                              
                              27,500
                              
                              
                              
                              27
                              
                              
                              
                              
                              
                              
                              
                              18,873
                              
                              
                              
                              
                              
                              
                              
                              18,900Common
      stock issued for cash
                              
                              
                              265,250
                              
                              
                              
                              265
                              
                              
                              
                              
                              
                              
                              
                              285,765
                              
                              
                              
                              
                              
                              
                              
                              286,030Net
      (Loss)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,008,670
                              )
                              
                              
                              (2,008,670
                              )Balance
      December 31, 2007
                              
                              
                              7,481,813
                              
                              
                              
                              7,482
                              
                              
                              
                              108,675
                              
                              
                              
                              11,152,911
                              
                              
                              
                              (14,536,470
                              )
                              
                              
                              (3,267,402
                              )Common
      stock issued for related party services
                              
                              
                              62,500
                              
                              
                              
                              62
                              
                              
                              
                              
                              
                              
                              
                              49,938
                              
                              
                              
                              
                              
                              
                              
                              50,000Common
      stock issued for consulting services
                              
                              
                              1,204,905
                              
                              
                              
                              1,205
                              
                              
                              
                              
                              
                              
                              
                              692,590
                              
                              
                              
                              
                              
                              
                              
                              693,795Common
      stock issued for cash
                              
                              
                              1,672,656
                              
                              
                              
                              1,673
                              
                              
                              
                              (24,000)
                              
                              
                              
                              533,577
                              
                              
                              
                              
                              
                              
                              
                              511,250Common
      stock issued for related party debt
                              
                              
                              3,506,104
                              
                              
                              
                              3,506
                              
                              
                              
                              (108,675)
                              
                              
                              
                              1,167,464
                              
                              
                              
                              
                              
                              
                              
                              1,062,295Beneficial
      conversion feature
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              900,000
                              
                              
                              
                              
                              
                              
                              
                              900,000Fair
      value of options granted
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              231,577
                              
                              
                              
                              
                              
                              
                              
                              231,577Fractional
      shares cancelled in reverse stock split
                              
                              
                              (63)
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -Net
      (Loss)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (529,500
                              )
                              
                              
                              (529,500
                              )Balance
      December 31, 2008
                              
                              
                              13,927,915
                              
                              
                              $
                              13,928
                              
                              
                              $
                              (24,000)
                              
                              
                              $
                              14,728,057
                              
                              
                              $
                              (15,065,970
                              )
                              
                              $
                              (347,985
                              )
  The
accompanying notes are an integral part of these financial
statements.
  F-5
 
 SKYE
      international, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH
      FLOWSYears
      Ended December 31,2008
                                                                                                  
                                                                                                  
                                                                                                  2007Operating
      ActivitiesNet
      (Loss)
                                                                                                  
                                                                                                  $
                                                                                                  (529,500
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (2,008,670
                                                                                                  )Gain
      on Extinguishment of Debt
                                                                                                  
                                                                                                  
                                                                                                  (1,823,954
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (2,152
                                                                                                  )Depreciation
      Expense
                                                                                                  
                                                                                                  
                                                                                                  19,092
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,761Amortization
      of discount on Convertible Debt
                                                                                                  
                                                                                                  
                                                                                                  8,055
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Shares
      and options issued for services rendered
                                                                                                  
                                                                                                  
                                                                                                  975,371
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,577,532Changes
      in assets and liabilities:Inventory
                                                                                                  
                                                                                                  
                                                                                                  (324,310
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  43,394Accounts
      Receivable
                                                                                                  
                                                                                                  
                                                                                                  (4,852
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  -Prepaid
      Expense
                                                                                                  
                                                                                                  
                                                                                                  (9,161
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  16,869Deposits
                                                                                                  
                                                                                                  
                                                                                                  (103,371
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (2,460
                                                                                                  )Accrued
      Interest Payable
                                                                                                  
