UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-KSB





(Mark
One)


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


For
the fiscal year ended December 31, 2007





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


For the
transition period from ____ to _____





Commission
File Number: 000-28083









SKYE
INTERNATIONAL, INC.


(Name of
small business issuer 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 4 Scottsdale, AZ 85260(Address of principal executive
      offices) (Zip Code)Issuer’s telephone number:(480)
      993-2300Securities registered under
      Section 12(b) of the Exchange Act:NoneSecurities registered under
      Section 12(g) of the Exchange Act:Common Stock,
      $0.001 Par Value




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





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o





1





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





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yeso  Nox





State
issuer’s revenues for its most recent fiscal year. $0





State 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 a specified date within the past 60
days.  $1,866,092 as of April 10, 2008





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.  42,539,797 shares as of April 10,
2008





Transitional Small Business Disclosure
Format (Check one): YesoNox


















































2





SKYE
INTERNATIONAL INC.


FOR
THE FISCAL YEAR ENDED


December
31, 2007




Index
to Report


on
Form 10-KSB






PART
      I
            Page(s)





Item
      1.
            Description
      of Business
            5Item
      2.
            Description
      of Property
            12Item
      3.
            Legal
      Proceedings
            12Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            14





PART
      IIItem
      5.
            Market
      for Common Equity and Related Stockholder Matters and Small
      Business
              Issuer
      Purchases of Equity Securities
            15Item
      6.
            Management’s
      Discussion and Analysis or Plan of Operation
            17Item
      7.
            Financial
      Statements
            26Item
      8.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            26Item
      8A.
            Controls
      and Procedures
            27Item
      8B
            Other
      Information
            28PART
      IIIItem
      9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance With Section 16(a) of the Exchange Act
            29Item
      10.
            Executive
      Compensation
            31Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            32Item
      12.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            33Item
      13.
            Exhibits
            35Item
      14.
            Principal
      Accountant Fees and Services
            36Signatures
            38







































3





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 6. “Management’s Discussion and Analysis or Plan of Operation -
Factors That May Affect Our Results of Operation” in this document.





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







































4





PART
I





ITEM
1.  DESCRIPTION OF
BUSINESS





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., it changed
its name to Tankless Systems Worldwide, Inc. and on October 21, 2005, it changed
its name to Skye International, Inc., as part of its overall plan to create a
brand name for its revised business plan and expanded product
lines.




Skye has
three subsidiary corporations, all wholly-owned:




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


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


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




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




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





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., Suite 4
Scottsdale, Arizona 85260. The Company’s fiscal year ends on December
31.




Envirotech




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




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




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.









5


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 Envirotech(continued)


current
amount of approximately $42,500, Skye did not assume 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,
which are reflected in the consolidated financial statements. During the
pendency of the Chapter 11 Proceedings, Envirotech continued selling its water
heater products. Subsequently, in the first quarter of 2005, due to the lack of
working capital and other factors, Envirotech ceased production of its products.
The Chapter 11 Proceedings were dismissed by the Court, with prejudice, on
February 28, 2006 Because Envirotech has ceased operations, its only asset of
any anticipated value is its intellectual property, including the patent as
discussed above.




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 has since conducted research and development of alternative
heating technologies and products. Skye has invested heavily in a research and
development program to develop new and innovative methods of heating water,
which has resulted in the filing of several applications for patents with the
U.S. Patent and Trademark Office involving dozens of claims. As of the date of
this report, several patents have been issued to the company and several more
remain pending in the United States and in certain foreign countries, all as
more fully detailed elsewhere in this report.




With the
exception of one patent held by Envirotech (discussed above), as well as other
patents pending or awaiting assignment to ION in due course, ION holds all
patents and intellectual property of the Company and it may license that
property to an affiliated or third party entity for manufacturing and
distribution. The assets of ION are included in the consolidated financial
statements for the Company.




Valeo




Valeo was
formed by Skye in January 2005 as a wholly-owned operating subsidiary. Valeo
will license technology from ION and manufacture or contract for the manufacture
of several lines of water heating products, as well as other products embodying
ION patent technology. These new products, based on proprietary technology, are
expected to serve as the foundation for the future growth of the
Company.




Business
of the Company





The
Company is in the business of designing, developing, manufacturing and marketing
consumer products.  Initially these are electronic, tankless water
heaters. The tankless water heater is small, easy to install and supplies
virtually endless amounts of hot water with energy savings. The unit is a
durable, microprocessor controlled electric water heater contained in a compact
unit, eliminating the space demands of conventional water
heaters.  Prior to the development of new technology, which is
discussed later in this section, the Company was dependent upon the operations
of Envirotech tankless water heaters for its revenue. Beginning in 2004 and
continuing through the first quarter  2005, Envirotech’s production
and sales declined..  In January 2004, SKYE formed ION through which
it has since conducted research and development on alternative heating
technologies and products. SKYE has invested heavily in a concerted R&D
program to develop new and innovative methods of heating water which has
resulted in the filing of applications for several patents involving dozens of
claims. As a result, several patents have been issued and other patent
applications are pending, and new products have been developed and readied for
commercial production in 2008.





SKYE’s
first product line is FORTISTM   the
result of the R&D program discussed above. SKYE’s FORTISTM series is a
whole house unit of heating power, microprocessor-controlled electric water
heater contained in a compact unit, which is designed to operate in most any
climate. SKYE’s developing safer and innovative way of heating water for homes.
Not only does it supply virtually endless amounts of hot water, but it also
offers substantial energy savings to most users. In FORTISTM uses advanced
technology and high quality parts in the construction of the FORTISTM  series, which
provides reliability and longevity. The FORTISTM series will heat
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.





6


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 Business
of the Company(continued)





The
Company has established relationships with contract manufacturers, Jabil
Circuit, Inc., and Electrosem, LLC. to produce its FORTISTM  line of
products. Despite commencing production in 2008, the Company expects that it may
take up to one year for the production design and processes to stabilize and all
cost reductions to be effectively implemented.





Additionally,
the Company has continued to focus development efforts on the commercialization
of its new ParadigmTMtechnology. Although we have been very excited about the functionality
that the ParadigmTM  
technology offers, we have not been successful in developing a cost effective
means to commercialize the technology into a consumer product line. We are
currently negotiating with a critical supplier to jointly complete the
engineering and commercialization process, and then subsequently the engineering
for manufacturing phase. In the event we are successful in concluding a
strategic relationship in this regard, the Company expects that it will have
first delivery of prototype product utilizing the ParadigmTMtechnology by
late 2008 or early 2009, and commercial availability in 2009. As we have not yet
completed our negotiations there can be no assurance that we will finalize any
such agreement, or if we do finalize the agreement, that we will be successful
in the completion of a commercialized product, and the related testing and
certification of such products, in order for distribution within a reasonable
period of time.





We have
expended considerable efforts to develop a sales and distribution network in the
United States and beyond. We have chosen to sell our products through wholesale
distribution utilizing manufacturer’s representatives. As of December 31, 2007,
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’s representatives in territories across the United States and we
anticipate hiring a national Sales Manager in 2008 to coordinate such
efforts.  As we commence commercial production of the FORTISTM product line, we
anticipate adding additional manufacturer’s representatives in order to gain a
broader sales and service network across the United States.  Efforts
in this regard will continue throughout 2008 and 2009.





The Marketplace for Tankless Water
Heaters.





Frost and Sullivan has
published a series of reports on the residential water heating industry citing
statistics including total units shipped of roughly 9.6 million annually and a
1.5-2.0% annual growth rate both as of 2004.  In addition, the split
between gas versus electric has been nearly 50/50.  Current tankless
manufacturers estimate under 4% of all water heater sales units are tankless,
yet show dramatic gains in market share over traditional tank
units.  Tankless gas manufacturers reported a 70% annual growth rate
from 2003 through 2005.  Management believes, from discussions with
other tankless manufacturers, that the market penetration of tankless products
is nearing 6% of the U.S. marketplace.  Management believes that,
although there has been a significant slowdown in new home construction in the
U.S., tankless sales will likely continue to increase for the foreseeable future
as tankless products continue to garner market share as compared to tank-based
products.





Extensive
study of the tankless water heater market and strategies for penetrating that
market show that the water heater replacement market is estimated to be over 10
million units annually and growing.(Frost & Sullivan,
2004)





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





7


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 The
Marketplace for Tankless Water Heaters(continued)





The
conventional water heater market is highly competitive, highly concentrated, and
mature, and dominated by a small number of manufacturers. Conventional tank
water heaters maintain approximately 97% market share of residential water
heater sales (Frost &
Sullivan, 2004). Management believes that tankless products comprise
nearly 6% of the U.S. marketplace as of the end of 2007.  Steep
discounts and rebates as high as 20% or more are standard. Some contractors are
loyal to their favorite brands and are opposed to tankless systems. The five
dominant U.S. manufacturers have substantial resources, well known brand names,
established distribution networks, worldwide manufacturing capabilities, and
sizeable engineering, research and development resources to protect and increase
their market share and profitability. Further, price competition has increased
in recent years, and major manufacturers have been increasing research and
development activities. 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 manufactures include Takagi, Noritz, and Rinnai. The
European competitors in the US marketplace in gas, and to a lesser extent,
electric-based heaters, include Bosch and Steibel 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. SKYE’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 SKYE’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





The
Company has developed what it believes will be the world’s most advanced,
efficient, reliable, safe and durable electric tankless water heaters - FORTISTM  and ParadigmTM. The FORTISTM series has
substantially all metal construction and features a bright 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 sophistication of the 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 ZigBee-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.





8


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 Product
Overview(continued)




TheFORTISTMSeries.SKYE
expects to offer two power models of the FORTISTM unit, with different
combinations of heating elements. The models as tentatively configured have the
following characteristics:





•
            304
      Surgical grade, stainless steel heating chamber, including housing,
      tubing, and high flow end caps•
            Four,
      18” Incoloy® 800 heating elements24-bit
      microprocessor controller, sampling over 60,000 times per
      second•
            Durable
      and reliable Avionics grade solid state relays•
            Redundant
      mechanical power breakers•
            Built-in
      Breaker sub-panel reducing installation
costs


•
            Drip
      Detection sensors and shut-off•
            Freeze
      protection


•
            Dry
      Fire protections•
            Fast
      and accurate electric water heater•
            Advanced
      paddle wheel flow sensor with 0.3 gallon per minute activation that can be
      cleaned if necessary


•
            Standard
      manual flush cleaning system





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 water
heaters heat water using new innovative 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, point-of-use 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.