                                                                                                  
                                                                                                  58,147
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  3,350Accounts
      Payable and Accrued Expenses
                                                                                                  
                                                                                                  
                                                                                                  31,288
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (869,731
                                                                                                  )Net
      Cash (Used) by Operating Activities
                                                                                                  
                                                                                                  
                                                                                                  (1,703,195
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (1,239,107
                                                                                                  )Investing
      Activities(Purchase)
      Disposal  of Assets
                                                                                                  
                                                                                                  
                                                                                                  (49,976
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (5,594
                                                                                                  )Net
      Cash Provided (Used) by Investing Activities
                                                                                                  
                                                                                                  
                                                                                                  (49,976
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (5,594
                                                                                                  )Financing
      ActivitiesProceeds
      from Notes payable
                                                                                                  
                                                                                                  
                                                                                                  1,246,544
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  985,330Repayment
      of Notes Payable
                                                                                                  
                                                                                                  
                                                                                                  (2,132
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  -Proceeds
      from Common Stock
                                                                                                  
                                                                                                  
                                                                                                  511,250
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  286,030Net
      Cash Provided by Financing Activities
                                                                                                  
                                                                                                  
                                                                                                  1,755,662
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,271,360Net
      Increase/(Decrease) in Cash
                                                                                                  
                                                                                                  
                                                                                                  2,491
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  26,659Cash,
      Beginning of Year
                                                                                                  
                                                                                                  
                                                                                                  35,331
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  8,672Cash,
      End of Year
                                                                                                  
                                                                                                  $
                                                                                                  37,822
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  35,331Supplemental
      Information:Taxes
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  -Interest
      Expense
                                                                                                  
                                                                                                  $
                                                                                                  71,570
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  71,570Non
      Cash Financing Activities:Common
      Stock Issued for Debt
                                                                                                  
                                                                                                  $
                                                                                                  1,062,295
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  18,900
  The
accompanying notes are an integral part of these financial
statements.





F-6
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007





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.





SKYE has
two wholly owned subsidiary corporations:




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


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





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 acquisition is accounted for as a reverse merger with
Envirotech being the accounting acquirer of Tankless.





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. With the acquisition of Envirotech, the
Company is in the business of designing, developing, manufacturing and marketing
several models of electronic, tankless water heaters. With the adoption of the
SKYE name in October 2005 the business of the Company was expanded to include
the manufacture and sale of consumer lifestyle appliances, including tankless
water heaters.





In
January 2004, SKYE formed ION to perform research, development and marketing of
new heating technologies.  Prior to the commencement of sales during
2008, the Company was classified as a development stage enterprise.





Nature of
Business





The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of an
electric, tankless water heater.  The Company’s products, together
with a limited quantity of related parts purchased for resale, are sold
primarily through manufacturer representatives and wholesale distributors 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 owned subsidiaries.




F-7
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
  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.





Recently Issued Accounting
Standards





The
following is a listing of the most recent accounting standards and their effect
on the Company.





In
June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the computation of earnings per share under
the two-class method as described in FASB Statement of Financial Accounting
Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. We are not required
to adopt FSP EITF 03-6-1; neither do we believe that FSP EITF 03-6-1 would have
material effect on our consolidated financial positionand results of
operations if adopted.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial
Guarantee Insurance Contracts-and interpretation of FASB Statement No.
60”.SFAS
No. 163 clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement of  premium
revenue and claims liabilities. This statement also requires expanded
disclosures about financial guarantee insurance contracts. SFAS No. 163 is
effective for fiscal years beginning on or after December 15, 2008, and interim
periods within those years. SFAS No. 163 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162,
“The Hierarchy of Generally
Accepted Accounting Principles”.SFAS No. 162 sets forth
the level of authority to a given accounting pronouncement or document by
category. Where there might be conflicting guidance between two categories, the
more authoritative category will prevail. SFAS No. 162 will become effective 60
days after the SEC approves the PCAOB’s amendments to AU Section 411 of the
AICPA Professional Standards. SFAS No. 162 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.