Other. SKYE intends to conduct
further research and development to design other value-added consumer products
to incorporate the ParadigmTM thick-film
resistive technology.  Current efforts include an ultra-efficient
space heater, as well as a new generation ceiling fan to cool in the summer and
provide heat in the winter. Using the FORTISTM and ParadigmTM  technology,
along with other proprietary technology, the Company seeks to develop additional
products for recreational vehicles, marine and other applications.




Governmental
Approvals, Effect of Regulations





All of
SKYE’s products are currently being tested to ensure compliance with applicable
code requirements. Additionally, SKYE is submitting its products for testing
and/or approval by the following agencies:







9


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 Governmental
Approvals, Effect of Regulations(continued)


·
            NSF (National Sanitation
      Foundation – for compliance with NSF standard
  61


·
            IAPMO
      (International Association of Plumbing and Mechanical
      Officers)


·
            CE
      (European Standards Certification
Mark)


·
            CSA
      (Canadian Standards Association)





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
November 1, 2007 the Company received notice from Underwriters Laboratories,
Inc. (“UL”) concerning the successful completion of the Construction Review
process.  The Company suspended further investigation of its FORTISTM product series by UL
because of timing issues to complete the full review of the FORTISTM by UL at the
time.





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.





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 has determined
it will use wholesale distribution through appointed manufacturer’s
representatives to enter the market place. As consumer knowledge of tankless is
still quite low, SKYE believes that a “push” style distribution through
wholesale distribution is needed. Utilizing the resources of wholesalers to make
sales calls and stock inventory locally will help to reduce initial capital
needs and expedite a broader distribution network. SKYE has appointed
manufacturer’s representatives in many states and expects that it will continue
to appoint more representatives over the balance of 2008 and 2009, including
manufacturer’s representatives in Canada, Mexico and Europe.




The
wholesale distribution model is favored by SKYE because, among other reasons,
according to the 2004 Frost & Sullivan report, over 60% of plumbing sales
are made by wholesale distributors. Many of the wholesale distributors add value
to SKYE’s distribution because, in addition to providing the local sales and
installation force, they also are able to inventory both units and parts. As
awareness of tankless grows, a local presence is essential to convert home
building, architects and other key decision makers to adopt tankless
technology.




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




Manufacturing





On
February 15, 2006, SKYE entered into a Manufacturing Services Agreement with
Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
certain components and to assemble SKYE’s tankless water heater products as
specified by SKYE from time to time. SKYE anticipates that Jabil will become
SKYE’s primary high volume manufacturer in conjunction with Electrosem LLC. In
January, 2008 the Company reached an agreement with Electrosem, LLC of Tempe, AZ
(“Electrosem”) to manufacture the first commercial production run of FORTISTM
product.  Additionally, SKYE is also actively negotiating with
critical suppliers to qualify them to supply ParadigmTM components, as
well as potentially expedite the earlier market availability of products
utilizing the new ParadigmTM technology.





10


ITEM
1.  DESCRIPTION OF
BUSINESS(continued)
 
 Materials and Principal
Suppliers.





When
production commences with Jabil, or production expands at Electrosem, SKYE will
be dependent upon Jabil and Electrosem to perform satisfactorily so as to ensure
the availability of product for sale. Jabil and Electrosem are required to buy
components for SKYE’s products from the market at large, as well as from an
approved list of suppliers, including Siemens, AG (electrical components), Lake
Monitors (flow sensors), Tru-Heat (heating elements), and Arnold Bros.
(stainless steel sheet metal and components). Although no production experience
has been obtained, SKYE is satisfied that Jabil has the necessary experience to
avoid supplier delivery problems.




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.  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 approximately $629,299 in 2007 and $26,878 in 2006 on research
and development.





Intellectual
Property





The
Company currently holds a number of patents through its subsidiaries, ION and
Envirotech.  In the past two years, the following patents have been
received and assigned to the Company:





·
            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 SKYE or ION, the Company believes that is applications are
meritorious and will be granted at least in part.





Competition





The water
heater market is mature, highly concentrated and highly competitive, and steep
discounts and rebates as high as 20% or more are standard. Some contractors are
loyal to favorite brands and on occasion resistant to tankless systems, and the
plumbing industry is on occasion also resistant to tankless systems,
particularly electric powered tankless units. Pricing competition has increased
in recent years, and major manufacturers are increasing their expenditures on
research and development. Conventional water heaters (tank heaters) are slightly
more efficient and reliable than conventional tank water heaters in previous
years. There are several companies around the world who manufacture water
heaters, conventional and tankless. It is reasonable to expect to encounter
intense competition in all aspects of our business and that such competition
would increase. Substantial competition could emerge at any time. Many of our
competitors and potential competitors have longer operating histories and
significantly greater experience, resources, and managerial, financial,
technical, and marketing capabilities than us. In addition, many of these
competitors offer a wider range of products and services than we contemplate
offering.









11


ITEM
1. DESCRIPTION
OF BUSINESS(continued)




Competition(continued)





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
space. Consequently, new competitors or alliances may emerge and rapidly acquire
significant market share. We cannot assure you that we will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by us will not harm our business. This intense competition, and the impact
it has on the valuation of companies of this nature, could limit our
opportunities and have a materially adverse effect on the Company’s
profitability or viability.





The
Company believes that future competition may come from the manufacturers of
conventional tank water heaters, who are firmly established with the plumbing
industry. There are a large number of manufacturers of tank water heaters, both
domestic and foreign. The dominant manufacturers are five large, multinational,
established companies with significantly more resources than the Company
(Bradford-White, Rheem, A. O. Smith, State Industries and American Standard).
Manufacturers of tank water heaters dominate the U.S. market, maintaining over
96% 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.





Employees





At
December 31, 2007, Skye had one full-time employee. 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
2.  DESCRIPTION OF
PROPERTY




The
Company leases offices comprising a total of approximately 2,189 square feet
located at 7701 E. Gray Rd., Suite 4 Scottsdale, AZ 85260.  The
Company entered into a one-year lease effective April 11, 2006 at a monthly
lease cost of approximately $3,118, with a one year option with a reduced
monthly cost of $2,672 per month through April 30, 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. With the filing of the Bankruptcy
Petition by Envirotech (see below), this action was stayed.  However,
with the dismissal of the Chapter 11 Proceedings on February 28, 2006, this
judgment is once again a claim against the assets of Envirotech, subject,
however, to the claims and rights of the Senior Secured Creditor. In June 2007
the executor and beneficiary of the estate of the deceased plaintiff made
written demand for payment of the sums owed under the Stipulated
Judgment.  Envirotech is currently investigating a course of action
and response to such written demand, and Envirotech has received no further
communication from the executor of the estate.





12


ITEM
3.  LEGAL
PROCEEDINGS(continued)




Seitz Suit. In 2002,
Envirotech was named as a Defendant in a law suit filed in the U.S. District
Court for the Southern District of Texas, Houston, Texas (Civil Action No.
H-02-4782, David Seitz and Microtherm, Inc. vs. Envirotech Systems Worldwide,
Inc., and Envirotech of Texas, Inc.) (the “Seitz Suit”). 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
recently dissolved.  Skye is not a party to this
case.  Envirotech filed a summary judgment motion and is awaiting a
ruling from the Court.  The matter has not been set for
trial.





Myers and Jenkins Suit. In 2006, thefirm of Myers
& Jenkins, PC obtained a default judgment against Envirotech for the
principal sum of $105,830 together with interest and costs in connection
with Envirotech’s non-payment of legal fees for an arbitration
matter.  The judgment remains unsatisfied.





Sensor Technologies Suit.  In 2006, Sensor Technologies & Systems, Inc., an
engineering firm that provided consulting services in connection with
Envirotech’s ESI-2000 product obtained  a default judgment against
Envirotech for the principal sum of $55,452, together with interest and
costs.  The judgment remains unsatisfied.




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.  The Court has not
yet ruled on the matter.





Shareholder Inspection
Suit. In April 2006 a shareholder purporting to have obtained consent
from at least 15% of the Company’s shareholders filed a lawsuit in the United
States District Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF)
seeking inspection of the Company’s books and records pursuant to Nevada
corporate law. The Court denied plaintiff’s initial request. The Company has
asserted several counterclaims against the plaintiff for tortious conduct and
for abuse of the legal process in connection with the lawsuit. The lawsuit was
dismissed with consent of both parties.










13


ITEM
3.  LEGAL
PROCEEDINGS(continued)




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.  The parties are awaiting the Court’s decision.





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 lawsuit is pending
in Maricopa County Superior Court (CV2007- 002890) The Company does not believe
that this case will be resolved until the claims against Mr. Papazian in the
Derivative Action are also resolved.





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 three individual
plaintiffs are also members of the plaintiff group in the Shareholder Derivative
Suit and, as set forth in the Company’s counterclaims in the Shareholder
Derivative Suit, do not believe that this case has any merit.  The
matter has not been scheduled for trial.





Quick & Confidential
Claim. The Company has settled this matter by submitting $12,000 as
payment to Quick & Confidential.





Semple & Cooper
Claim. The Company has settled this arbitration dispute by submitting
$27,000 as payment to Semple & Cooper.





Lawrence White Claim.
The Company has settled this arbitration dispute by submitting $12,000 as
payment to Lawrence White.





Berry-Shino Claim.
The Company has settled this arbitration dispute by issuing 456,482 shares as
payment to Berry-Shino Securities, Inc.





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





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








14


ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
  On April
20, 2006, the President of the Company, acting pursuant to Article II section 2
of the Company’s By-laws, having received a demand of shareholders holding in
excess of 15% of the issued and outstanding shares of
the Registrant, called a Special Meeting of the common shareholders
of the Company that was to be held on May 31, 2006 (the “May 2006 Shareholders’
Meeting”). The purpose of the special meeting was to:





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





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





At its
meeting on May 11, 2006, the Board of Directors postponed the May 2006
Shareholders’ Meeting until a future date that was to be established after the
Company had brought its SEC filings current. The Board subsequently cancelled
the May 2006 Shareholders’ Meeting and expects to call an Annual and Special
Meeting of Shareholders of the company sometime in 2008.








PART
II




ITEM
      5.
              MARKET FOR
      COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS 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)


SKYY -
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.