In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.This standard requires companies to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet adopted the
provisions of SFAS No. 161, but does not expect it to have a material impact on
its financial position, results of operations or cash flows.





In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based
Payment.  In particular, the staff indicated in SAB 107 that it
will accept a company's election to use the simplified method, regardless of
whether the company has sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the staff stated in SAB
107 that it would not expect a company to use the simplified method for share
option grants after December 31, 2007. The staff understands that such detailed
information about employee exercise behavior may not be widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company currently uses the
simplified method for “plain vanilla” share options and warrants, and will
assess the impact of SAB 110 for fiscal year 2009. It is not believed that this
will have an impact on the Company’s financial position, results of operations
or cash flows.




F-8
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
  Note
1.                 THE
COMPANY-
continued
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No.
51.  This statement amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. Before this
statement was issued, limited guidance existed for reporting noncontrolling
interests. As a result, considerable diversity in practice existed. So-called
minority interests were reported in the consolidated statement of financial
position as liabilities or in the mezzanine section between liabilities and
equity. This statement improves comparability by eliminating that diversity.
This statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009,
for entities with calendar year-ends). Earlier adoption is prohibited. The
effective date of this statement is the same as that of the related Statement
141 (revised 2007). The Company will adopt this Statement beginning March 1,
2009. It is not believed that this will have an impact on the Company’s
financial position, results of operations or cash
flows.





In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations.This
Statement replaces FASB Statement No. 141, Business Combinations, but
retains the fundamental requirements in Statement 141.  This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. The
effective date of this statement is the same as that of the related FASB
Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  The Company will adopt this
statement beginning March 1, 2009. It is not believed that this will have an
impact on the Company’s financial position, results of operations or cash
flows.





In
February 2007, the FASB, issued SFAS No. 159,The Fair Value Option for Financial
Assets and Liabilities—Including an Amendment of FASB Statement No.
115.  This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities. Most of the provisions in FAS 159 are elective;
however, an amendment to FAS 115 Accounting for Certain Investments
in Debt and Equity Securities applies to all entities with available for
sale or trading securities. Some requirements apply differently to entities that
do not report net income. SFAS No. 159 is effective as of the beginning of an
entities first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS No. 157 Fair Value
Measurements.  The Company adopted SFAS No. 159 beginning March
1, 2008. The adoption of this pronouncement did not have an impact on the
Company’s financial position, results of operations or cash flows.





In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements  This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change
current practice. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The Company adopted this statement March 1, 2008. The adoption of this
pronouncement did not have an impact on the Company’s financial position,
results of operations or cash flows.







F-9
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007




Note
2.                 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.





Cash and Cash
Equivalents





All
highly liquid debt instruments with a maturity of six 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,
2008, and December 31, 2007 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 subsidiary ION, the
Company continues to expense research and development costs as incurred in
developing additional products based on new technologies. The Company incurred
research and development expense of $231,624 and $629,299 during the years ended
December 31, 2008 and 2007, respectively.





Marketing
Strategy





The
Company sells to large wholesale distributors through its network of
manufacturer representatives. The Company has periodically advertised on cable
television stations, at trade shows and through trade magazines and it maintains
a website.





Revenue
Recognition





The
Company records sales when revenue is earned. The Company sells on credit to its
distributors and manufacturer representatives. Due to the Company’s Warranty and
Right of Return policy, six percent of the sales are recognized immediately and
the balance is recognized 25 - 40 days after shipment of the product to the
customer. All shipments are FOB shipping point. The Company no longer
manufactures the ESI-2000 product lines and so the Company plans to refund the
purchase price paid for undelivered heaters or, alternatively, to ship new
heaters to those customers that did not receive delivery of an ESI-2000 heater.
The Company had revenue from sales of products of $72,949 in 2008 and no revenue
from sales of products during 2007.










F-10
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
  Note
2.                 SIGNIFICANT
ACCOUNTING POLICIES-
continued





Accounts
Receivable





Accounts receivable are recorded when an order is
received from a distributor andthe product isshipped. An allowance for doubtful
accounts will
beset up based on the
actual rate of uncollected accounts.Net accounts receivable is as follows:




December
      31,
                    
                    2008
                    
                    
                    2007Accounts
      Receivable
                    
                    $
                    4,852
                    
                    
                    $
                    -0-Less:
      Allowance for Doubtful Accounts
                    
                    
                    (-0-
                    )
                    
                    
                    (-0-
                    )Net
      Accounts Receivable
                    
                    $
                    4,852
                    
                    
                    $
                    -0-




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.





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, 2008 and 2007, was $48,065 and $-0- 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:




December
      31,
                          
                          2008
                          
                          
                          2007Equipment,
      Furniture and Fixtures
                          
                          $
                          110,823
                          
                          
                          $
                          79,200Vehicles
                          
                          
                          18,353
                          
                          
                          
                          -Less:
      Accumulated Depreciation
                          
                          
                          (51,538
                          )
                          
                          
                          (32,446
                          )Net
      Fixed Assets
                          
                          $
                          77,638
                          
                          
                          $
                          46,754





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. 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 has no capitalized patent and software
costs at December 31, 2008 and 2007.





F-11
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
  Note
2.                 SIGNIFICANT
ACCOUNTING POLICIES-
continued
  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 potentially dilutive securities outstanding at the end of the
statement periods. However, they are excluded from the computation of basic and
diluted earnings per share because they anti-dilutive. The Company has 1,700,000
options outstanding at December 31, 2008. There is also $900,000 of outstanding
convertible debt which may be converted into 3,600,000 shares of the Company’s
common stock.





Stock Based
Compensation





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.” 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.  The Company uses the Black-Scholes pricing model
for determining the fair value of stock based compensation.





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.





Warranty and Right of
Return





In
connection with the sale of each product, the Company provides a limited 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 10 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, 2008 a total reserve of $43,486 for refunds and warranties were
recorded against product sales.




Balance of Warranty Accrual for
      2003
                  
                  $
                  3,240Balance
      of Warranty Accrual for 2004
                  
                  
                  9,725Balance
      of Warranty Accrual for 2005
                  
                  
                  21,605Balance
      of Warranty Accrual for 2006
                  
                  
                  -0-Balance
      of Warranty Accrual for 2007
                  
                  
                  -0-Balance
      of Warranty Accrual for 2008
                  
                  
                  8,916Total
      Warranty Accrual as of December 31, 2007
                  
                  $
                  43,486





























F-12
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007





Note
3           
      NOTES PAYABLE AND CONVERTIBLE DEBTOBLIGATIONS





Notes
payable and capital lease obligations consist of the following:




Year
      Ended December 31,
                    
                    2008
                    
                    
                    2007Convertible
      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.
                    
                    $
                    -
                    
                    
                    $
                    163,366Convertible
      Notes, Unsecured, Mature five-yearsfrom
      issue date, bear 10% Interest payable quarterly,principle
      and interest convertible into one commonshare
      for each outstanding $0.25.  Principal amount of$900,000
      net of the discount for the fair value of the beneficialconversion
      feature of  $891,945 as of  December 31,
      2008:
                    
                    
                    8,055
                    
                    
                    
                    -Vehicle
      purchase contract, 6% Interest, secured by vehicle;$426
      due monthly through July 2011.
                    