Per
Share Common Stock Bid Prices by Quarter




For 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
            
            
            0.18For
      the Fiscal Year Ending on December 31, 2006
            
            
            High
            
            
            LowQuarter Ended December 31,
      2006
            
            $
            0.35
            
            $
            0.16Quarter Ended September 30,
      2006
            
            
            0.60
            
            
            0.25Quarter Ended June 30,
      2006
            
            
            0.96
            
            
            0.40Quarter Ended March 31,
      2006
            
            
            1.25
            
            
            0.41








15


ITEM
      5.
                MARKET FOR
      COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES (continued)




Holders
of Common Equity





As of
April 10, 2008, there were 244 shareholders of record of the Registrant’s Common
Stock and there were 42,539,797 shares of Common Stock issued and
outstanding.





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
2007, 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
            Securities
            ConsiderationD.
      Scott Hemingway, Christopher M. Skelly, Mark Chester, Anthony E. Deprima,
      Stanford E. Lerch and Jones Vargas Chartered
            5,236,527
      shares
            Legal
      services valued at $1,049,805Directors
      of the Company
            80,000
      shares
            Directors’
      fees for 2006 valued at $15,200Directors
      of the Company
            500,000
      shares
            Directors’
      fees for 2007 valued at $137,000Wesley
      G. Sprunk, William Watkins, Larry Dickinson, Rentz Revocable Living Trust,
      Andrew L. Jacobson and Kurt Markgraf
            110,000
      shares
            Compensation
      for 2006 convertible loan made to the Company valued at
      $18,900Ted
      Marek and Perry D. Logan
            1,061,000
      shares
            Cash
      of $286,030Ronald
      Sams and Richard Ankrom
            100,000
      shares
            IT
      and research and development services valued at $29,000Ronald
      Abernathy
            2,000
      shares
            Compensation
      for services as an officer for 2006 valued at $380Ronald
      Abernathy
            9,000
      shares
            Compensation
      for services as an officer for 2007 valued at $2,130Berry-Shino
      Securities Inc.
            456,482
      shares
            Compensation
      under a services agreement valued at $174,681Digital
      Crossing LLC
            750,000
      shares
            Compensation
      under a services agreement valued at
$169,336





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.













16


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


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





Plan
of Operation.





The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of electronic,
tankless water heaters. Previously the Company produced, marketed and sold its
electronic tankless water heater products directly through the internet. The
FortisTM and ParadigmTM  units, and future products, however, are proposed to
be sold primarily through manufacturer’s representatives in the wholesale
market.





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 through issuances
of common stock and cash generated from our operations. As we continue our
activities, we may continue to experience net negative cash flows from
operations, pending receipt of significant revenues.  Commencing in
the first quarter of 2007 and continuing throughout the third quarter, all of
the Company’s cash needs were met through loans advanced to the Company by
certain of its related party directors.




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 funds to complete
the ramping up for production of the FORTISTM, and to fully
implement its marketing plans and for continued
operations.  Additionally, the Company will also require further
development funds in order to finalize a commercialized version of its consumer
product utilizing the patented ParadigmTM technology. 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.




As of
December 31, 2007, the existing capital and anticipated funds from operations
were not sufficient to sustain Company operations or the business plan over the
next twelve months. We anticipate substantial increases in our cash
requirements; 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.




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 will market the FORTIS TM tankless water
heater shortly through an established and growing list of manufacturer’s
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. Skye is
currently working to commercialize this technology into a suite of products that
can be used in homes across North America and Europe.










17




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




Executive
Summary (continued)




Once
FORTISTM  is ready
for commercial production and distribution, in late 2008, the Company’s success
will be dependent upon its ability to attract high quality distributors and
manufacturer’s representatives to market its products. To date, the Company has
been able to attract distributors and manufacturer’s representative groups with
a solid track record selling tankless water heating devices to home
builders and the wholesale plumbing trade. The Company is unable to provide
forecasts as to the amount of product it anticipates selling. As of December 31,
2007, the Company has entered into contracts with a number of manufacturer’s
representatives located in states across the Southwest and Southeast of the U.S.
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 35%, and 7%
commissions to manufacturer’s representatives; (b) non-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. The Company plans on assisting in the
training of its U.S. distributors and manufacturers representatives in the safe
use of its products.





Going
Forward





The
Company has established relationships with contract manufacturers, Jabil
Circuit, Inc., and Electrosem, LLC. to produce its FORTISTM  line of
products.. Despite commencing commercial production late in the first quarter of
2008, the Company expects that it may take up to one year for the production
design and processes to stabilize and all cost reductions to be effectively
implemented.





The
Company has also continued to focus development efforts on the commercialization
of its new ParadigmTMtechnology.
Although we have been very excited about the functionality that the ParadigmTM technology
offers, we have not been successful in developing a cost effective means to
commercialize the technology into a consumer product line. We are currently
negotiating with a critical supplier to jointly complete the engineering and
commercialization process, and then subsequently the engineering for
manufacturing phase. In the event we are successful in concluding a strategic
relationship in this regard, the Company expects that it will have first
delivery of prototype product utilizing the ParadigmTMtechnology by
late 2008 or early 2009, and commercial availability in 2009. As we have not yet
completed our negotiations there can be no assurance that we will finalize any
such agreement, or if we do finalize the agreement, that we will be successful
in developing a commercialized product for distribution within a reasonable
period of time.





Access to
capital remains one of the most pressing considerations for the Company.
Although we were successful in concluding a $600,000 non-brokered private
placement in April 2006, and a further $100,000 as of September 30, 2006, such
funds were not sufficient to provide adequate working capital to meet the needs
of the Company beyond the beginning of the third quarter 2006. As such, the
Company has continued to fund operations with loans from, and equity private
placements made to, the Company’s directors.  In order to execute our
business strategy, the Company must raise in excess of $2 million over the next
12-month period in order to fully execute our current production and business
plan. There can be no assurance that we will be able to raise such additional
funding by way of either new debt or equity, and, in the event we are unable to
raise the funds necessary to fund our business plan, it will be necessary to
curtail such plans and this could have a detrimental impact on our business.
Management believes that, in order to properly exploit the introduction of both
the FORTISTM  and
ParadigmTM 
technologies, it will be necessary that we be positioned not only as a quality
supplier of products, but that we also be able to supply a sufficient volume of
product to meet wholesale demand. We believe that, relative to the wholesale
market, there is a very high expectation that product be available in a timely
fashion when ordered. In order to meet this expectation, we must be capable of
not only producing our products in sufficient volume, but expand our management
team, corporate infrastructure, and working capital base. 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 the year we will continue to focus our efforts on initiating
production of the FORTISTMproduct line and in getting it into the market to be sold. We will
continue to develop our markets and train installers and field service personnel
in cooperation with our appointed manufacturer’s representatives. This is no
small task and it will require a significant investment of capital, as well as a
greatly expanded staff in order to execute the business plan resulting in
effective sales and service of the FORTISTM product line.





Over the
balance of 2008, we will continue to focus on completing the ParadigmTMtechnology and
we are challenged by the opportunity to introduce this powerful technology to
the US marketplace. While ParadigmTMwill require a
significant investment of time and capital in order to yield a line of
marketable products, we are confident that products based on this technology
will be amongst the most efficient and technologically advanced in the market.
Many challenges remain and Skye’s Board, Management and Staff are committed to
the challenge.





18


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





Results of
Operations





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





Comparison
of the Years Ended December 31, 2007 and 2006 Revenues


For
      the Twelve months ended December 31:
            2007
            2006
            Increase/(decrease)$
            %Revenue
            $
      -
            $
      196,341
            $
      (196,341)
            (100%)




Revenues
for the year ended December 31, 2007 were $NIL, compared to revenues of
$196,341 in the year ended December 31, 2006. The decreases in revenue is
attributable to the cessation all sales of ESI-2000 products and parts pending
the launch of the Company’s FORTISTM product line in
addition to the non-recurring Other Income charge of  $194,269 in the
prior year.




General
and Administrative expenses




For
      the Twelve months ended December 31:
            2007
            2006
            Increase/(decrease)$
            %General
      & Administrative expenses
            $341,635
            $
      586,620
            $
      (244,985)
            (42%)





General
and administrative expenses decreased by 42% reflecting the fact that
the Company continued to operate at minimal staffing levels as it completed
the balance of development work on its pending FORTISTM product line.
Commencing May 1, 2007, the Company’s operations were conducted from 2,189
square foot leased premises in Scottsdale, Arizona. During the year ended
December 31, 2007, we submitted the product for Nationally Recognized Testing
Laboratory (“NRTL”) for certification/approval by Intertek Testing Laboratories,
Inc. (“Intertek”). We anticipate an increase in the general and administrative
expenses by the Company in 2008 as we add more operational and administrative
personnel, and continued professional assistance with our continued efforts to
execute our business plan and market our products.





Total
Operating Expenses


For
      the Twelve months ended December 31:
            2007
            2006
            Increase/(decrease)$
            %Total
      operating expenses
            $
      1,935,902
            $
      2,586,754
            $(650,852)
            (25%)




Overall
operating expenses decreased by approximately 25% as a result of reduced
occupancy and general and administrative costs., Minimal non-research and
development expenses were incurred during  2007 as the Company focused
its efforts on completing the FORTISTM product line and
readying it for NRTL investigation for certification/approval and subsequent
production. Legal and professional fees declined $810,272 or 46% from the prior
year, whereas research and development expenses increased $602,421 or 2241% from
the prior year ended December 31, 2006.







19


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


Net
Loss


For
      the Twelve months ended December 31:
            2007
            2006
            Increase/(decrease)$Net
      (Loss)
            $
      (2,008,670)
            $
      (2,463,287)
            $454,617




The net
loss for the year ended December 31, 2007 improved (reduced) by $454,617 or 18%.
The prior year included a $194,269 non-recurring Other Income benefit and which
was offset by a reduction (downsizing) in Rent of $177,631.  The most
dramatic improvements have been made in shifting away from general and
administrative and legal spending and investing in research and
development.  The $600,000 increase in research and development was
more than offset by these reductions resulting in the $450,000
improvement.





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 2007, all
of the Company’s cash needs were met through loans advanced to the Company by
certain of its related party directors.





Net cash
change for the twelve months ending December 31, 2007 was an increase of $26,659
as compared to an increase of $5,961 for 2006.  Net cash used in
operating activities was $253,777 for 2007, as compared to $695,550 for
2006.  The largest adjustment to reconcile cash used for operating
activities was $1,577,532 for shares and options issued for services
rendered.  Operations were financed primarily by proceeds from common
stock in the amount of $286,030 for 2007, as compared to $655,000 in
2006.




Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2007, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern.  We have an accumulated deficit of $14,536,470 and working
capital deficit of $3,316,616 as of December 31, 2007.  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.





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.





20


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




Critical
Accounting Policies (continued)




Revenue Recognition.
We record sales when revenue is earned.  We sell on credit to our
distributors and manufacturer’s 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’s 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 no revenue from sales of products during
2007.





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, 2007, a total of $34,570 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 $629,299 and $26,878 during the years ended December 31,
2007 and 2006, 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.





FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS





Our
future existence remains uncertain and the report of our independent registered
public accounting firm on our December 31, 2007 financial statements contain a
“going concern” qualification.





The
report of the independent registered public accounting firm on our financial
statements for the years ended December 31, 2007 and 2006, includes an
explanatory paragraph relating to our ability to continue as a going concern. We
have suffered substantial losses from operations, require additional financing,
are subject to significant and costly litigation and need to continue the
development and marketing of our products. Ultimately we need to generate
additional revenues and attain profitable operations. These factors raise
substantial doubt about our ability to continue as a going concern. There can be
no assurance that we will ever be able to develop commercially viable products
or an effective marketing system. Even if we are able to develop commercially
viable products, there is no assurance that we will ever be able to attain
profitable operations.





21


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




FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS(continued)





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





At
December 31, 2007, our accumulated deficit was $14,536,470. We have not been
able to generate enough revenues to cover our expenses and have survived only by
raising funds through the sale of debt and equity securities. We must continue
to raise funds in the near future to continue operations. While management has
been successful in the past in raising these funds, there is no assurance that
management will be successful in raising sufficient funds to continue operations
and thus the Company may fail.





Awaiting
SEC Response to Amended Financial Filings for the Year Ended December 31,
2005





On
September 15, 2005 the Company received a letter from the U.S. Securities and
Exchange Commission (“SEC”) relating to information provided by the Company in
its financial filings for the year ended December 31, 2005 (the “2004 10KSB”),
as well as the interim quarterly filings preceding such date. The SEC has
requested, among other things, that we clarify and restate certain disclosures
in the 2004 10KSB and possibly some related quarterly disclosures on form 10QSB
during such year. On June 14, 2006 the Company filed an amended and restated
10KSB for the year ended December 31, 2005, and, to date, we have not received
any comments thereon from the SEC. Other than filing an amended and restated
financial as discussed above we have not formally responded in writing to the
SEC, and thus we have not yet concluded such matters with the SEC and the
Company may be required to undertake further actions or financial restatements
as a result of further enquiries or actions by the SEC and the Company’s Board
of Directors.





Limited
Capital and Need for Additional Financing.




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




Competition.





The water
heater market is mature, highly concentrated and highly competitive, and steep
discounts and rebates as high as 20% or more are standard. Some contractors are
loyal to favorite brands and on occasion resistant to tankless systems, and the
plumbing industry is on occasion also resistant to tankless systems,
particularly electric powered tankless units. Pricing competition has increased
in recent years, and major manufacturers are increasing their expenditures on
research and development. Conventional water heaters (tank heaters) are slightly
more efficient and reliable than conventional tank water heaters in previous
years. There are several companies around the world who manufacture water
heaters, conventional and tankless. It is reasonable to expect to encounter
intense competition in all aspects of our business and that such competition
would increase. Substantial competition could emerge at any time. Many of our
competitors and potential competitors have longer operating histories and
significantly greater experience, resources, and managerial, financial,
technical, and marketing capabilities than us. In addition, many of these
competitors offer a wider range of products and services than we contemplate
offering.





22


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




Performance;
Market Acceptance.





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





Dependence on
Intellectual Property - Design and Proprietary Rights.





Our
success and ability to compete depend to a significant degree on our
intellectual property. We will rely on patent, copyright and trademark law, as
well as confidentiality arrangements, to protect our intellectual property. Even
if legal actions are initiated by the Company to enforce our intellectual
property rights however there can be no guarantee that such actions will be
successful in protecting our intellectual property adequately.





Policing
Efforts to Protect Intellectual Property may not be successful.





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





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




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





23


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




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




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




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




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




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




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




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




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




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




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





24


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




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




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





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





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




·
            ability
      to commercialize new products from ongoing research and development
      activities;·
            developments
      in tankless water heating
technology;


·
            price
      and availability of alternative solutions for water heating
      systems;·
            availability
      and cost of technology and marketing
personnel;


·
            our
      ability to establish and maintain key relationships with industry
      partners;·
            the
      amount and timing of operating costs and capital expenditures relating to
      maintaining our business, operations, and
  infrastructure;


·
            general
      economic conditions and economic conditions specific to the cost of
      electricity and water; and·
            the
      ability to maintain a product margin on sales, given the early stage of
      our market for our products.





These and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit or
prevent investors from readily selling their shares of common stock and may
otherwise negatively affect the liquidity of our common stock. In the past,
securities class action litigation or shareholder derivative litigation has
often been brought against companies following periods of volatility in the
market price of their securities, as happened in the case of the Company. If
additional derivative litigation or securities class action litigation were to
be brought against us it could result in substantial costs and a diversion of
our management’s attention and resources. Such adverse events, will hurt our
business and may result in the inability to continue operations, and in such a
case, investors will face the risk of an entire loss of their
investment.





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




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





25


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





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





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








ITEM 7.FINANCIAL
STATEMENTS





Financial
statements as of and for the years ended December 31, 2007 and  2006
are presented in a separate section of this report following Part
IV.






ITEM 8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





On
February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
Company’s independent registered public accounting firm. The reason for the
withdrawal was the retirement of the firm’s principal. Shelley had audited the
registrant’s financial statements for the fiscal years ended December 31, 2005,
2004 and 2003.





On
February 24, 2006, the registrant engaged Semple & Cooper, LLP to serve as
the Company’s independent registered public accountants for the fiscal year
ending December 31, 2006. The Company’s Board of Directors approved the
engagement of Semple & Cooper.





On June
2, 2006, Semple and Cooper resigned as auditors for the Company and on the same
date the Board of Directors approved the engagement of Moore & Associates,
Chartered of Las Vegas, Nevada to be its independent registered public
accountants for the fiscal year ending December 31, 2006. During the short time
that Semple and Cooper were the Company’s auditors, there were disagreements on
certain matters. Semple and Cooper furnished the Company with a letter addressed
to the Commission setting forth its understanding of such matters. A copy of
that letter was filed as an exhibit to the report on Form 8-K/A dated June 15,
2006. The Company disputes the factual basis for the disagreements identified by
our former auditors.





The
resignation of Semple & Cooper was accepted, but was not encouraged or
recommended, by Skye’s Board of Directors and Audit Committee. As noted above,
the engagement of Moore and Associates has been approved by both the Skye Board
and Audit Committee.





On June
13, 2006, Semple & Cooper provided the Company with a letter to the SEC
dated June 9, 2006. That letter noted certain issues that it believed, if
further investigated, might materially impact the fairness or reliability of the
financial statements of the Company for 2004 and 2005. In particular, the
auditors noted the receipt of a letter from an attorney representing certain
shareholders that contained allegations of financial and accounting
improprieties and accusations of possible bankruptcy and securities fraud. The
Board of Directors had not concluded its investigation of those allegations at
the time Semple & Cooper resigned. The matters noted in that letter are the
subject of the Shareholder Derivative Action discussed in “Item 3 - Legal
Proceedings” above.





26


ITEM
8.CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
(continued)




Semple
& Cooper also noted that it had questions regarding the propriety of certain
arrangements relating to a patent owned by a subsidiary of the Company that were
not addressed to the auditor’s satisfaction before it resigned. Documentation of
those arrangements was completed after the firm’s resignation. The Board has
concluded its investigation of the propriety of the transactions and the related
disclosures and has determined that there were no improprieties in such
transactions, and further, that related disclosures were fully and timely
made.





The audit
reports of Shelley on the financial statements for each of the past two years as
of December 31, 2005 contained a separate paragraph stating: “The accompanying
financial statements have been prepared assuming that the company will continue
as a going concern. The Company has experienced losses since inception. This
raises substantial doubt about the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from this uncertainty.” There were no other adverse opinions, disclaimers
of opinions, or qualifications or modifications as to uncertainty, audit scope,
or accounting principles.





During
the two most recent fiscal years and the subsequent interim period through
February 24, 2006, there were no disagreements with Shelley on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Shelley, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report. The registrant requested Shelley to furnish it a
letter addressed to the Commission stating whether it agrees with the above
statements. A copy of that letter was filed as an exhibit to the report on Form
8-K dated February 24, 2006.





During
the registrant’s two most recent fiscal years and through February 24, 2006, the
date prior to the engagement of Semple & Cooper, LLP, neither the registrant
nor anyone on its behalf consulted Semple & Cooper, LLP regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the registrant’s consolidated financial statements.





Moore and
Associates, Chartered, audited the restatement of the 2004 financial
statementsfiled in
connection with the Amended Annual Report on SEC Form 10-KSB/A which was filed
by the Company on June 14, 2006 (as amended, the “2004 10-KSB/A”). In connection
with that restatement, Moore filed a consent with the 2004
10-KSB/A.





During
the registrant’s two most recent fiscal years and through June 2, 2006, the date
prior to the engagement of Moore and Associates, neither the Company nor anyone
on its behalf consulted Moore and Associates regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the registrant’s
consolidated financial statements.





There
were no other “reportable events” as that term is described in Item
304(a)(1)(iv) of Regulation S-B occurring within the registrant’s two most
recent fiscal years.




ITEM 8A.CONTROLS AND
PROCEDURES





Evaluation
of disclosure controls and procedures





Management,
with the participation of our Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Exchange Act, Rules 13a-15(e) and
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, 2007, our disclosure
controls and procedures were ineffective to ensure that the information we were
required to disclose in reports that we file or submit under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
More specifically, the company identified a material weakness due to a lack of
sufficient personnel with appropriate knowledge in U.S. GAAP and lack of timely
recording of transactions,  supporting documentation and sufficient
analysis of the application of U.S. GAAP to transactions, including but not
limited to equity transactions. During the year ended December 31, 2007, there
was no change in our internal control over financial reporting identified in
connection with the evaluation that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





27


ITEM
8A.CONTROLS
AND PROCEDURES(continued)




Internal
Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management used the framework of conducting
an extensive review of existing documentation and transactions to make that
evaluation. As of December 31, 2007, the Company had a deficiency in internal
controls over the application of current US 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 has
concluded that this and other control deficiencies constituted a material
weakness that continued throughout 2005, 2006 and 2007.