                    
                    13,221
                    
                    
                    
                    -Demand
      Note with Former Distributor of Subsidiary,in
      Settlement and Repurchase ofDistributorship Territory,
      7% Interest; Note is in default
                    
                    
                    -
                    
                    
                    
                    519,074Demand
      Note Made by Subsidiary,10%
      Interest, Payable Monthly; Note is in default
                    
                    
                    -
                    
                    
                    
                    11,880Demand
      Note Made by Subsidiary,6%
      Interest; Note is in default
                    
                    
                    -
                    
                    
                    
                    35,000Demand
      Note Made by Subsidiary,Note
      is in default
                    
                    
                    -
                    
                    
                    
                    72,391Unsecured
      Demand Note made  in favor of related party;
                    
                    
                    120,000
                    
                    
                    
                    120,000Unsecured
      Demand Note made in favor of related party;
                    
                    
                    140,000
                    
                    
                    
                    13,825Unsecured
      Demand Note made in favor of related parties;
                    
                    
                    78,000
                    
                    
                    
                    66,284Convertible
      Notes, Unsecured, Issued March 2006,Matured
      March 2007, bear 5% Interest, principle and interestconvertible
      into one common share $0.55 per share.  Noteshave
      not been converted.
                    
                    
                    75,000
                    
                    
                    
                    75,000Demand
      Note Made by SKYE in favor of consultants
                    
                    
                    -
                    
                    
                    
                    828,943Total
                    
                    $
                    434,276
                    
                    
                    $
                    1,905,763




Maturities
of Long-Term Debt and Amortization of the Discount are as follows:




2009
                        
                        $
                        417,407
                        
                        
                        $
                        180,0002010
                        
                        
                        6,611
                        
                        
                        
                        180,0002011
                        
                        
                        2,203
                        
                        
                        
                        180,0002012
                        
                        
                        -
                        
                        
                        
                        180,0002013
                        
                        
                        900,000
                        
                        
                        
                        171,945Total
                        
                        $
                        1,326,221
                        
                        
                        $
                        891,945







F-13
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
  Note
4.                 STOCKHOLDERS’ EQUITY





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 has the right to
grant awards or stock options and 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, 2008 and December 31, 2007, the Company
has issued 462,541 and 462,541 shares respectively under the 2005 Stock
Incentive Plan. As of December 31, 2008, 37,459 shares remain unissued under
this Plan.





During
2008 the Company issued 62,500 shares for $50,000 in consulting services to
related parties; 1,204,905 shares valued at $693,795 for other consulting
services; 3,388,230 to retire $1,084,240 in related party debt; and 1,672,656
shares for $511,250 in cash in private placements. During 2007 the Company
issued 6,543,009 shares for $1,422,822 in consulting services; 591,000 shares at
$154,710 for employee stock awards; 110,000 shares to retire $18,900 in
convertible notes; and 1,061,000 shares for $286,030 in cash in private
placements. During 2008, the Company’s shares of common stock were reverse split
on a 1 share for 4 shares basis. The Company’s financial statements have been
restated to reflect the reverse stock split on a retro-active basis. The
total common stock issued and outstanding at December 31, 2008 is 13,927,915
shares.





Warrants




No
warrants are outstanding.





Stock
Options





On
February 11, 2004, the Company granted 5-year stock options to purchase 150,000
shares of restricted common stock at $2.00 per share to consultants assisting in
company operations. Using a discounted stock price of $1.72, exercise price of
$2.00, 5-year option, risk-free rate of 4.1% and a volatility rate of .038 the
value of these options is calculated at $0.12 using the Black-Scholes model. The
aggregate value of 150,000 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.  At December 31, 2008, none of the options have
been exercised.





In
September 2006, the Company granted options to each of its directors to purchase
12,500 shares at $2.00.  In addition it granted an option to its
Chairman to purchase 37,500 shares at $2.00.  The options may be
exercised at any time within five (5) years of the date of
grant.  Using a discounted stock price of $1.96, exercise price of
$2.00, 5-year option, risk-free rate of 5.35% and a volatility rate of .052 the
value of these options is calculated at $0.12 using the Black-Scholes model. The
aggregate value of 50,000 options is $32,216. At December 31, 2008, none of
the options have been exercised.





In
September 2008, the Company granted options to each of its three directors to
purchase 500,000 shares at $0.50.   The options may be exercised
at any time within five (5) years of the date of grant.  Using a
discounted stock price of $0.18, exercise price of $0.50, 5-year option,
risk-free rate of 3.3% and a volatility rate of 149% the value of these options
is calculated at $0.42 using the Black-Scholes model. The aggregate value of
1,500,000 options is $231,577. At December 31, 2008, none of the options have
been exercised.





Outstanding
stock options are as follows:




SharesBalance,
      December 31, 2006
                                          
                                          
                                          200,000Granted,
      2007
                                          
                                          
                                          0Expired,
      2007
                                          
                                          
                                          0Balance,
      December 31, 2007
                                          
                                          
                                          200,000Granted,
      2008
                                          
                                          
                                          1,500,000Expired,
      2008
                                          
                                          
                                          0Balance,
      December 31, 2008
                                          
                                          
                                          1,700,000





F-14
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007





Note
5.                 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 Net Operating Loss of $15,071,231. The total valuation allowance is
equal to the total deferred tax asset.




2008
                    
                    
                    2007Deferred
      Tax Asset
                    
                    $
                    4,335,043
                    
                    
                    $
                    4,491,098Valuation
      Allowance
                    
                    $
                    (4,335,043
                    )
                    
                    $
                    (4,491,098
                    )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
                      
                      $
                      3,673,441
                      
                      
                      2013-20232004
                      
                      
                      1,893,331
                      
                      
                      20242005
                      
                      
                      4,051,870
                      
                      
                      20252006
                      
                      
                      2,463,287
                      
                      
                      20262007
                      
                      
                      303,908
                      
                      
                      2027Total
                      
                      $
                      12,385,837




Note
6.                 LEASES
AND OTHER COMMITMENTS





The
Company offices out of leased premises comprising a total of approximately 2,180
square feet located at 7701 E. Gray Rd., Suite 104, Scottsdale, AZ 85260. 
The Company entered into a one-year lease effective April 11, 2007, at a monthly
lease cost of approximately $3,118, with a one year option at a reduced monthly
cost of $2,672 per month through April 30, 2009.   In January
2009, the Company amended the lease with a three-year option to extend through
April 30, 2011, with the option for the Company to provide 90 days notice of its
intention to vacate.  Given the recent expansion of operations the
Company intends to move to larger premises at some point during fiscal
2009.




Note
7.                 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 $15,065,970 as of December 31, 2008.
The Company has not generated meaningful revenues in the last 2 years. The
Company has a working capital deficit of $411,214 as of December 31, 2008. These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern.





Management’s
Plans





The
Company has expended considerable efforts in working with its contract
manufacturer in order to begin the production of its new line of products.
The Company expects that the first commercial units will be produced in 2008
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. The Company has continued to focus
development efforts on the commercialization of its patent pending ParadigmTMtechnology. To date
the Company has not been successful in developing a cost effective means to
commercialize the technology into a consumer product line. The Company is
currently negotiating with a critical supplier to jointly complete the
engineering and commercialization process and then subsequently engage in
engineering for manufacturing phase. The Company has developed and continues to
develop a sales and distribution network.





The
Company has funded all of its capital needs over the 2008 fiscal year by way of
private placements and loans from related parties.  The Company is
currently working to complete further private placements of an amount up to $2.3
million from related and third parties to fund our business strategy, but to
date the Company has not yet raised any significant amount of capital. The
Company’s business strategy requires it to raise in excess of $3 million over
the next 12 month period in order to fully execute its business plan. Management
believes that, in order to properly exploit the introduction of its products, it
will be necessary to be positioned not only as a quality supplier of products,
but also able to supply a sufficient volume of product to meet wholesale
demand.





Note
8.                 CONTINGENCIES





The
Company is subject to litigation in the normal course of business. The Company
accrues the amount of legal liabilities when it determines that the plaintiff is
more likely than not to prevail with its claim. The Company has accrued $70,000
for such claims as of December 31, 2008.





F-15