The
Company’s management is reviewing the Company’s internal controls over financial
reporting to determine the most suitable recognized control framework. The
Company will give great weight and deference to the product of the discussions
of the SEC’s Advisory Committee on Smaller Public Companies (the “Advisory
Committee”) and the Committee of Sponsoring Organizations’ task force entitled
Implementing the COSO Control Framework in Smaller Businesses (the “Task
Force”). Both the Advisory Committee and the Task Force are expected to provide
practical, needed guidance regarding the applicability of Section 404 of the
Sarbanes-Oxley Act to small business issuers. The Company’s management intends
to perform the evaluation required by Section 404 of the Sarbanes-Oxley Act at
such time as the Company adopts a framework. For the same reason, the Company’s
independent registered public accounting firm has not issued an “attestation
report” on the Company management’s assessment of internal
controls.







ITEM
8B.  OTHER
INFORMATION





None.











































28





PART
III





ITEM
      9.
              DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT





Executive
Officers and Directors





Our
officers, directors and key employees are as follows:


Name
            Age
            PositionPerry
      Logan
            79
            Chief
      Executive Officer, President, Chief Financial and Accounting Officer and
      DirectorMark
      D. Chester
            46
            Chairman
      of the Board of DirectorsWesley
      G. Sprunk
            72
            DirectorBarry
      M. Goldwater, Jr.
            70
            DirectorThadeus
      (Ted) F. Marek
            66
            Director,
      Corporate Secretary and Treasurer


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.





Mark
D. Chester, Chairman, Director - Member of Corporate Governance
Committee




Mark
Chester has been a director of the Company since September 2005 and the Chairman
of the Board since April 2006.  He has been a licensed attorney in the
State of Arizona since 1987. He currently practices in Scottsdale at the law
firm of Chester & Shein, P.C., which focuses on business and real estate
transactions and litigation. Mr. Chester received his B.S. in commerce at the
University of Virginia and his J.D. with honors from the Arizona State
University, Sandra Day O’Connor College of Law.





Wesley
G. Sprunk, Director





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.





Perry
D. Logan, President, Chief Executive, Financial and Accounting Officer, 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.





Thadeus
(Ted) F. Marek, Director and Member of Audit and Corporate Governance Committee,
and Corporate Secretary and Treasurer




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.





29


ITEM
      9.
                DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (continued)
 
 Executive
Officers and Directors (continued)


Barry
M. Goldwater, Jr., Director - Member of Audit Committee




Barry
Goldwater has been a director of the Company since June 2006.  He
served as a congressman for Northern Los Angeles County from 1969 to 1984.
He has been a financial and management consultant since 1984.  For the
past 24 years he has held responsible positions involving finance and
management, including eight years of trading privileges with the New York
Stock Exchange.





Compliance
with Section 16(a) of the Exchange Act.





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 FiledBarry
      M. Goldwater, Jr.
            Form
      3 due January 26, 2007
            June
      14, 2007Barry
      M. Goldwater, Jr.
            Form
      4 due April 23, 2007
            April
      14, 2008Barry
      M. Goldwater, Jr.
            Form
      4 due September 27, 2007
            April
      14, 2008Mark
      D. Chester
            Form
      3 due October 3, 2005
            Not
      yet filedMark
      D. Chester
            Form
      4 due January 18, 2007
            Not
      yet filedMark
      D. Chester
            Form
      4 due April 23, 2007
            Not
      yet filedMark
      D. Chester
            Form
      4 due September 27, 2007
            Not
      yet filedD.
      Scott Hemingway
            Form
      4 due October 4, 2006
            October
      26, 2007Perry
      D. Logan
            Form
      3 due February 9, 2007
            March
      2, 2007Perry
      D. Logan
            Form
      4 due April 17, 2007
            May
      7, 2007Perry
      D. Logan
            Form
      4 due April 23, 2007
            April
      14, 2008Perry
      D. Logan
            Form
      4 due September 27, 2007
            April
      14, 2008Perry
      D. Logan
            Form
      4 due October 25, 2007
            April
      14, 2008Ted
      Marek
            Form
      3 due February 16, 2007
            February
      23, 2007Ted
      Marek
            Form
      4 due February 28, 2007
            March
      1, 2007Ted
      Marek
            Form
      4 due March 9, 2007
            March
      16, 2007Ted
      Marek
            Form
      4 due April 23, 2007
            April
      30, 2007Ted
      Marek
            Form
      4 due June 22, 2007
            June
      26, 2007Ted
      Marek
            Form
      4 due July 3, 2007
            July
      9, 2007Ted
      Marek
            Form
      4 due July 16, 2007
            July
      19, 2007Ted
      Marek
            Form
      4 due August 7, 2007
            August
      15, 2007Ted
      Marek
            Form
      4 due August 21, 2007
            August
      30, 2007Ted
      Marek
            Form
      4 due September 6, 2007
            September
      10, 2007Ted
      Marek
            Form
      4 due September 17, 2007
            September
      20, 2007Ted
      Marek
            Form
      4 due October 5, 2007
            October
      11, 2007Ted
      Marek
            Form
      4 due May 4, 2007
            October
      24, 2007Ted
      Marek
            Form
      4 due November 2, 2007
            November
      15, 2007Wesley
      G. Sprunk
            Form
      4 due January 18, 2007
            April
      11, 2008Wesley
      G. Sprunk
            Form
      4 due April 23, 2007
            April
      11, 2008Wesley
      G. Sprunk
            Form
      4 due June 6, 2007
            April
      11,2008Wesley
      G. Sprunk
            Form
      4 due September 27, 2007
            April
      11, 2008








30


ITEM
      9.
                DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (continued)


Code
of Ethics





The
Company maintains a Code of Ethics that is filed with this 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.





Audit
Committee





The
Company’s Audit Committee consists of Directors: Logan (Chairman), Goldwater and
Marek. Mr. Marek has been designated by the Board or the Audit Committee as an
“audit committee financial expert.”





The
Company adopted a Corporate Governance Charter and Code of Ethics on March 1,
2007.  The Corporate Governance Committee consists of: Chester
(Chairman), Logan, Goldwater 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 10.EXECUTIVE
COMPENSATION





The table
below sets forth the remuneration of our chief executive officers during our
last two completed fiscal years (the years ended December 31, 2007 and December
31, 2006), 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 and Treasurer
(1)
            2007
            -0-
            -0-
            27,400
            -0-
            -0-
            -0-
            -0-
            27,400Ronald
      O. Abernathy, President (2)
            2007
              2006
            -0-
              -0-
            -0-
              -0-
            2,510
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            2,510
              -0-Thomas
      Kreitzer, Chief Executive Officer and Chief Financial Officer
      (3)
            2006
            -0-
            -0-
            -0-
            -0-
            -0-
            -0-
            10,800
            10,800Gregg
      C. Johnson, Executive Vice President and Secretary (4)
            2007
              2006
            95,500
              -0-
            -0-
            -0-
                15,000
            -0-
                -0-
            -0-
                -0-
            -0-
                -0-
            -0-
                105,000
            95,500
              120,000





(1)
            Mr.
      Logan became our Chief Executive Officer and President on May 3,
      2007.


(2)
            Mr.
      Abernathy served as our Chief Executive Officer from November 17, 2006 to
      May 3, 2007.


(3)
            Mr.
      Kreitzer served as our Chief Executive Officer from 2001 to September 24,
      2006.


(4)
            Mr.
      Johnson was replaced as Corp. Secretary in October 2007 by Ted
      Marek.





Compensation
of Directors





Each of
our non-employee directors receives reimbursement for expenses of attendance for
each scheduled meeting that requires physical attendance.





31


ITEM
10.EXECUTIVE
COMPENSATION(continued)




Compensation of Directors(continued)




Compensation
for our directors for our last completed fiscal year is set forth below, with
the exception of Perry Logan, 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-
            33,100(1)
            -0-
            -0-
            -0-
            -0-
            33,100Barry
      M. Goldwater, Jr.
            -0-
            31,200
            -0-
            -0-
            -0-
            -0-
            31,200Ted
      Marek
            -0-
            27,400
            -0-
            -0-
            -0-
            -0-
            27,400Wesley
      G. Sprunk
            -0-
            33,100
            -0-
            -0-
            -0-
            -0-
            33,100





(1)
            Mr.
      Chester’s awards do not include shares issued for legal services performed
      for the Company.





Each
Director is entitled to receive 50,000 restricted common shares for each quarter
year of service to the Company.








ITEM
11.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The
following table sets forth certain information, as of April 10, 2008, 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
            7,901,500
      (3)
            18.6%Perry
      D. Logan
              PO
      Box 35080
              Las
      Vegas, NV 89144
            7,375,666
            17.3%D.
      Scott Hemingway
              1717
      Main Street, Suite 2500
              Dallas,
      TX 75201
            4,196,317
            9.9%Mark
      D. Chester
              8777
      N. Gainey Center Drive, Suite 191
              Scottsdale,
      AZ 85258
            1,300,605
      (4)
            3.0%Wesley
      G. Sprunk
              3451
      S. 40th
      Street
              Phoenix,
      AZ 85040
            1,281,855
      (5)
            3.0%Barry
      M. Goldwater Jr.
              3104
      E. Camelback Road, Suite 274
              Phoenix,
      AZ 85106
            336,111 (5)
            0.8%All
      officers and directors as a group (5 persons)
            18,195,737
      (6)
            42.8%




32


ITEM
11.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS (continued)


(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 42,539,797 shares of Common Stock outstanding as of
      April 10, 2008.  If a person listed on this table has the right
      to obtain additional shares of Common Stock within sixty (60) days from
      April 10, 2008, 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
      2,308,000 shares held of record by Ted Marek Family Trust and 3,750,000
      shares held of record by Ted Marek Real Estate Defined Benefit Pension
      Plan,


(4)
            Includes
      200,000 shares issuable upon exercise of vested stock
    options.


(5)
            Includes
      50,000 shares issuable upon exercise of vested stock
    options.


(6)
            Includes
      300,000 shares issuable upon exercise of vested stock
    options.







Changes
in Control





The
Company is not aware of any arrangements which may result in a change in control
of the Company.





Equity
Compensation Plans





As of
December 31, 2007 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
            900,000
            $0.50
            N/ATotal
            900,000
            $0.50
            N/A





The
Company has granted options to (1) Sundance Financial Corp., and Digital
Crossing, LLC, to purchase 300,000 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 ten-year period beginning February 11, 2004 and ending
February 11, 2014. The options are fully exercisable as of the grant date,
February 11, 2004, and require that the exercise price be paid in cash. The
number of shares purchasable upon exercise of the option are subject to certain
adjustments, and in certain circumstances the price per share may also be
adjusted. The grantees have unlimited piggy-back registration rights to have
shares purchased pursuant to the option included in any registration statement
filed by the Company. In September 2006, the Company granted options to each
Director and Ronald O. Abernathy, to each purchase 50,000 shares of common stock
at an exercise price of $0.50 per share, and to its Chairman to purchase 150,000
shares at an exercise price of $0.50 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, 2012. The options are fully exercisable as of the
grant date, and require that the exercise price be paid in cash. 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 12.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.





33





ITEM 12.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE (continued)




Other
Amounts Owed to Related Parties





At
December 31, 2007, the following amounts were owed to related
parties:





Name
            Relationship
            Amount
            Factual
      BackgroundWesley
      G. Sprunk
            Director
            $50,000
            Convertible
      note issued in 2006 that accrues interest at 12% per annum
    (1)Perry
      Logan
            Officer
      and director
            $49,175
            Convertible
      note issued in 2007 that accrues interest at 12% per annum, secured by all
      assets of the Company (2)Ted
      Marek
            Officer
      and director
            $49,175
            Convertible
      note issued in 2007 that accrues interest at 12% per annum, secured by all
      assets of the Company (2)





(1)
            On
      April 10, 2008, the Company issued 784,000 shares to Mr. Sprunk as payment
      of all principal and accrued interest on this
  note.


(2)
            On
      April 10, 2008, the Company issued 140,500 shares to Mr. Logan as
      payment of all principal and accrued interest on this
  note.


(3)
            On
      April 10, 2008, the Company issued 140,500 shares to Mr. Marek and/or
      entities controlled by Mr. Marek as payment of all principal and accrued
      interest on this note.




Legal
Services




During
the years ended December 31, 2007 and 2006, the Company issued 820,605 and -0-
shares, respectively, to Mark D. Chester, the Chairman of the Board of
Directors, for legal services valued at $164,121 and $-0-
respectively.





Purchases
of Common Stock





During
the year ended December 31, 2007, Perry Logan and Ted Marek purchased 140,500
and 920,500 shares, respectively, for total cash consideration of
$286,030.





On April
10, 2008, Messrs. Logan, Sprunk and Marek purchased 5,487,500; 784,000 and
5,487,500 shares, respectively, for total cash consideration of $940,720. 
The
cash consideration and total number of shares issued includes shares issued at
$0.08 per share for the repayment to Messrs. Logan and Marek of outstanding
notes discussed elsewhere in this Report.





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.





Barry M.
Goldwater, Jr. and Wesley G. Sprunk 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.




34





ITEM 13. EXHIBITS
  Regulation S-B
  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)


10.1
            2003
      Stock Incentive Plan (7)10.2
            2003
      Stock Incentive Plan #2 (8)


10.3
            2005
      Stock Incentive Plan (9)10.4
            Manufacturing
      Services Agreement between Jabil Circuit, Inc., and Skye International,
      Inc. (10)


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
            Personal
      Services Consulting Agreement between Skye International, Inc., and Gregg
      C. Johnson #(5)


10.11
            Convertible
      notes to Ted Marek (13)10.12
            Convertible
      notes to Perry Logan (13)






14.1
            Code
      of Ethics *


16.1
            Letter
      from Shelley International, CPA (11)16.2
            Letter
      from Semple & Cooper, CPA (12)


21.1
            Subsidiaries
      of Skye International, Inc.


31.1
            Rule
      13a-14(a) Certification of Chief Executive Officer and Chief Financial
      Officer *


32.1
                Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and Chief
      Financial Officer *
 * Filed
with this Annual Report
 # Relates
to executive compensation


35


ITEM
13.  EXHIBITS(continued)







(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 registration statement on
      Form S-8, file number 333-108728, filed September 12,
  2003.(8)
            Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-111348, filed December 19,
  2003.


(9)
            Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form S-8, file number 333-123663, filed March 30, 2005.(10)
            Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K, filed February 23, 2006


(11)
            Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed March 7, 2006.(12)
            Incorporated
      by reference to the exhibits to the registrant’s current report on Form
      8-K/A, filed June 15, 2006.(13)
            To
      be filed by amendment.









ITEM
14.  PRINCIPAL ACCOUNTANT
FEES AND SERVICES





On
February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
registrant’s independent registered public accounting firm, since the firm’s
principal retired. Shelley had audited the Company’s financial statements for
the fiscal years ended December 31, 2005 and 2003. On February 24, 2006, Semple
& Cooper, LLP was engaged to serve as the Company’s independent public
accountants for the fiscal year ending December 31, 2006. On June 2, 2006,
Semple and Cooper, LLP, withdrew as auditor for the Company and Moore and
Associates, Chartered was engaged to serve as the Company’s independent public
accountants for the fiscal year ended December 31, 2006 and with respect to the
restatement of financial statements for the fiscal year ended December 31,
2005.  Moore and Associates continues to be retained as the Company’s
independent public accountants.










36


ITEM
14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES (continued)




Audit
Fees




Moore and
Associates, Chartered, is expected to bill $20,000 for the audit of the 2007
annual financial statement. For the fiscal year ended December 31, 2006, Moore
and Associates, Chartered billed $25,000 for the 2006 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 2007 and 2006.




Tax
Fees





There
were no fees billed for tax compliance, tax advice, and tax planning services
for the fiscal years ended December 31, 2007 and 2006.





All
Other Fees





There
were no fees billed for other services for the fiscal years ended December 31,
2007 and 2006.





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.








37





SIGNATURES





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




SKYE
      INTERNATIONAL, INC.Date: April
      14, 2008
            
            /s/ Perry
      LoganPerry
      LoganTitle Chief
      Executive Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
            
            Title
            
            Date/s/
      Perry Logan
            
            Chief
      Executive Officer, Chief Financial Officer (Principal Executive, Financial
      and Accounting Officer)
            
            April
      14, 2008Perry
      Logan/s/
      Mark D.
      Chester
            
            Director
      and Chairman
            
            April 14,
    2008Mark
      D. Chester/s/
      Perry D.
      Logan
            
            Director
            
            April 14,
    2008Perry D.
    Logan/s/ Thadeus (Ted) F.
      Marek
            
            Director, Secretary and
      Treasurer
            
            April 14,
    2008Thadeus (Ted) F.
      Marek/s/ Wesley G.
      Sprunk
            
            Director
            
            April 14,
    2008Wesley G.
      SprunkDirectorBarry M. Goldwater,
      Jr.


















38














SKYE
INTERNATIONAL, INC., AND SUBSIDIARIES





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS







Page
      No.REPORTS 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-
  F-16














































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, 2007 and December 31, 2006, and the
consolidated related statements of operations, stockholders’ equity and cash
flows for the years ended December 31, 2007 and December 31, 2006. These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Skye International Inc and
Subsidiaries as of December 31, 2007 and December 31, 2006, and the consolidated
related statements of operations, stockholders’ equity and cash flows for the
years ended December 31, 2007 and December 31, 2006, 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 $14,536,470, 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


April 10,
2008





2675 S. Jones Blvd. Suite
109, Las Vegas, NV 89146 (702) 253-7499 Fax (702) 253-7501









F-2





Skye
      International, Inc. and SubsidiariesCONSOLIDATED BALANCE
      SHEETSDecember
      31,
            
            
            December
      312007
            
            
            2006ASSETSCURRENT
      ASSETSCash
            
            $
            35,331
            
            
            $
            8,672Inventory
            
            
            119,668
            
            
            
            163,062Prepaid
      Expenses
            
            
            82,510
            
            
            
            99,379Total
      Current Assets
            
            
            237,509
            
            
            
            271,113EQUIPMENT,
      NET
            
            
            46,754
            
            
            
            43,921OTHER
      ASSETSDeposits
            
            
            2,460
            
            
            
            -Total
      Other Assets
            
            
            2,460
            
            
            
            -Total
      Assets
            
            $
            286,723
            
            
            $
            315,034LIABILITIES AND
      STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      Payable
            
            $
            1,227,923
            
            
            $
            2,160,624Accrued
      Expenses
            
            
            206,231
            
            
            
            31,132Notes
      Payable - Related Parties
            
            
            1,905,763
            
            
            
            1,053,615Accrued
      Interest Payable
            
            
            76,267
            
            
            
            72,917Warranty
      Accrual
            
            
            34,570
            
            
            
            34,570Customer
      Deposits
            
            
            103,371
            
            
            
            103,371Total
      Current Liabilities
            
            
            3,554,125
            
            
            
            3,456,228Total
      Liabilities
            
            
            3,554,125
            
            
            
            3,456,228STOCKHOLDERS'
      EQUITYCommon
      Stock: 100,000,000 sharesauthorized
      at $0.001par value;Issued
      and outstanding 29,927,252 and21,622,243
      shares, respectively
            
            
            29,927
            
            
            
            21,622Common
      Stock Subscribed
            
            
            108,675
            
            
            
            108,675Paid
      in Capital
            
            
            11,130,466
            
            
            
            9,256,308Accumulated
      Deficit
            
            
            (14,536,470
            )
            
            
            (12,527,800
            )Total
      Stockholders' Equity (Deficit)
            
            
            (3,267,402
            )
            
            
            (3,141,194
            )TOTAL
      LIABILITIES ANDSTOCKHOLDERS
      EQUITY (DEFICIT)
            
            $
            286,723
            
            
            $
            315,034




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





F-3








Skye
      International, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF OPERATIONSYears
      Ended December 31,2007
            
            
            2006REVENUESProduct
      Sales
            
            $
            -
            
            
            $
            2,071Other
      Income
            
            
            -
            
            
            
            194,269Total
      Revenues
            
            
            -
            
            
            
            196,341Cost
      of Goods Sold
            
            
            -
            
            
            
            28,357Gross
      Profit
            
            
            -
            
            
            
            167,984EXPENSESLegal
      and Professional
            
            
            962,207
            
            
            
            1,772,479General
      and Administrative
            
            
            341,635
            
            
            
            586,620Research
      and Development
            
            
            629,299
            
            
            
            26,878Advertising
      and Marketing
            
            
            -
            
            
            
            190,906Depreciation
            
            
            2,761
            
            
            
            9,870Total
      Expenses
            
            
            1,935,902
            
            
            
            2,586,754Net
      (Loss) from Operations
            
            
            (1,935,902
            )
            
            
            (2,418,770
            )OTHER
      INCOME AND (EXPENSE)Gain
      on Extinguishment of Debt
            
            
            2,152
            
            
            
            -Interest
      Expense
            
            
            (74,920
            )
            
            
            (44,518
            )Total
      Other Income (Expense)
            
            
            (72,768
            )
            
            
            (44,518
            )Net
      (Loss) before Income Taxes
            
            
            (2,008,670
            )
            
            
            (2,463,287
            )Income
      Tax Expense
            
            
            -
            
            
            
            -NET
      (LOSS)
            
            $
            (2,008,670
            )
            
            $
            (2,463,287
            )Basic
      and diluted (loss) per share
            
            $
            (0.08
            )
            
            $
            (0.12
            )Weighted
      Average Number of CommonShares
      Outstanding
            
            
            23,818,336
            
            
            
            20,312,973











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, 2005
            
            
            17,838,231
            
            
            $
            17,839
            
            
            $
            275,000
            
            
            $
            7,436,334
            
            
            $
            (10,064,513
            )
            
            $
            (2,335,340
            )Common
      stock issued for related party services
            
            
            378,750
            
            
            
            379
            
            
            
            
            
            
            
            262,496
            
            
            
            
            
            
            
            262,875Common
      stock issued for consulting services
            
            
            808,100
            
            
            
            808
            
            
            
            
            
            
            
            420,444
            
            
            
            
            
            
            
            421,252Common
      stock issued for subscription
            
            
            370,000
            
            
            
            370
            
            
            
            -210,000
            
            
            
            209,630
            
            
            
            
            
            
            
            -Common
      stock subscribed
            
            
            
            
            
            
            
            
            
            
            43,675
            
            
            
            
            
            
            
            
            
            
            
            43,675Common
      stock options granted for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            32,216
            
            
            
            
            
            
            
            32,216Beneficial
      conversion feature of convertible debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,922
            
            
            
            
            
            
            
            15,922Common
      stock issued for debt
            
            
            412,902
            
            
            
            413
            
            
            
            
            
            
            
            226,080
            
            
            
            
            
            
            
            226,493Common
      stock issued for cash
            
            
            1,814,260
            
            
            
            1,814
            
            
            
            
            
            
            
            653,186
            
            
            
            
            
            
            
            655,000Net
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,463,287
            )
            
            
            (2,463,287
            )Balance
      December 31, 2006
            
            
            21,622,243
            
            
            
            21,623
            
            
            
            108,675
            
            
            
            9,256,308
            
            
            
            (12,527,800
            )
            
            
            (3,141,194
            )Common
      stock issued for related party services
            
            
            591,000
            
            
            
            591
            
            
            
            
            
            
            
            154,119
            
            
            
            
            
            
            
            154,710Common
      stock issued for consulting services
            
            
            6,543,009
            
            
            
            6,542
            
            
            
            
            
            
            
            1,416,280
            
            
            
            
            
            
            
            1,422,822Common
      stock issued for debt
            
            
            110,000
            
            
            
            110
            
            
            
            
            
            
            
            18,790
            
            
            
            
            
            
            
            18,900Common
      stock issued for cash
            
            
            1,061,000
            
            
            
            1,061
            
            
            
            
            
            
            
            284,969
            
            
            
            
            
            
            
            286,030Net
      (Loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,008,670
            )
            
            
            (2,008,670
            )Balance
      December 31, 2007
            
            
            29,927,252
            
            
            $
            29,927
            
            
            $
            108,675
            
            
            $
            11,130,466
            
            
            $
            (14,536,470
            )
            
            $
            (3,267,402
            )



















F-5





Skye
      international, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF CASH FLOWSYears
      Ended December 31,2007
            
            
            2006Operating
      ActivitiesNet
      (Loss)
            
            $
            (2,008,670
            )
            
            $
            (2,463,287
            )Gain
      on Extinguishment of Debt
            
            
            (2,152
            )
            
            
            -Depreciation
      Expense
            
            
            2,761
            
            
            
            9,870Shares
      and options issued for services rendered
            
            
            1,577,532
            
            
            
            716,343Changes
      in assets and liabilities:Inventory
            
            
            43,394
            
            
            
            (137,993
            )Accounts
      Receivable
            
            
            -
            
            
            
            2,773Prepaid
      Expense
            
            
            16,869
            
            
            
            (82,700
            )Deposits
            
            
            (2,460
            )
            
            
            20,000Accrued
      Interest Payable
            
            
            3,350
            
            
            
            (8,709
            )Accounts
      Payable
            
            
            (1,044,830
            )
            
            
            1,926,068Notes
      Payable
            
            
            985,330
            
            
            
            161,867Accrued
      Expenses
            
            
            175,099
            
            
            
            (839,782
            )Net
      Cash (Used) by Operating Activities
            
            
            (253,777
            )
            
            
            (695,550
            )Investing
      Activities(Purchase)
      Disposal  of Assets
            
            
            (5,594
            )
            
            
            2,836Net
      Cash Provided (Used) by Investing Activities
            
            
            (5,594
            )
            
            
            2,836Financing
      ActivitiesStock
      Subscriptions
            
            
            -
            
            
            
            43,675Proceeds
      from Common Stock
            
            
            286,030
            
            
            
            655,000Net
      Cash Provided by Financing Activities
            
            
            286,030
            
            
            
            698,675Net
      Increase/(Decrease) in Cash
            
            
            26,659
            
            
            
            5,961Cash,
      Beginning of Year
            
            
            8,672
            
            
            
            2,711Cash,
      End of Year
            
            $
            35,331
            
            
            $
            8,672Supplemental
      Information:Taxes
            
            $
            -
            
            
            $
            -Interest
      Expense
            
            $
            71,570
            
            
            $
            44,517Non
      Cash Financing Activities:Common
      Stock Issued for Debt
            
            $
            18,900
            
            
            $
            226,493











F-6
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006





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
three subsidiary corporations, all wholly-owned:




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


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


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





On
November 7, 2003, 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.  In January 2005, it created Valeo to
license ION technologies and to manufacture products using those
technologies.





Nature of
Business





The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of an
electronic, tankless water heater.  The Company’s products, together
with a limited quantity of related parts purchased for resale, are sold
primarily through manufacturer’s 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, 2007 and 2006





Note 1.THE
COMPANY - continued




On August
6, 2004, Envirotech filed a voluntary petition with the United States Bankruptcy
Court for the District of Arizona (Case No. 2:04-13908-RTB ) seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve all existing
litigation, judgments and efforts to collect on judgments entered against
Envirotech. On December 2004, the Company filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy
Court.  This Plan was not approved and in January 2006, the Company’s
motion to withdraw its Chapter 11 filing was granted by the Bankruptcy Court for
the District of Arizona without prejudice or relief from any of its liabilities
previously classified as Subject to Compromise,




As such,
the accompanying Consolidated Financial Statement for the years ended December
31, 2006  were not prepared in accordance with Statement of Position
90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the
Bankruptcy Code” (See Note 2) which requires that all pre-petition liabilities
subject to compromise are segregated in the consolidated balance sheets as of
end of the respective years and classified as Liabilities Subject to Compromise,
at the estimated amount of allowable claims with liabilities not subject to
compromise being separately classified.





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





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





In
December 2007, the FASB issued SFAS 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. This Statement is effective for fiscal
years beginning on or after December 15, 2008. Early adoption is not permitted.
Management is currently evaluating the effects of this statement, but it is not
expected to have any impact on the Company’s financial statements.





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 creates a fair value option allowing
an entity to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities,
with changes in fair value recognized in earnings as they occur. SFAS 159 also
requires an entity to report those financial assets and financial liabilities
measured at fair value in a manner that separates those reported fair values
from the carrying amounts of assets and liabilities measured using another
measurement attribute on the face of the statement of financial position.
Lastly, SFAS 159 requires an entity to provide information that would allow
users to understand the effect on earnings of changes in the fair value on those
instruments selected for the fair value election. SFAS 159 is effective for
fiscal years beginning after November 15, 2007 with early adoption permitted.
The Company is continuing to evaluate SFAS 159 and to assess the impact on its
results of operations and financial condition if an election is made to adopt
the standard.





In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements” which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. Where applicable, SFAS No. 157 simplifies and codifies
related guidance within GAAP and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier adoption is encouraged. The Company does
not expect the adoption of SFAS No. 157 to have a significant effect on its
financial position or results of operation.





F-8
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006





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, 2007
and December 31, 2006 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 $629,299 and $26,878 during the years ended
December 31, 2007 and 2006, respectively.





Marketing
Strategy





The
Company sells to large wholesale distributors through its network of
manufacturer’s 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’s 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. Sales to distributors and
manufacturer’s representatives are sold FOB shipping point with receivables
recorded 25 to 40 days post shipping.  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 no revenue from sales of products during 2007.







F-9
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




Note 2.SIGNIFICANT
ACCOUNTING POLICIES - continued




Accounts
Receivable





Accounts
receivable are recorded when an order is received from a distributor and
shipped. An allowance for doubtful accounts was set up based on the actual rate
of uncollected accounts.  Net accounts receivable is as
follows:




December
      31,
            
            2007
            
            
            2006Accounts
      Receivable
            
            $
            -0-
            
            
            $
            -0-Less:
      Allowance for Doubtful Accounts
            
            
            (-0-
            )
            
            
            (-0-
            )Net
      Accounts Receivable
            
            $
            -0-
            
            
            $
            -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, 2007 and 2006, was $-0- and $131,323 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,
            
            2006
            
            
            2006Property,
      Equipment, furniture and Fixtures
            
            $
            67,216
            
            
            $
            61,622Less:
      Accumulated Depreciation
            
            
            (20,462
            )
            
            
            (17,701
            )Net
      Fixed Assets
            
            $
            46,754
            
            
            $
            43,921





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
either expensed as they are incurred or capitalized and amortized over the
estimated useful lives of seventeen years and software over five
years.











F-10
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




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. Therefore, the basic and diluted earnings (loss) per share
are presented on the face of the statement of operations. There are 600,000
options at $0.55 and 300,000 options at $0.50 per share available at this time.
There are also $163,366 of outstanding convertible debentures which within 12
months may be converted into restricted common shares of the Company at a 30%
discount to the then current 10-day moving average of the Company’s common
stock. All outstanding warrants were either exercised or cancelled and
convertible debt is anti-dilutive.





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, 2007 a total of $34,570 in refunds and warranty allowances 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
            
            
            21,625Balance
      of Warranty Accrual for 2006
            
            
            0Balance
      of Warranty Accrual for 2007
            
            
            0Total
      Warranty Accrual as of December 31, 2007
            
            $
            34,570






F-11
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




Note 3.NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS





Notes
payable and capital lease obligations consist of the following:




Year
      Ended December 31,
            
            
            2007
            
            
            2006Convertible
      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.
            
            $
            163,366
            
            $
            70,000Convertible
      Notes, Unsecured, Matured one-yearfrom
      issue date, bear 10% Interest payable quarterly,principle
      and interest convertible into one commonshare
      for each outstanding $1.00.  Forty noteswere
      issued between January 23, 2004 and January15,
      2005. Of these notes, thirty six had been eitherrepaid
      or converted at December 31, 2005. Of theremaining
      four notes, three were converted in April2006;
      the fourth has not been converted or repaidand
      is in default. Aggregate Amount:
            
            $
            -
            
            $
            15,000Demand
      Note with Attorneys, 6% Interest, All Assets ofSubsidiary,
      Envirotech, pledged as Collateral; Note is indefault.  Note
      has been acquired by Envirotech’s parent, Skye
            
            $
            -
            
            $
            194,895Demand
      Note with Former Distributor of Subsidiary,Envirotech,
      in Settlement and Repurchase ofDistributorship
      Territory, 7% Interest; Note is in default
            
            $
            519,074
            
            $
            519,074Demand
      Note Made by Subsidiary, Envirotech,10%
      Interest, Payable Monthly; Note is in default
            
            $
            11,880
            
            $
            11,880Demand
      Note Made by Subsidiary, Envirotech,6%
      Interest; Note is in default
            
            $
            35,000
            
            $
            35,000Demand
      Note Made by Subsidiary, Envirotech;Note
      is in default
            
            $
            72,391
            
            $
            72,391Demand
      Note Made by ION Tankless in favor of related party;
            
            $
            120,000
            
            $
            120,000Demand
      Note Made by Valeo in favor of related party;
            
            $
            13,825
            
            $
            13,000Demand
      Note Made by Skye in favor of related parties;
            
            $
            66,284
            
            $
            65,000Convertible
      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
            
            $
            828,944
            
            $
            10,000





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, 2007 and December 31, 2006, the Company
has issued 462,541 and 462,541 shares respectively under the 2005 Stock
Incentive Plan. As of December 31, 2007, 37,459 shares remain unissued under
this Plan.





F-12
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




Note 4.STOCKHOLDERS’
EQUITY - continued




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 2006, the Company issued 205,000 shares for
consulting and legal services valued at $230,753; 370,000 shares previously
subscribed for cash in private placements; 412,902 shares to retire principal
and interest on outstanding bridge loans; 1,814,260 shares in private placements
for $655,000; 110,000 shares for legal fees valued at $48,000; 600,000 shares
for consultants for fees valued at $330,000; 50,000 shares for investment
banking fees and services valued at $17,500; 173,750 shares for employees in
lieu of pay and for signing bonuses valued at $57,375, and 100,000 shares to be
issued in connection with the receipt of $100,000 in convertible bridge notes.
The total common stock issued and outstanding at December 31, 2007 is 29,927,252
shares.





Warrants





No
warrants are outstanding.





Stock
Options





On
February 11, 2004 the Company granted 5-year stock options to purchase 600,000
shares of restricted common stock at $0.50 per share to consultants assisting in
company operations. Using a discounted stock price of $0.43, exercise price of
$0.50, 5-year option, risk-free rate of 4.1% and a volatility rate of .038 the
value of these options is calculated at $0.03 using the Black-Scholes model. The
aggregate value of 600,000 options is $18,000. By amendment dated September 6,
2005, the option period has been extended for an additional 5 years, to expire
February 11, 2014.  At December 31, 2007,  none of the
options have been exercised.





In
September 2006, the Company granted options to each of its directors to purchase
50,000 shares at $0.50.  In addition it granted an option to its
Chairman, to purchase 150,000 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 $0.49, exercise price of
$0.50, 5-year option, risk-free rate of 5.35% and a volatility rate of .052 the
value of these options is calculated at $0.03 using the Black-Scholes model. The
aggregate value of  300,000 options is $32,216. At December 31, 2007,
none of the options have been exercised.





Outstanding
stock options are as follows:





SharesBalance,
      December 31, 2005
            600,000Granted,
      2006
            0Expired,
      2006
            300,000Balance,
      December 31, 2006
            900,000Granted,
      2007
            0Expired,
      2007
            0Balance,
      December 31, 2007
            900,000




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.





F-13
 
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




Note 5.INCOME
TAXES - continued




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 $12,831,708. The total valuation allowance is
equal to the total deferred tax asset.




2007
            
            
            2006Deferred
      Tax Asset
            
            $
            4,491,098
            
            
            $
            4,384,730Valuation
      Allowance
            
            $
            (4,491,098
            )
            
            $
            (4,384,730
            )Current
      Taxes Payable
            
            
            -
            
            
            
            -Income
      Tax Expense
            
            
            -
            
            
            
            -





Below is
a chart showing the estimated federal net operating losses and the years in
which they will expire.




Year
            
            
            Amount
            
            
            Expiration1993-2003
            
            $
            4,119,312
            
            
            2013-20232004
            
            
            1,893,331
            
            
            20242005
            
            
            4,051,870
            
            
            20252006
            
            
            2,463,287
            
            
            20262007
            
            
            303,908
            
            
            2027Total
            
            $
            12,831,708




Note
6.LEASES AND
OTHER COMMITMENTS





The
Company offices out of leased premises comprising a total of approximately 2,189
square feet located at 7701 E. Gray Rd., Suite 4 Scottsdale, AZ
85260.  The Company entered into a one-year lease effective April 11,
2006 at a monthly lease cost of approximately $3,118, with a one year option
with a reduced monthly cost of $2,672 per month through April 30,
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 $14,536,470 as of December 31, 2007.
The Company has  not generated meaningful revenues in the last 2
years. The Company has a working capital deficit of $3,316,616 as of December
31, 2007. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern.






F-14
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


Note 7.GOING
CONCERN - continued




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 2007 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 $2 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.PENDING
LITIGATION





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. With the filing of the Bankruptcy
Petition by Envirotech (see below), this action was stayed. However, with the
dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment is
once again a claim against the assets of Envirotech, subject, however, to the
claims and rights of the Senior Secured Creditor. In June 2007 the executor and
beneficiary of the estate of the deceased plaintiff made written demand for
payment of the sums owed under the Stipulated Judgment.  Envirotech is
currently investigating a course of action and response to such written demand,
and Envirotech has received no further communication from the executor of the
estate.





Seitz Suit. In 2002,
Envirotech was named as a Defendant in a law suit filed in the U.S. District
Court for the Southern District of Texas, Houston, Texas (Civil Action No.
H-02-4782, David Seitz and Microtherm, Inc. vs. Envirotech Systems Worldwide,
Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”). 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
recently dissolved.  Envirotech filed a summary judgment motion and is
awaiting a ruling from the Court. That matter has not been set for
trial.




Myers and Jenkins Claim..In 2006,Thefirm of Myers
& Jenkins, PC obtained a default judgment against Envirotech for the
principal sum of $105,830 together with interest and costs in connection
with Envirotech’s non-payment of legal fees for an arbitration
matter.  The judgment remains unsatisfied.





Sensor Technologies
Claim..  In 2006, Sensor Technologies & Systems, Inc., an
engineering firm that provided consulting
services in connection with Envirotech’s ESI-2000 product
obtained  default judgment against Envirotech for the principal sum of
$55,452, together with interest and costs.  The judgment remains
unsatisfied.






F-15
 SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




Note 8.PENDING
LITIGATION - continued




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.  The Court has not
yet ruled on the matter.





Shareholder Inspection
Claim. In April 2006, a shareholder purporting to have obtained consent
from at least 15% of the Company’s shareholders filed a lawsuit in the United
States District Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF)
seeking inspection of the Company’s books and records pursuant to Nevada
corporate law. The Court denied plaintiff’s initial request. The Company has
asserted several counterclaims against the plaintiff for tortious conduct and
for abuse of the legal process in connection with the lawsuit. The lawsuit was
dismissed with consent of both parties.





Shareholder Derivative
Action. In May 2006, a small group of dissident shareholders (including
the plaintiff from the Shareholder Inspection Claim) filed a lawsuit in the
United States District Court for the District of Arizona (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, Judge
Roslyn O. Silver of the United States District Court for the District of Arizona
issued an Order rejecting the Plaintiffs’ requested a 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 Counterdefendants and third-party
defendants.  The motions were granted (in part), resulting in the
refilling of those claims.  Additional motions for dismissal
followed.  The parties are awaiting the Court’s decision.





Papazian Claim. 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 lawsuit is pending in Maricopa County
Superior Court (CV2007- 002890) The Company does not believe that this case will
be resolved until the claims against Mr. Papazian in the Derivative Action are
also resolved.





Promissory Note
Claim. 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 three individual plaintiffs are also members of the
plaintiff group in the Derivative Action and, as set forth in the Company’s
counterclaims in the Derivative Action, the Company does not believe that this
case has any merit.  The matter has not been scheduled for
trial.




Quick & Confidential
Claim. The Company has settled this matter by submitting $12,000 as
payment to Quick & Confidential.





Semple & Cooper
Claim. The Company has settled this arbitration dispute by submitting
$27,000 as payment to Semple & Cooper.





Lawrence White Claim.
The Company has settled this arbitration dispute by submitting $12,000 as
payment to Lawrence White.





Berry-Shino Claim.
The Company has settled this arbitration dispute by issuing 456,482 shares as
payment to Berry-Shino Securities, Inc.





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.




F-16